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Direct Energy Proposes Retail Auction For D.C. SOS, Process Could Raise $500,000 Via Supplier Fees To Fund Customer Rebates For Energy Management Measures

August 24, 2016

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Copyright 2010-16 EnergyChoiceMatters.com
Reporting by Paul Ring • ring@energychoicematters.com

Direct Energy has proposed a retail model for electricity SOS in the District of Columbia, starting June 1, 2019.

The District of Columbia statute explicitly allows retail suppliers to provide SOS.

Ron Cerniglia, Director of Government and Regulatory Affairs for Direct Energy, told EnergyChoiceMatters.com that Direct's proposal was designed to address common stakeholder concerns with a retail model

Notably, for residential customers, Direct Energy is proposing a fixed two-year price under retail SOS.

For residential customers, the retail auction would produce a 24-month fixed price product. Direct Energy proposes that five retail suppliers be selected for the residential class via a sealed-bid competitive auction.

Based on current migration (13% of residential customers shopping, 200,000 on SOS), residential tranches in the auction would be about 40,000 customers each. Therefore, the intention is that each of the five winning suppliers is awarded a single 40,000 tranche (to the extent there are less than 5 bidders, Direct offers contingency measures based on the number of bidders).

The single residential retail price applicable to all retail SOS customers would be the price that clears the auction and awards five tranches (in other words, the fifth-lowest price). All suppliers would be paid this single clearing price.

A similar auction would occur for small commercial customers (under 100 kW). Small commercial customers would also receive a two-year fixed price, but there would be only three retail suppliers selected to serve retail SOS

For large customers (100 kW and higher), customers would be served on hourly prices (plus an administrative adder determined through a retail auction), with one winning retail supplier selected for a two-year term.

Direct Energy proposes that the PSC continue this structure and repeat the auction process (with new auctions and pricing) at the end of the initial two-year term until such time as the PSC elects to move to an end-state retail market, which Direct suggested would be appropriate as the amount of customers in the retail SOS pool decreases to a number for which it is impractical to hold an auction.

Notably, similar to Ohio's Standard Choice Offer auctions, at the end of the 24-month term, customers who remain on retail SOS would once again be part of the retail SOS auction pool; retail suppliers would not be able to keep customers who do not make an affirmative selection.

Under Direct's retail SOS, customers could choose a competitive supplier for service at any time with no penalty, or a competitive product from their retail SOS provider.

In its filing, Direct Energy states, "If a customer chooses to leave SOS and goes to a competitive supplier, that customer can re-enroll in SOS at the beginning of the next SOS term by advising its SOS Administrator and Pepco that it wants to move back to SOS prior to the next SOS term."

Direct Energy's proposal is notable in that winning retail suppliers would pay a $2-$3 per customer "social responsibility" donation for customers served under retail SOS.

The social responsibility donation would be $2 per customer for the first year of the auction, and would be paid for all customers assigned to the winning supplier

The social responsibility donation would be $3 per customer for year two of retail SOS service, and would be paid only for customers who continued to be served under the retail SOS product at that time.

The social responsibility donations would be paid into a fund that would disseminate customer rebates spent on energy management measures and for customer education and awareness efforts directed at customers to help them identify the benefits of being served by the competitive market; and to identify and help to address any barriers to customers’ ability to shop over the life of the SOS contract, Direct Energy said

Based on current migration, Direct Energy estimates that funding for these programs in the first and second years would likely be in excess of $500,000

"This investment should become part of the retail SOS auction process and be required each time a retail auction is held (every two years). Direct Energy is not aware of any service like this offered by the wholesale supply community," Direct Energy said

The June 1, 2019 start date for retail SOS would avoid disrupting any existing SOS contracts in D.C., provided that the PSC alters future procurements to ensure that new contracts are shorter-term and do not extend beyond May 31, 2019.

Regarding the retail SOS auctions, Direct Energy proposed that all participating bidders should be required to post $300,000 in bid assurance immediately prior to the opening of the auction. The bid assurance would be forfeited if a company was awarded a bid but fails to execute a contract to provide SOS. Any bidder that did not win, or any bidder that wins and executes a standard offer supply contract, would have its bid assurance returned the following day. "The bid assurance requirement is very important because it will dissuade companies with no intention of providing SOS from participating in the auctions," Direct Energy said

Additionally, Direct Energy noted that the current performance assurance requirement for winning wholesale suppliers is 15% of the wholesale SOS provider’s bid obligation for the SOS class(es) the provider is awarded, and expected to serve

"Direct Energy believes that winning retail SOS suppliers should also be required to provide performance assurance, however, the current 15% obligation is too high for a retail supplier, because it will also be posting collateral with other counter-parties," Direct Energy said

"Direct Energy suggests that 5% of the entire contract value is sufficient. Additionally, the assurance obligation should be rebalanced every six months so that as retail suppliers continue to execute their obligations under their standard offer contracts, they are able to free up capital to further invest in their companies or in the market. Because of the market-based assurance that the retailer will have posted with the wholesale entity, the assurance obligation to the Commission should be tied only to the financial value of the contract and not to any other pricing benchmark," Direct Energy said.

