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State-Run Opt-Out Aggregation, Reference Price Levels Proposed As Means Of Allowing ESCOs To Serve Low-Income Customers in New York

November 9, 2015

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

A PSC-managed opt-out aggregation and the use of reference price levels are two proposals put forth by a collaborative report on implementing New York PSC directives concerning ESCO service to low-income customers participating in utility administered low income discount programs and the Home Energy Assistance Program (assistance program participants or APP)

As previously reported, the PSC has ordered that for an ESCO to serve a low-income assistance program customer, the ESCO, "must guarantee that the customer will pay no more, on an annual basis, than the customer would have paid as a full service customer of the utility, or the ESCO must provide Assistance Program Participants with energy-related value-added products or services."

The PSC has broadly stated that, "energy-related value-added products or services," will be defined to include certain fixed price offers, but details on qualifying fixed price offers were left to a collaborative.

The collaborative report does not offer any consensus proposals on allowing ESCOs to offer fixed rates to APP customers.

However, the collaborative report summarizes a proposal from a sub-workgroup, whose members included Constellation, Direct Energy, IGS Energy, Just Energy and NRG Energy, which would aggregate all APP customers and award service to such customers via an RFP. Aggregation could occur on an opt-in or opt-out basis, but the listed ESCOs support an opt-out mechanism

Specifically, under the aggregation proposal, APP customers would be aggregated by each electric and gas distribution service territory (and ISO Zone, as applicable). A request for proposals (RFP) would be issued, by an entity to be determined, seeking a fixed price product and energy-related value added services meeting high level goals or criteria which are established in any future Commission Order and reflected in the RFP. Proposals would identify the fixed price, as well as one or more value-added products that are proposed by respondent ESCOs. Review of the proposals would determine a single winner in each ISO Zone as well as the fixed price and value-added products to be provided to APPs.

The ESCOs propose that the term of the agreement with winning ESCOs would be for a minimum of two years.

Qualified bids would be judged on pricing plans and value-added energy-related criteria based on Commission-established guidelines defined in the RFP.

One winner would be selected for each electric and gas distribution company territory (and ISO Zone as applicable). A single ESCO may be awarded multiple electric and gas tranches, but no single ESCO may be awarded 100 percent of all tranches put out for bid in every territory. Bids would be reviewed and judged by the Department. Final awards would be approved by the Commission.

A reasonable, non-refundable bid fee would be collected from prospective bidders to cover administrative costs as well as a consumer awareness campaign. Winning ESCOs may have a direct communication relationship with customers during the term of the program. However, ESCOs may only offer APP compliant offers to customers.

Consumer advocates expressed various concerns about the proposal including the legal authority for the PSC to award bids for ESCO service.

The aggregation proposal was offered as an alternative to an approach primarily developed by Staff which would establish fixed prices which could be offered to APPs based on a forward-looking "reference price" calculated based on publicly available information. Additional pre-approved energy-related value-added products or services (ERVAS) could be offered to APPs at prices that, for fixed price products, do not exceed a specified adder in addition to the "reference price," and that, for variable priced products, do not exceed a specified adder in addition to the utility price measured over a twelve-month period.

The reference price approach would establish an upper limit on fixed prices that may be provided to APPs based on a forward-looking methodology reflecting market prices and other factors. The collaborative considered development of a methodology which could reasonably and practically be implemented to establish a reference price for a one-year fixed price product, with the reference price reset on the first of each month and the price available to consumers throughout the month. The methodology for electricity, detailed below, is based in part on information provided by the utilities in New York State, at the request of Staff. The same conceptual methodology could be used for natural gas fixed price products.

Under the proposal, the reference price may be established based on forward prices for energy and capacity and other related costs ("all-in" price). Historical data may be used to adjust the forward price for liquid trading zones to prices for all non-liquid NYISO Zones (basis) as well as to determine the Ancillary Service costs as a percentage of forward energy prices. In addition, a premium could be added to the "all-in" price to reflect the additional risks the market participant will assume. The sum of the "all-in" price and total risk premium is referred to as the reference price. It could be calculated by zone, made available on the Public Service Commission web site, and updated on a monthly basis. All ESCOs would be able to sell one-year fixed price products to APPs at or below this reference price. Some of the risk factors that could be considered in developing this methodology include the following:

• Volumetric Risk. Entities offering a fixed price may hedge or procure supply for a fixed price at a fixed volume that may not reflect actual participation. The premium for this type of risk may be developed using a Swing Option model. Alternatively, a broker may be contacted to price a strategy to mitigate the volumetric risk.

• Holding Period Risk. Forward prices are dynamic and change frequently. There is a risk associated with holding a price fixed for any length of time, and the risk increases as the duration of the open time period increases. Quantifying such a premium may require historical pricing data, which is typically publicly available.

• Credit Risk. Entities offering a fixed price may be subject to credit risk, which includes the cost of doing business, including the cost of securing capital for transactions to support offering a fixed price.

These risks are not meant to be all-inclusive. There may be other premiums that market participants want to add to fairly price a fixed price option. The total risk premium would be revisited on an as needed basis, following, for example, an unusual movement in forward prices.

Regarding other ERVAS that could be offered to customers as part of ESCO service, the ERVAS product price would be amortized over a one-year period by ESCOs bundling this ERVAS with commodity, so that APPs would pay this amount over time via an "adder." ESCOs bundling ERVAS with a variable priced commodity product would be required to guarantee that the customer pays no more over the course of the year, than what would have been paid to the utility plus the representative price of the value-added product. ESCOs bundling this ERVAS with a fixed rate commodity product would be required to charge no more than the fixed reference price for commodity, plus the representative price of the ERVAS.

The ERVAS adder would be based on the representative price of the value-added element, an annual interest rate of 6%, contract duration determined by the ESCO, and historical usage of the customer.

As an illustration, an advanced thermostat with a representative price of $250, would result in an adder of 3.68 cents per kWh for a one-year fixed price contract, for a customer consuming an average of 600 kWh monthly.

The collaborative notes that, at this point, it would be difficult to identify all forms of value-added products and their associated values. It is recommended by the proponents of the reference price model, that after issuance of a Commission decision adopting the general methodology, the Commission institute a comment period during which interested parties would submit proposals for the adder to be used for specific value-added products

One area where consensus was reached concerned products with price guarantee relative to the utility price

The consensus of the collaborative is that few, if any, ESCOs intend to offer a product which guarantees that the customer will pay no more than would have been paid had energy been purchased from the utility. ESCOs cited several reasons for this result, including the practical difficulties of providing a price guarantee while commodity prices offered by the utility are unknown in advance and are subject to out-of-period adjustments, the desire for ESCOs to recover marketing and other costs that utilities do not incur, and the utilities’ ability to purchase energy in volumes that many ESCOs cannot.

However, in compliance with the Commission’s Order, mechanisms have been established so that ESCOs wishing to offer such products to APPs, can do so. By December 2015, changes must be made to the EDI protocols to accommodate bill credits that ESCOs serving customers subject to the price guarantee, may be required to provide.

Case 12-M-0476

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