PennFuture's E-cubed is a commentary biweekly email publication  concerning 
the current themes and trends in the energy market.  

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November 3, 2000
Vol. 2, No. 22
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Pennsylvania's First Successful CDS Auction
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An important new regulatory skirmish has broken out before the Pennsylvania  
Public Utility Commission (PUC) over which company has won the right to 
provide  default generation service to 300,000 customers of PECO Energy, an 
Exelon  Company. This skirmish is actually good news for consumers and is the 
fruit of  the 1998 PECO Energy restructuring settlement agreement, a landmark 
document  that ended a ferocious regulatory war when all combatants signed 
it. 
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The &peace treaty8 includes a requirement that PECO Energy bid out default  
service for 20% of its customers, and PECO has done so. Green Mountain 
Energy  Company is now challenging PECO Energy,s decision that New Power won 
the auction  to provide the settlement,s mandated default service. 
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Both Green Mountain and New Power are offering those 300,000 consumers  small 
rate reductions compared to customers receiving default service from PECO,  
and more electricity generated from renewable energy resources. 
Specifically,  New Power and Green Mountain are offering generation service 
to Rate R  residential customers for approximately 5.54 cents per 
kilowatt-hour. That offer  is 3.11 cents per kilowatt-hour less than PECO 
Energy,s unbundled generation and  transmission rate of 8.65 cents per 
kilowatt-hour and 0.11 cents per  kilowatt-hour less than the shopping credit 
of 5.65. 
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The consumer savings that these offers represent is masked or reduced by  the 
stranded cost payments that consumers must pay PECO Energy. Indeed, were it  
not for stranded cost payments, the New Power and Green Mountain offers 
would  reduce total bills by about 3.11 cents per kilowatt-hour, or 20%. 
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The dispute between New Power and Green Mountain is noteworthy because it  
proves that companies will compete vigorously to provide default service if  
shopping credits and lengths of contracts are set at reasonable levels. It 
also  shows that renewable energy portfolio standards can be met 
economically.  Finally, the result of this case will switch more customers to 
competitive  suppliers in one day than the total number who switched in 
California over a  period of nearly three years. 
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When the PUC anoints New Power or Green Mountain as the winner, if all  
299,300 consumers opt to stay with the CDS provider, the total number of  
customers in Pennsylvania that will be served by a competitive supplier will  
jump to more than 850,000. Of this total, 504,000 will be residential 
customers  of PECO, a number equal to 37% of the PECO residential class.
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CDS Background: In Pennsylvania, there must always be a &default8 supplier  
or &provider of last resort8 to assure that service is always available to 
all  customers. The incumbent utility is the default supplier, unless the PUC 
decides  otherwise. The default supplier must provide generation service to 
customers who  do not have a competitive supplier either because they chose 
not to shop or did  not find a willing supplier at an acceptable price. The 
PECO Restructuring Case  Settlement initially defined CDS service in 
paragraph 38:
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&On January 1, 2001, 20% of all of PECO,s residential customers --  
determined by random selection, including low-income and inability-to-pay  
customers, and without regard to whether such customers are obtaining 
generation  service from an EGS -- shall be assigned to a provider of last 
resort-default  supplier other than PECO that will be selected on the basis 
of a  Commission-approved energy and capacity market price bidding process. 
This  service shall be referred to as Competitive Default Service (&CDS8).8
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The same approach was used in the other Settlements in the GPU, PPL and APS  
restructuring cases. CDS reflects an effort to assure that there is at least 
one  other large competitor in each market. CDS also has a renewable 
portfolio  standard (RPS), even though there is no RPS for regulated 
utilities in  Pennsylvania. The winning bidder must supply: 
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&(2.0% of its offered energy supply for CDS service from renewable  resources 
of solar, wind, sustainable biomass (including landfill gas but  excluding 
incineration of Municipal Solid Waste), geothermal or ocean power. The  
renewable energy increment shall increase by annual increments of 0.5%  
thereafter.8
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This increasing renewable requirement continues indefinitely, meaning that  
in year four of the CDS there will be a 3.5% renewable requirement, 4% in 
year  five and so on. This is significant, as each extra percent of renewable 
energy  used to serve the 299,300 customer block prevents approximately 950 
tons of NOx,  3200 tons of SO2, and 390,000 tons of CO2 from being emitted by 
fossil fuel  burning power plants.
