KEMA PANEL TOPIC - GROWTH AND INNOVATION IN C&I MARKETS

Opening Remarks
There are currently 19 states that allow commercial and industrial customers to purchase electric
generation from suppliers instead of the local regulated utility. However, the smaller the customer is
in terms of usage, the more limited their options are when choosing an electric supplier.
One necessary step in growing innovation in C&I marets is to assure that all C&I customers have a
real opportunity to shop. This is accomplished !y correcting sewed pricing in some utilities that
mae it difficult for suppliers to offer competitive products to certain classes of C&I customers.
"nother solution, which has !een very effective in getting small commercials to shop in Ohio, is opt#
out municipal or governmental aggregation where groups of small !usinesses act as an aggregated
!uying group, providing suppliers the a!ility to serve them at a lower cost of ac$uisition. Currently,
a!out %&' of commercial customers representing over ()' of the commercial load in the Ohio
*dison, Toledo *dison and The Illuminating Company service territories are !eing served !y
competitive electric generation suppliers due mainly to opt#out governmental aggregation. "nd
we+re seeing interest from communities in the other Ohio utility ,urisdictions.
One of the largest !arriers to shopping in the C&I marets is a narrow#minded view regarding how
to supply electric generation service. -ecent actions !y the .ew /ersey legislature and 0aryland
1u!lic 2ervice Commission a!out providing regulated generation service from the utilities will result
in customers su!sidi3ing new generation. "nd some might argue that in these cases, new generation
will !e !uilt whether it+s needed or not. This su!sidi3ation and state selected generation service will
only create !arriers to ensuring that the maret delivers innovative and cost#effective generation
supply to customers 4 which would most certainly lead to fewer customer options and higher prices
over the long term.
2imilarly, recent filings and pu!lic statements !y certain utilities in Ohio indicate a strong interest in
reregulating the Ohio marets despite evidence that suggests customers have !enefited in Ohio
marets. Interestingly, the argument has moved toward the need for more ,o!s in Ohio that could
result from the construction of regulated generation. "nd in this economy, a position of increasing
,o!s tends to get the attention of local politicians. "long with this new regulated generation comes
additional shopping !arriers, such as non#!ypassa!le generation !ased charges that customers pay
whether they get their generation from the utility or a supplier.
2imply stated, competitive marets wor. This is clearly proven !y the levels of shopping in many
.ortheast states as well as here in Te5as, which 6according to the 7)11 2cope of Competition -eport
in *lectric 0arets of Te5as8 has the lowest electric rates in the nation with customers in the 9allas
and Houston areas paying less than those in :ashington 2tate. I+m confident that marets, not
regulatory mandates, will deliver more options and lower prices to customers in the future. Our !est
opportunity to meet the nations future energy needs is through the innovations, efficiencies and
productivity improvements offered !y competitive marets.
Cmmer!ia" S#i$!%ing an& %# i$ mig%$ &i''er 'rm resi&en$ia" an& in&(s$ria"
Commercial customers come in a range of si3es and vary widely on their understanding of
electric shopping. . Commercial accounts can !e anywhere !etween a small office or storefront
that uses less electricity than most homes, up to a large hospital that uses more power than most
industrial accounts.
The real $uestion is not how switching differs !ased on customer si3e, !ut rather !ased on the
utility+s different rules among customer classes. ;or e5ample, large customers, whether
commercial or industrial, tend to have hourly default pricing. <ecause these customers tend to
en,oy the !udget certainty of a fi5ed price product that is readily availa!le in the retail maret,
switching levels for large customers are consistently a!ove 9)' across most competitive marets
2ince smaller C&I accounts typically have a fi5ed price default 1rice to Compare, their levels of
switching is tied closely to how current maret prices compare to the default service price. In
times of escalating maret prices, customers return to the utility default as it is a cheaper option,
while during times of falling maret prices switching levels increase.
