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Boom: Broken Wholesale Market Compels State to Open Investigation of Greater "Layering", "Flexibility" In Default Service Procurements, Ditching Full Requirements Service

April 10, 2015

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Copyright 2010-15 EnergyChoiceMatters.com
Reporting by Karen Abbott • kabbott@energychoicematters.com

Citing recent electric price spikes and declining participation by wholesale suppliers in electric default service procurements, the Massachusetts DPU has opened an investigation into the provision of basic service, including the potential elimination of full requirements contracts and use of less market-reflective procurements.

"[T]he current investigation considers the full range of options regarding the procurement and pricing of basic service," the DPU said.

Noting recent increases in residential basic service costs to 15-16¢/kWh, the DPU said that it, "is very concerned about such price impacts on customers and is committed to exploring any opportunity to mitigate such increases or their effects on customers."

The DPU specifically puts forth for consideration three potential changes to basic service pricing and procurement: (1) adopting a more "layered" approach to the procurement of basic service supply; (2) providing the distribution companies with greater discretion and flexibility in their basic service supply procurement practices; and (3) changing the "all requirements" obligation currently placed on basic service suppliers.

The Massachusetts electric distribution companies currently procure basic service supply through competitive solicitations every six months for 50 percent of the load for one year for their residential and small C&I customers

"We now consider an approach, described herein as 'layering,' that involves many solicitations, conducted at various times for varying length, layered together in order to provide greater price stability for customers. We note that Rhode Island currently uses this sort of procurement approach for standard offer service, Rhode Island's equivalent of basic service," the DPU said.

"Next, the Department puts forth whether electric distribution companies should have greater flexibility and discretion in procuring basic service supply. Currently in Massachusetts, electric distribution companies issue solicitations at predetermined times for predetermined terms. By allowing electric distribution companies to structure solicitations, pricing options, and the terms of service based on current market conditions, companies may be able to reduce prices by customizing their procurement strategy. However, any consideration of allowing greater flexibility to procuring basic service supply must take into account potential negative impacts on the competitive retail supply market," the DPU said.

One possible approach to altering the all-requirements obligation involves changing the parameters set forth regarding the solicitations themselves, the DPU said.

"For example, this could include insulating suppliers from fluctuations in basic service load beyond a certain level. Alternatively, this approach could involve the distribution companies' procuring multiple alternatives to all-requirements service, which would pose less risk for suppliers (e.g., tranches of firm supply, tranches of products allowing more flexible purchases, and tranches of products designed to accommodate highly uncertain load requirements, such as call options)," the DPU said.

The DPU said that the use of full requirements contracts may, in particular, be driving decreased participation in wholesale procurements, particularly for the large customer classes.

"[I]n recent years, Massachusetts distribution companies have experienced declining participation by wholesale suppliers to basic service solicitations, particularly for medium and large commercial and industrial ('C&I') customers, with potential negative impacts for customers," the DPU said.

The DPU noted that the lack of wholesale supplier participation has prompted several EDCs to propose alternative procurement mechanisms, such as reliance on the ISO-NE market. The DPU noted, however, that these alternative approaches, "vary significantly in several ways, such as: whether prices are established before delivery of the electricity or calculated after the fact based on actual market costs; whether the risk associated with the differences between projected and actual market costs are borne by the specific customers being served or by all distribution customers through the basic service reconciliation mechanism; and whether the energy is procured in day-ahead or real time ISO-NE markets."

The DPU noted that another approach to addressing issues related to full requirements service is through the distribution companies' procuring basic service supply in the ISO-NE wholesale energy markets

"This approach is embodied in the methods for procurement used by Unitil for large C&I customers and described in the contingency plans put forth by Eversource and National Grid ... As part of this investigation, the Department will assess these different approaches, including specific elements, such as the allocation of risk from variations in wholesale market prices and procurement through the day ahead versus real time ISO-NE markets" the DPU said.

The DPU will conduct a technical conference on May 19, with the utilities directed to present discussion regarding the procurement mechanisms and product design used by their affiliated distribution in other states, particularly those that embody the alternatives discussed above (e.g., for National Grid, Rhode Island and New York; for Eversource, Connecticut; for Unitil, New Hampshire).

"In particular, we seek input from competitive suppliers active in states with different basic service procurement practices, in order to learn about the impacts on their business from these practices," the DPU said.

D.P.U. 15-40

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