The Business of Electricity in Texas

1

• The Business of Electricityin Texas
• April 2008

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 [phone]
fax [phone] www.aect.net
2
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.
3
U.S. Divided into Eight Reliability Regions
FERC

• The eight reliability regions in the continental
  U.S. are subject to the oversight and enforcement
  authority of the North American Electric
  Reliability Corporation (NERC), which is subject
  to the Federal Energy Regulatory Commissions
  (FERC) oversight. NERC is responsible for
  developing standards to ensure and improve
  reliability for delivery of electricity on the
  bulk power system.

NERC

• Electric systems in Texas are located within
  four separate reliability regions
• - Texas Regional Entity (TRE), which
  oversees participants in the Electric
  Reliability Council of Texas (ERCOT) (green
  shading)
• - SERC Reliability Corporation - Southwest
  Power Pool (SPP) and
• - Western Electricity Coordinating Council
  (WECC).

(ERCOT)
4
AECT Companies Outside of ERCOT
SERC Reliability Corporation
SPP
WECC
Southwest Power Pool (SPP)
Western Electricity Coordinating Council (WECC)
SERC
5
AECT Member Companies Within ERCOT
Retail Electric Providers
Transmission and Distribution Utilities
Generation Companies
6
Contents
Slide 7 Electric Market Structures in
Texas Slide 12 Texas Wholesale Electric
Markets Slide 22 ERCOT Generation Mix Slide
29 Types of Generation Benefits and
Challenges Slide 39 Emissions and the
Environment Slide 51 Transmission and
Distribution Utilities Slide 59 Energy
Efficiency Slide 64 Competitive Retail
Electric Market in ERCOT
7
Electric Market Structures in Texas
8
ERCOT Separate companies provide retail,
transmission distribution and generation
services
Power Flow
Financial Flow
Regulated

• In competitive markets, consumers have multiple
  retail electric providers (REPs) and service
  plans to choose from.
• Wholesale and retail prices are set by
  competitive market forces, while the PUC sets
  transmission and distribution rates.

9
ERCOT Separate companies provide retail,
transmission distribution and generation
services
Power Flow
Financial Flow
Regulated

• Because wholesale electric prices are set by the
  competitive market, the risks associated with the
  cost of construction, operations and maintenance
  of a generation plant are borne entirely by the
  generator and its investors, not by end-use
  customers.

10
Outside ERCOT A single company provides retail,
transmission distribution and generation
services in each area
Power Flow
Financial Flow
Regulated

• In fully regulated markets, the PUC sets retail
  rates charged to end-use customers.
• Each of these service areas is part of
  multi-state electric grids, with differing
  regulations. In many cases, vertically integrated
  utilities purchase wholesale power from certain
  unregulated entities.

11
Outside ERCOT A single company provides retail,
transmission distribution and generation
services in each area
Power Flow
Financial Flow
Regulated

• New power plants in these regions can be built
  by both regulated entities and certain
  unregulated entities or qualifying facilities.
• Regulated utility power plants, however, must be
  approved by the PUC after a rigorous review of
  need and siting.

12
Texas WholesaleElectric Markets
13
The Competitive Wholesale Market A Success Story

• Competition has brought greater efficiency to
  the wholesale market
• Generators shoulder the risk of building new
  power plants, bringing efficient, cost-effective
  generation to consumers.
• New power plants produce more electricity per
  unit of fuel.
• New power plants include modern environmental
  emissions controls.
• The competitive market is in the public interest
• Operational efficiency of a competitive market
  helps push wholesale prices downward.
• No market structure is more effective at ensuring
  efficient operations than a competitive one.
• Policy decisions should be focused on
  maintaining vibrant competition
• Texas leaders should support policies that
  maintain the competitive market.
• The competitive market will bring forward the
  right mix of technology and fuel type based on
  environmental choices by policymakers.

14
Permitted and Operating Electric Generating Units
in Texas
15
ERCOT Wholesale Market Management

• System Reliability
• ERCOT oversees system reliability.
• ERCOT is part of national reliability council.
• ERCOT protocols, approved by PUC, mandate system
  reliability standards that all market
  participants must follow.
• Statute and Rules Address Market Power and
  Generation Merger Issues
• Independent Market Monitor oversees wholesale
  market operations.
• Generating capacity owned and controlled by a
  Power Generation Company limited to 20 of
  installed generating capacity capable of
  delivering power to a power region.
• Administrative penalties for market power abuse
  were reviewed and updated during the 79th Regular
  Session.
• Mergers of Power Generation Companies subject to
  PUC review.
• Market Design
• ERCOT will transition to a Nodal Market in 2009
  as a result of PUC rulemaking.
• The change is expected to bring cost-savings and
  additional efficiency to the market by enhancing
  market transparency and allocating costs more
  accurately to market participants.