;rom a supplier+s perspective, smaller commercial customers tend to !e more lie residential
customers in terms of their default utility service option as well as their cost to ac$uire. "nd
much lie residential customers, small commercial customers tend to !e less educated a!out
choice, are often times apathetic a!out competitive suppliers and don+t thin the savings are
worth the effort of comparison shopping.
"s mentioned in my opening remars, one very effective way to fight consumer apathy toward
savings is through opt#out municipal aggregation. 2tates that have legislation that allows some
form of opt#out aggregation today include Ohio, Connecticut, .ew /ersey, 0aryland and Illinois.
However, only Ohio has put the specific rules in place to allow opt#out municipal aggregation to
!e implemented.
W%a$ pr&(!$s are #rking)n$ #rking in $%e C&I marke$s
It is our e5perience that the ma,ority of contracts signed in the C&I maret are simple fi5ed price
full re$uirements products. These are the easiest for customers to understand, provide !udget
certainty, and do not place any volumetric riss on the customer. 0ore sophisticated customers
with fle5i!le energy consumption patterns and the manpower to monitor power prices have
found value in varia!le priced programs that might include !oth a !loc and inde5 portion of
their load. The customer assumes more ris in e5change for a lower initial price or the perceived
a!ility to get lower pricing.
However, as any!ody who has dealt in these marets nows, a year+s worth of savings can !e
erased in a day or two of pea pricing. 2o it+s critical for customers who choose more
sophisticated products to have solid ris management capa!ility to monitor maret fundamentals
and technical trends. These customers will also need to trac regulatory and legislative activity,
or have a very good supplier that provides these things as value#added services to the commodity
sale.
<eyond pricing options, we+ve seen interest from customers in demand response programs where
they can receive compensation for fle5i!ility to reduce load. The $uestion !ecomes whether to
sign up to the -TO program or whether there could !e more !enefit in negotiating that value in
their deal with their electric generation supplier.
:e+ve seen certain customers with stronger sustaina!ility mandates e5press interest in !uilding
their own wind farms and=or solar arrays and in a long#term commitment from their supplier to
ac$uire either the output or the -*Cs from the renewa!le facility. However, we+ve found that
very few C&I customers are willing to pay e5tra for green energy.
H# &es p#er inn*a$in !mpare $ na$(ra" gas marke$s
In comparing power innovation to natural gas marets, we find !oth similarities and differences.
"nd I thin we can learn from the history of natural gas in deregulated marets since they+ve
!een at it for much longer. *lectric utilities can learn from the transition that gas utilities have
made in removing the artificial !arriers that prevent customer shopping. ;rom a generation
perspective, !oth industries are facing challenges with environmental concerns. <ut with the
recent events in /apan with its nuclear facilities and our country+s desire to wean itself off
foreign oil imports, I have to !elieve that !oth energy sources are considered to !e important
sources in the >.2. energy future.
"ll of that !eing said, there are legitimate differences in innovation. :henever there is
comple5ity, there is opportunity. <ecause the power marets are more comple5 6for e5ample,
electric prices are hourly versus gas marets !eing mostly daily, gas can !e stored easily, and
there are a larger num!er of devices that use electricity8 ,it would seem that there are more
opportunities for power maret innovation than natural gas.
;or instance, opportunities for power maret innovation lie in the fact that power can !e
generated in a variety of ways, offering opportunities around how you pacage each one of the
generation sources to create consumer products. The o!vious pacaging is relating to
selling=developing green power. "nd as other alternate electric generation sources mature,
suppliers will start to offer additional products around the generation technologies. Once storage
technologies !ecomes more via!le, you+ll see new products develop out of this capa!ility as
well. "nd as I indicated, there is significantly more opportunity for in home=facility product
offerings since ,ust a!out everything runs on electricity.
