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

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

Chantale LaCasse, Senior Vice President, NERA

Amparo Nieto, Senior Consultant, NERA

9 September 2010

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Met-Ed and Penelec Default Service Program

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

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

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Agenda

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

Key Elements of the October 2010 Solicitation

Products and Supplier’s Business Opportunity

Auction Rules

Proposal Submission Process for the October 2010 Solicitation

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Overview of the Program

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Met-Ed and Penelec Default Service (“DS”) Program procures power from customers that do not choose service from an Electric Generation Supplier (“EGS”) during the period January 1, 2011 to May 31, 2013

Three classes of customers by Company: Residential or R Class; Commercial or C Class (up to 400 kW); Industrial or LI Class (above 400 kW)

Full requirements products (energy, capacity, ancillary services, applicable Transmission Services) are procured through descending clock auctions

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How Many Solicitations and When

DS Program includes a total of ten solicitations

All solicitations include a Fixed Auction while the Hourly Auction is only 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

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What Portion of Supply Is at Auction: Residential and Commercial

100% of supply in the stub period (Jan 1, 2011 to May 31, 2011)

From June 2011 until May 2013: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 via Fixed Auction

Industrial Class

Full requirements supply for the remainder through the Hourly Auction

Up to 50 MW supply eligible for Fixed Auction procurement for customers that enroll

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Two Different Price Plans: Fixed Price Service

Fixed Auction is for a “Fixed Price Service” Plan: Residential payments and rates:

Stub period: 95% based on the final auction price and 5% based on the real-time PJM price and a fixed $9/MWh adder

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

Commercial payments and rates: 90% based on the final auction price and 10% based on

the real time PJM price and $9/MWh adder

Industrial opt-in option payments and rates: 100% fixed at the final auction price (October 2010

Solicitation only)

Seasonal billing factors apply

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Seasonal Billing Factors under the Fixed Price Service SMAs

Season Periods Seasonal Factor

Winter

Jan 1-May 31, 20110.970

Oct 1 2011-May 31, 2012

Oct 1 2012-May 31, 2013 0.995

SummerJun 1-Sept 30, 2011 1.060

Jun 1-Sept 30, 2012 1.010

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Two Different Price Plans: Hourly Priced Service

Hourly Auction is for service priced to the hourly PJM real-time market

Applicable to Industrial class

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

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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

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Key Elements of the October 2010 Solicitation

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Main Features of the October 2010 Fixed Auction

1. A Fixed Auction with a descending-clock format

2. A total of ten products in the Auction: Residential (R) , Commercial (C), and Fixed Price Service Industrial (LI), each defined by three dimensions:

the Company/the Class/the supply period

3. LI customers will have the choice to opt-in to a 12-month Fixed Price Service in the October 2010 Solicitation

Open to the first 50 MW of LI DS Load that Opts-In

4. Each Class DS load divided into “tranches”

A tranche represents a fixed percentage of the DS load

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The Residential and Commercial Products of the October 2010 Fixed Auction

Products, Tranche Targets and Load Caps

October 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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The Industrial Fixed-Price Service Products of the October 2010 Fixed Auction

Products, Tranche Targets and Load Caps

October 2010 Solicitation

Product Supply PeriodTotal No. Tranches

Load Cap

Tranche Size

Met-Ed LI

Jan - 2011 to Dec -2011

1 1Open to the first 50 MW of LI DS Load that Opts-In

Penelec LI

Jan - 2011 to Dec - 2011

1 1Open to the first 50 MW of LI DS Load that Opts-In

Total 2 2

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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

ME-LI-12 100.00

PN-R-5 100.00

PN-R-24 100.00

PN-C-5 100.00

PN-C-12 100.00

PN-LI-12 100.00

11 1

25 5

13 3

10 5

5 5

11 1

10 0.7143

20 0.5000

10 0.3704

5 0.1250

0 0.0000

10 0.7143

Round 2Start

Price

95.00

95.30

95.00

95.00

96.00

95.30

96.77

99.05

100.00

96.00

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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 95.30

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

ME-LI-12 96.00

PN-R-5 95.30

PN-R-24 96.77

PN-C-5 99.05

PN-C-12 100.00

PN-LI-12 96.00

5 1

25 5

18 3

10 5

10 5

5 1

4 0.2857

20 0.5000

15 0.5556

5 0.1250

5 0.1250

4 0.2857

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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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October 2010 Auction Timeline

SEPTEMBER

Monday Tuesday Wednesday

Thursday Friday

September 6 7 8 9Webcast

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13 14 15 16 17

20

Final Decision on Alt Guaranty

21

Part 1 Window Opens

22 23 24

27 28 Part 1 Date

29 30

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October 2010 Auction Timeline (cont.)

