Pa. PUC Allows Citizens'/Wellsboro to Use Non-Cleared Financial Transactions for
Default Service Email This Story February 14, 2011
The Pennsylvania PUC adopted without modification a recommended decision which allows
Citizens' Electric Company of Lewisburg and Wellsboro Electric Company to use certain
non-cleared financial transactions and options in their default service plan (P-2009-2110780
et. al., 9/13/10).
The recommended decision endorsed an unopposed settlement which allows Citizens'
and Wellsboro to use non-cleared financial transactions in the form of fixed for
floating swaps and call options, as well as physical options, subject to the following
1. All non-cleared financial transactions will be restricted to settlement at PJM
West Hub and will be limited to either swaps or call options;
2. All non-cleared financial swaps will be fixed for floating swaps;
3. Non-cleared financial swaps may be used to meet up to 60% of baseload (7x24) hedge
target thresholds, and up to 50% of intermediate (5x16) hedge target thresholds;
4. All non-cleared financial options or swaptions will be purchases of call options;
5. Swaptions, together with any physical call options, may be used to meet up to
20% of summer peak requirements during June through September and up to 20% of winter
peak requirements during December through March.
The authorization is limited to Citizens' and Wellsboro's current default service
plan, which runs through May 31, 2013.
Under the approved settlement, the utilities may request to amend the current default
service plan to include a multiple year product with a duration of longer than one
year, and may propose to use a non-cleared financial product for this transaction.
However the only non-cleared financial products that may be proposed by the companies
in such a filing are fixed-for-floating swaps or options, and other parties may oppose
this request, which is subject to PUC approval.
"The joint settlement petition will provide the Companies with additional tools to
cost effectively manage their joint portfolio and help them to provide reliable and
adequate service at the least cost to customers over time ... The ability of the
Companies to use non-cleared financial transactions and physical call options in
their Joint DSP may result in lower rates for default service in several ways," an
ALJ had noted.
First, the ALJ found that financial products are more heavily traded than physical
products in the PJM markets. "Increasing the number of potential counterparties
will provide the Companies with access to additional markets and greater product
diversity and, consequently, more competitive pricing," the ALJ said.
Second, including financial products in their portfolio could provide more flexibility
in small lot purchases since the companies need to obtain monthly financial products
in smaller increments than the standardized increment of 50 MW. "The more precise
the procurements and products, the greater potential for costs savings as the Companies
will avoid unnecessary purchases. The ability to purchase smaller increments will
limit situations where the Companies have to sell back excess power," the ALJ added.
Third, the use of financial products could reduce the companies' credit obligations
and exposure in some instances. "The use of non-cleared financial products will
require substantially less upfront credit and, therefore, reduce the cost of credit
passed through to ratepayers," the ALJ found.
The ALJ also noted that the use of call options will assist the companies in managing
the effect of any migration on the default service portfolio, though migration has
been limited in each service area to date.