met-ed and penelec’s 2011 to 2013 default service program: the may 2010 solicitation chantale...

Met-Ed and Penelec’s 2011 to 2013 Default Service Program: The May 2010 Solicitation

Chantale LaCasse, Senior Vice President, NERAAmparo Nieto, Senior Consultant, NERAKush Patel, Consultant, NERA

15 April 2010

2

Met-Ed and Penelec Default Service Program

Agenda

Overview of Met-Ed and Penelec’s Default Service Program

Key Elements of the May 2010 Solicitation

Products and Supplier’s Business Opportunity

Auction Rules

Proposal Submission Process for the May 2010 Solicitation

3


Disclaimer

Any statements describing or referring to documents and agreements are summaries only, and are qualified in their entirety by reference to such documents and agreements

The governing documents are: Joint Petition for Settlement of Metropolitan Edison Company

(“Met-Ed”) and Pennsylvania Electric Company (“Penelec”) for their Default Service Programs (Docket Nos. P-2009-2093053 and P-2009-2093054)

Metropolitan Edison Company/Pennsylvania Electric Company Default Service Program Fixed Auction Process and Rules 2011-2013

Metropolitan Edison Company/Pennsylvania Electric Company Default Service Program Hourly Auction Process and Rules 2011-2013

Met-Ed and Penelec Default Service Supplier Master Agreements for the Residential, Commercial, and Industrial Customer Classes

4


Overview of the Program

5


Met-Ed and Penelec’s Default Service Program

Met-Ed and Penelec filed their Default Service (“DS”) Program on February 20, 2009 to procure power from those customers that do not choose service from an Electric Generation Supplier (“EGS”)

The DS program starts when generation rate caps expire on January 1, 2011 and ends on May 31, 2013

The Pennsylvania Public Utility Commission (“PaPUC”) approved the Petition for Settlement on Nov 6, 2009: http://www.puc.state.pa.us/general/search.aspx

NERA’s role is to serve as the Independent Evaluator as well as the interface between Bidders and the Companies

6


The Met-Ed and Penelec’s DS Program is Comprehensive

The Program covers three classes of customers for each Company

Residential or R Class; Commercial or C Class (up to 400 kW); Industrial or LI Class (above 400 kW)

Specifies three bidding processes for different portions of the supply

Full requirements products (energy, capacity, ancillary services, applicable Transmission Services, any other service as required by PJM) through descending clock auctions

Two parallel procurement processes as part of the same DS program:

RFPs to obtain Solar Photovoltaic Alternative Energy Credits (“SPAECs”) over a 10 year period (will be available to DS Suppliers to satisfy their solar requirements under the AEPS Act)

RFPs for block power supply products

7


How Many Solicitations and When

Four solicitations are planned every year in January, March, May, and October, allowing price diversity in the supply base

All solicitations have a Fixed Auction while the Hourly Auction is held once a year

2010

Fixed

Hourly

2011

Fixed Hourly

2012

Fixed

Hourly

Jan Jan Jan Mar Mar Mar May May May Oct * Oct Oct *Solicitation for Fixed Price Industrial product

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Two Different Auctions For Two Different Price Plans

Fixed Auction is for a fixed price plan

Industrial opt-in: payments and rates based on the final auction price

Residential: Stub period: payments and rates based on the final auction

price for 95% and the real time PJM price and a fixed $9/MWh adder for 5% for each MWh served

Starting June 1, 2011: 100% fixed at the final auction price

Commercial: payments and rates based on the final auction price for 90% of each MWh served and is paid the real time PJM price and a fixed $9/MWh adder for 10%

Hourly Auction is for service priced to the hourly market

Industrial: payments and rates based on the final auction price, the real-time PJM price, and a fixed $2 adder

9


What Portion of Supply Is at Auction: Residential and Commercial 100% in the stub period from January 1, 2011 to May 31,

2011

For the remainder of the Program term:

Residential Class

75% full requirements supply through the Fixed Auction

25% block energy through RFP with Company balancing and other components from PJM markets