16
Wholesale Market Management Outside ERCOT

• System Reliability
• Larger, multi-state Councils (SERC, SPP, WECC)
  oversee system reliability.
• Each is part of national reliability council.
• Protocols, approved by the Federal Energy
  Regulatory Commission (FERC), mandate system
  reliability standards that all market
  participants must follow.
• Wholesale market operations overseen by FERC

17
Increased Population DrivesFuture Electric
Consumption
Texas Projected Population GrowthAssuming Net
Migration Equal to 2000-2004 (median scenario)
43.6 million

• To meet increases in electric load created by
  Texas rapid population and economic growth,
  Texas will require additional power, transmission
  
• and distribution, customer demand response and
  energy efficiency.

36.3 million
30.3 million
25.1 million
2010 2020 2030 2040
Source Texas State Data Center
18
Electric Demand Continues toGrow in ERCOT
1 TWh 1 billion kWh
Source ERCOT, Report on Existing and Potential
Electric System Constraints and Needs, December
2007
Note The peak in electric consumption in 2000
was due to an exceptionally hot summer.
19
ERCOT Restructuring Spurred Massive Generation
Investment
90-97 Additions 6 GW
98-07 Additions 30 GW
PURA 95 (wholesale competition)
SB7 (retail competition)
Year in Service
GW 1000 MW Source Energy Velocity NERC,
ERCOT, PUC
20
Update on ERCOT Reserve Margins

• ERCOT Estimated Peak Demand - 2008 through 2012

Source ERCOT, Report on the Capacity, Demand
and Reserves in the ERCOT Region, December 2007

• At a KEMA conference in March 2008, ERCOT CEO Bob
  Kahn stated that ERCOTs May 2008 update on
  reserve margins will show that the states power
  supply will not be below the 12.5 reserve margin
  in the next few years.
• Maintaining a robust competitive wholesale market
  is the best way to ensure adequate reserves.

21
ERCOT Long-Term Projections ShowSubstantial
Investment Needed
Source ERCOT, Report on the Capacity, Demand
and Reserves in the ERCOT Region, December 2007
22
ERCOT Generation Mix
23
ERCOT Generation Mix

• The generation technology mix is an outcome of a
  robust competitive wholesale market and
  environmental policy decisions.
• In addition to the price of fuels and the cost of
  technology, environmental and siting issues
  impact choices made by generation developers.
• Coal, including lignite, is an important fuel in
  the ERCOT electric generation mix.
• Coal is the most abundant fossil fuel in the
  United States, with an estimated 200 year supply
  remaining (per the Energy Information
  Administration (EIA)).
• Electricity produced from Texas lignite exceeds
  the entire generation of 28 states individually.
• Texas lignite accounts for about 45 of the coal
  used in the state for electricity.
• Texas lignite mining industry is a key part of
  the state economy, providing over 33,000
  permanent jobs and contributing about 10.5
  billion in annual Total Expenditures.
• The existing framework of Texas competitive
  wholesale electric market has helped lead
  generators to invest in and announce plans for
  over 27,000 MW of new generation, including
  natural gas, coal, nuclear and renewable power.

Sources EIA, National Mining Association, The
Perryman Group
24
ERCOT Generation Compared to U.S. Average
ERCOT
U.S. Average
Energy (MWh)
Capacity (MW)
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 ERCOT, Energy Velocity
25
Gas on the Margin in ERCOTYear-Round
Examples are purely illustrative

• There are multiple types of power plants with
  different operations in ERCOT that are operated
  on different schedules.
• Because of their lower marginal costs, nuclear
  and coal-fired power plants in ERCOT operate
  approximately 90 percent of the time.
• In contrast, natural gas-fired power plants are
  ramped on and off, depending upon demand.
• Wind-generated electricity is only intermittently
  available, depending on wind conditions.
• Some natural gas-fired generation is required to
  operate at all times in the ERCOT region to meet
  demand.
• Natural gas-fired generation sets the market
  price of wholesale electricity in ERCOT.
• Natural gas-fired units that are used to meet
  peak demand tend to be older units that cost more
  to operate.

