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PSC Issues Major Order On Structure, Design, and Procurement of Default Service --And It's Bad News For Retail Suppliers

Current Bypassable Adder Removed From SOS

PSC Won't "Coerce" Customers Off SOS

Essentially All Of Retail Suppliers' Sought Changes Rejected

July 11, 2017

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Copyright 2010-17
Reporting by Paul Ring •

The District of Columbia PSC has issued an order in its investigation into the current structure of electricity SOS, and essentially rejected all proposed changes from retail suppliers, while removing the current bypassable adder to SOS rates.

In brief, the PSC:

• Rejected a retail model for SOS

• Maintained utility Pepco as the SOS provider

• Maintained SOS as a full requirements wholesale product purchased via sealed-bid RFP

• Removed the current bypassable adder for SOS

• Maintained compensation to Pepco for providing SOS service, but altered the compensation to be in the form of a fixed fee instead of a volumetric charge (though the fee will still be recovered from customers volumetrically)

• Declined to adjust any other components of the SOS Administrative Charge

• Declined to institute hourly pricing for any threshold of large customers

• Declined to shorten the SOS contract lengths for any customer class

• Declined to change the current SOS bid days and procurement schedule

• Declined to terminate the minimum stay for commercial customers who return to SOS

As more fully discussed in our related story today (click here), the PSC declined to adopt a retail model for SOS

Upon deciding to maintain a wholesale SOS model, the PSC further decided to continue to use Pepco as the SOS administrator (provider) for the, "foreseeable future."

Regarding the bypassable Administrative Charge, the PSC said, "we do not see any reason to change the components of the Administrative Charge with the exception of the adder."

Addressing concerns from retail suppliers that certain costs related to SOS may not be reflected in SOS rates (e.g. overhead), the PSC stated, "[t]he Administrative Charge does, in fact, include all of Pepco's costs incurred in providing SOS." The PSC said that the Administrative Charge recovers Pepco's incremental costs to conduct the SOS bidding, charge offs due to uncollectible expenses, collection to provide cash working capital, the allowed margin, and true-ups to adjust for past over or under collections.

The PSC declined retail suppliers' call for a cost of service study for SOS to ensure costs are properly allocated between generation and distribution. "[W]e believe that concerns about the value of the Administrative Charge are important, but are more efficiently addressed in response to Pepco's annual rate filing with the Commission in Formal Case No. 1017. In that filing, Pepco provides the work papers used to calculate the charge for review by all parties. It appears that the last time any party filed comments was OPC back in 2010. If in any future filing, OPC, Direct Energy, or any other party identifies specific areas of concern, we will consider a targeted investigation in those areas or consider it as part of the next Biennial Review," the PSC said

The PSC did, however, eliminate the adder from the bypassable SOS Administrative Charge. The adder was previously adopted in recognition that competitive electricity suppliers incur customer acquisition and customer care costs that Pepco does not incur as the SOS provider.

"While Pepco and others contend that maintaining the adder may contribute increased competition in the retail market in the District, we are no longer convinced that the adder is necessary as 'not to impede the development of a competitive retail market," the PSC said

"We agree with OPC that 'most residential ratepayers remain on SOS,' and, therefore, 'the adder has merely led to higher bills for most ratepayers.' We also agree that despite the fact that Pepco does not retain but returns the adder funds to both SOS and non-SOS customers through distribution rates, the adder 'effectively subsidizes non-SOS customers at the expense of SOS customers,' since money is collected only from SOS customers. Thus removing the adder will lower costs for SOS customers and eliminate a subsidy going to retail shopping customers from SOS ratepayers," the PSC said

The adder shall be removed from SOS rates effective June 1, 2018.

The residential adder is about 0.28 mills or $0.00028 per kWh for residential customers, or under 0.4 percent of the SOS price to compare rate which amounts to 19 cents/month for the average residential customers with an average bill of $81.00. Thus removing the adder will lower the SOS rates slightly, the PSC said

The PSC will continue to allow Pepco to earn margin on providing SOS, but eliminated the current volumetric charge in favor of a fixed charge, effective June 1, 2018.

"The purpose of switching to a fixed charge would be to remove the incentive for Pepco to sell additional energy. Under the current mechanism, Pepco makes money for every kWh sold. Such a mechanism appears inconsistent with an overall regulatory scheme in the District which seeks to reduce electricity consumption and encourages the development of distributed generation and renewable energy to achieve a variety of public policy goals such as reducing pollution generally and greenhouse gas emissions in particular," the PSC said

The PSC set the new fixed compensation to Pepco for providing SOS as the average of the margin earned over the last three years, which would currently be $6.1 million (though such average would change by the time the new mechanism takes effect in June 2018)

The PSC allocated the fixed SOS compensation to customer classes as follows: 45.0 percent to Residential customers, 7.3 percent to Small Commercial customers, and 47.7 percent to Large Commercial customers

Pepco will still recover its fixed compensation through volumetric customer rates

"The manner in which Pepco should collect this is to take the compensation amount assigned to each customer class and divide it by the SOS kWhs expected to be sold in the upcoming service year. Current charges are 1.5 mills per kWh for Residential, 2.0 mills per kWh for Small Commercial, and 3.0 mills for Large Commercial. A per kWh charge for rate payers is preferable to a fixed fee per customer as it incentivizes usage reduction on the customer's part. Additionally, a per kWh charge makes it easier for third party suppliers to compare their costs to those of Pepco," the PSC said

The PSC indicated that it will further review the level of return earned by Pepco for providing SOS, including the relationship between this return and cash working capital, as part of its next biennial review which it will initiate in 2018.

