Update on the Competitive Electric Market in Texas

Legislative Staff Briefing November 18, 2010

Legislative advertising paid for by: John W. Fainter, Jr. • President and CEO Association of Electric Companies of Texas, Inc. 1005 Congress, Suite 600 • Austin, TX 78701 • phone 512-474-6725 • fax 512-474-9670 • www.aect.net

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AECT Principles

• AECT is an advocacy group composed of member companies committed to:

- Ensuring a modern, reliable infrastructure for the supply & delivery of electricity.

- Supporting efficient competitive markets that are fair to customers and market participants.

- Supporting consistent and predictable oversight and regulation that will promote investment and ensure the stability of Texas’ electric industry.

- Promoting an economically strong and environmentally healthy future for Texas, including conservation and efficient use of available resources.

• AECT member companies remain dedicated to providing Texas customers with reliable service and are committed to the highest standards of integrity.

The Association of Electric Companies of Texas, Inc. (AECT) is a trade organization of investor-owned electric companies in Texas. Organized in 1978, AECT provides a forum for member company representatives to exchange information about public policy, and to communicate with government officials and the public. For more information, visit www.aect.net.

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AECT Member Companies Within ERCOT

Generation Companies

Transmission and Distribution Utilities

Retail Electric Providers

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AECT Companies Outside of ERCOT

Western Electricity Coordinating Council (WECC)

Southwest Power Pool (SPP)

SERC Reliability Corporation

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Prices in the Competitive Electric Market in ERCOT

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Natural Gas: Key Component of Electricity Prices In ERCOT

•  Retail prices are driven by wholesale power prices – no matter how an electric market is structured.

•  The ERCOT region is more dependent on natural gas-fired generation than any other electric power region in the nation.

•  Thus, changes in natural gas prices result in changes in wholesale power prices, which result in changes in retail power prices.

•  With several dozen retail electric providers (REPs) competing for business, the competitive retail electric market in ERCOT helps place downward pressure on retail prices.

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Natural Gas Prices Have Been Volatile Since 2000

•  Through 1999, natural gas prices were relatively stable, but the cost of this key commodity has fluctuated greatly since 2000, with three exceptionally large peaks during the past decade.’

•  While prices have fallen over the past 18 months, natural gas prices today are still double the price of gas in 1999.

•  Despite this volatility, consumers have offers available in the market lower than before competition began.

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ERCOT Generation Mix More Gas-Heavy than U.S. Average

Note: Oil-fired generation is negligible in ERCOT, accounting for less than 0.1% of ERCOT capacity and load; numbers may not add up to 100% due to rounding.

Sources: PUC(2010 summer data, no wind adjustment), EIA (2008 data, latest available)

Ener

gy (M

W)

ERCOT U.S. Average

Natural Gas

Coal

Nuclear

Other

21%

48%

20%

10%

Coal

Natural Gas

Nuclear

Other

47% 35%

12% 6%

“ERCOT has the highest dependency on natural gas of any other region”

- ERCOT

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Regions Outside ERCOT Part of Larger, Multi-State Grids

(ERCOT)

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ERCOT far More Dependent On Gas Than Neighboring Power Regions

% MWh from Natural Gas

% MWh from Coal

% MWh from Other

% MWh from Hydro

% MWh from Nuclear

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Review: Timeline of the Transition to Competition

•  ERCOT market restructuring legislation, Senate Bill 7, passed in 1999

•  Initiated competition in ERCOT retail markets beginning January 2002. •  Included environmental and energy efficiency provisions. •  Utilities required to fund energy efficiency programs equal to at least 10% of

each year’s annual growth in demand.

•  1999 - 2001 – Preparation for retail competition. •  ERCOT develops systems required to support competition. •  PUC promulgates competition rules. •  PUC determines rate unbundling cases.

•  July 2001 – Retail competition pilot project begins.

•  January 2002 – Market opens in ERCOT, providing a clear point of comparison: regulated rates in 2001 and competitive price offers in 2002.

