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NorthBridge Principal: "No Convincing Evidence" Shortening Default Service From 24-Month Horizon Would Better Facilitate Retail Market
The next time you see a study by The NorthBridge Group touting a centralized capacity market, or how a capacity market wouldn't cost materially any more than an energy-only market, keep in mind the following testimony from Scott Fisher, Principal with The NorthBridge Group, who was testifying on behalf of PECO in support of PECO's proposed residential default service portfolio, the majority of which would be served under 24-month contracts.
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"[T]here is no convincing evidence that further shortening the term lengths of the default service products would better facilitate the development of the competitive retail market for residential customers in Pennsylvania," Fisher testified in support of PECO's proposal.
"In fact, the greater price stability provided by PECO's proposed residential supply product portfolio will facilitate retail competition by providing a more predictable and stable default service rate, making it easier for EGSs to market savings off of the default service rate, and making it easier for customers to compare EGS offers with default service rates and more confidently make retail supply decisions," Fisher testified.
"Based on market data from PECO's service area, as well as from other large EDC service areas in Pennsylvania, there is no reason to believe that default service supply portfolios with product term lengths similar to (or even somewhat longer than) those proposed by PECO will reduce EGS participation in the market due to any concerns about the possibility of future 'bust' periods. In fact, market data indicate that EGSs will enter markets and serve customers when they are able to offer attractive service offerings for customers, regardless of whether the supply product term lengths present a possibility of 'bust' periods in the future. These market data are especially compelling because they are from a time after EGSs actually experienced a period that the Commission has cited as a 'bust' period (which occurred during the time of the Pennsylvania EDCs' 'transition periods' in which default service rates were frozen for a long period of time)," Fisher testified.
"Notwithstanding this experience, EGSs have proven to be very willing to compete for customers in the retail market when the default service supply portfolios have product term lengths similar to (or even somewhat longer than) those proposed by PECO," Fisher testified.
"The first example of such market data pertains to PECO's service area. In PECO's first default service plan, the default service supply portfolio for residential customers included a mix of 29-month, 24-month, 17-month, and 12-month FPFR [fixed price full requirements] supply products, some of which were procured over a year-and-a-half before delivery of the product began. During that default service plan period, the percentage of residential load in PECO's service area being served by EGSs grew from 0.2% to 34%, and by the end of that default service plan period there were 70 EGSs serving PECO's residential load," Fisher testified.
"As another example, Duquesne Light Company recently completed a default service plan period in which its residential default service rate was fixed for 29 months. During this time, the percentage of residential load being served by EGSs grew to approximately 44%, which is one of the highest residential customer switching percentages in the United States. Furthermore, even before this default service period was over, Duquesne Light Company reported that the number of active EGSs serving its residential load had grown to 34," Fisher testified.
"Finally, the most significant growth in PPL Electric Utilities Corporation's ('PPL') residential customer switching occurred during 2010, when residential default service customers were supplied through 12-month calendar year 2010 FPFR products that were procured over time during the three-year period leading up to the 2010 delivery period. By the end of 2010, the percentage of PPL's residential load served by EGSs had already reached approximately 40%, making PPL's percentage one of the highest in the United States," Fisher testified.
"In all three of these Pennsylvania service areas, the term lengths (procurement lead time plus delivery period) of the default service products were in line with or were even longer than the term lengths that PECO is proposing for its residential default service supply products in DSP III. Yet, in all of these cases, large numbers of EGSs concluded that they should invest and compete to provide value for customers despite any alleged concerns about the possibility of future 'bust' periods," Fisher testified.
Fisher also testified that it is not necessary to shorten the term lengths of the default service supply products to reduce the likelihood of over- and under-collections. "PECO's proposed DSP III will reduce the likelihood of over- and under-collections by phasing out the block-and-spot component of the default service supply portfolio and by relying on FPFR products for effectively all of the small customer default service supply instead," Fisher testified.
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March 11, 2014
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Copyright 2010-13 EnergyChoiceMatters.com
Reporting by Paul Ring • ring@energychoicematters.com
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