"Direct Energy also believes that companies whose stock is publicly traded on an exchange in a country with a debt rating of AA (or equivalent) or above from at least two debt rating agencies should be afforded the same rights granted to companies domiciled in the US. The Commission’s regulations related to financial assurance do not require any incremental financial assurance obligations or requirements from foreign-owned entities, yet Pepco has incorporated more onerous requirements into its credit application for foreign-owned entities, including the requirement that the entity supply 'a legal opinion acceptable to the utility' but doesn’t define what would qualify as 'acceptable'. It also includes a vague 'requirement' to supply '[a]ny additional information the applicant or its Guarantor wish to give that could provide comparable credit assurances to those that are provided by other applicants or Guarantors whose financial data is denominated in the United States currency'. These requirements are unnecessary and the Commission should compel Pepco to provide the same opportunities for non-American companies domiciled in 'first-world' countries to participate in its markets as are afforded American companies," Direct Energy said

Direct Energy's retail SOS auction would include special treatment of customers who are subscribers to a Community Renewable Energy Facility as outlined in DC Code § 34-1515.01.

"Direct Energy believes that each CREF and its Subscribers should be individually auctioned to the winning SOS suppliers after the original retail SOS auction is held. In other words, all CREF Subscribers (residential and commercial) would be withheld from the retail SOS auction. For the purposes of the CREF auctions, customer classification would not matter. Each CREF and its Subscribers would be auctioned separately because the attributes of any CREF (size, resource type, subscription rate) may be materially different from another CREF. Each bidder would have access to sufficient data regarding the resource and the Subscribers to project the economic impact of being responsible for the unsubscribed output of the facility. The retail providers would then bid for the right to manage the resource in the market. The rate bid into the auction would be an adjustment to the Subscribers energy rate. It would not matter if an individual Subscriber was being served by a different retail provider. This auction would not supplant that retail contract. It would just supplement the value stream to the Subscriber/customer," Direct Energy said

"Under a retail SOS model, Direct Energy suggests that the retail supply community manage the CREF assets in much the same way that the SOS Administrator manages them today. Additionally, Direct Energy believes that after the retail auction described throughout this document is completed and the winners are revealed, then each winner should have an opportunity to bid on Administrative responsibilities of the resource. The price offered for managing the resource would represent an adjustment to the rates of the subscribers. This adjustment could be either positive or negative. For example, if it was a 5 MW facility with only 10 residential subscribers, the SOS suppliers might offer a healthy premium to manage that resource and those subscribers could see a healthy discount to their electric bills," Direct Energy said

Direct Energy said that, aside from structural issues with wholesale SOS noted below, the move to retail SOS is necessitated by Exelon's acquisition of Pepco

"[T]he current wholesale model also needs to be revised in light of the recent acquisition of Pepco by Exelon. Exelon’s acquisition means that under the current SOS model, the provision of SOS and the acquisition of SOS resources will be directly controlled by an entity (Pepco) that is affiliated with one of the major SOS wholesale suppliers (more than 32,700 MWs of electric generation) and that has a self-proclaimed 'strong position[] in the ... mid-Atlantic...' This affiliated relationship creates concerns that Pepco, as an Exelon affiliate, may have a vested interest in maintaining as many customers on the existing wholesale SOS as possible. Accordingly, it is vitally important that the Commission revise the current SOS structure to both remove Pepco from its SOS Administrator role, and replace the current structure with one that will enhance retail competition in the District," Direct Energy said

"Prior to the Exelon acquisition, Pepco had not been directly affiliated with a generation company for many years. That is no longer the case. Pepco’s new parent company, Exelon, has significant investments in generation assets, and its affiliates serve significant amounts of SOS generation load. Exelon/Pepco’s dominant role in the District’s SOS market creates the significant potential that Exelon/Pepco could take actions that could enable Exelon to maintain its dominant position and push out other wholesale and retail competitors. Even the appearance that such actions could be taken should be concerning to the Commission. The best way for this Commission to protect the electricity customers in Washington, DC is to migrate SOS to the competitive retail market," Direct Energy noted

As to other issues with the current wholesale SOS, Direct Energy said, "Despite the best intentions of the Commission to implement market enhancements, the current SOS program is deficient for several reasons, but most notably, the current SOS framework renders a price that significantly hinders the development of the competitive supply market. It is not the dollars and cents aspect of the SOS price that is deficient. Rather it is the wholesale framework and the subsidization of costs associated with the provision of SOS by the distribution ratepayers that inhibits the competitive supply market. As currently structured, the retail market companies are competing with a three-year laddered contract wholesale supply SOS. That framework renders ongoing 'boom-bust', subsidized prices that continue to hinder the development of competitive markets. The best evidence of the negative effect on retail competition that the current wholesale model has had can be seen in the relatively anemic residential shopping levels – just 13% of residential customers choosing a competitive supplier. This is considerably less than the shopping levels in other Mid-Atlantic states and certainly anemic compared to Texas, the national leader where 90% of customers have exercised their ability to switch suppliers."

Direct's comments came in a PSC docket reviewing the structure of SOS (FC 1017)

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