Sustainable retail margins in ercot
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Although Residential Retail Headroom Is Expected To Rise Over The Next Two Years…. Margin history and outlook 02-06; Mixed measures. Retail headroom 1 Percent. 7x24 power price 2 $/MWh. TXU’s Incumbent Market Has Developed Similarly To Other Successful Deregulated Markets.

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Sustainable retail margins in ercot

Although Residential Retail Headroom Is Expected To Rise Over The Next Two Years…

  • Margin history and outlook

  • 02-06; Mixed measures

  • Retail headroom1

  • Percent

  • 7x24 power price2

  • $/MWh

TXU’s Incumbent Market Has Developed Similarly To Other Successful Deregulated Markets

  • Forward wholesale

  • power price

  • Incumbent market share1

  • Years since deregulation; Percent

  • Wireline

  • North Texas residential

  • TXU retail headroom

  • South Texas residential

0

  • UK residential2

1 Headroom = (PTB – power cost – wires charges) / PTB; based on average of forward looking 12 months; forward curve as of October 18, 2004; assumes a strike up to $6.92/MMBtu approved in February 2005

2 Rolling average of 12 month forward curve

1 Market share estimates based on customer count

2 Estimates for 2003 and 2004

Source: PUC; OFGEM

1

2

…Market Volatility Challenges Attacker’s Economics…

…And Margins Are Below Other Industries When Normalized For Volatility

Gross margin

99-04 (except TXU=02-04); Percent

  • Attacker gross margins

  • 07E; $/MWh

  • ERCOT North zone power price volatility

  • 02-04; $/MWh

55

  • Gross margin per volatility

  • 99-04; No units

  • Specialty apparel

  • Depart-ment stores

  • Grocery stores

  • Super-center stores

  • Drug stores

  • North Texas attacker

  • TXU

  • retail

  • Net margin3

  • Volatility1 of gross margin

  • 99-04 (except TXU=02-04); Percent

  • Net margin3

45.5

  • TXU gross margin –07 estimate

  • Com-petitor discount

  • Acquisition cost1

  • Attacker gross margin

  • Standard deviation of ERCOT power prices2

  • TXU volatility4

  • Specialty apparel

  • Depart-ment stores

  • Grocery stores

  • Super-center stores

  • Drug stores

  • North Texas attacker

  • TXUretail

1 Assumes $150 customer acquisition cost with 24 month customer lifetime

2 Assumes no hedging; 20% adders for shaping, ancillary services, and line losses

3 After SG&A, customer acquisition costs, bad debt expenses, and taxes

4 Assumes TXU retail demand is 85% self supplied; TXU retail only exposed to 15% of volatility

3

4

  • Specialty apparel

  • Depart-ment stores

  • Grocery stores

  • Super-center stores

  • Drug stores

  • North Texas attacker

  • TXU

  • retail

1 Defined as standard deviation of quarterly gross margin normalized by initial gross margin

The Dramatic Increase In Gas Prices Over The Last Month...

…Has Made Retail Economics Unsustainable Without Further Price Adjustments

  • ESTIMATES

Historical Gas Prices vs. Forward Curve

04-05; $/MMBtu

  • TXU

  • North Texas residential gross margin

  • 05; $/MMbtu

20 day rolling average of 12 month forward curve1

  • Attacker1

Current strike threshold(+5%) = $6.85

  • TXU

  • North Texas residential

  • net margin2

  • 05; $/MMBtu

Current strike = 6.52

  • Attacker

Daily NYMEX gas prices

  • Modeled strike in current plan

  • No strike

  • Potential strike

  • Cal 05 gas, $/MMBtu

  • PTB Strike, $/MMBtu

  • 7.63

  • 6.52

  • 7.63

  • 6.92

  • 7.63

  • 7.63

  • 1 Includes acquisition costs of $150/MWh amortized over 24 months

  • 2 Includes impact of SG&A, bad debt, income taxes and revenue taxes; Attacker economics based on 10% discount from PTB, SG&A of $2.5/MWh, bad debt equals 1.3% of revenues, income taxes at 35% rate, revenue taxes equals 1.8% of revenues; forward curve as of October 21, 2004

1Assumes all future prices are equal to forward curve as of October 22, 2004

2 Assumes strike would not take effect for 45 days

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Sustainable Retail Margins In ERCOT

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