OCTOBER

Monday Tuesday Wednesday Thursday Friday

October 1Bidders

Qualified

4 5 6Trial Auction

7 8

11 12Part 2 Date

13 14 15Part 2

Proposal Notification

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AUCTION Begins

19IE Submits Report to

PaPUC*

20PaPUC issues

Decision *

21 22

* Assumes the bidding closes on the18th.

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Process After the Auction

Commission will consider the results of the Auction within one business day after the Independent Evaluator submits its report

Either the Commission approves all results (for both Companies and all Classes) or all results are rejected

If results are accepted, SMAs are executed within three business days

Any security required under the creditworthiness standards of the Agreement 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 (R, C, or LI)

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 of the DS Supplier Responsibility Share of each Supplier’s Peak Load Capacity obligation, which PJM will use to determine that Supplier’s daily 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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Suppliers have the opportunity to:

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

migration risk

Wholesale Sources may include:

Power from owned-generation resources (in PJM or adjoining regions), bilateral energy transactions, PJM energy markets, financial and OTC, weather derivatives markets

Wholesale Sources and Supplier’s Opportunities

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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 October 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 October 2010 Solicitation Vary by Class

Industrial Class 100% Fixed at the final auction price

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

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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 DS SMA, and for any increasing requirements permitted under existing law during the term of a DS 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 DS SMA

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Bidding in the Auction

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Descending Clock Auction - 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 total tranches bid are greater than the product target)

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1. 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

2. Bids are binding until the price ticks down again:

A bidder can only change the number of tranches bid on a product if the round price ticked down

3. Auction closes on all products at once:

Winners are determined for all products at the same time

4. Uniform price for all winners on a product

Four Main Features

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What is a Bid in Round 1?

Bid: number of tranches for each product that a supplier is willing to serve at the going prices of the round. E.g.:

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

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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

5-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-5 97.20

ME-LI-12 96.10

PN-LI-12 96.35

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Changes in Round 2 Bidding

If the price for a product has ticked down, a bidder will be able to: Withdraw tranches from the product

Switch tranches to another product, by reducing tranches bid on that product and increasing tranches bid on another

Both withdraw and switch tranches

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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)

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

38


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– Example with Residential and Commercial only

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

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A Bidder May 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

In case not all requested switches can be granted, the bidder will be asked for a switching priority

Switching Priority 1 2

Fixed Auction – Example with Residential and Commercial only

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

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A Bidder Could Be Asked to Indicate Which Tranche is Being Withdrawn

A bidder may want to reduce the number of tranches bid on several products but only switch some of the tranches

The bidder will need to designate which tranches are being withdrawn and name an exit price

Exit

Exit Price 93.753

Fixed Auction – Example with Residential and Commercial only

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

41


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)

42


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)

43


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

44


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

45


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

46


Location Bidding teams in two geographical locations

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 for back-up bidding

System Technical Requirements Are Minimal

47


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

48


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 any of the previous DS Solicitations may use the “Short Part 1 Form” for the October 2010 Auction

3. Part 2 Proposal: Indicative Offers and Financial Guarantees

4. Submission of Bids: Auction Starts

Stages of Proposal Submission Process

50


Key Dates

1 September 2010Deadline to submit initial Alternate Guaranty Form and supporting documents

28 September 2010

Part 1 Proposal deadline

1 October 2010 Part 1 Proposal Notification

12 October 2010 Part 2 Proposal deadline

15 October 2010 Part 2 Proposal Notification

18 October 2010 Auction starts

51


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

52


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

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 bidder’s Part 2 Application

The Companies may use the indicative offer information in setting prices for round 1 of the Auction

Requirements for Part 2

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Pre-Bid Security Requirements

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

Bidders relying on their own financial standing and qualifying for an unsecured credit line must submit 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

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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 (the Independent Evaluator) and not to FirstEnergy personnel

QUESTIONS???

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

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