If you want to offer free shipping for all your Merchant fulfilled items first you need to set this up in Seller Central. In your seller account on Amazon go to Setiings > Shipping Settings, click the "Edit" button for the "Your Price Banded Shipping Rates" box, click "Continue", set all "Shipment Rate" to zero and click "Continue", then finally click "Confirm".
NOTE: Amazon allows you to set up free shipping only for non-media items.
After changing your shipment rates in Seller Central, in SE+ you need to go to File > Preferences > Shipping Credit, and set all values to 0.01 (right now the software does not accept 0 but we have a feature request submitted for this).
As a result, when items are repriced, if you have your schema set up to compete against the total price+shipping (in Step 4 of the reprice wizard you have enabled the option to compete against total price+shipping) the shipping credit subtracted from the final price will only amount to 0.01.
This means that after the software reprices against the reference price + shipping you chose, it will only subtract 1 penny from the final price. You can adjust (+/-0.01) how you compete against the reference price in Step 4 of the Wizard to maintain the initial position compared to the price you are competing with. It is recommend that you run a few tests and check the reprice log to see how it goes.