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New Hampshire Rejects Alternative Default Service Proposal at PSNH
January 27, 2012
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Copyright 2010-
The New Hampshire PUC has rejected Public Service Company of New Hampshire's proposed design for an alternative default service rate, finding that the proposed mechanism could price the rate below PSNH's marginal cost, which would encourage gaming by customers.
As first reported by Matters, Rate ADE, Alternate Default Energy Service, would apply to customers returning to PSNH for supply after taking service from a competitive supplier.
PSNH proposed that Rate ADE be priced at PSNH's marginal cost of serving returning customers, plus a 1¢/kWh adder for certain fixed costs. However, the marginal cost would be established annually on January 1, with a potential adjustment after six months, similar to how the current energy service rate is established.
The specific marginal cost rate proposed by PSNH was 6.33¢/kWh, for a total Rate ADE price of 7.33¢/kWh. The PUC noted that this price is almost 1¢/kWh less than the energy service rate of 8.31¢/kWh that was approved for the period starting January 1, 2012.
"Our first concern is that the pricing of Rate ADE may not reflect market prices. PSNH proposes to adjust Rate ADE twice a year, in January and July, which is the schedule for its adjustments to the ES [energy service] and stranded cost adjustment charge rates; and it proposes to establish those rates based on forecasts of power costs. If market prices suddenly increased or decreased, for example, in March or August of any year, under PSNH's proposal, Rate ADE would remain unchanged," the PUC said.
"If market prices increased during the six-month period between rate adjustments, Rate ADE would be more attractive to customers who had migrated to competitive supply, and those customers could return to PSNH for energy service. If qualifying load returned to PSNH at a lower-than-market Rate ADE, PSNH would not collect sufficient revenue from returning load to pay the marginal cost of power. In this example, PSNH would have to purchase power on the market at a higher rate than the revenue collected through Rate ADE. Because the ADE rate is not reconciled to actual costs as is the DE [default energy service] rate, in a rising market, PSNH would then expect to recover any under-collection due to Rate ADE from customers remaining on Rate DE," the PUC continued.
"Those remaining customers would pay not only the actual cost of power they receive but the additional under-collection amount associated with Rate ADE, exacerbating existing adverse effects of customer migration on the Rate DE customer group," the PUC explained.
"Our second concern is that the Company designed Rate ADE so that that any customer returning to Rate ADE following 12 consecutive months of taking energy from a competitive supplier must remain on Rate ADE for a 24-month period; however, during that 24-month period, a customer would be able to move between competitive supply and Rate ADE on a monthly basis, as long as the customer did not stay with a competitive supplier for a consecutive 12-month period. The risk that customers will switch from PSNH's Rate ADE to competitive supply, whichever is at lowest cost – a form of 'gaming' – is inherent to the rate design. The ability of the customer to move back and forth between competitive supply and Rate ADE, combined with fact that Rate ADE is fixed for a period of six months, increases the possibility that PSNH will under-recover costs in Rate ADE, resulting in higher costs for Rate DE customers than currently results from existing customer migration," the PUC said.
"Finally, we find that the record does not support the calculation of the adder at one cent per kWh. Furthermore, there is enough uncertainty in the rate design to suggest that the one cent per kWh may not collect enough revenue to cover unexpected price spikes in the marginal cost of electricity that would be used to supply Rate ADE load," the PUC said.
The PUC directed PSNH to file a redesigned Rate ADE by June 30, 2012.
"We restate our direction in Order No. 25,256 that 'such rates must be cost-based and non-discriminatory and should not have an adverse effect on competition,' and that the alternative rate may exceed the marginal cost of default service," the PUC said.
"With respect to PSNH's large customer group, we also restate our suggestion in Order No. 25,256 that PSNH consider having a separate tariff and default service rate for its largest classes of customers generally," the PUC added.
Email This StoryCopyright 2010-
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