New England

1
New Englands Electric Industry in an Era of
Climate Change,
Globalization, and AlzheimersWhere
We Stand, Where We Need to Go. . . . .

• Susan Tierney
• What Have We Accomplished With Electric
  Restructuring in New England Over
  the Past Decade, and What Do We Need To
  Accomplish Over the Next Decade?
• 100th Massachusetts Restructuring Roundtable
• March 30, 2007 Boston

2
Some humble thoughts on our journey to an
electric industry that does what we need it
to do

• Where We Stand
• Our strengths
• Our weaknesses
• Our realities
• Where We Need to Go

3
Where We Stand New Englands strength in numbers

• We start restructuring with a key strength
  regional ties
• Its an important legacy
• Key connections in physical energy systems.
• Significant trade flows with NY and Eastern
  Canada
• Shared resources, reserves, know-how
• Shared environment and climatic systems (Acid
  Rain, NOx, CO2)
• Inter-governmental collaboration (e.g., NEGC,
  NECPUC, NEC/ECP)
• Institutional cooperation (e.g., NESCAUM, ISO-NE)
• Were hung in there together for better or for
  worse
• Ties may be fraying but theyve served us well
  for years

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Where We StandPhysical energy infrastructure
We import just about all of our energy supplies.
Our interconnections and integration make us
stronger than if we were alone.
Electric
Natural Gas
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New England and its trading neighbors A
substantial energy market
New England Maritimes Quebec New York Total NE/ECP/ NY CAL
Customers (million) 6.8 4.8 7.7 m 19 m 15 m
Peak Demand (Gw) 27 (sum) 22 (win) 24 (sum) 40 (win) 33 (sum) 26 (win) 83 (sum) 89 (win) 54 (sum) 38 (win)
Net Elec capacity (Gw) 31 (sum) 28 (win) 35 (sum) 45 (win) 41.5 (sum) 37.5 (win) 108 (sum) 112 (win) 49 (sum) 63 (win)
NE plus NY and E Canada are bigger than CAL
Notes of customers Maritimes (0.26 m in
Labrador and Newfoundland, 0.36 in New Brunswick,
0.46 m in Nova Scotia, 0.07 in PEI). Actual
2006 peak load of 28,000 (ISO-NE Press release,
8-2-06) Peak Demand and Net Electric capacity
for CA include Northern Baja California. Sources
Internal demand and Net capacity NERC 2006
Summer Assessment (6/2006) NERC 2006/2007 Winter
Assessment (11/2006)
of customers Maritimes (J.
Lipp, M. Tampier, and M. Pattenden, Pollution
Probe, Towards a Green Power Vision and Strategy
for Atlantic Canada, 10-2006, p. 16) Quebec
(Hydro Quebec, Annual Report, 2005) New England,
NY, and California (EIA, Electric Power Annual,
2005, Figure 7.1)
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Where We StandFacing reality is the price of
mental health

• NE electricity prices
• Before restructuring, we had high prices.
• Thats what drove us and the other high-priced
  states in the US to look for a better way to
  discipline rates.

Source James A. Fallows, MD
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We had high prices then
1990 (when I was at the DPU)
NE 125 US
The 6 New England states were at
the high end
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We had high prices then
1996 (the eve of
restructuring)
NE 134 US
The 6 New England states are still at
the high end
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We had high prices then
2000 (before gas prices rose)
NE 132 US
The 6 New England states are still at
the high end
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We had high prices then, and we still do today
2006 (after gas prices rose)
NE 134 US
Yup, you guessed it.
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The underpinnings of high power pricesThe
rising price of natural gas

Wellhead prices
City Gate prices
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
2000 2001 2002 2003 2004 2005 2006
EIA, Short Term Energy Outlook, January 2007
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Where We StandFacing reality is the price of
mental health

• NE electricity prices
• We had relatively high prices before we
  restructured.
• We still have them today.
• Restructuring hasnt changed that fact.
• Its our reality for so many reasons.

Source James A. Fallows, MD
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Where We Stand Like it or not, weve embraced
markets.

• Strong policy preference for markets in past
  decade (e.g., electricity) Many signs..
• Centrally-organized wholesale markets.
• Utility ownership of delivery facilities.
• Power plant divestiture by utilities in New
  England.
• In recent years, most plant investment at-risk.
• Diversity and large number of market
  participants.
• Retail access policies in much of the region.
• Diminished mandatory long-term contracting.

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Retail Customer LoadServed by Competitive v.
Basic Service
NE States with Retail choice
Significant competitive supply to large customers
Massachusetts
Sources NE States Polestar Report (10-06) for
New England Energy Alliance (Table 6), using data
from state PUCs MA data for 12-2006 from MA DOER
website http//www.mass.gov/Eoca/docs/doer/2006mig
rate.pdf
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Where We Stand Is it fickleness or short-term
memory loss 1

• We say we like and wanted markets
• But we seemed to have wanted particular outcomes
• E.g., cheap power, not efficient prices?
• E.g., diverse resources (or ones with stable
  fuel prices), not the ones the market produced?