Commercial Class

100% full requirements supply through the Fixed Auction

10


What Portion of Supply Is at Auction: Industrial customers

Industrial Class

Full requirements supply for the remainder through the Hourly Auction

Up to 50 MW supply through the Fixed Auction to customers that affirmatively enroll

Industrial Class straddles the two Auctions

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Auction Web Site

Auction web site will be your main source of information: www.firstenergycorp.com/mepnauction

Web site includes:

All solicitation documents and forms

Relevant Commission decisions

Data Room

Link to submit questions ([email protected])

Frequently Asked Questions page

Please direct all questions relating to the Auctions to NERA and not to FirstEnergy personnel

12


Key Elements of the May 2010 Solicitation

13


Main Features of the Auction

1. A Fixed Auction with a descending-clock format

2. Residential and Commercial products, each with three dimensions: the Company the Class the supply period

3. Each Class DS load divided into “tranches” A tranche represents a fixed share of load for the

Class Sized to approximately 50 MW

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What’s New in the May 2010 Solicitation

New products. In addition to the 5-month products for the stub period, Auction procures supply for:

Residential 24-month (June 1, 2011 to May 31, 2013) Commercial 12-month (June 1, 2011 to May 31, 2012)

There will be a total of eight products in the Auction

Different payment basis for the Residential Class. In the stub period payments based on final auction price for 95% while for the 24-month contract the payment is based on final auction price for 100%

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What’s New in the May 2010 Solicitation

Seasonal Factors. Suppliers paid on the basis of Auction price that is adjusted seasonally

Seasonal factors for period starting June 1, 2012 may be updated in May 2011

Season Periods Seasonal Factor

Winter

Jan 1-May 31, 2011

0.97Oct 1 2011-May 31, 2012

Oct 1 2012-May 31, 2013

SummerJun 1-Sept 30, 2011

1.06Jun 1-Sept 30, 2012

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The Products of the May 2010 Fixed Auction

Products, Tranche Targets and Load Caps

May 2010 Solicitation

Product Supply PeriodTotal No. Tranches

Load Cap

Tranche Size (%)

Met-Ed R-5 Jan 2011 – May 2011 7 5 3.57

Met-Ed R-24 Jun 2011 – May 2013 4 3 3.57

Met-Ed C-5 Jan 2011 – May 2011 6 4 4.35

Met-Ed C-12 Jun 2011 – May 2012 5 3 4.35

Penelec R-5 Jan 2011 – May 2011 5 3 4.76

Penelec R-24 Jun 2011 – May 2013 3 2 4.76

Penelec C-5 Jan 2011 – May 2011 5 3 5.00

Penelec C-12 Jun 2011 – May 2012 5 3 5.00

Total 40 26

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Auction Format is a Clock Auction

Multi-product design Tranches for both Met-Ed and Penelec are procured at

once

Multi-round design Suppliers state how many tranches they want to supply

at prices suggested by the Independent Evaluator Prices tick down if there is excess supply Suppliers could switch their bids from one product to

another in a given Auction All in price in $/MWh

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Fixed Auction Example: Prices Tick Down When There Is Excess Supply

Round 1

Product Price ($/MWh)

ME-R-5 100.00

ME-R-24 100.00

ME-C-5 100.00

ME-C-12 100.00

#bid

#to buy

57 7

29 4

56 6

30 5

Excess Supply

Oversupply Ratio

50 0.7353

25 0.6098

50 0.9259

25 0.6250

PN-R-5 100.00

PN-R-24 100.00

PN-C-5 100.00

PN-C-12 100.00

25 5

13 3

10 5

5 5

20 0.5000

10 0.3704

5 0.1250

0 0.0000

Round 2Start

Price

95.00

95.32

95.00

95.00

95.00

96.46

99.22

100.00

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Fixed Auction Example: Prices Tick Down When There Is Excess Supply

Round 2

Product Price ($/MWh)