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PECO,s CDS RFP: Importantly, the PECO/Unicom merger case modified the CDS  
bidding process as established by the 1998 settlement. Of particular note, 
the  revisions eliminated the &customer care8 functions from CDS, made the 
contract  three years long to help spread out return of start-up costs, and 
instituted  several rounds of selection in the event that prior efforts 
yielded no  successful CDS contract. 
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PECO issued its initial RFP for CDS on April 6, 2000, and Shell Energy  
Services submitted the only bid. However, the PUC rejected the bid as  
non-conforming and denied Shell,s Petition for Reconsideration of its 
decision.  Pursuant to the modifications in the merger settlement, PECO 
entered into  bilateral negotiations based on an August 24, 2000 RFP. 
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Three suppliers submitted conforming bids, and PECO selected New Power as  
the winner on October 18, 2000. New Power is the new competitive supplier  
actively marketing residential and small commercial customers in the PECO  
service territory and is backed by Enron, AOL, and IBM. 
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PECO and New Power negotiated a complete contract that is before the PUC  for 
approval on November 9, 2000. Under the proposal, PECO and New Power  
expanded the size of the CDS requirement to include 22% (299,300) of  
non-shopping residential customers instead of 20% of all residential 
customers,  whether shopping or not. This change was designed to implement 
paragraph 39 of  the Restructuring Settlement, requiring adjustments to the 
numbers assigned to  CDS in order to have 35% of all PECO residential and 
commercial customers  obtaining competitive generation as of January 1, 2001. 
There also will be a  second round of assignment of non-shopping customers as 
of October 15, 2002 if  New Power is providing CDS to fewer than 20% of all 
PECO residential  customers
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New Power electricity will be 2% renewable in 2001, 2.5% renewable in 2002,  
and 3% renewable in 2003 as required, but does not include a commitment to  
exceed the requirements or provide cleaner power for the non-renewable 
portion  of the product. 
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The price for New Power,s CDS for Rate R customers would be 2.02% below the  
shopping credit, while residential heating customers on Rate RH would pay 
1.02%  less than their shopping credit. For a Rate R customer, this would 
mean that  overall rates would fall .8% (as energy and transmission falls 
from 5.65 to  5.54); for Rate RH rates would fall .44%. Customers assigned to 
CDS may still  choose any competitive supplier, or opt out and retain default 
service from PECO  without penalty or charge. New Power will be able to offer 
its full slate of  energy and non-energy related products to these customers.
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Green Mountain asserts that approval of the PECO/New Power contract is &not  
in the public interest,8 arguing that PECO ignored Green Mountain,s offer 
that  included CDS pricing 2% below the shopping credit for all residential 
customers,  including those on residential heating or off-peak service. Like 
the New Power  proposal, the Green Mountain proposal would lower Rate R and 
RH rates .8% and  .44%, respectively. Green Mountain asserts that the New 
Power rate cut for Rate  R is only 1.83%, and not 2% and argues that its 
product is better for the  environment because the non-renewable portion of 
the product would come from  natural gas and hydro instead of system power 
generated primarily from coal and  nuclear fuels. If not declared the winning 
bidder, Green Mountain proposes in  the alternative that both they and New 
Power receive CDS contracts.
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In response, PECO states that all three bidders had the opportunity to  
submit revised bids and that the Green Mountain revised bid was not 
submitted  until October 12, 2000, 13 days after the deadline and nine days 
after the  selection of New Power as the winning bidder. 
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The PUC will sort out the facts and arguments on November 9. Some think  that 
the PUC may very well split the 300,000 customer block between Green  
Mountain and New Power. 
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Whatever the result, customers in the Philadelphia area should receive yet  
another small price reduction, more renewable energy, and the opportunity for 
a  more competitive electricity market. 

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