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Where We Stand Is it fickleness or short-term
memory loss 2

• We say we want diversity but
• We have been too slow to lead on steps towards
  these outcomes
• E.g., supporting truly aggressive energy
  efficiency
• E.g., siting realities (if we didnt want so much
  gas, could we have sited more wind, coal,
  nuclear, LNG, DG, gas pipelines, electric
  transmission lines?)

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Where We Stand Is it fickleness or short-term
memory loss 3

• Were very quick to blame restructuring for the
  fact that electricity prices are high.

although electricity prices have risen both in
restructured and non-restructured states.
Source Joint Statement of John W. Rowe and
Elizabeth Anne Moler, Exelon Corporation, Before
the Federal Energy Regulatory Commission,
Conference on Competition in Wholesale Energy
Markets, Docket No. AD07-7-000, February 27,
2007, Technical Appendix (original data source is
EIA data, January 1999 through October 2006).
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Where We Stand Is it fickleness or short-term
memory loss 4

• We think that the good old days were so great
• We moved to find a better way precisely because
  it wasnt so great at the time.
• We forget that traditional after-the-fact
  prudence reviews often produced high fixed-cost
  utility commitments, which industrial customers
  wanted to flee.
• And (at least in MA), we never really got the
  chance to see if least-cost planning would work
  without being overly burdensome and costly
  process.
• We hate federally imposed capacity charges
• But we forget that there used to be state-imposed
  capacity charges fully embedded in rates.

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Where Do We Need to Go?What is it that we really
want?

• Figure out what we want, then try HARD to stay
  the course
• Investors like stability in the rules
• We need investment in supply demand-side
  resources.
• If there are attributes of electric resources not
  valued in todays markets, send clearer signals
  to investors
• Good examples
• Putting a price on carbon emissions via RGGI
• Establishing through RPS a market for renewable
  energy credits
• Adopting demand-side approaches that are aligned
  with markets (e.g., demand-side resources as part
  of ISO-NEs Forward Capacity Market Efficiency
  Vermont)

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Where Do We Need to Go?

• Get over our denial energy isnt cheap
• In recent memory in NE, it has been anything but.
• Time to accept the fact that were living in an
  era where global markets shape energy prices?
• Were a consumer region in a sellers market.
• Rather than focusing on prices, focus on
  improving the amount we use.
• Show customers what it costs to supply
  electricity at different times of day.

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Where Do We Need to Go?

• Resist our worsening tendency to politicize
  electricity (and natural gas) policy.
• This stuff is unfortunately technically
  complex.
• More importantly, its no-win decisions, except
  when prices are low.
• Dont always assume markets are to blame if
  prices rise.
• Where there are problems in markets, fix them.
• Where market failures are clear, then regulate
  efficiently.

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Where Do We Need to Go?

• If we want to continue to use electricity as an
  instrument of certain social values, then lead by
  doing so in ways that align with markets
• Start aggressively implementing demand-side
  resources in ways that work with markets
• Align utilities financial interests via
  decoupling
• Use the tax system to induce addl investment
• Give all customers the option of seeing real
  price signals
• Avoid least-cost procurement approaches that send
  mixed (mis-aligned) signals in states with retail
  choice
• Assist market-based development of renewables
  through siting reforms, REC markets, RPS
  policies, clean-business development strategies

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Where Do We Need to Go?

• Truly lead on US economy-wide carbon policy
• Push aggressively for mandatory national carbon
  control
• Essential for signaling carbon prices to
  investors
• Push for allowance allocation mechanisms that do
  not disadvantage regions with markets
• Watch out for free allocations grandfathered to
  coal-fired plants which will
  make NE worse off relative to
  low-cost regions
• Focus on allowance allocations that channel value
  of carbon allowances to public benefit/consumers
• Strive for a unified national cap-and-trade
  program
• Dont get stuck in fights over state/federal
  preemption
• Moving the much-more-carbon intensive rest of the
  nation is the most important objective.

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Where Do We Need to Go?What is it that we
really want?

• Work to create an environment in which we are
  willing to support leaders when they make tough
  decisions.
• Be wary of throwing away the benefits of
  regionalism.
• Think long-term.
• Articulate the reality that we depend on so many
  others for what we consume in this region.
• Stop looking for silver bullets for our energy.
  
• There arent any. We need all options on the
  table.

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Susan F. Tierney, Ph.D.Managing
PrincipalAnalysis Group, Inc.111 Huntington
Ave., 10th FloorBoston, MA 02199ph
617-425-8114fax [phone]stierney_at_analysisg
roup.comwww.analysisgroup.com