26
All Energy Commodities Have Increased
Change in Energy CommoditiesDecember 2001 -
March 2008
Sources Energy Information Administration (EIA)
(EOM 12/01, 3/24/08), NYMEX natural gas
12-month-strip (12/31/01, 3/20/08)
27
Texas Has the Most Installed Wind Energy
Capacity
Over 25 of the nations installed wind
generation capacity is located in Texas.
Source American Wind Energy Association, 1/16/08
(www.awea.org/projects)
28
Business Climate for Generatorsin ERCOT

• In ERCOT, generation companies assume all of the
  financial risk included in a new generation
  projects.
• The decision to build new generation thus depends
  upon whether the generator believes the
  electricity can be sold at a price to recoup
  construction costs, cover operations and
  maintenance costs and achieve a profit.
• Market forces have been effective in bringing new
  generation to the state, with over 37,063 MW of
  generation constructed since the advent of
  wholesale competition in 1995. Another 4,433 MW
  of new generation is under construction,
  according to the PUC.
• While not all is expected to the built, the PUC
  reports 25,756 MW of new generation has been
  announced
• 6,389 MW of new coal-fired generation
• 6,002 MW of new nuclear generation
• 8,012 MW of new wind-powered generation
• 5,253 MW of new natural gas-fired generation
• Though such news is positive, market forces and
  legislative and regulatory certainty will
  ultimately dictate how much of the announced new
  generation is actually built.

Data source PUC, New Electric Generating Plants
in Texas, as of November 17, 2007
29
Types of GenerationBenefits and Challenges
30
Three Key Factors Affecting Choicesfor New
Generation
Environmental Issues
Type of Generation
Wholesale Market
Cost of Construction and Fuels
31
Coal-Fired Generation
Type of Generation Coal-fired plants provide
baseload generation, by running approximately 90
percent of the time.
Environmental Issues - Greater air emissions than
natural gas-fired plants, including rate of about
twice the CO2 per kWh generated. - Risk of higher
costs due to future carbon-capture requirements.
Cost of Construction and Fuels Currently,
pulverized coal generation is economical to build
based on current natural gas prices of
8-10/MMBtu. Long-term domestic supply of
coal, including lignite. Fuel cost is
relatively low - High initial capital costs
relative to natural gas-fired plants.
32
Natural Gas-Fired Generation
Type of Generation - Natural gas plants, such as
combined-cycle plants, can provide baseload
generation, but demand conditions in ERCOT result
in a lower capacity factor than for coal-fired or
nuclear-powered generation. Other simple-cycle
natural gas plants have quick start-up and
shut-down times to allow them to meet peak demand.
Environmental Issues Lowest air emissions among
fossil fuels. Newest power plants operate more
efficiently, burning less fuel per MWh of
generation.
Cost of Construction and Fuels Low initial
capital costs. - When natural gas prices are
high, gas-fired power plants are expensive to
operate.
33
Nuclear-Powered Generation
Type of Generation Nuclear-powered plants
provide baseload generation by running
approximately 90 percent of the time.

• Environmental Issues
• No air emissions.
• - Long-term storage of waste needs to be
  implemented.
• Historic concerns regarding public perception of
  safety of nuclear power.

Cost of Construction and Fuels Lowest fuel cost
of all large-scale generation. - High capital
costs. - Longest permitting and construction
times among generation types.
34
Wind-Powered Generation

• Type of Generation
• Wind is plentiful in certain parts of Texas.
• Wind blows intermittently, making it a less
  reliable power source.

• Environmental Issues
• No air emissions.
• Can affect migratory birds.
• - Concerns about aesthetic impact.

• Cost of Construction and Fuels
• No fuel cost.
• Limited ability to replace other generation to
  satisfy reserve margins.
• Imposes other costs on the system, such as
  increased ancillary service requirements, backup
  capacity and the need for transmission lines to
  reach rural wind farms.

35
Solar Generation
Type of Generation Solar power is generally
reliable, but intermittent, as it depends on
certain levels of sunlight. - Plants are
generally small in scale.
Environmental Issues No air emissions. - Large
areas of land needed for effective solar arrays.

• Cost of Construction and Fuels
• - Can have 15 to 20 times the capacity cost of
  natural gas-fired generation
• No fuel cost.
• Cannot be used to replace other generation to
  satisfy reserve margins.
• Imposes other costs on the system, such as the
  need for transmission lines, since large-scale
  solar power plants would be located in areas far
  from population centers.

36
Biomass and Landfill Gas Generation
Type of Generation Biomass and landfill gas
generation generally operates reliably. - Plants
are generally small in scale.
Environmental Issues - Plants burning biomass can
have high CO2 emissions. Landfill gas
facilities reduce methane greenhouse gas
emissions. - Generation is difficult to permit
and site.

