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Strong Case Lacking for Substantial Changes to Pennsylvania Default Service Under Current Statute

March 22, 2012

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Copyright 2010-12 Energy Choice Matters

No strong case is apparent for the Pennsylvania PUC's legal authority to substantially modify Pennsylvania's current default service model without legislative action, at least in the manner contained in two Staff discussion options, based on comments at a hearing on the end-state default service model held yesterday.

The hearing focused on three possible end-state default service designs (click for further detail), as contained in a Staff discussion document.

In brief, one of the potential end-state designs would rely on real-time/hourly LMPs (Model A), and another would rely on prevailing market prices, as established through an index, auction or other acceptable method (Model B). Only the third potential end-state design (Model C), largely mirroring the current design, explicitly addressed the requirements of, and stated that it would be complaint with, 66 Pa. C.S. §2807(e)(3.1)-(3.4) governing default service, including the prudent mix and least cover over time requirements.

Current law under Act 129 requires that the default service provider procure a "prudent mix" of spot market purchases, short-term contracts, and long-term purchase contracts, with such prudent mix designed to ensure, among other things, "least cost to customers over time."

Additionally, the default service provider shall provide electric generation supply service pursuant to, "a commission-approved competitive procurement plan."

In promulgating rules to comply with the statute, the PUC interpreted the statute in a manner that cannot be reasonably harmonized with an LMP-based or "prevailing market price"-based default service method. While the PUC stressed in L-2009-2095604 that its default service regulations, "should not be construed to anticipate, pre-judge or otherwise foreclose our consideration of other default supply models or adjustments to the current default service model in the pending Retail Electricity Markets Investigation at Docket No. I-2011-2237952," the PUC cannot escape the language of Act 129 on which its conclusions in L-2009-2095604 are based.

From the PUC's rulemaking in L-2009-2095604, regarding the term least cost over time:

• "We do not endorse, at this time, the position of those parties that recommend solely a mix of just short and intermediate term contracts and spot purchases as that unduly limits the range of supply products available."

• On the argument that least cost over time should mean the market price of energy: "[T]his interpretation conflicts with the Act 129 objective of achieving price stability which dictates consideration of a range of energy products, not just those that necessarily reflect the market price of electricity at a given point in time. Price stability benefits are very important to some customer groups in that exposing them to significant price volatility through general reliance on short term pricing would be inconsistent with Act 129 objectives"

• "The Competition Act, as modified by Act 129, envisioned a continuing role for DSPs [default service providers] to regularly propose procurement plans for Commission review." [emphasis added]

• "In implementing default service standards, the Commission must be concerned about rate stability as well as other considerations such as ensuring a 'prudent mix' of supply and ensuring safe and reliable service"

• "Price stability benefits are very important to some customer groups, so an interpretation of 'least cost' that mandates subjecting all default service customers to significant price volatility through general reliance on short term pricing is inconsistent with Act 129's objectives. This is especially true given that the statute specifically enumerates short-term (up to 4 years) and long-term (over 4 to 20 years) contracts as part of the 'prudent mix' of contracts that should be included in a default service plan." [emphasis added]

Commissioner James Cawley acknowledged that certain "legalisms are in the way" as the PUC seeks to place retail suppliers in the default service role, but said that he believes that default service offered by a retail supplier can meet the Act 129 standard, including both the least cost over time and prudent mix requirements.

With respect to the least cost over time, Cawley noted the retail suppliers are currently pricing offers below the default service rate, which the PUC has judged to be compliant with the least cost over time, implying that the retail supplier rate must also meet (and is superior to) the PUC-established least cost over time.

Cawley further noted that in meeting their default supply obligations, a retail supplier would naturally amass a prudent mix of contracts to meet its load.

This is essentially the case made by retail suppliers. However, retail suppliers said that detailed review of retail supplier hedging practices, as occurs under Act 129 today for default service providers, would not be appropriate, or needed, to implement Model A (LMP-based) or Model B (prevailing market prices).

Rather, retail suppliers said that the Commission would oversee a competitive selection process to define the pricing structure, and default service provider, including setting qualifications standards, additional financial security for retail suppliers acting as default service providers, etc. Retail suppliers said that they should be allowed to retain flexibility in their hedging practices to enter into a variety of competitively sourced products, with no mandated procurement approach.

While the PUC has previously adopted in the post Act-129 environment, at Duquesne Light, a default service product under which the PUC established a specific default service rate and allowed the default service provider to assemble contracts to meet this load as it saw fit (which was essentially a single-bidder retail opt-out auction), the case is distinguishable because the retail product in that case had a base energy charge fixed for 29 months.

While the PUC may have authority to allow retail suppliers to assemble a prudent mix of contracts outside of a PUC-mandated procurement, it is not clear if such prudent mix can be assembled under the "prevailing market price" model of default service as established through an index or auction, since prevailing market price implies a reliance on short-term contracts.

Retail suppliers did not address, from a legal standpoint, the PUC's prior finding that general reliance on short term pricing (as would occur under both Model A/LMP and Model B/prevailing market price) is inconsistent with Act 129's objectives.

Commissioner Wayne Gardner was "troubled" by the answers from suppliers concerning meeting the Act 129 requirements, especially the least cost over time standard. Gardner said that the default service product needs to meet, "a specific statutory requirement" and said that if retail suppliers are not prepared to meet such requirements, it may preclude them from being in the default supply business.

Gardner did agree that there are inefficiencies with the current default service model which need to be addressed.

Nonetheless, despite the open legal questions, Chairman Robert Powelson said, in closing the hearing, that the, "train [has] left the station" on "substantial" changes to the default service model.

Specifically, Powelson, without naming the company, chastised Duquesne Light, which had said in comments dated January 24 that, "Duquesne does not support substantially modifying the end state default service model at this point in time."

"I got to be honest with you, I'm scratching my head ... that train left the station about 18 months ago, and you need to get on board," Powelson said in response to the comments.

"[T]o make a comment that you do not support substantial modifications of the end state default service is insulting to my colleagues and I," Powelson said.

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