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Natural gas prices have been volatile, still substantially higher than before the market opened

Source: Frontier Associates LLC, “Energy Efficiency Accomplishments of Texas Investor Owned Utilities, Calendar Year 2009”

‘02-08 Natural Gas Avg: $7.14/MMBtu (+238%)

‘92-99 Natural Gas Avg: $2.11/MMBtu

NYMEX Natural Gas, 12-month Strip Annual Average ($/MMBtu)

With Electric Competition

Before Electric Competition

‘00-01 Natural Gas Avg: $4.02/MMBtu (+90%)

’09-10 Natural Gas Avg: $5.15/MMBtu (+144%)

Natural Gas Prices 1992 – 2010 YTD; $/MMBtu

Source: NYMEX (latest data as of 10/11/10)

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Competitive electricity prices still track natural gas, but enable customer choice and lower prices

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¢

1 Average annual residential electric prices at 1000 kWh/month in the 5 TDU areas opened to competition in 2002; pre-competition prices based on filed tariffs; post-competition prices based on Power to Choose offerings and PUC data. Sources: NYMEX, PUC, Power to Choose website (latest data as of 10/11/10)

Residential Electricity Price Annual Average (¢/kWh)1

NYMEX Natural Gas, 12-month Strip Annual Average ($/MMBtu)

¢

Average Competitive Offer

Average Lowest Offer

NYMEX Average 12-Month Strip

¢

¢

¢

¢

‘02-08 Natural Gas Avg: $7.14/MMBtu (+238%)

‘92-99 Natural Gas Avg: $2.11/MMBtu

With Electric Competition

Before Electric Competition

Natural Gas vs. Texas Residential Retail Electricity Prices In Areas Now Open to Competition 1992 – 2010 YTD; $/MMBtu and ¢/kWh

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Price offers falling in recent years

Source: Offer prices averaged from the 5 TDU areas open to competition from www.powertochoose.org (10/22/10) for a residential customer using an average of 1,000 kWh per month

Oct-07 Oct-08 Oct-09 Oct-10

# of 1-Year Fixed-Price Price Products 33 32 39 69

Average 1-Year Fixed-Price Offer 12.7¢/kWh 14.9¢/kWh 11.7¢/kWh 10.0¢/kWh

Lowest 1-Year Fixed-Price Offer 11.0¢/kWh 12.8¢/kWh 10.4¢/kWh 8.8¢/kWh

Lowest Offer Available in the Market 10.0¢/kWh 11.5¢/kWh 9.1¢/kWh 7.5¢/kWh

Offers and Prices – October 2007 – October 2010

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Recent news and updates on the competitive electric market

Sources: EIA, www.powertochoose.org,

Shop Now for Cheaper Electric Rates By Jack Z. Smith, October 7, 2010

Recent Stats

As of July 2010 (latest available), statewide residential electric prices in Texas are below the national average.

Competition is fierce. For example, there are 51 different 1-year fixed-price offers in North Texas (Oncor) below 10 cents.

Competition is helping to push prices down: the average 1-yr fixed price offer in competitive areas of Texas has fallen 33% in the past two years.

"There are one-year fixed rates available that are below what most North Texans were paying just before the majority of the state's electricity market was deregulated nearly nine years ago, on Jan. 1, 2002.”

•  "Nineteen one-year, fixed-rate plans below 9 cents per kwh, including two at 8.4 cents, six at 8.5 cents, three at 8.6 cents, four at 8.8 cents and four at 8.9 cents.”

•  "Six two-year fixed-rate plans at 9 cents per kwh.”

•  "Fourteen all-renewable energy, one-year fixed-rate plans below 10 cents, ranging from 8.8 cents to 9.8 cents per kwh."

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Every Competitive Area in ERCOT Has Variable and 1-Year Lock Offers Available that are Lower than the National Average Price

Sources: Energy Information Administration, www.powertochoose.org

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Residential Retail Electric Prices All Data as of July 2010

¢/kW

h U.S. Average

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Retail electric price offers have fallen while energy commodity prices have risen

Sources: Public Utility Commission of Texas; www.powertochoose.org (1,000 kWh monthly usage); EIA (Cushing, OK Oil Future Contract 1 Prices; US All Grades Conventional Retail Gasoline Prices); NYMEX (natural gas 12-month strip); all data as of 10/11/10

Percent change in price December 2001 – October 2010

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Texas competitive electric prices compare well to the rest of the nation

Sources: EIA average annual residential rates for 2001 and July 2010 monthly data (latest available information). Average of lowest available prices in the 5 TDU areas open to competition from www.powertochoose.org (10/22/10) for a residential customer using an average of 1,000 kWh per month

¢/kW

h ¢/

kWh

2001 State Ranking (Pre-Competition)

July 2010 (Latest Available) Average lowest offer in

Texas competitive areas in Oct. ‘10– 7.5¢/kWh

Average lowest offer in July ‘10 - 8.5¢/kWh

State Price Rank Improved by 6 Spots

with Competition

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Texas competitive offers compare favorablywith prices in neighboring states

Sources: EIA; PUCT; www.powertochoose.org

Then: December 2001 Now: July 2010 (latest available consistent data)

Res

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Pric

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(¢/k

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Texas Competitive

OK LA NM AR OK LA NM AR Texas Competitive

Average Lowest Offer

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Other Issues

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Electric Consumption Continues toGrow in ERCOT

Source: ERCOT, “Report on Existing and Potential Electric System Constraints and Needs,” December 2009

Note: The peak in electric consumption in 2000 was due to an exceptionally hot summer.