• Cost of Construction and Fuels
• Requires high capital and operating costs when
  compared with fossil fuel-fired generation
• Often located far from population centers,
  requiring high transmission costs

37
Hydroelectric Generation
Type of Generation Hydroelectric power is
reliable to operate, except during
drought. - Texas has very little potential for
new hydroelectric power generation.
Environmental Issues No air emissions. - Can
kill fish.
Cost of Construction and Fuels Once built,
hydroelectric power is among the least expensive
forms of power, as it has no fuel costs. - High
capital costs
38
Energy Efficiency and Demand-Side Management
Type of Technology Several cost effective
solutions available. - Success requires broad
implementation.
Environmental Issues Reduces emissions that
would otherwise accompany fossil fuel usage.
Cost of Construction and Fuels Can improve cost
levels for residents and customers. Reduces
need for building new power supply.
39
Emissions and the Environment
40
Key Environmental Issues

• Air emissions, including emissions of criteria
  pollutants, mercury and carbon dioxide
• Water discharges
• Water rights and usage
• Cooling reservoirs and towers
• Low-level radioactive waste
• Permitting for new generation
• Transmission line siting issues
• Vegetation management and right-of-way clearing
• Storm water
• Endangered/protected species and habitat
• Avian issues
• Materials and treatments for transmission and
  distribution poles
• Regulatory approvals for new transmission
  facilities
• Oil filled electrical equipment

41
Texas is Already Leading the Wayin Clean Power
Plants
2006 NOx Emissions Rate Averages (lbs/MMBtu)
0.267OK
0.436NM
0.210AR
National Average 0.255
0.179LA
0.111TX
Texas NOx emissions rate is less than that of
neighboring states and 56 percent below the
national average
Source EPA Clean Air Markets Division - 2006
Acid Rain Program Data
42
NOx Reductions Achieved UnderTCEQ 1-hr Ozone
State Implementation Plan (SIP) Rules

• Houston/Galveston SIP- 86 overall reduction from
  1997
• Dallas/Fort Worth SIP- 88 overall reduction from
  1997
• Beaumont SIP- 45 reduction from 1997
• East Texas SIP- 51 reduction from 1997

Between 2000 and 2005, electric generating
companies in Texas spent over 1 billion on NOx
emission reductions alone.
43
Texas Electric Generating Plants Among Lowest
NOx Emitters in the Nation
Texas has the 7th cleanest NOx emissions rate
Data source EPA Acid Rain Database - data
through 2006
44
SO2 EmissionsTexas vs. Other States
Texas has the 16th cleanest SO2 emissions rate
50 below the U.S. average.
Data source EPA Acid Rain Database - data
through 2006
45
CO2 Emissions inContext of Texas Economy

• A common refrain is that CO2 emissions generated
  in Texas are higher than in
• other states. However, it is critical to view
  that in the context of other truths
• Texas consumes more electricity than any other
  state in fact, Texas produces 80 more
  electricity than the next most generating state.
• Much of the CO2 emitted in Texas results from the
  generation of products that are very
  significant to our state and nation. For example,
  Texas produces about
• 60 of petrochemicals produced in the U.S.
• 30 of gasoline and diesel refined in the U.S.
• 10 of electricity generated in the U.S.
• Texas has a high level of gross product per ton
  of CO2 produced, and it increased by more than
  1000 between 1963 and 2001.
• The amount of CO2 emitted per MWh of electricity
  generated in Texas is well below the national
  average, and lower than half of the states that
  have more than a nominal amount of coal-fired or
  oil-fired electricity generation.

Source EIA, 2006 State Electricity Profiles
46
CO2 EmissionsTexas vs. Other States
Texas has the 15th cleanest CO2 emissions rate
Data source EPA Acid Rain Database - data
through 2006
47
Future Additional Emission Reductions

• Federal Clean Air Interstate Rules (CAIR)
• Requires additional NOx and SO2 emissions
  reductions from power plants in 2009, 2010, and
  again in 2015, with a cap and trade program.
• The NOx and SO2 emissions from all new units must
  fit under the 2009, 2010, and 2015 caps such
  emissions are not in addition to those caps.
• TCEQ has recently revised its rules to implement
  CAIR.
• Regional Haze
• Requires reductions in NOx, SO2, and Particulate
  Matter (PM) emissions based on best available
  retrofit technology (BART) for different types of
  facilities, including electric generating units,
  industrial boilers, and refineries.
• EPA has decided that NOx and SO2 emissions
  reductions made for CAIR will suffice for the NOx
  and SO2 emissions reduction requirements under
  Regional Haze.
• The TCEQ is developing rules to implement BART.

48
Future Additional Emission Reductions

• Federal mercury (Hg) regulations (CAMR)
• February 8th decision by DC Circuit Court to
  vacate rules
• Would have marked the first time the any country
  has regulated mercury emissions from power plants
• Would have required a 70 reduction of mercury
  emissions from power plants in all 50 states
• If EPA has to set a Maximum Achievable Control
  Technology (MACT) standard
• the new emissions standard for each existing and
  new facility needs to be set according to fuel
  type
• Different coals will require different controls
  and considerations.

49
Giving Back to theEnvironment

• AECT member companies help to improve our
  environment through stewardship, support for new
  technologies and partnership with other agencies.