PA e+amina$in ' ,E merger an& impa!$ n !mpe$i$in
The merger of ;irst*nergy and "llegheny *nergy was certainly an interesting process. There
was concern !y some parties that the 1" marets would !ecome less competitive as a result of
the merger !ut we+ve seen the opposite. 2hopping in all of ;irst*nergy+s 1" utilities is growing
and is attracting non#affiliated suppliers. :est 1enn 1ower, a former "llegheny 1ower utility,
along with ;irst*nergy+s 0et#*d and 1enelec utilities are seeing residential and small
commercial shopping for the first time. On a side note, 1enn 1ower+s latest default supply plan
was folded into the e5isting 0et#*d and 1enelec plans. :e thin it would !e positive if the ?
;irst*nergy utilities in $uestion 4 0et#*d, 1enelec, 1enn 1ower and :est 1enn 1ower 4 would
adopt a single set of rules and processes to mae it easier for competitive retail suppliers to cost
effectively ac$uire customers.
"nother interesting part of the merger was that during the process, a group of competitive
suppliers proposed that ;irst*nergy+s 1" utility companies !e re$uired to implement certain
aspects of the Te5as retail model, while limiting the competitive affiliate 6that !eing ;irst*nergy
2olutions8 from participating as a supplier in either the 1O@- load or proposed retail customer
auction. In my view, placing limits on any affiliated supplier in 1" from participating in the
marets is the more egregious anti#competitive !ehavior. The focus should !e on the rules that
prevent utility affiliates from getting preferential treatment from the utility on either the
wholesale or retail front.
"s a final note, one of the outcomes of the merger is that the 1" 1>C has indicated its intent to
open a statewide investigation into 1ennsylvania+s retail electric marets to ensure that a
properly functioning and wora!le competitive retail maret e5ists. "nd since 1" has done a
great ,o! of assuring fair competition to date, I+m cautiously optimistic that the statewide
investigation will achieve that same o!,ective.
Are $%e marke$s ge$$ing sa$(ra$e& #i$% n ne# s$a$es pening (p- %# & #e $%ink a.($ i$
Certain customer classes have !een saturated for $uite a while. ;or e5ample, large C&I
shopping in the 9u$uesne @ight territory has !een a!ove 9)' since the mid#7)))s. 2uppliers
have reacted as one would e5pect, !y targeting smaller and smaller accounts. -ecent activity in
the residential sectors of .ew /ersey, 0aryland, 1ennsylvania and Illinois supports this notion,
as many of the offers are from retail suppliers that traditionally target medium and large C&I
customers.
"nother trend we+re seeing is that suppliers are !ecoming more adept at implementing taeaway
campaignsAand in some cases using $uestiona!le tactics lie misrepresenting to customers the
T&Cs in e5isting supplier contracts. In Ohio, we+ve seen competitors suggest things lie Byou
can switch since they pro!a!ly wont+ charge you the cancellation fee that+s in your contractC.
<ut I firmly !elieve that the small commercial maret is not saturated and still offers good
opportunities for suppliers. <ut utilities will need to remove artificial !arriers to shopping in
which case we thin there could !e 7)' more shopping in the small commercial customer class
in some utilities.
One of the more daunting !arriers to shopping is created when utilities design a variety of non#
!ypassa!le charges to help pay for new generation !uild in competitive states. "nd most often,
the small commercial and residential customer is saddled with the !ul of those costs through
sewed rate design. :e continue to !elieve that the !est outcome for customers in creating
shopping opportunities and savings is to let the maret send the signals for new generation !uild
and have stocholders, not customers, !are the ris of !uilding new generation.
"n additional !arrier created !y some utilities lies in how they set up their consolidated !illing
rules for suppliers.
It would also !e helpful for utilities to offer suppliers a variety of !illing options, such as
purchase of receiva!les, !ill ready, rate ready and percent off the 1TC to increase suppliers+
a!ility to innovate products around their !illing fle5i!ility.
;inally, lowering threshold where customers will receive hourly pricing for default service
instead of a fi5ed price will spur additional switching. " fully developed functional maret lie
.ew /ersey still has an hourly threshold of 1,))) : 6!eing reduced to D&) : starting /une 18,
while a relatively new entrant in Com*d has a 1)) : threshold. "nd again, the trend indicates
that the lower the threshold, the higher rate of customer shopping.