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Generation investment in ERCOT

•  The competitive market has steadily added new generation and greater efficiency to the wholesale market.

•  Generators in the competitive market shoulder the risk of building new power plants, bringing efficient, cost-effective generation to consumers.

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Nodal Market Design in ERCOT

•  The transition to a nodal market design required substantial investment and upgrades to ERCOT’s information technology systems that will allow ERCOT to better monitor and control the real-time information pertaining to each node of the electric grid.

•  The ERCOT nodal market will provide benefits to customers by allowing ERCOT to dispatch generation units more efficiently, which will reduce delivered energy costs.

•  The nodal market will improve the economic efficiency of the wholesale electric market in ERCOT by improving grid management and providing enhanced system visibility and price signals for the market.

•  The nodal market is scheduled to go live on December 1, 2010.

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Texas Has the Most Installed Wind Energy Capacity

Source: American Wind Energy Association, 7/20/10 (www.awea.org/projects)

27% of the nation’s installed wind generation capacity is located in Texas.

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Map of Adopted Competitive Renewable Energy Zones (CREZs)

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Status of CREZ Certificates of Convenience and Necessity (CCNs)

Approved CCNs

LCRA Tippet to North McCamey

Oncor Bluff Creek to Brown Scurry County South to Tonkawa Dermott to Scurry County South Central Bluff to Bluff Creek Newton to Killeen Sweetwater to Central Bluff Tonkawa to Sweetwater Riley-Bowman Brown to Newton/Salado Jacksboro-Willow Creek-Parker Bowman to Jacksboro Tonkawa Station Expansion Jacksboro Station Expansion Bowman Switch Upgrade Carrollton NW Terminal

ETT East Abilene to Putnam Oklaunion Cap Bank Clear Crossing to Dermott Tesla to Riley Riley to Edith Clarke Edith Clarke to Cottonwood

LCRA Kendall to Gillespie Big Hill to Kendall

Lone Star Scurry County South to West Shackelford West Shackelford to Navarro/Sam Switch Sam Switch to Navarro West Shackelford Compensation Navarro Station Sam Switch Station West Shackelford Substation Additional Reactive Equipment

Sharyland Hereford to White Deer Silverton to Cottonwood Hereford Compensation Silverton Compensation

Cross Texas Silverton to Tesla Gray to Tesla Silverton to Tesla Compensation Gray Reactive Compensation Gray Substation

Oncor Clear Crossing to Willow Creek Riley to West Krum West Krum to Anna Willow Creek to Hicks Scurry County South Compensation Dermott Compensation Scurry County South Station Dermott Station Dermott to Willow Creek Brown Station Brown Compensation Newton Station Hicks Station West Krum Sweetwater East Switch Killeen Station Upgrade Willow Creek Station Parker Switch Upgrade

Filed CCNs

Source: PUC, “CREZ Progress Report No. 1,” October 2010

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Advanced Metering Activities in Texas

•  The approved deployment plan for CenterPoint Energy calls for installation of advanced meters over five years beginning in March 2009. In 2009, CenterPoint Energy received a Federal Smart Grid Investment Grant that enables the deployment to be completed by late 2012. Through October 2010, CenterPoint Energy has installed 789,857 advanced meters.

•  Oncor’s approved deployment plan initiated in late 2008 will have installation of advanced meters completed by the end of 2012. To date, Oncor has installed over 1.4 million meters.

•  The AEP Texas deployment plan was approved in December 2009 and installation of advanced meters will be completed by the end of 2013. To date, nearly 5,000 meters have been installed in Portland, Texas, in order to conduct a system acceptance test.

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Benefits for Qualified Low-Income Customers: The System Benefit Fund

•  The System Benefit Fund (SBF) was enacted as part of the Texas Electric Choice Act in 1999. It is intended to provide funding specifically for: –  assistance to low-income customers through reduced electric rates; –  weatherization programs; and –  administrative funding.

•  During the months of May through September, eligible low-income customers received a discount of up to 20 percent through the “LITE-UP Texas” electric discount program.

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Web: AECT.net

Blog: AECTnet.wordpress.com

Twitter: twitter.com/AECTnet

Facebook: Association of Electric Companies of Texas, Inc.

Email: info@aect.net