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End State: PECO Wants Majority of Residential Default Service to Be Sourced Under 24-Month Contracts Through 2017, Seeks New Long-Term Contract
If the Pennsylvania PUC wants more market-reflective default service, as it indicated (but did not order) in its much-hyped end-state retail electric market order, utilities have not gotten the message.
PECO has filed its proposed default service plan for the period June 1, 2015 through May 31, 2017, and it includes the use of 24-month contracts to supply the majority of residential default service, plus the procurement of a new long-term contract for a slice of residential supply.
Having been previously rebuffed in its efforts to institute an annual reconciliation of default service charges, PECO proposes in its new default service plan a semi-annual reconciliation, in place of the current quarterly reconciliations.
PECO is the latest utility to seek a 2015-17 default service plan heavily reliant on non-market-reflective rates for small customer service. The FirstEnergy Pennsylvania utilities previously filed for approval of a 2015-17 default service plan that would rely on contracts lasting 24 to 48 months to serve nearly 50% of residential and commercial default service load (click here for details)
We have been critical of the end-state final order, not on policy grounds but because it promised far more than it actually delivered, and while we have been accused of "Monday Morning Quarterbacking," the latest default service filings only validate our criticism.
To wit, PECO has proposed no changes to its default service procurement as a result of the end-state retail market order. While PECO may point to the termination of block energy procurements in the new proposal, this policy of ceasing the use of block procurements had already been instituted in default service plan II, prior to the end-state order. Indeed, PECO is arguably now proposing a less market-reflective default service plan, through the introduction of a new 53-month contract for a slice of residential load, and the use of semi-annual reconciliations.
We understand that the PUC did not order any procurement changes in its end-state order; however, the current "prudent mix" standard is one that can be met in a number of ways, including through the use of a single product-type, as recently affirmed by the Commonwealth Court. Therefore, while it is understandable that PECO is not, for example, proposing exclusive use of 6 and 12-month contracts for residential default service, incremental improvement in market-reflective pricing should be expected, as more incrementally market-reflective contracts can arguably constitute a "prudent mix" in a world where 33% of residential customers now shop.
That PECO did not see fit to propose even incremental changes in its residential default service procurement (say limiting 24-month contracts to 25% of default load, if not eliminating such 24-month contracts entirely) speaks volumes as to the impotence of the PUC's end-state order, despite all the adulation to the contrary.
Specifically, for residential customers, PECO proposes that the default supply portfolio reflect the following:
• 96% of the load is supplied by a mix of products representing a transition to:
-- 40% of this total served under 1-year fixed price full requirements products with delivery periods that overlap (laddered) on a semi-annual basis
-- 60% of this total served under 2-year fixed price full requirements products with delivery periods that overlap on a semi-annual basis
• The other 4% of the load is initially supplied by the pre-existing five-year block energy product purchased in DSP I and associated spot purchases; this block product expires on December 31, 2015, at which time the supply for this portion of the load is replaced by fixed price full requirements products spanning four years and five months (approximately 3% of the supply) and spot purchases (approximately 1% of the supply)
• All products are procured approximately 2-4 months before the start of delivery of that product
Testifying on behalf of PECO, Scott Fisher, Principal with The NorthBridge Group, said, "I do not believe that any significant shortening of the product term lengths in PECO's residential default service supply portfolio is appropriate at this time."
"[I]n assessing the relative merits and drawbacks of a portfolio consisting of generally shorter-term products, it must be recognized that such a portfolio would erode the price stability provided to default service customers. This is an important consideration because small customers generally realize the greatest benefits from default service price stability. Some small customers who need price stability may not have the time, incentive, knowledge, sophistication, or resources to elect an EGS offering that provides the price stability that they seek with competitive pricing. The mix of one-year and two-year FPFR products in PECO's residential default service supply portfolio, and the semi-annual overlapping of their delivery periods, are important to insulate customers from sudden and large price fluctuations. In contrast, supply portfolios with generally shorter-term products would unnecessarily increase residential customers' exposure to substantial price fluctuations," Fisher testified.
For all commercial customers, PECO does not propose any changes in the default service procurement versus the current plan.
For small commercial (< 100 kW) customers, default service will be 100% supplied by 12-month fixed price full requirements products, with delivery periods that overlap on a semi-annual basis. All products will be procured approximately 2-4 months prior to delivery
For medium commercial (100-500 kW) customers, default service will be 100% supplied by 6-month fixed price full requirements products, with no overlap in the delivery periods.
Large customers (over 500 kW) will receive hourly pricing.
The medium commercial class portfolio provides another opportunity for the PUC to back-up its statements in its end-state retail market order. In the end-state order, the PUC said that default service for customers above 100 kW should be hourly pricing, but acknowledged metering limitations.
However, while other utilities may not have a "clean" customer class break at the 100 kW level, PECO does, meaning that medium customers can be moved to a more market-reflective default supply portfolio without impacting smaller customers. Specifically, while hourly pricing may not yet be appropriate for such customers due to metering, we will be interested to see if the PUC is able to justify continued use of six-month contracts for these customers, whom the PUC has previously said should receive spot pricing. There is no metering limitation preventing the use of monthly spot or quarterly full requirement contracts for PECO medium customer default service, for example.
As noted above, PECO is seeking to reconcile over/under collections of default service charges on a semi-annual basis instead of a quarterly basis.
Additionally, PECO is also proposing to assume responsibility for collecting PJM generation deactivation charges associated with its default service load from default service customers under PECO's bypassable default service transmission rate instead of as part of the price for default service supply paid to wholesale suppliers. "This change will result in the collection of generation deactivation charges in the same manner as other default service-related transmission charges," PECO said in its petition.
Related Story Today: NorthBridge Principal: "No Convincing Evidence" Shortening Default Service From 24-Month Horizon Would Better Facilitate Retail Market
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March 11, 2014
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Reporting by Paul Ring • ring@energychoicematters.com
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