Question-and-Answer Session
Operator
Operator instructions. Your first question comes from the line of Asha Arkon(?).
Q - Asha Arkon(?)
Good morning. John, could you just, I guess it came on the wires that the regulated industry committees are going to meet today and you're going to be making some presentation on the retail markets. Could you just mention what the scope of this hearing is? It's just normal updates or what's the scope of these hearings, I guess, today?
A - John Wilder
It's just normal. Part of that hearing process is to discuss a variety of issues that the legislature will need to think about in its coming 2007 session. There's going to be a number of companies represented. We're going to be discussing the state of the market, both retail as well as wholesale, and talk broadly about what big public policy initiatives and issues need to be considered to make sure this market continues to be the best functioning market in the U.S. And that's kind of normal course of business for us to have prehearings before the session to help try to set the key issues, at least from the perspective of all the market. We're actually quite excited and encouraged about the hearing because we think there's some big issues that the state leaders need to think about, particularly these issues around reliability. It's surprising us all how quickly these reserve markets are melting away. We need to make sure there's very constructive laws and very constructive public policy to make sure that we're able to get these plants built on time.
Q - Asha Arkon(?)
If I can just have a follow-up, John. As I was looking through the slides, one major change that came in your presentation two days ago was the retail position previously, you had a, it was a perfect hedge, I guess, somewhat of a hedge. And now in the presentation, there's a range for each year, 2008, '09. And I just want to understand, how should we look at that range? I mean the range is pretty wide. How should we look at that range in terms of the retail position as an offset to the hedge?
A - John Wilder
Yes. I'll open with that, then I'm going to ask David to provide some more specific color. We've always, Asher, on our hedge tables as well as any sensitivities we've had, we've always had a range for retail, and we've always capped retail in our forward plan at varying levels. When we first started doing our plan, we used gross margin, so we would cap it at $30 or so. Then we started using that margin and we capped it at 5 to 10. Sometimes in which we gave a forward view where we ran our forward plan, we ran into the cap, and other times we didn't. The majority of the plans, at least as I can recall, we've actually invoked that cap. The only time we weren't required to invoke that cap was the last forward business plan that we'd calculated because the underlying wholesale commodity prices were high enough that that never needed to be operationalized. So what we did is we saw the wholesale prices come down again. That was unexpected to us, as well as unexpected to many of the market followers, as we started introducing a feathering down of what we call our hedge effectiveness. If you look at it now, it's about 90%. At least in the current year, it's about 90%. In our forward view, we kind of walked that thing down to a 50% effectiveness level by, as you noted, widening out the range. So I'm going to ask David to kind of give you the mechanics of it but that's our thought process behind it. Our thought process is retail is a margin business within a certain expected margin range. Any time you get materially outside of that range, we would expect to see those benefits of continuing to flow to the customer. It's going to have a wider range around it as this market unfolds. Someday when it's fully competitive, our retail business would be just a pure, pure, very narrow margin range. Right now, we think it needs to stay pretty wide in five to ten, mainly driven by the volatility of the underlying power prices.
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