Descending Clock Auction for New Jersey

BGS Power Procurements

Workshop to Support RGGI on the Topic: Implementing the Minimum 25% Public Benefit

Allocation

Steven GabelSteven GabelNew York, NYNew York, NYJuly 20, 2006July 20, 2006

Gabel Associates 417 Denison StreetGabel Associates 417 Denison Street Highland Park, NJ 08904 732-296-0770 Highland Park, NJ 08904 732-296-0770

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Background – Basic Generation Service Background – Basic Generation Service (“BGS”) Auction in New Jersey(“BGS”) Auction in New Jersey

BGS is power supply service provided by utilities to BGS is power supply service provided by utilities to customers who do not switch or do not have access customers who do not switch or do not have access to competitive retail suppliersto competitive retail suppliers

Electric utilities divested their generating assets in Electric utilities divested their generating assets in the late 1990’s and early 2000’s, and needed to the late 1990’s and early 2000’s, and needed to obtain power supply in the open market to meet obtain power supply in the open market to meet their BGS obligationstheir BGS obligations

Electric utilities proposed the descending clock Electric utilities proposed the descending clock auction in 2001 as the best means of obtaining BGS auction in 2001 as the best means of obtaining BGS supply for residential and commercial customers at supply for residential and commercial customers at the lowest possible price. the lowest possible price.

New Jersey has conducted 5 state-wide Auctions for New Jersey has conducted 5 state-wide Auctions for BGS power, annually each February 2002-2006.BGS power, annually each February 2002-2006.

Similar auction has been approved and will be used Similar auction has been approved and will be used in Illinois (Com Ed and Ameren) in Fall 2006 to in Illinois (Com Ed and Ameren) in Fall 2006 to procure POLR supply.procure POLR supply.

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Public ProcessPublic Process

Authorized by NJ legislature through Authorized by NJ legislature through the Electric Discount and Energy the Electric Discount and Energy Competitive Act in 1999Competitive Act in 1999

NJ Board of Public Utilities conducts NJ Board of Public Utilities conducts annual proceeding to adjust program annual proceeding to adjust program if necessaryif necessary

Input by all stakeholdersInput by all stakeholders

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BGS Auction OverviewBGS Auction Overview NJ electric utilities initially procured a mixed NJ electric utilities initially procured a mixed

portfolio of 1 to 3 year contracts. By the third year portfolio of 1 to 3 year contracts. By the third year (2004), the utilities had a staggered portfolio of 3-(2004), the utilities had a staggered portfolio of 3-year contracts, with contracts covering 1/3 of total year contracts, with contracts covering 1/3 of total BGS expiring each year.BGS expiring each year.

Now in each year the utilities seek offers for a 3-Now in each year the utilities seek offers for a 3-year contract term covering 1/3 of their load, to year contract term covering 1/3 of their load, to replace expiring contracts.replace expiring contracts.

Staggered 3-year contracts provide term-averaging Staggered 3-year contracts provide term-averaging to ‘smooth-out’ volatility in market prices.to ‘smooth-out’ volatility in market prices.

The load being put out to bid in any one year is The load being put out to bid in any one year is broken into ‘tranches’ of about 100mw each (each broken into ‘tranches’ of about 100mw each (each slice approximately 1- 4% of total load depending slice approximately 1- 4% of total load depending on utility). on utility).

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BGS Auction Public BGS Auction Public ProtectionProtection

Qualification criteria and processes, auction rules, Qualification criteria and processes, auction rules, Master Supply Agreement, are submitted by the Master Supply Agreement, are submitted by the utilities to the BPU for review and approval; are subject utilities to the BPU for review and approval; are subject comment by interested parties and possible comment by interested parties and possible modification; and are ultimately approved by the BPU. modification; and are ultimately approved by the BPU.

The auction is conducted via internet by an Auction The auction is conducted via internet by an Auction Manager that is hired by, but independent of, the Manager that is hired by, but independent of, the utilities.utilities.

BPU staff is permitted to observe in the bid room.BPU staff is permitted to observe in the bid room. BPU hires an auction expert (consultant) that advises BPU hires an auction expert (consultant) that advises

the BPU during each stage of the bid prep and bid the BPU during each stage of the bid prep and bid implementation process, and is also present in the bid implementation process, and is also present in the bid room to oversee the processroom to oversee the process

The BPU auction expert provides a report to the BPU The BPU auction expert provides a report to the BPU with respect to the final results and whether the with respect to the final results and whether the auction was competitive and conducted in a manner auction was competitive and conducted in a manner consistent with the approved auction rules. consistent with the approved auction rules.

