ace usa

How to Make Retail Markets Work

Presentation by Patricia Goudarzi,

ACE USA Power Products

to the New England Conference

of Public Utility Commissioners

June 2002CONFIDENTIAL & PROPRIETARY

ACE USA

Agenda

Introduction to ACE USA

Experience In New England

Differences in How Markets Evaluate Risk

Regulatory Issues

Benefits of Insurance Solutions

ACE USA

Introduction to ACE USA

ACE USA is a division of the ACE Group of Companies “A” rated capacity; “A+” S&P; “A” AM Best

Global business in 50 countries

$40 Billion in Consolidated Assets

ACE USA

Introduction to ACE USA (Contd.)

ACE USA Power Products Introduced product in 1998

Started as Retail; Currently Predominantly Wholesale

Insured 70,000 MW of Generating Capacity at Summer Peak

Coverage ranges from 2 MW to 12,000 MW systems

All 10 NERC regions covered and UK and Australia

Policy Limits up to $100 million available per individual risk

Risks can be covered either individually or as a portfolio

ACE USA

Experience in New England

Largest concentration of clients in Midwest and PJM

Great Bay (Only Announced Transaction in New England)

Predominantly municipal clients in New England (versus IOU in other areas of country)

PURMA Relationship

Power Marketers with Off-Take Agreements

ACE USA

Basics of Insurance

Fortuitious

Unexpected or Rare Events

Low Probability Events Make it Affordable

Credit

D&O

Business Interruption

Earthquake

Terrorist Act

Forced Outages

Interruptible Contracts

ACE USA

Risk Management Perspectives

Commodity/Trading OrganizationStandardized RisksRisk Management Offsetting Positions Unwind positions Rely on market liquidity and

transparencyLarge portfolios rely on offsetting positions for risk managementForward Looking

InsuranceCustomized SolutionsRisk Management Risk is retained until expiration (not relying

on chain of suppliers for delivery, etc.) One-Sided Transactions Typically Hedge through reinsurance

Large portfolios rely on law of large numbers for risk managementRely on historic statistics and fleet information Larger number of transactions,

converge to expected losses

ACE USA

Innovative Solutions Are Available

Full Service Capabilities

Short-term outage and price volatility coverage

Long-term outage/fixed indemnification coverage

Volumetric Risk Management due to temperature extremes

Specialized Solutions (eg. Retail Programs)

ACE USA

Retail Risk Transfer Example 1

Interruptible Tariff

Extreme conditions to interrupt (reserve margin threshold)

No Purely Economic Pass Through

Tariff Contained Option to Buy Through if Able

Insurance Protected Against Impact of Extreme Prices for Pass Through

ACE USA

Risk Transfer Example 2

Onsite Generation

Receive Back-up Generation from Local Provider at Market Cost

Protect Customer Against Extreme Price Volatility if Generator Offline

ACE USA

Advantages of Insurance Solutions

Generally Backed by Financially Strong Counterparties

Insurance Companies are Not Potential Competitors in Commodity Business

Insurance Companies are Diversified Into Different Businesses

Contingent Nature of Coverage Tends to Result in Pricing and Coverage Efficiencies

Financially settled through look-back mechanism. No scheduling or other requirements

ACE USA

Contact Information:

Patricia Goudarzi

Senior Vice President - ACE Power Products

215.640.1893 (phone)

patricia.goudarzi@ace-ina.com

Thanks for Your Attention!