RULES OF THE ROAD FOR OHIO’S JOURNEY TO ELECTRICITY CHOICE

Public Utilities Commission of OhioCase No. 13-3151-EL-COI

December 11, 2013

Philip R. O’Connor, Ph.D.PROactive Strategies, Inc.

Phil.OConnor@PROactvie-Strategies.net

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LESSONS FROM MORE THAN A DECADE OF CUSTOMER CHOICE

• Half-measures, delay & excess focus on unneeded safety nets generally operate to dilute benefits.

• All of the concerns about adverse results from choice have proven unfounded: volatility, price levels, generation investment, utility credit.

• Transaction cost barriers to residential choice can be largely addressed by PoR, UCB, internet enrollment and muni-agg.

• Flexibility for utilities to re-organize is important to optimize value and encourage cooperation.

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THE OHIO PROCESS IS TIMELY: A SECOND RESTRUCTURING WAVE

• Ohio customers are showing an appetite for choice & deserve a clear, straight path.

• An impending wave of industry restructuring:– The shale gas revolution and regulatory pressure on coal are

upending traditional cost formulas.– Traditionally lower priced states are losing their advantage

as prices in competitive states fall.– Big decisions must be made as to whether customers will

bear the risks of new investment. • PUCO has recognized the need to bring order, direction

and greater certainty for all parties. 3

WHEN GIVEN A CHOICE – CUSTOMERS CHOOSE

• Except for Texas, customer choice largely confined to the northeast quadrant of the US.

• Yet over one-third of US electricity usage is in the 13 fully competitive states & DC.

• More than 20% of all 2012 US usage served by non-utility suppliers: 740TWh/3,687TWh = .20

• During the post-2007 period of the economic slowdown, customer choice in both residential and non-residential sectors has surged by >50%.

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TRADITIONAL MONOPOLY IS THE OUTLIER IN THE U.S. NORTHEAST

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U.S. LOAD SERVED BY NON-UTILITIES UP >50% 2008-2012

2008 2009 2010 2011 2012U.S. Load 488 492 588 685 740

0

100

200

300

400

500

600

700

800

GW

h (0

00s)

+.8%+19.5%

+16.5%

+8.0%

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20% OF ALL U.S. LOAD NOW SERVED BY NON-UTILITIES

2008 2009 2010 2011 2012C&I 17.1% 18.1% 20.7% 24.0% 24.9%Total 13.2% 13.8% 15.8% 18.5% 20.1%Residential 6.4% 6.7% 7.9% 9.4% 12.1%

0%

5%

10%

15%

20%

25%

30%

Co

mp

etiti

ve L

oad

%

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MORE THAN 90% OF ILLINOIS LOAD SERVED BY NON-UTILITY SUPPLIERS

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13

Residential Non-Residential 8

FOUR KEY ARGUMENTS AGAINST CHOICE FAIL THE EMPIRICAL TEST

Assertions of choice opponents have proven untrue:1) There is no statistically significant difference in retail price

volatility between choice and monopoly states except for lower volatility in choice states 2008-13.

2) Choice state price increases lower than 1997-2013 inflation while monopoly states higher than inflation.

3) Competitive electricity markets have attracted substantial investment in generation, with Illinois becoming the key export state in the Upper Midwest.

4) Differences in utility credit ratings between choice & monopoly states are not statistically significant.

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WEIGHTED PRICE VOLATILITY:LOWER IN CHOICE STATES 2008-2013

WeightedGroups

Standard DeviationCoefficient of Variation

Stat Sig @95%*

1999-2013 2008-2013 1999-2013 2008-2013

Competitive (14) 4.06% 3.10% 17.06% 6.88%*

Traditional (30) 4.11% 3.91% 17.30% 7.42%*

Hybrid (5) 5.16% 4.59% 15.63% 8.27%10

UPPER MIDWEST VOLATILITY 2008-13:IL & OH LOWER THAN IN, MI & WI

State

2000-2013 2008-2013

Std. Dev.Coefficient of

VariationStd. Dev.

Coefficient of Variation

IL 4.12 13.81 2.79 5.73

OH 2.46 13.81 2.30 4.62

IN 2.25 17.67 2.15 6.56

MI 3.67 18.12 3.93 9.17

WI 3.99 16.75 2.24 9.4911

1997-2013: CHOICE STATE RATES LESS THAN INFLATION – MONOPOLY MORE

Nominal Real Nominal Real Nominal Real Nominal Real

Competitive States -- 14 35.6% -7.9% 33.1% -9.6% 21.6% -17.4% 37.0% -6.9%

Traditional States -- 30 58.2% 7.5% 53.1% 4.0% 49.8% 1.8% 61.3% 9.6%

Hybrid States -- 5 50.8% 2.4% 44.2% -2.0% 40.3% -4.7% 54.7% 5.1%

National Average 48.0% 0.6% 44.1% -2.1% 36.2% -7.4% 51.4% 2.9%

Notes: Competitive states include CT, DE, IL, MA, MD, ME, NH, NJ, NY, OH, PA, RI, TX, and DC (14 states)

Hybrid states include AZ, CA, MI, MT, VA (5 states)

Traditional states include remaining 30 states (excluding AK and HI)