ME-R-5 95.00

ME-R-24 95.32

ME-C-5 95.00

ME-C-12 95.00

#bid #to buy

47 7

29 4

26 6

25 5

Excess Supply

Oversupply Ratio

40 0.5882

25 0.6098

20 0.3704

20 0.5000

PN-R-5 95.00

PN-R-24 96.46

PN-C-5 99.22

PN-C-12 100.00

25 5

18 3

10 5

10 5

20 0.5000

15 0.5556

5 0.1250

5 0.1250

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Commission Has Approved the SMAs

Different Supplier Master Agreement (“SMA”) for each Class and Company

The parties to the SMA are the Company and the Default Service Supplier

Participants in the proceeding had the opportunity to submit comments and to propose modifications

Final Agreements are approved by the PaPUC and are non-negotiable

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May 2010 Auction Timeline

Monday Tuesday Wednesday

Thursday Friday

April 12 13 14 15Webcast

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Initial Alternate

Guaranty Form

19 20 21 22 23

26 27

Final Decision on Alt

Guaranty

28 29 30

MAY 2010

3 4 May 5Part 1

Date

6 7

10Bidders Qualified

11 12 13 14Bidder Training

17 May 18Part 2 Date

19 20 21Bidders

Qualified

May 24AUCTION

BEGINS

25 26 27 28

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Commission Will Consider Auction Results

Independent Evaluator will submit a report the day after bidding closes

Commission will consider the results of the Auction within one business day

Either all results are approved (for both Companies and all Classes) or all results are rejected

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SMA Execution and Beyond

If Commission accepts the results, SMAs executed within three business days

If any security is required under the creditworthiness standards of the Agreement, it is posted upon execution of the Agreement

Any financial guarantees submitted as part of the Proposal process are returned to the Supplier

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Supplier’s Role and Standard Contract

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What is a Tranche?

A tranche is a set percentage of a Company’s Default Service load for a Class (Residential, Commercial, or Industrial)

Winning suppliers will be serving the tranches of DS Supply for a specific Company and Class

Loads upon which Suppliers are paid are adjusted for losses to the zonal aggregate load bus and de-rated in accordance with PJM’s marginal loss implementation procedures

All Default Service customers are free to come and go from Default Service provided that they give notice at least 16 days before their next scheduled meter reading date

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Each Company will inform PJM of each Supplier’s obligation for each category of ancillary service

From PJM perspective, DS Suppliers are “Electric Generation Suppliers” (EGS) and must be registered as Load Serving Entities (LSE) by January 1, 2011

PJM’s Perspective of Suppliers

Each Day:

Unforced capacity obligation

Each Company will inform PJM the DS Supplier Responsibility Share of each Supplier’s Peak Load Capacity obligation, which PJM will use to determine that Supplier’s capacity obligation

Each Hour:

Energy at zone bus

PJM will know each Company’s total zonal energy and each Company will transmit to PJM the share of each EGS and each DS Supplier’s Responsibility Share

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Fixed Auction Aggregate supply portfolio from wholesale sources Assess and price load variability, market price volatility and

migration risk Platform for participation in future auctions Provide price-risk management services

Wholesale Sources include:

Generation owners in PJM or in adjoining regions, wholesale marketers, financial and OTC power and gas markets, PJM markets, weather derivatives markets

Supplier Role and Business Opportunity

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Key Elements of Credit Provisions of SMAs Security requirements are on a sliding scale on the basis of

credit ratings and Tangible Net Worth (“TNW”) Minimum Rating to obtain unsecured credit line is BB- from S&P /

Fitch and Ba3 from Moody’s

Credit Rating of Default Service Supplier

Max. Credit Limit (lesser of the % of TNW and credit limit cap

below)

S&P Moody’s Fitch % of TNWCredit Limit Cap

BBB+ and

above

Baa1 and above

BBB+ and

above16% of TNW $75,000,000

BBB Baa2 BBB 10% of TNW $50,000,000

BBB- Baa3 BBB- 8% of TNW $25,000,000

BB+ Ba1 BB+ 4% of TNW $15,000,000

BB Ba2 BB 3% of TNW $10,000,000

BB- Ba3 BB- 2% of TNW $5,000,000

Below BB-

Below Ba3

Below BB-

0% of TNW $0

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Key Elements of Credit Provisionsof SMAs (cont.)