• Environmental Stewardship
• Reducing releases of chlorofluorocarbons from
  electrical equipment- Recycling coal combustion
  products- Educating schools and communities
  about renewable energy- Designating land and
  reservoirs for public recreational use-
  Preserving and restoring forests by planting
  millions of trees- Helping other industries
  adopt pollution-prevention plans- Launching
  education campaigns to help communities save
  energy- Creating wetlands and wildlife habitats
  on company properties
• Reclaimed water utilization
• Offering renewable energy products to retail
• customers

• Environmental Partnerships
• Climate Challenge Program- Energy Star- Energy
  Smart Schools- Environment Research Program
• EPA SF6 Partnership program
• Mickey Leland Internship Program
• TCEQ Teaching Environmental Science
• Green Lights- Habitat Protection- Learning
  From Light!- Millennium Council- Million Solar
  Roofs- National Energy Education Development
  (NEED) Project- Natural Gas Star

50
Selected Environmental Programs and Fees

• The electric industry is among the most heavily
  regulated in the nation, complying with hundreds
  of regulations and paying millions of dollars in
  fees annually.

• Selected Current Environmental Programs
• - Compliance with National Ambient Air Quality
  Standards
• State Implementation Plan
• NOx reductions for electric generating units
• Clean Air Interstate/Clean Air Mercury Rules
• New Source Review (NSR)Prevention of
  Significant Deterioration
• Non-attainment NSR, including offset
• State Minor NSR
• Title V and Acid rain permits
• Compliance Assurance Monitoring
• Continuous Emissions Monitoring Systems
• Toxic Release Inventory
• Monitoring cooling water
• Mass Emission Cap and Trade Program

• Selected Current Environmental Fees
• - Title V federal operating permit fees- Air
  inspection fees- Air quality permit fees- Air
  quality permit renewal fees- Wastewater
  inspection fees- Wastewater permit application
  fees- Water quality fees- Potable water fees-
  Water use permit application fees- Hazardous
  waste generation fees- Non-hazardous waste fees
• Low level radioactive waste fee
• Injection well fee

51
Transmission and Distribution Utilities
52
TDUs Role in the Competitive ERCOT Market

• Transmission and Distribution Utilities
• Provide reliable delivery of electricity on a
  24-7 basis.
• Invest in and build infrastructure (e.g.,
  transmission lines, Smart Grid) to support the
  needs of Texas growing economy.
• Manage their transmission networks under the
  direction of ERCOT coordinating with ERCOT on
  transmission planning activities.
• Respond to outages (e.g., storms, natural
  disasters) that affect the grid and restore
  service as quickly as safely possible.
• Provide key market information, such as premise
  information and metering services to facilitate
  successful operation of the ERCOT deregulated
  market.
• Provide regulated transmission and distribution
  services to facilitate operations of wholesale
  and retail business entities.
• Charge regulated delivery rates to REPs
• Rates based on a historical cost of service
  including a PUC-established return on capital
  investment
• Allocation of ERCOT-wide transmission costs
• Non-bypassable charges include the cost to
  deliver electricity, System Benefit Fund,
  recovery of true-up costs and nuclear
  decommissioning expenses for existing nuclear
  facilities

53
TD Market Design ERCOT

• ERCOT Transmission
• 1995 amendments to the Public Utilities
  Regulatory Act (PURA) required PUC to ensure open
  access to transmission grid, allowing new
  independent generators to utilize transmission
  network.
• TX76RSB 7 adopted postage stamp transmission
  pricing structure and eliminated impact of
  location on transmission rates.
• Transmission Cost of Service (TCOS) ratemaking
  structure implemented and billed to distribution
  service providers (DSP).
• DSPs recover TCOS through the TDSP delivery rate
  and transmission cost recovery factor (TCRF),
  approved by PUC.
• New transmission investment is coordinated
  through the ERCOT regional transmission planning
  process and requires PUC facility certification.

54
New Transmission Investment in ERCOT

• Since 2005, TDUs have invested 2.2 billion
  in the ERCOT transmission grid.
• ERCOT estimates that the electric grid will
  require adding or improving 2,538 circuit
  miles of transmission lines at a cost of
  3.0 billion from 2008 through 2012.
• In addition, the integration of competitive
  renewable energy zones (CREZs) into the
  competitive ERCOT market will require
  additional investment.
• Non-ERCOT areas will also require significant
  investment to ensure reliability.

Source ERCOT, Report on Existing and Potential
Electrical System Constraints and Needs,
December 2007
55
Continued Transmission and Distribution
Investment Needed Throughout Texas

• According to the Texas State Data Center, 5
  million new residents are expected in Texas by
  2020.
• New generation must be delivered effectively and
  efficiently to population centers of the state.
• Texas must provide regulatory certainty and fair
  rates of return to ensure appropriate capital
  investment.
• Though not shown here, areas of Texas located
  outside the ERCOT grid are also growing, both in
  terms of population and economic development.