IndustrialAll Sectors Residential Commercial

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SHALE GAS REVOLUTION: CHOICE & MONOPOLY STATE PRICES DIVERGE

-10%

0%

10%

20%

30%

40%

50%

60%

Cu

mu

lati

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erce

nt C

han

ge

YearCompetitive States Traditional States Hybrid States National Average

ALL-SECTOR AVERAGE ¢/kWh % CHANGE

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RESIDENTIAL CUSTOMERS ARE REALIZING COMPETITVE BENEFITS

-10%

0%

10%

20%

30%

40%

50%

60%

Cu

mu

lati

ve P

erce

nt C

han

ge

YearCompetitive States Traditional States Hybrid States National Average

RESIDENTIAL AVERAGE ¢/kWh % CHANGE

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2007-13 UPPER MIDWEST PRICE DIVERGENCE: CHOICE v MONOPOLY

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2007-13: ILLINOIS & OHIO GAINING A PRICE ADVANTAGE WITH CHOICE

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ILLINOIS PRICE POSITION v U.S. AVGIMPROVED $36 BILLION SINCE 1998

6

7

8

9

10

11

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All

Sect

ors

Rat

e (c

ents

/ k

Wh

)

YearIL average rateUS average rateIL Proxy rate

$36 Billion

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UPPER MIDWEST GENERATION: CHOICE STATES ADDED CAPACITY

StateName Plate Capacity (MW) Pct.

Change1997 2011

Illinois 38,132 49,739 30%

Ohio 28,936 36,305 25%

Indiana 23,363 30,765 32%

Michigan 27,255 33,066 21%

Wisconsin 12,750 20,030 57%

Total 130,436 169,905 30%18

ILLINOIS’ COMPETITIVE GENERATION:TAKING THE LEAD IN EFFICIENCY

MWh Productionper MW Capacity Capacity Factor

State 1997 2011 1997 2011

Illinois 3,544 3,983 40% 45%

Ohio 4,935 3,764 56% 43%

Indiana 4,911 3,949 56% 45%

Michigan 3,925 3,309 45% 38%

Wisconsin 4,032 3,322 46% 38%19

STATE PRODUCTION/USAGE RATIOS:ILLINOIS IS NOW A MAJOR EXPORTER

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UTILITIES IN CHOICE STATES HAVE COMPETITIVE CREDIT RATINGS

More Credit Supportive Less Credit Supportive

S&P Moody's S&P Moody's

Average Score 9.7 10.0 9.5 9.1Average Rating BBB+ Baa1 BBB Baa2

Choice Avg Score 8.9 9.6 9.9 9.2

Choice Avg Rating BBB Baa1 BBB+ Baa2

NO Choice Avg 9.9 10.0 9.0 8.8

NO Choice Avg BBB+ Baa1 BBB Baa221

STEPS FOR OHIO TO CONSIDER:CLEAR PUCO PHILOSOPHY IS PARAMOUNT

1) PUCO can provide clarity of purpose and certainty by ending the ESP/MRO dichotomy.

2) Facilitate generation divestment/devolution & competitive corporate re-org.

3) Wind-down & end inter-class cross-subsidies.4) Terminate a “regulated” price supply product

as a referent for the market in order to avoid ongoing version of the ESP/MRO dichotomy.

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STEPS FOR OHIO TO CONSIDER:THE DEVILISH DETAILS

5) Procure default/POLR supply through a class tranche of load auction to translate bid prices directly to retail prices with minimal adjustment.6) Improve type, accuracy, access, timeliness of customer data from utilities to help customers and suppliers deal with one another effectively.7) Seamless enrollment & contract portability.8) Standard Purchase of Receivable across all Ohio utilities to reduce transaction costs.

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Philip R. O’Connor, Ph.D.PROactive-Strategies, Inc. -- Chicago, Illinois

Dr. Phil O’Connor is President of PROactive Strategies, a Chicago consulting firm providing advice in the energy and insurance industries. For over two decades Phil has been recognized as a leading advocate of competitive market solutions for regulated businesses.

Phil is the author of Customer Choice in Electricity Markets: From Novel to Normal, published by COMPETE Coalition in November 2010 and co-author with Terrence L. Barnich of “The Grand Experiment: Has Restructuring Succeeded on Either Continent?”, published in Public Utilities Fortnightly, February 2007. He co-authored with John L. Domagalski “Regulation and Relevancy: Assessing the Impact of Electricity Customer Choice,” in ElectricityPolicy.com, January 2013.

In addition to a lengthy career in the private sector, Phil has had extensive government and political

experience, having chaired the Illinois Commerce Commission serving as Director of the Illinois Department of Insurance and as a member of the Illinois State Board of Elections. Five consecutive Illinois Governors have appointed him to various boards and commissions.

From March 2007 to March 2008, Phil served in the U.S. Embassy in Baghdad, Iraq with the US Army

Corps of Engineers and the US State Department as an advisor to the Iraqi Ministry of Electricity. A magna cum laude graduate of Loyola University of Chicago, Phil received his Masters and Doctorate in Political Science from Northwestern University.

Phil.OConnor@PROactive-Strategies.net 312-446-3536 312-9804860

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