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Steps Leading up to the Steps Leading up to the AuctionAuction

In advance of the qualification stage, detailed data related to In advance of the qualification stage, detailed data related to the BGS load to be served is made available to prospective the BGS load to be served is made available to prospective bidders on an auction websitebidders on an auction website

Utilities/auction manager conduct information sessions for Utilities/auction manager conduct information sessions for prospective bidders: make presentations; provide prospective bidders: make presentations; provide information; answer questionsinformation; answer questions

No later than 10 days before date for interested parties to No later than 10 days before date for interested parties to first apply to participate in the Auction, the auction manager first apply to participate in the Auction, the auction manager will announce utility-specific load caps; statewide load caps; will announce utility-specific load caps; statewide load caps; and statewide maximum and minimum starting prices.and statewide maximum and minimum starting prices.

Load caps are maximum amount of load (# of Load caps are maximum amount of load (# of tranches) that any one supplier can be awarded. tranches) that any one supplier can be awarded. Intended to mitigate dependence on any one supplier Intended to mitigate dependence on any one supplier (to approximately 30% total load).(to approximately 30% total load).

Max and min starting prices represent the range of Max and min starting prices represent the range of actual possible starting prices in the first round of the actual possible starting prices in the first round of the auction auction

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Part 1: Qualification Part 1: Qualification ProcessProcess

All interested parties that can meet PJM LSE requirements All interested parties that can meet PJM LSE requirements can submit a Part 1 application. can submit a Part 1 application.

No state licensing requirementNo state licensing requirement Interested parties must submit financial information to Interested parties must submit financial information to

permit utilities to assess creditworthinesspermit utilities to assess creditworthiness Interested parties must agree to comply with auction Interested parties must agree to comply with auction

rules and with the BGS Supplier Master Agreement rules and with the BGS Supplier Master Agreement (Master Agreement contains standard terms and (Master Agreement contains standard terms and conditions that are approved in advance by the BPU, that conditions that are approved in advance by the BPU, that are uniform (i.e. same for each supplier), and that are not are uniform (i.e. same for each supplier), and that are not subject to negotiation.subject to negotiation.

Applicants notified within 3 days whether they have Applicants notified within 3 days whether they have successfully met criteria. If so, they become successfully met criteria. If so, they become qualified qualified biddersbidders. .

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Part 2 Application Part 2 Application ProcessProcess

Only qualified bidders may submit Part 2 application Only qualified bidders may submit Part 2 application Qualified bidder must certify that it is bidding Qualified bidder must certify that it is bidding

independently from all other qualified bidders; and must independently from all other qualified bidders; and must agree the submission of any bid creates a binding and agree the submission of any bid creates a binding and irrevocable offer to provide the service under the terms of irrevocable offer to provide the service under the terms of the Master Agreement the Master Agreement

With their Part 2 applications, qualified bidders must With their Part 2 applications, qualified bidders must submit an indicative offer and a financial guarantee in submit an indicative offer and a financial guarantee in proportion to their indicative offer (ex. bid bonds, letters proportion to their indicative offer (ex. bid bonds, letters of credit, parent guarantee of sufficiently creditworthy)of credit, parent guarantee of sufficiently creditworthy)

An indicative offer specifies two numbers of tranches: the An indicative offer specifies two numbers of tranches: the first is the # of tranches the bidder is willing to serve at first is the # of tranches the bidder is willing to serve at the maximum starting price on a statewide basis; and the the maximum starting price on a statewide basis; and the second is the # of tranches the bidder is willing to serve at second is the # of tranches the bidder is willing to serve at the minimum starting price on a statewide basisthe minimum starting price on a statewide basis

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Final Auction Final Auction PreparationPreparation

Indicative offers determine the qualified bidder’s Indicative offers determine the qualified bidder’s initial eligibility: a bidder will never be able to bid in initial eligibility: a bidder will never be able to bid in the Auction on a number of tranches > the initial the Auction on a number of tranches > the initial eligibility.eligibility.