Source ERCOT, Report on Existing and Potential
Electric System Constraints and Needs, December
2007
56
Challenges of TransmissionLine Construction
Example of Transmission Construction Process in
ERCOT

• While certain types of generation can be
  constructed quickly -- often as short as 12-18
  months -- transmission lines typically take
  between three and five years. Generation can be
  brought into the market more rapidly if the
  siting takes advantage of the existing
  transmission infrastructure.
• Building long transmission lines can affect many
  landowners, often requiring a lengthy and
  extensive easement acquisition effort.
• The transmission line siting process must take
  into account the impact of those lines on
  environmentally sensitive and historically
  significant lands.
• Utility is not typically allowed to begin
  recovering costs until year 5 or 6.

57
Distribution Investment Also Needed

• The need to replace an aging distribution
  infrastructure to meet population and demand
  growth will require continued investment.
• It is becoming more evident that rising
  construction material costs are an increasingly
  important driver contributing to the higher
  actual and planned utility industry
  infrastructure investments.

• Nationwide, distribution investment is expected
  to be almost triple the size of projected
  transmission spending, according to the Edison
  Electric Institute. Distribution investment is
  likely to exceed generation and environmental
  capital spending, as well.

58
TD Market Design Non-ERCOT

• Non-ERCOT Transmission
• Wholesale open access transmission rights subject
  to Federal Energy Regulatory Commission (FERC)
  jurisdiction.
• FERC transmission pricing reflects location of
  generation.
• FERC requires generators to bear higher cost
  relative to the ERCOT system of connecting with
  the transmission grid.
• Certification in Texas is with the PUC.
• Recently adopted PUC rules allows most non-ERCOT
  utilities to recover transmission investments
  between rate cases through a transmission cost
  recovery factor (TCRF).

59
Energy Efficiency
60
Energy Efficiency ProgramsHave Exceeded Goals
Total Energy Savings by Investor-Owned
Utilities2003 - 2006

• In 2006, utilities in Texas exceeded their
  statewide legislative energy efficiency goals for
  the fourth straight year. Utilities achieved 164
  MW of peak demand reduction in 2006, which was
  27 above their 129 MW goal.
• Energy savings from standard offer programs and
  market transformation programs resulted in an
  equivalent reduction of 551,317 pounds of
  nitrogen oxide emissions per year.

Source Frontier Associates LLC, Energy
Efficiency Accomplishments of Texas Investor
Owned Utilities, Calendar Year 2006, July 12,
2007
61
TX80RHB 3693 Enhancing Energy Efficiency

• TX80RHB 3693 included a host of programs designed
  
• to help reduce electricity usage in Texas.
• Raises energy efficiency goal for electric
  utilities from 10 of annual demand growth to 15
  in 2008 and 20 in 2009.
• PUC will study energy efficiency programs by
  January 15, 2009, and submit a report to the
  legislature.
• The study shall address whether utility energy
  efficiency programs should continue and whether
  energy efficiency programs are best provided by
  the competitive market.
• The findings of the study will determine whether
  a goal increase to 30 percent is achievable by
  2010 and 50 percent by 2015.
• PUC will work with ERCOT to develop a method to
  account for projected energy efficiency impacts
  in ERCOTs forecasts of future capacity, demand,
  and reserves.

62
TX80RHB 3693 Enhancing Energy Efficiency

• The bill also includes
• an energy efficiency cost recovery factor
• a utility financial incentive for exceeding
  goals and
• the ability for utilities under a rate freeze to
  defer recognition of these costs.
• Provisions aimed at reducing energy consumption
  by schools and government buildings.
• Stronger, more energy-efficient building
  standards for low-income housing.
• Creates an annual sales tax holiday during
  Memorial Day weekend for energy efficient
  products that bear the designation of the
  nationwide Energy Star program.

63
Advanced Metering in Texas

• Customers can better manage their electric
  consumption, reducing the need for new power
  plants.
• Advanced meters and other new technologies and
  associated infrastructure will provide
  information and opportunities that will enable
  customers to take control of their energy
  consumption (e.g., shifting usage to off-peak
  times).
• Advanced meters will also allow for more
  automation of utility functions such as meter
  reading and connections/disconnections.
• Since late 2007, market participants have been
  working on technical issues related to deployment
  of advanced meters.