Fixed Auction SMAs: Independent Credit Requirement (“ICR”) as well as Mark-to-Market ICR declines over the term of each of the

SMAs (See Appendix B of the SMA) Initial ICR for the May 2010 Solicitation

$375,000 per Tranche for a 5-month product $750,000 per Tranche for a 12-month product $1,500,000 per Tranche for a 24-month product

The Independent Credit Threshold (“ICT”) determined as a function of the Supplier’s credit ratings and % of TNW is used to either partially or fully cover the aggregate ICR amounts across all Default Service obligations to a given Company

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Supply Payments for the May 2010 Solicitation Vary by Class

Seasonal supplier payments:

Final auction price for a product times a seasonal billing factor

Season PeriodsSeasonal Payment Factor

Winter

Jan 1-May 31, 2011

0.97Oct 1 2011-May 31, 2012

Oct 1 2012-May 31, 2013

SummerJun 1-Sept 30, 2011

1.06Jun 1-Sept 30, 2012

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Supply Payments for the May 2010 Solicitation Vary by Class

Commercial Class

90% Fixed at the final auction price. 10% varies based on the real-time PJM hourly energy price at the Company zone plus a fixed pre-specified adder of $9.00/MWh

Residential Class

100% Fixed for the 12- and 24-month products

For the 5-month products is: 95% Fixed at the final auction price and 5% varies based on the real-time PJM hourly energy price at the

Company zone plus a fixed pre-specified adder of $9.00/MWh

Rates for customers are determined on the same basis

32


Compliance with AEPS through AECs

Compliance with Tier I and II requirements must be demonstrated using Alternative Energy Credits or AECs issued by PJM-EIS GATS

Suppliers must use PJM-EIS GATS to transfer AECs to the Companies to meet their AEPS requirements

Prior to using the PJM-EIS GATS, Suppliers must register into GATS and open a Retail LSE Account

GATS Administrator is available to help Suppliers through process:

For information and forms, see: www.pjm-eis.com Phone: 610-666-2245; Fax: 610-771-4114

Suppliers will be responsible for any changes to non-solar Tier I and Tier II requirements prior to execution of a Default Service SMA

Suppliers will not be responsible for future legislative or administrative changes to the Tier I and Tier II requirements that are imposed following the effective date of the Default Service SMA

33


Supplier Risk Mitigation Features

Full requirements excludes Network Integration Transmission Service (“NITS”), which is paid by the Company and recovered from customers

Supplier is protected from the following risks: Change in NITS rate Changes in AEPS law

Risks of procurement of SPAECs

Supplier assumes other risks of full requirements product, including migration risks

34


Bidding in the Auction

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1. Bids are binding until the price ticks down:

A bidder cannot change the number of tranches bid on a product if the going price did not tick down

2. Total number of tranches bid cannot increase:

Bidders can only maintain or reduce their total number of tranches bid from one round to the next

3. Auction closes on all products at once:

Winners are determined for all products at the same time

4. Uniform price:

All winners on a product are given the same price

Descending Clock Auction Has Four Main Features

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Round Schematic

Bids at Going PricesBids at Going Prices

Information to Bidders

Information to Bidders

Round andBidding Start

Round andBidding Start

Bidding EndsBidding Ends

Round EndsRound Ends

Total excess supply in the round and going prices for next round

(Price for a product ticks down if tranches bid are greater than the target)

37


What is a Bid in Round 1?