Impa!$ ' DR/ EE/ rene#a."es/ e$!0
:e+re starting to see trends with C&I customers around energy efficiency, includingE
o ;acility !enchmaring to esta!lish a starting point for pro,ect ,ustification
o Customers taing advantage of energy re!ates and ta5 !reas
o @arge interest in *nergy2T"- for !enchmaring and measurement and verification of
energy efficiency pro,ects
o 0any facilities woring on lighting conversion programs
o @arge interest in greenhouse gas reporting or understanding car!on footprint
<ecause of the rollout of advanced meters, one $uestion yet to !e answered and currently !eing
discussed at the ;*-C and -TO level is whether dynamic retail pricing can achieve the same
o!,ectives as wholesale full @01 priced demand response. 1/0 has started to loo at whether
dynamic retail pricing is complementary or competitive with wholesale demand response.
"s it relates to renewa!les, we+re seeing spotty interest from larger C&I customers. 2ome larger
customers are !uilding solar and wind farms on their properties. Others have ased us to enter
into long#term 11"s for renewa!le output to help finance the pro,ect.
"nd of course, there is the ongoing de!ate a!out the impact of these varia!le renewa!le
resources on the power grid and its relia!ility as generation resources that can !e counted on.
The de!ate !egs the $uestion a!out the impact of large scale storage on the successful
development of renewa!le resources lie solar and wind. Coupled with demand side solutions
lie 9- and **, cost#effective large scale storage could !e one of the eys to $uicer adoption of
renewa!le resources.
Feep in mind that state renewa!le portfolio standards were set up in a way that did not include
much integrated resource planning, 0uch more engineering needs to !e completed to determine
the real cost of certain sustaina!ility solutions and their long#term via!ility as solutions that large
!locs of customers may adopt.
H# & .(siness m&e"s &i''er 'r !mpe$i$i*e s(pp"iers #i$% genera$in *s0 $%se #i$%($
;irst*nergy 2olutions+ family of companies owns appro5imately 71,))) 0: of generation,
maing us the second largest owner of deregulated power in the >nited 2tates. <ecause of our
status as a generator=retailer, you would !e correct in assuming that we !elieve there are
advantages to owning generation as a supplier. <ut at the same time, you+d pro!a!ly hear non#
generation suppliers tal a!out the advantages of not owning generation.
2o without suggesting who+s right, I !elieve that !oth can !e very competitive in the marets for
different reasons. *vidence is that non#generators have !een successful in 1O@- auctions.
Those also serving the retail marets typically are aligned with a generator or commodity group
of large financial institutions. One difference is that non#generators could have more concern
with collateral o!ligations relating to their short positions, which will !e impacted further !y the
final results that come from the proposed financial reforms that are part of C;TC = 9odd#;ran.
"t the same time, some generators struggle with the discipline that non#generators have out of
necessity since they rely on partners or the maret for their generation supply. Generators also
need to worry a!out if=when to idle plants !ecause they don+t clear the maret and the additional
costs to comply with environmental regulation 4 costs that are not directly felt !y non#generator
suppliers.
, I tend to thin that pricing differences, if any, will show up in the ris premium that each would
include in their price $uotes since a generator may loo at swing and shopping ris a little
differently than a supplier without generation.
W%a$ r"e &es ser*i!e inn*a$in p"a1 2!ns"i&a$e& .i""ing/ .asis managemen$/ e$!03
2ervice innovation can !e important for customers who need help managing their usage and
price ris. ;irst*nergy 2olutions has an energy consulting !usiness that helps customers in these
areas. 0uch of the innovation comes in the form of the way in which you might help customers
manage their energy consumption data, which then helps them !etter manage their energy spend.
:e+ve seen these inds of services play a more important role for multi#site facilities, especially
when those sites cross multiple utilities in multiple states, some deregulated and some still fully
regulated.