64
Competitive Retail Electric Market in ERCOT
65
The ERCOT Competitive Retail Electric Market is
Providing Strong Customer Benefits

• Customer Choices Continue to Increase in ERCOT
• Eligible residential customers have between 26
  and 30 retail electric providers (REPs) from
  which to choose, and the number of products
  continues to grow.
• As of December 31, 2007, 80 percent of eligible
  residential customers have made an observable
  choice in the market, making Texas 1 in the U.S.
  for residential choice.
• Customers Have Competitively Priced Products to
  Choose From in ERCOT
• In areas of Texas open to consumer choice,
  competitive prices for residential customers have
  fallen since full competition began in January
  2002.
• After adjusting for inflation, prices have fallen
  since the last regulated rate of 12/31/01.
• ERCOT Prices Compare Well to Other Areas
• ERCOTs competitive residential electricity rates
  compare favorably to those of major cities across
  the nation.
• Retail electric prices have grown far less than
  other energy commodities, such as gasoline, crude
  oil, natural gas and coal.
• Prices Are Dependent Upon Input Costs
• REPs prices are affected by the cost of
  wholesale power, which is largely dependent upon
  the price of natural gas.
• Important input costs, such as steel and copper
  have also risen in price, which can affect the
  price of electricity.

66
Eligible Residential Customers Have MoreRetail
Electric Choices than Ever Before
Texas-New Mexico Power Co. Service
Territory Number of REPs 26 Change in number
of residential product choices 117 increase
AEP Texas North Service Territory Number of
REPs 28 Change in number of residential
product choices 118 increase
Oncor Service Territory Number of REPs
28 Change in number of residential product
choices 93 increase
CenterPoint Energy Service Territory Number of
REPs 28 Change in number of residential
product choices 85 increase
AEP Texas Central Service Territory Number of
REPs 30 Change in number of residential
product choices 112 increase
Since January 2007, investment by REPs in ERCOT
has increased available choices for residential
customers.
Sources PUC historical data, www.powertochoose.or
g (1/1/07 and 3/25/08)
67
4 Out of 5 Eligible ERCOT Customers Have
Exercised a Choice in theCompetitive Market
Residential Customer Choice TrendsPrevious Four
Quarters
75
79
77
80
ERCOT is the 1 competitive retail electric
market in the country and customers are
exercising choice in ever-growing numbers.
Source Letter from Bret J. Slocum, to Public
Utility Commission of Texas, January 24, 2008.
Data is through December 31, 2007.
68
Greater Detail on Customers Choicesin the
Competitive Electric Market
Residential Customer Choice TrendsPrevious Four
Quarters
75
79
77
80
Source Letter from Bret J. Slocum, to Public
Utility Commission of Texas, January 24, 2008.
Data is through December 31, 2007.
69
Texas is the Undisputed Leader in Delivering
Electric Choice
Net Residential Incumbent Switch Rates (Oct
06-Dec 071)
80
41
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11
6
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0.6
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The rate of customers choosing electric service
in Texas dwarfs that observed in other states.
1 Texas switching data as of 12/31/07 per ERCOT
and reflects customer counts Texas customers
observably choosing as of 12/31/07 per letter
from Bret J. Slocum of Clark, Thomas and Winters
to PUC Commissioners dated January 24, 2008 NJ
as of October 2006 from NJ Board of Public
Utilities data for other states from November /
December 07 KEMA Retail Energy Foresight Report
and ranges from 6/30/07-12/31/07. Ohio excludes
load attributable to municipal aggregation per
PUCO September 2007 report. Sources KEMA, NJ
Board of Public Utilities, Ohio PUC, ERCOT
Clark, Thomas Winters
70
Competitive Residential Electric Prices Have
Fallen Since Full Competition Began in January
2007
Texas-New Mexico Power Co. Service
Territory Lowest available residential
price 5.7 decrease
AEP Texas North Service Territory Lowest
available residential price 1.0 decrease
Oncor Service Territory Lowest available
residential price 13.9 decrease
CenterPoint Energy Service Territory Lowest
available residential price 12.4 decrease
AEP Texas Central Service Territory Lowest
available residential price 5.6 decrease
Since January 2007, competitive prices for
residential customers have fallen in every
service area.
Source http//www.powertochoose.org (1/1/07
3/25/08)
71
After Adjusting for Inflation, Today's Lowest
Priced Offers Give Customers Significant Savings
Over the Last Regulated Rate
Average competitive offer in /kWh includes ALL
available offers in service territory for 1000
kWhrenewables, variable rates, lock rates,
etc. Sources http//www.powertochoose.org
3/25/08 http//www.bls.gov/home.htm
3/19/08 http//www.puc.state.tx.us/nrelease/2001/1
20701.cfm
72
Even Without Inflation Adjustment, Most Texans
Can Choose Lower-Priced Current Offers than the
Last Regulated Rate
Average competitive offer in /kWh includes ALL
available offers in service territory for 1000
kWhrenewables, variable rates, lock rates,
etc. Sources http//www.powertochoose.org
3/25/08 http//www.puc.state.tx.us/nrelease/2001/1
20701.cfm
73
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.
• The PUC recently approved the utilization of the
  80 million of SBF funds authorized by the 80th
  legislature.
• These funds will be used to provide a discount to
  low-income customers in the competitive areas of
  the state.
• During the months of May through September,
  eligible low-income customers will receive an
  approximate 20 percent discount through the
  LITE-UP Texas electric discount program.