A bid is a number of tranches for each product that a supplier is willing to serve at the going prices of the round. Example:

Two rules: the total number of tranches bid on all

products cannot exceed bidder’s initial eligibility

the number of tranches bid on a product cannot exceed the load cap

Fixed-Auction Bids at Round 1 Prices

ME-R-5 ME-C-12 PN-R-5 PE-C-12

3 3 2 1

38


Round 1 Report

The Bidder can see: Range of total excess supply

Total excess supply is the sum of excess supply for all products

Range includes actual total excess supply

Five-tranche range at start of Auction

The next round prices (round 2)

The bidder’s own bid in round 1Bidder has no information

about others’ bids, identities or eligibilities

Fixed Auction Round 1

Total Excess Supply: 55-60

ProductRound 2 Price

($/MWh)

ME-R-5 105.25

ME-R-24 104.30

ME-C-5 102.22

ME-C-12 99.97

PN-R-5 98.24

PN-R-24 98.22

PN-C-5 97.20

PN-C-12 97.45

39


Changes in Round 2 Bidding

A bidder will be able to: Keep the number of tranches bid for each product

the same as in round 1

Withdraw some tranches from the Auction

Switch between products, by reducing tranches bid on one product and increasing tranches bid on another

Both withdraw and switch

If the price for a product has not ticked down, a bidder cannot reduce the number of tranches bid for that product

40


What Are The Rules In Round 2?

The total number of tranches bid on all products combined cannot exceed eligibility in round 2 (the number of tranches bid in round 1)

Again, the number of tranches bid on any one product cannot exceed the load cap for that product

41


Bidders Must Name an Exit Price When Withdrawing a Tranche

A bidder must enter an exit price (a final and best offer):

Above current going price

Below or equal to the going price of the previous round

Fixed Auction

product ME-R-5ME-C-

12PN-R-5

PE-C-12

Price Round 1 95.00 95.00 92.50 97.50

Bid Round 1 3 3 2 1

Price Round 2 91.73 92.02 92.02 96.09

Bid Round 2 3 2 2 1Exit Price 94.51

42


A Bidder Could Be Asked to Provide Switching Priority Information

A bidder may reduce the tranches bid on one or more products and increase the tranches bid on more than one product

The bidder will be asked for a switching priority to be used if not all switches can be granted

Switching Priority 1 2

Fixed Auction

product ME-R-5ME-C-

12PN-R-5 PE-C-12

Price Round 1 95.00 95.00 92.50 97.50

Bid Round 1 3 3 2 1

Price Round 2 91.73 92.02 92.02 96.09

Bid Round 2 4 1 3 1

43


A Bidder Could Be Asked to Indicate Which Tranche is Withdrawing

A bidder may decrease the number of tranches bid on more than one product but switch only part of them

The bidder will be asked to designate which tranches are being withdrawn and name an exit price for the withdrawn tranches

Exit

Exit Price 93.753

Fixed Auction

product ME-R-5ME-C-

12PN-R-5 PE-C-12

Price Round 1 95.00 95.00 92.50 97.50

Bid Round 1 3 3 2 1

Price Round 2 91.73 92.02 92.02 96.09

Bid Round 2 2 1 3 1

44


Changes in Round 2 Calculating Phase

A bidder may have requested a switch or a withdrawal – but it may not be granted if necessary to fill the tranche targets

The Independent Evaluator fills tranche target in this order: first with tranches bid at the going price then by retaining exits (if necessary to fill the

target) then by denying switches (if still necessary)

45


Changes in Round 2 Reporting

Each bidder gets this information:

A range of total excess supply

The prices for next round

The bidder’s own bid, including: Any tranches requested to be withdrawn that were retained (retained at the exit price)

Any tranches requested to be switched that were denied (retained at the last price freely bid)

46


Same Rules Apply for Rounds 3, 4…

Eligibility in round 3 is equal to eligibility in round 2 minus tranches withdrawn in round 2 (even if any of those exits were denied)

Bidder can reduce number of tranches bid on a product (via switching or withdrawal) only if price has ticked down in that round

Exit price must still be above current going price and equal to or below previous going price

47


When Does The Auction Close?

