Maine's Standard Offer Service

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Maine's Standard Offer Service

• Tom Welch
• Massachusetts Electric Restructuring Roundtable
• January 28, 2005

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Standard Offer Design

• Available to all customers
• Bid by TD territory, not state-wide
• Prices differentiated by customer size (small,
  medium, large)
• Billed through TD company
• Fixed uncollectible amount in contract (based on
  prior year TD experience) during contract term,
  TD bears risk of misestimated uncollectible rate
• Use of load profiling to determine residual
  load
• Bids by percentage of load (to permit selection
  of multiple bidders)
• Objective is to obtain good price but avoid
  distorting retail market

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Key Design Elements

• Relatively short term (6 mos. To 3 years) fixed
  price (for larger customer classes, can vary by
  season, time of day)
• Supplier takes all risk
• Load risk
• Price risk
• No adjustments (retroactive or otherwise) during
  term
• Relatively free customer entry/exit
• Anti-gaming rules
• No new deferred costs
• Market priced
• Retail price price is not raised or lowered by
  regulator (avoids new stranded costs)

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Design Implications for Attracting Supply
Investment

• Standard Offer is not intended to provide
  incentives beyond those in the market for
  development of new supply
• Issue of degree of government involvement in
  encouraging new supply still unresolved
  (Editorial Current LICAP proposal won't work)
• Standard Offer design could accommodate
  transparent efforts to encourage supply

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Bid Process

• Issue RFPs
• Describe product clearly
• Documents available in hard copy and on website
• Provide load data
• Pre-bid conferences
• Answer questions and post on website
• Seek indicative prices
• Periodic update of bids (can add or drop from
  preferred list)
• Most bidders are consistent, but some bid low
  initially to get into the game

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Bid Process 2

• Negotiate non-price terms
• Rank suppliers negotiate with best (rank can
  change)
• Keep enough bidders to avoid being boxed in and
  to keep bidders nervous
• Negotiations are confidential
• Complete negotiations with preferred list before
  asking for final bids

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Bid Process 3

• Non-price terms (cont.)
• This phase is most time-consuming and difficult
  (our attempts to standardize terms resulted in
  very few bidders)
• Focus on bidders with best prices, but do not
  eliminate anyone until final bids are accepted
• Key non-price issues security,
  breach/termination, change of law

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Bid Process 4

• Final bids
• Very rapid (one day) process receive bids at
  1000, decide by 1400 execute contracts the
  same day.
• All evaluation must be done in advance
• Requires thorough and accurate staff work and
  frequent meetings with Commissioners

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History of Bids

• Some "start-up" issues (bids rejected for some in
  first years TD acted as supplier with market
  pass-through rates)
• Participation has been strong (multiple bids the
  norm)
• Taking 2 and 3 year prices for residential
  customers has muted political discourse

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History of Bids

• Fifth year (2004)
• Prices significantly higher for residential
  class increased from 5 to 7 cents (effective
  3/1/05)
• Purchased in slices 100 for first year, 2/3 for
  second year, 1/3 for third year 1/3 will be
  rebid (for 3 years) going forward. Prices for
  2nd and 3rd years are slightly lower.
• Total price increase for residential customers
  will be moderated by pass-through of decrease in
  stranded costs

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Relationship of Bids to Market

• Bids track market closely, but market is much
  more variable than prices
• Following charts are primarily indicative of
  direction (exact comparison of wholesale price
  and retail price competing with standard offer is
  difficult)

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Relationship of Standard Offer to Competitive
Activity

• High percentage of Customers in larger classes
  have entered competitive market
• Participation in retail market is open to all who
  become licensed. Price is completely unregulated
  (bilateral contracts not reviewed by commission)
• Strong correlation among standard offer price,
  wholesale market price, and competitive activity
• Most competition based on price some fixed
  price, some as differential from Standard Offer

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Inherent Tension Politics

• The system is designed to avoid government-driven
  (and ratepayer supported) long positions
• Retail Model (i.e. pass-through without
  government set price) is essential component
  of Maine model
• Price shock may be destabilizing impact of
  recent price increase is not yet known.
  Comparisons to national average prices and to
  increases in other fuel costs may be helpful.

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Inherent Tension Market

• Product is a hybrid
• Free aggregation given to suppliers
• Price and volume risk taken by suppliers
• Goals
• Encourage competition without creating price
  umbrella
• Provide politically acceptable price without
  killing competition or creating deferrals