74
Benefits for Qualified Customers REP Programs

• Several retail electric providers across the
  state also provide additional, voluntary programs
  to assist low-income customers. Examples of
  programs include
• Since May 2003, the Neighbor-to-Neighbor program
  has helped tens-of-thousands of Direct Energy,
  CPL Retail Energy, and WTU Retail Energy
  customers with their home energy expenses. The
  program was created to assist families
  experiencing financial emergencies with up to
  200 in bill payment assistance, as much as twice
  during a calendar year. The program is
  administered by more than 30 community action
  agencies across the state.
• The Care to Share Fund provides bill payment
  assistance to eligible First Choice Power
  residential customers in need of emergency
  funding. Customers can donate to the Care to
  Share Fund and assist residential customers who
  need a little extra help by providing extra
  emergency assistance through the Care to Share
  Fund.
• The CARE Energy Assistance Program was created by
  Reliant Energy to help Reliant customers during a
  difficult time. Customers who qualify may receive
  this one-time annual assistance through
  non-profit social service agencies in communities
  that are served by Reliant Energy. These agencies
  review customer cases and qualify them based upon
  the agencys designated hardship criteria.
• TXU Energy has committed 25 million per year for
  5 years to fund a 10 low-income discount, and an
  additional 5 million per year for 5 years for
  low-income bill assistance through its TXU Energy
  Aid program. In addition, TXU Energy has
  established the Low Income Advisory Committee and
  works collaboratively with over 400 agencies
  across the state to assist customers in need.
• Since September 2006, several REPs have
  participated in the low-income credit program
  resulting from CenterPoint Energys 2006 rate
  case settlement. This program is currently
  providing a credit of 7.68 per month to eligible
  customers.
• Texans can check their electric providers Web
  site or call their provider to see what other
  programs are available.

75
Dallas and Houston Residential Electricity Rates
Compare Favorably to Major Cities Across the
Nation
Summer Electricity Prices by City July 2007 Data
Lowest Competitive Offers (July 2007)
Sources All cities except Dallas and Houston
based on EEI report Typical Bills and Average
Rates Report Summer 2007. Average price in
Dallas and Houston based on 7/30/07 average of
non-renewable offers, weighting each REP equally
(http//www.powertochoose.org).
76
In 2001, Regulated Rates in Texas Ranked
14th-Highest Nationwide in Average Retail Prices
Slide Source What Have You Done For Me Lately?
A Look at the Texas Competitive Electricity
Market, Presentation by PUC Commissioner Julie
Caruthers Parsley, January 2008
77
Today, Texas Rank Has Slightly Improved and
ERCOT Customers Can Choose to Lower Their
Electric Bills Even More
Note Texas statewide average price includes
prices from both competitive and regulated areas
of the state.
Slide Source What Have You Done For Me Lately?
A Look at the Texas Competitive Electricity
Market, Presentation by PUC Commissioner Julie
Caruthers Parsley, January 2008
78
Electricity Prices in ERCOT are Strongly
Influenced by Natural Gas Prices
Electric Price per kwh
Natural Gas Price per MMBtu
Sources Public Utility Commission of Texas, NYMEX
79
Retail Electric Prices have Grown Far Less than
Other Energy Commodities
Change in Energy CommoditiesDecember 2001 -
March 2008
Sources Energy Information Administration (EIA)
(EOM 12/01, 3/24/08), NYMEX natural gas
12-month-strip (12/31/01, 3/20/08), PUC
historical data (12/2001), http//www.powertochoos
e.org,( 3/25/08, average of all offers, including
renewables)
80
Energy Input Costs Affecting Retail Electric
Prices
Paul Hudson, a commissioner for the Texas Public
Utility Commission, said prices are rising for
everything needed to make electricity -- fuel,
steel, labor, copper, pipes, everything. My
great challenge as a regulator is to explain to
customers that the era of inexpensive power is
coming to an end, he said during a conference on
Tuesday held by KEMA Inc.
Dallas Morning News Texas electric official
High prices are here to stay By Elizabeth
Souder, March 12, 2008
81
The ERCOT Competitive Retail Electric Market Key
Takeaways

• The ERCOT competitive electric market is
  well-structured to protect customers.
• Customers have many choices among REPs to allow
  them to find an electric service plan suited to
  their needs.
• REPs are developing innovative pricing and
  service options to attract and retain customers.
• Input costs, such as the cost of natural gas and
  metals for use in transmission and distribution
  construction, are the key factors in overall
  prices, but competition among REPs helps
  consumers in the market.

ERCOT is the 1 competitive retail electric
market in the country and customers are
exercising choice in ever-growing numbers.
82
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