The Auction closes when total excess supply equals zero and none of the prices have ticked down

Bidding on all products will stop at the same time and the final auction prices will be calculated then

All bidders who win tranches of a product will be paid the final auction price for that product

48


Bids Are Submitted Online

Bidding is done through online Internet bidding through specialized auction software

Bidders access an Internet link

Bidders log in to the auction software using a Login ID and password provided by the Independent Evaluator to the Authorized Representative

Bids are submitted and round results received through the auction software

49


Standard PC Windows 98, Windows Me, Windows NT

4.0, Windows 2000, Windows XP, or Windows Vista

Internet Connection

Primary access through a company network

Secondary access through an alternative ISP

Web Browser Internet Explorer 7, Internet Explorer 8,

Firefox 3.0, Firefox 3.1, Firefox 3.5, Safari 4, or Chrome 2

Backup Systems

Backup laptop and backup connection

Dedicated fax machine

System Requirements Are Minimal

50


To Be Technically Prepared

Bidding teams in two geographical locations Reduces the likelihood that disruptions in one location

will affect your participation

Access to a backup ISP

Backup computer (preferably a laptop with charged batteries and access to the backup ISP)

A dedicated fax machine for backup bidding

51


Pauses

A bidder can request an extension to the bidding phase two times during the Auction Typically due to technical problems

Bidders will be advised of length of extension (typically 15 min)

All bidders will benefit from the extended bidding phase

The Independent Evaluator can call a “time-out” any time

For example, in case of general technical difficulty

Generally no more than 15 minutes

52


Proposal Submission Process

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1. Alternate Guaranty Process (Optional)

2. Part 1 Proposal: Basic Contact Information and financial information

New Bidders use the “Long Part 1 Form” to submit the Part 1 Proposal

Bidders that submitted a successful Part 1 Proposal in January or March may use the “Short Part 1 Form” for the May auction

3. Part 2 Proposal: Indicative Offers and Financial Guarantees

4. Submission of Bids: Auction Starts

Stages of Proposal Submission Process

54


Key Dates

16 April 2010Deadline to submit initial Alternate Guaranty Form and supporting documents

5 May 2010 Part 1 Proposal deadline

10 May 2010 Part 1 Proposal Notification

18 May 2010 Part 2 Proposal deadline

21 May 2010 Part 2 Proposal Notification

24 May 2010 Auction starts

55


Requirements for Part 1

1. Applicant’s Contact Information Designated Representative : point of contact for

Independent Evaluator

Officer of the Bidder makes certifications in Proposal

2. Licensing requirements No state licensing required

Supplier must be an LSE in PJM by January 1, 2011

3. Agree to Auction Rules and SMAs

4. Financial Information for creditworthiness evaluation Annual and quarterly financial information

Senior unsecured debt ratings

5. Comments on Pre-Bid Letter of Credit (optional)

Part 1 Forms are available for completion on the Web site

56


A Supplier with a successful Part 1 Proposal may submit a Part 2 Proposal

Need to provide an indicative offer and preliminary interest at the maximum starting price and minimum starting price

Provide Pre-Bid Security proportional to indicative offer at maximum starting price

Bidders relying on their own financial standing and qualifying for an unsecured credit line under the SMA, submit a Letter of Credit or cash of $125,000 per tranche

Bidders relying on the financial standing of a guarantor submit a Letter of Credit or cash of $125,000 per tranche and a Letter of Intent to Provide a Guaranty of $250,000 per tranche

Bidders that do not qualify for an unsecured credit line under the SMA and that do not have a Guarantor submit a Letter of Credit or cash of $375,000 per tranche

Requirements for Part 2

57


Role of the Indicative Offers

For the Bidder,, the indicative offer at the maximum starting price sets:

The maximum number of tranches that the bidder can bid in the auction (initial eligibility)

The amount of pre-bid security required with the Part 2 Application

For the Companies,, they can use the indicative offers in setting prices for round 1 of the Auction

QUESTIONS???

met-ed and penelec’s 2011 to 2013 default service program: the may 2010 solicitation chantale...

Documents

default service ds program

penelecs ds program

ds suppliers

senior consultant

solar requirements

r class commercial

c class

li class