Municipal aggregation in Northeast Ohio

At our last meeting, we identified several impediments to participating in
the aggregation programs in Northeast Ohio. They included the uncertainty of
the shopping credit and the requirement for load following on 500-600
megawatts of capacity in Cleveland and possibly 2000 megawatts in Norheast
Ohio, where we have no generating capacity and no pool exists. At the
conclusion of the meeting, we decided to try and find out if there are other
serious non-Ohio affiliated bidders out there before we took more aggressive
measures on why municipal aggregation doesn't work.

I have spoken to George Pofok at Cleveland Public Power who stated that he
has spoken to 12 power marketers and 1 power broker. He has received a
number of bids below the shopping credit from suppliers who are both
affiliates and nonaffiliates. He said that about three or four of the
bidders have voiced concerns about getting firm transmission service into
FE. (Once the power reaches FE, under the Ohio settlement, they will treat
it like their own native load). An equal number of marketers have also
expressed concern about the load following issue. Pofok's view is that
without generation in the region, it will be difficult to play in this
market. He noted that in 3-4 years, Orion will be a major player once the
buy-back is completed. Further, he believes that the problem is not as much
one of insufficient generation as it is of insufficient transmission and that
"paper solutions" will not solve the problem. Jeff and I will be meeting
with him to discuss transmission issues. (Pofok is also Chairman of the
Board of Amp-Oh).

Our competitors who are proposing/building capacity in Ohio include:
Cogentrix, Dominion, DPL Energy, Dresden, Duke, Entergy, Ohio National Energy
and PG&E National Energy Group.

With regard to aggregation in FE service territory, I see three options which
are as follows:

1. Do not compete in that market for aggregated load
2. Reconsider building generating capacity in the FE service territory
3. Bid on aggregation and take the risk for balancing or sign a network
operating agreement

With respect to the third option, preliminarily, it appears that under FE's
regs, if you don't have power within a control area's control, you have to
sign a network agreement. I am in the process of obtaining that agreement to
see if that gets us over the hurdle, since if we signed the network
agreement, we would not have to worry about load following, (depending of
course on the price). Point to point is only available to retail customers
taking service at 69 kv and above.

The other point with regard to balancing is that under the FE settlement, as
long as the system is balanced within 88 MW, there is no penalty, A payment
of the cost to the utility would be required if the system was out of balance
by more than 88MW (based on FE's L-sub 10 limit) and our contribution to the
system was in the same direction as the imbalance. Cash out is at market
price with no penalties. Market price is calculated as the incremental cost
to FE to buy the power if we are short or the sale price if we are long.
Penalties attach if there is a pattern of frequently being out of balance.
Under the FE agreement, we would schedule a day ahead but could change that
schedule up to twenty minutes before each hour which should help manage the
risk of getting into an imbalance situation. This is very close to how we
managed the deal we did behind Duquesne.

One other issue I am looking into is ancillary services. It appears in the
Alliance RTO filing that the intention is to require suppliers to pay for
ancillary services associated with retail services whereas the utilities
would not. In the FE supplier tariffs, it indicates we must pay for
transmission and ancillaries, but in the retail tariffs unbundling service,
the transmission and ancillary charges are broken out and appear to be
included in the cost the customer pays the utility (minus the shopping
credit). I asked Rick Hornsby of Tabors and Associates to look at this to
see if there is a double counting or an argument that could be made to keep
suppliers and customers from paying the same charge twice. He concurred that
there appears to be a double counting. I have written up an argument on this
which is being included in a pleading we are filing today and am also talking
to staffers about it. This would improve the economics of any aggregation
deal we might do.

As soon as I get the network agreement, I will let you know. Please let me
know your thoughts about how we ought to proceed.

Janine