The o!vious challenge for suppliers is finding those innovations that appeal to customers, and
this is particularly challenging when dealing with small C&I customers. >nlie large C&I
accounts where relationships are cultivated and customer needs e5plored, there is rarely an actual
human interaction !etween retail suppliers and smaller customers, and providing innovative
products to this group may !e difficult.
H# &es in*es$men$ .1 #ires !mpanies in a&*an!e& me$ering an& gri& a($ma$in
impa!$ inn*a$in
"t this point in the marets where ;irst*nergy 2olutions operates, this is largely a theoretical
discussion, as smart grid deployment is ,ust !eginning with many of the programs rolling out
over an e5tended period. "nd even where utilities are more aggressive a!out their
implementation schedules for smart grid, most utilities will prioriti3e wor around grid
automation. This is !ecause it will typically have more line#of#sight !enefits to their operations
than will advanced meters, which generally provides the capa!ility for customers to have more
control over their energy consumption.
<ut once advanced metering and grid automation pro,ects near completion, suppliers can !e in a
position to analy3e a customer usage patterns and offer a variety of time#of#use products and
services so that it feels to the customer lie the product was designed specifically for that
customerAone to on mareting. "nd as mentioned in my discussion on demand response, -TOs
are considering the impact that varia!le pricing capa!ilities of retail service providers that will !e
created !y advanced meters, will have on wholesale demand response. Feep in mind that the
customers+ o!,ective will !e to manage and reduce its energy !ills. However, some have
e5pressed customer privacy concerns, which !rings into $uestion how much data a supplier will
!e a!le to receive, and how they will !e a!le to use it in the future. The full !enefits of smart
meters will not !e availa!le if generation suppliers do not have access to the data to tailor
products and services.
W%a$ are sme ' $%e reg("a$r1 &i''eren!es $%a$ impa!$ inn*a$in an& C&I s%pping
-egulatory consistency is the single most important factor that impacts innovation and C&I
shopping. .ot all states have shown a real commitment to advancing competition, and the
supplier community has responded accordingly. "nd although we don+t agree with every ruling
from state commissions, we !elieve that the 1ennsylvania 1u!lic >tility Commission has done
an admira!le ,o! over the past several years in advancing the choice maretplace. They have
generally provided a more positive e5perience for shopping customers while encouraging
suppliers to come into the maret and compete. .ow the 1u!lic >tilities Commission of Ohio
has its wor cut out with at least two utilities trying to rewind the cloc to reregulate the state, or
at least their ,urisdictions. This ind of uncertainty is not what suppliers want to hear when
they+re faced with decisions to invest their time and effort to winning customers in the state.
2uppliers need to decide whether to get licensed with state commissions, perform all the
necessary *9C testing and esta!lish a sales office, and suppliers are less willing to do these
things in a state where the regulatory wind changes direction every few years.
<ut specific regulatory differences that not only impact innovation !ut impact whether suppliers
will want to play at all includeE
1. The threshold where the hourly priceis esta!lished. Customers are much more liely to
shop when they don+t have a default 1rice to Compare, which means the lower that the
hourly threshold is set, the more customers will shop.
7. 0aing a customer+s 1rice to Compare easily identifia!le to customers and suppliers is
ey to the shopping e5perience. @arge portions of power procured in spot maret
purchases that are su!,ect to $uarterly true#ups can swing the 1TC wildly from $uarter#
to#$uarter, maing it difficult for suppliers and customers to estimate an offers savings.
H. 2tates with overly restrictive sales and mareting rules limit the a!ility of suppliers to
offer innovative products. There needs to !e a !alance !etween offering the appropriate
consumer protections and allowing suppliers the fle5i!ility to maret innovative
products.
Commissions that have a specific office dedicated to increasing competition, such as the Office
of -etail 0aret 9evelopment in Illinois or the Office of Competitive 0aret Oversight in
1ennsylvania, have allowed all of the staeholders to have a voice and come to a consensus on
the !est way to implement changes that lead to innovation and increased shopping.