The Auction Manager uses the indicative offers (in The Auction Manager uses the indicative offers (in consultation with the BPU) to inform the decision in consultation with the BPU) to inform the decision in setting round 1 (starting) prices setting round 1 (starting) prices

Indicative offers used to determine excess supply. Indicative offers used to determine excess supply. An oversupply ratio formula is applied to determine An oversupply ratio formula is applied to determine if initial competitiveness test is met. If not, Auction if initial competitiveness test is met. If not, Auction Manager can reduce total load volume in Auction Manager can reduce total load volume in Auction (this has never been triggered in 5 years of the (this has never been triggered in 5 years of the auction for the BGS-FP load) auction for the BGS-FP load)

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Auction MechanicsAuction Mechanics Three days before beginning of auction, The Auction Three days before beginning of auction, The Auction

Manager informs registered bidders of each utility’s starting Manager informs registered bidders of each utility’s starting price (the price in round 1 of the auction) and load capsprice (the price in round 1 of the auction) and load caps

In each round of bidding, bidders provide the number of In each round of bidding, bidders provide the number of tranches of BGS load they are willing to serve for each tranches of BGS load they are willing to serve for each utility at the announced prices (subject to load caps)utility at the announced prices (subject to load caps)

If the number of tranches bid is greater than the number of If the number of tranches bid is greater than the number of tranches needed by a utility, the prices reduced in the next tranches needed by a utility, the prices reduced in the next round.round.

In each round bidders can move tranches between utilities In each round bidders can move tranches between utilities (subject to load caps), but cannot increase total tranches (subject to load caps), but cannot increase total tranches offered statewide from previous round offered statewide from previous round

Prices ‘tick down’ in each round in decrements pre-Prices ‘tick down’ in each round in decrements pre-determined by a specific formula representing a percentage determined by a specific formula representing a percentage of the previous price. The auction closes when the supply of the previous price. The auction closes when the supply bid (# tranches bid) is just equal to the load to be procured.bid (# tranches bid) is just equal to the load to be procured.

Bidders holding the final bids when the Auction closes are Bidders holding the final bids when the Auction closes are the winnersthe winners

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Post-AuctionPost-Auction All bidders that win receive the same price per kwh of All bidders that win receive the same price per kwh of

load served by the utility during the contract termload served by the utility during the contract term Prices provides that the BPU votes up or down on the Prices provides that the BPU votes up or down on the

auction results by the end of the 2auction results by the end of the 2ndnd business day business day following the calendar day on which the auction closesfollowing the calendar day on which the auction closes

If the BPU approves the Auction results, each winner If the BPU approves the Auction results, each winner will have 3 days to demonstrate compliance with the will have 3 days to demonstrate compliance with the creditworthiness requirements and winners and the creditworthiness requirements and winners and the utilities have 3 days to execute the Master Supplier utilities have 3 days to execute the Master Supplier Agreement.Agreement.

A winner’s financial guarantee posted before the A winner’s financial guarantee posted before the Auction may be forfeited if the winner does not Auction may be forfeited if the winner does not execute the agreement within 3 days. execute the agreement within 3 days.

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NJ - Auction ResultsNJ - Auction Results

The first auction was conducted in February The first auction was conducted in February 2002. NJBPU has approved, and the state has 2002. NJBPU has approved, and the state has conducted, 4 additional state-wide BGS conducted, 4 additional state-wide BGS auctions: in 2003, 2004, 2005 and 2006.auctions: in 2003, 2004, 2005 and 2006.

Participation and competition has been healthy. Participation and competition has been healthy. Amount of power initially offered by suppliers Amount of power initially offered by suppliers has consistently exceeded the amount needed has consistently exceeded the amount needed to supply customers. to supply customers.

There have been no complaints lodged by There have been no complaints lodged by bidders, no instances of winners failing to bidders, no instances of winners failing to execute the Agreement, and no BGS supplier execute the Agreement, and no BGS supplier defaults. defaults.

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NJ - Auction Results NJ - Auction Results (Cont’d)(Cont’d)

Has proven to be an attractive product for Has proven to be an attractive product for suppliers/generators:suppliers/generators:

Regulatory and contractual stability/predictability in Regulatory and contractual stability/predictability in rules and decision-makingrules and decision-making

Large marketLarge market Multi-year bilateral contracts provide attractive Multi-year bilateral contracts provide attractive

optionoption

Has proven to be an attractive product for ratepayers:Has proven to be an attractive product for ratepayers:

Greater price stability due to 3 term averagingGreater price stability due to 3 term averaging Effective competitionEffective competition Fixed prices from financially secure suppliersFixed prices from financially secure suppliers