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GETTING THE BEST DEAL FOR ELECTRICITY CONSUMERS:THE COMPELLLING CASE FOR COMPETITIVE PROCUREMENT

John E. ShelkPresident and CEO

Electric Power Supply AssociationNovember 14, 2006

• Nearly 40% of installed generating capacity

• Competitive sector built almost all new generation since early 1990s – primarily natural gas

• Improved operating results at plants acquired through restructuring – coal and nuclear

• Competitive Power’s Fuel Diversity: Coal – 36%; Natural Gas – 27%; Nuclear – 27%; Renewables – 5%; Other – 5%

Role of Competitive Power Sector

• Demand up three times supply (2006-2015): 19 percent (141 GW) v. 6 percent (57 GW) (NERC 2006 LTRA)

• “Uncommitted” resources to double to over 100 GW (NERC)• Record peak demand (Merrill Lynch 7/06) (summer heat wave)• Crunch starts 2008-2012, not at end of the forecast period• GE Financial Energy Services: $250 billion/150,000 MW by 2025• How to meet demand is up for grabs – multiple fuels

• Who will meet demand is also up for grabs – choices

The Need for New Generation is Clear

• Fuels – global market, infrastructure needs• Environment – Carbon, CAIR, CAMR, NSR• Labor – benefits, wages, shortages• Construction materials – ordering at once• Technology risks are high, but manageable• What system better handles costs and risks: “cost-

plus” or “cost discipline”?

Costs and Risks Are Rising

• Some say no need for competitive procurement – what are they afraid of?

• Only rate-base can do new coal and nuclear – disagree

• Competitive suppliers are national in scope

• Case for competitive suppliers is compelling – risk transfer

• Nature of competitive procurement will vary by state

Buy vs. Build Debate is Joined

• Connecticut – sealed bid for anything over $50,000• Illinois – anything over $30,000• Louisiana – most purchases over $25,000• Massachusetts – most purchases over $5,000• North Carolina – anything over $25,000• Ohio – services over $50,000, supplies over $25,000• Rhode Island – nearly all construction over $10,000• Virginia – anything over $50,000, if practical

Taxpayers Protected by Competitive Procurement, Why Not Ratepayers?

• Collaborative Process– Local utility submits recommended approach– Multi-day, commission-facilitated collaborative meetings– State PUC resolves outstanding issues

• Independent, Third Party Evaluator– Performs independent evaluation– Monitors communication between the utility and affiliates– Benefit: Extra pair of “eyes”– Recent solicitations – IL CC, MD PSC, NJ BPU, GA PSC

Credible Procurement Solicitations

• Fair Process Must:– Be free from actual, apparent conflicts– Provide all bidders similar access to information– Require full public view of the utility decision-making process

• If the utility or affiliated entity participates, additional protections are required– Use of an independent evaluator – reports to commission– Separation of utility personnel – utility proposal vs. evaluating

bids– Utility winner must honor its bids as submitted

Credible Procurement Solicitations

• Don’t be dazzled by “debt equivalency”• Don’t change rules/terms in mid-stream• Don’t restrict solicitations to new builds• Don’t carve out or exempt specific projects• Don’t forget role of marketers and generators• Don’t over-compensate rate-base plants not subject to

competitive procurement

Competitive Procurement Pitfalls

QUESTIONS?John E. Shelk

President and CEOElectric Power Supply Association

1401 New York Ave., NW11th Floor

Washington, DC 20005

Telephone: (202) 628-8200Fax: (202) 628-8260

E-mail: jshelk@epsa.org Website: www.epsa.org