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Restructuring Roundtable: Merchant vs Rate-Base. presented by Dan Allegretti. The Basic Idea. Merchant = Gooood!!!! Rate Base = Baaaad!!!!. Benefits of Moving to Merchant Model. Three Main Benefits Competitive forces lead to more efficient operation

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Presentation Transcript
the basic idea
The Basic Idea
  • Merchant = Gooood!!!!
  • Rate Base = Baaaad!!!!
benefits of moving to merchant model
Benefits of Moving to Merchant Model

Three Main Benefits

  • Competitive forces lead to more efficient operation
  • Risk of generation plant cost over-runs shifted from captive ratepayers to merchant owner shareholders
  • Provide more efficient & reliable power system

Utility-owned power plant

Merchant power plant

more efficient operation
More Efficient Operation
  • Improved Generator Performance. Since Wholesale Restructuring, plant availability in New England has increased by 8%, avoiding the construction of up to five 400 MW generating facilities.
  • Reduced Emission Rates. While electricity generation within New England increased 25% between 1998 and 2004, associated SO2 rates decreased by 56%, NOX by 57% and CO2 by 22%.
  • Consumer Savings. Consumers have saved between $6.5 and $7.6 billion between 1998 and 2005, based on projections of where prices would have trended in the absence of restructuring.

Source: “A Review of Electricity Industry Restructuring in New England,”

Polestar Communications and Strategic Analysis (for the New England Energy Alliance), September 2006.

less ratepayer risk
Less Ratepayer Risk

Example: Duke Energy

“U.S. power company Duke Energy on Thursday significantly boosted its estimated cost for building two proposed power plants, citing higher material expenses and a shortage of skilled labor. Chief Executive Jim Rogers said at a press luncheon that the proposed clean-coal power plant in Indiana may cost $2 billion, up from a prior estimate of about $1 billion. The cost for the proposed conventional coal plant in the Carolinas has been increased to $3 billion from $2 billion, Rogers said.”

*Source: Reuters, November 16, 2006.

less ratepayer risk1
Less Ratepayer Risk

Example: Exelon

  • In 2003 Exelon Corp. turned over ownership of the newly re-powered Mystic and Fore River generating plants to its lenders. According to the Boston business Journal Exelon had acquired the plants from Sithe for a $543 million note. None of this money was recovered from captive ratepayers through stranded cost recovery charges.
efficient reliable system
Efficient & Reliable System
  • Nearly 40% of installed generation capacity is now merchant
  • Competitive sector built almost all new generation since early 1990s
  • Competitive Power’s Fuel Diversity:
    • Coal – 36%
    • Natural Gas – 27%
    • Nuclear – 27%
    • Renewables – 5%
    • Other – 5%
how much more do you need to see
How Much More Do You Need To See????
  • New England. $6.5 to 7.6 billion since restructuring. Polestar Study 2006.
  • New York. 14.7 to 17.7% savings for all customers. NYPSC Staff 2006.
  • PJM & NY Combined. $430 million to 1.3 billion/year. LECG 2006.
  • Eastern Interconnect. $15 billion for 1999-2003. Global Energy Decisions 2005.
  • Whole Nation. $34 billion over 7 years. Cambridge Energy Research Associates.
  • Economists agree benefits are real. 2006 Open Letter.