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PUCO Denies Duke Energy Ohio Market Rate Offer Application on Blending, Other Deficiencies

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February 24, 2011  

In an unsurprising order, the Public Utilities Commission of Ohio found that Duke Energy Ohio's proposed Market Rate Offer filing did not meet statutory criteria, due to its proposed two-year blending process, and found that the case can not move forward as filed. (Case 10-2586-EL-SSO).

The Commission has consistently opposed Market Rate Offer filings. In 2008, it formally denied an MRO application from the FirstEnergy distribution companies in Case 08-0936-EL-SSO, then, in 2009, the Commission essentially withheld action on the FirstEnergy companies' subsequent MRO filing in Case 09-0906-EL-SSO until the companies agreed to enter a stipulated electric security plan with several parties, including PUCO Staff. PUCO Staff had been opposing Duke Energy Ohio's MRO application, and had encouraged Duke Energy Ohio to file an electric security plan (ESP).

PUCO's denial of the Duke Energy Ohio MRO was based on the threshold question of the statutorily required blending process; however, it also found fault in several other areas of the application which would have been rejected regardless of the adjudication of the blending question.

Statute contemplates a five-year process for a distribution company which owns generation to transition from electric security plan rates to market-based rates, though it also states that PUCO retains ultimate jurisdiction of the amount of regulated and market rates blended during each year of the transition. Duke Energy Ohio has argued that such authority would allow PUCO to approve a two-year blending process for its proposed MRO, with market-based retail generation rates fully implemented in year three of the MRO.

However, the Commission concluded that, while the Commission may have ultimate authority to adjust the blending periods, at a later date based on actual rates, Sections 4928.142(D) and (E), Revised Code, as well as Chapter 4901:1-35, O.A.C., required Duke Energy Ohio to file a five-year blending plan and transition to market. "Failure to do so renders Duke's proposed MRO application in noncompliance with the statutory requirements," PUCO said.

"Since Duke has not presented a complete MRO application, the application is in noncompliance with the statute and this case can not proceed as filed," the Commission ordered.

The Commission said that any determination to alter the five-year blending process in the statute, "must be based on actual evidence that exists at some future point."

"The evidence [in support of a two-year blending period] presented on the record in this case is all speculative and based on events that may, or may not, occur, such as: the possible convergence of the ESP and market prices; the, as yet to be filed by Duke and considered by the Commission, request by Duke to transfer its legacy generation assets; and the prospective transfer of Duke to PJM and Duke's election to purchase generation services in PJM markets, which has not yet been confirmed," PUCO said.

While the two-year blending process was predicated on Duke Energy's Ohio intention to seek, in a separate case, the transfer of its generation assets to an affiliate, PUCO said that, since the case has not yet been filed, "it is likewise inappropriate for the Commission to take the possible transfer of the legacy generation assets into consideration in this case when determining whether or not Duke's proposal for a two-year blending period is permitted."

Despite finding that the docket cannot proceed due to this threshold issue, PUCO did provide guidance on a large number of other issues regarding the MRO structure.

Among other things, PUCO concluded that, "Duke does not appear to have demonstrated that its proposal would result in an open, fair, and transparent competitive solicitation."

One of the main reasons for this conclusion is the uniform product design in the competitive bid plan, and lack of any carve-out in the supply procurement for time-based generation rates to be offered by Duke Energy Ohio.

"Rules 4901:l-35-03(B)(2)(e) and (i), O.A.C., require Duke to provide, as part of its application, information regarding its customer loads, TDP (time differentiated pricing), dynamic pricing, alternative retail rate options, and price elasticity," PUCO said, suggesting that the utility should be facilitating the enrollment of more customers onto a utility-offered time-based product.

"Duke has proposed procuring generation at a single price covering all hours, all SSO customers, and a number of different generation products. Duke did not even consider soliciting some or all of its SSO energy requirements through RTO-operated competitive markets and reflecting the results in TDP or dynamic pricing," PUCO continued.

"As pointed out by Staff, Duke's TDP and dynamic pricing options are almost nonexistent, with participation of less than 100 of Duke's over 690,000 customers ... The extremely limited pervasiveness of Duke's alternative retail rate options and the fact that Duke has not demonstrated on the record in this case how its proposed MRO would promote the policy of the state, leads the Commission to find that Duke has not adequately shown that its MRO achieves an open, fair, and competitive solicitation," PUCO said.

PUCO also said that it is concerned with the lack of a load cap in the procurement plan filed by Duke Energy Ohio.

Furthermore, PUCO endorsed Staff's recommendation that there should be an overlap between auctions in order to dampen any changes in the market pricing from auction to auction.

The Commission would also have rejected Duke Energy's Ohio proposal to remove demand charges from generation rates, finding that such removal would lead to large rate increases for high load factor customers, as costs are re-allocated.

"The Commission directs Duke to consider, in any subsequent application filed by Duke, either for an ESP or an MRO, its rate design with respect to its demand classes and address whether Duke's proposed rate design sends appropriate price signals. Moreover, Duke should further address the adequacy of the use of the 4 CP method in allocating capacity costs, as opposed to the 12 CP method, which has previously been approved by FERC."

"[T]he Commission directs Duke to address the possibility of providing dynamic pricing options which reflect the time varying wholesale cost of electric service for large commercial and industrial customers with advanced or interval meters," PUCO added.

PUCO found that Rider RECON, which would have reconciled certain ESP generation charges that are eliminated under the MRO, should by bypassable, since the underlying components are either fully bypassable (Rider PTC-FPP), or conditionally bypassable (Rider SRA-SRT) depending on the customer.

Additionally, PUCO would have supported the creation of a non-recourse, non-discounted Purchase of Receivables program at Duke Energy Ohio under the MRO, under which bad debt costs would have been collected from all customers via a nonbypassable rider (similar to Duke Energy Ohio's gas program).

The Commission would have denied Rider SCR, a generation cost reconciliation rider to align the costs of market supply and actual retail revenues, as proposed, and would have removed the provision that allows the rider to become nonbypassable if reconciliation amounts exceed a certain circuit-beaker threshold. PUCO further said that the costs collected under Rider SCR should be more narrowly defined, and should not include carrying costs.

"If Duke were permitted to recover the costs included in Rider SCR from shopping customers, under any circumstances, we believe that it would create an anticompetitive subsidy," PUCO said, noting that the use of a potential nonbypassable generation reconciliation rider at the FirstEnergy companies (under a circuit breaker design) resulted from a stipulation, and was approved in the context of an ESP, not an MRO.

The Commission found that Duke's proposed Environmental Investment Rider (EIR), Fuel and Purchased Power Rider (FPP), and Generation Rider (GEN), which would have collected ESP-related costs during the transition to market rates, were not supported, and, having concluded such, did not delve into specifics such as whether Rider EIR should be bypassable. PUCO said it was unclear why Duke needs up to four riders (Riders EIR, RECON, FPP, and GEN) to incorporate, true-up, and reconcile the ESP price that would have been blended into customer bills under the MRO.

Finally, PUCO said that, "at this point, Duke has not yet adequately demonstrated that its voluntary business decision to procure generation services within PJM's markets, rather than in the Midwest Independent Systems Operator (Midwest ISO), is fair and consistent with state policy."

"Duke's choice to obtain generation services in the PJM RTO will impose certain capacity and other costs on consumers which might not have been incurred if Duke had elected to remain in the Midwest ISO. Duke has not yet made a sufficient case that its choice to obtain generation services in PJM is reasonable, such that any additional costs are recoverable from consumers," PUCO said.

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