The PSC rejected adopting a peak load ceiling above which non-shopping customers would only be able to take hourly-priced service, and would not have an option for fixed-price SOS

"The establishment of a peak load ceiling would reduce the amount of Large Commercial supply bid out and could make the Large Commercial product less appealing to SOS suppliers, resulting in less competitive pricing. Generally speaking, smaller levels of supply bid out result in lower levels of competition. In addition, Pepco correctly observes that currently Large Commercial customers can choose between an alternative supplier, hourly-priced service, and SOS as 'best meets their needs.' Pepco also notes that forcing these customers off SOS would expose them to 'spot market volatility,'" the PSC said

"The reality is that there are some Large Commercial consumers who, for whatever reasons, prefer SOS service. The additional promotion of the retail market and the other marginal benefits of forcibly moving these customers to hourly-priced service is simply not worth the price of undermining customer choice by eliminating SOS as a service option and exposing these customers to the potential risk of rate shock that taking hourly-priced service entails. Large Commercial customers should participate in the retail market by choice not through coercion by establishing a peak load ceiling. Based on the above, we are not persuaded that a peak load ceiling should be established at this time," the PSC said

The PSC declined to change the current SOS contract lengths and (where applicable) laddering -- three years laddered for residential and small commercial, 12 months (no laddering) for large commercial

"It is ... certain that shortening contract length would increase price volatility," the PSC said

"Without empirical evidence that the result will be better if we change the length of contract terms, the Commission is not persuaded that a change in the length of contract terms is needed at this point," the PSC said

"While no one has the capability to perfectly forecast future electricity prices, it is a fact that shorter-term contracts would be more volatile. Avoiding price volatility and rate shocks which would adversely affect the District's SOS ratepayers, particularly our moderate and low-income residents, is a critical concern. Accordingly, the Commission declines to shorten the current contract lengths for either Large Commercial or Small Commercial and Residential customers at this time," the PSC said

The PSC also declined to change its current SOS bid dates, in early December and early January, to be closer to the delivery start date (June 1), as the PSC noted that the current dates do not overlap with other jurisdictions' bid dates, and no party presented evidence that changing the dates would result in better SOS rates for customers.

The PSC maintained the sealed-bid format for SOS procurements, rejecting a descending-clock auction and reverse auction

"[W]ithout some proof of significantly lower prices, we are reluctant to change our practice," the PSC said.

However, the PSC did state, "We do, however, see that there may be merit to the reverse auction method, so we will consider this as [sic] alternative for the future."

The PSC also rejected a managed portfolio approach for SOS

The PSC declined to eliminate the SOS minimum stay provision which requires that, if a commercial customer leaves SOS for a competitive electricity supplier and subsequently returns to SOS, that customer must stay on SOS for a minimum period of 12 months. In addition, there is a grace period for customers whose suppliers default, which gives the customer three full billing cycles to go to another competitive electricity supplier or change to Market Price Service (for which service there is no minimum stay provision) rates in order to avoid the minimum stay.

"The goal of the minimum stay provision is to allow SOS suppliers to better manage migration between the SOS service and third party suppliers. We do not see the benefit of eliminating the minimum stay provision and, thereby, creating more uncertainty for SOS suppliers which could result in higher prices being bid, especially as there is a grace period allowing commercial customers time to choose another supplier," the PSC said

Regarding SOS bid sheets for certain distribution rate classes (e.g. residential and residential all-electric), the PSC declined to make any changes immediately in its order, but directed further study.

"[T]he Commission directs Pepco to work with Commission staff, the SOS Working Group which includes OPC, and other interested persons to consider what rate classes to consolidate in the bid sheet. Specifically, this group should consider merging rate classes for customers who have less than one percent of the load with other larger categories, removing classes that are no longer accounted for in the tariff, and removing categories that do not get used by bidders. This action should help provide simpler bid sheet formats for potential bidders, while still maintaining many of the class breakouts and still allowing bidders flexibility in pricing their bids," the PSC said

"Some of these changes are rate design and tariff issues currently being considered in Formal Case No. 1139. Any changes in the bid-form spreadsheets recommended by the ad hoc working group should be consistent with the Commission's upcoming decision in that case regarding these matters. The Commission expects to issue this Order later this summer. The working group should meet within 21 days of the date that Order issues. Based on the discussions within the working group, a report with recommendation should be filed by Commission staff on behalf of this ad hoc working group within 35 days of the date of the Order in Formal Case No. 1139. We expect the changes recommended by the working group to be considered in time for implementation by the Commission for the upcoming SOS bidding in December 2017 and January 2018," the PSC said

However, while the group will study bid sheet simplification, the PSC said, "we do not think it should have only one rate for all residential and small commercial classes as WGL Energy suggests."

"Residential and Small Commercial classes have different load profiles and load characteristics and we, therefore, choose not to merge them together at this time," the PSC said

The PSC noted that time-varying rates and different rates by usage quantity are currently being addressed in FC 1139

"As stated above, we expect an Order in Formal Case No. 1139 later this summer. The ad hoc working group previously referenced should also ensure that any changes in time metered residential service rates/tariff should be reflected in the bid sheets in time for the upcoming SOS bidding in December 2017 and January 2018," the PSC said

The PSC maintained the wholesale SOS product as a full requirements product, declining to remove renewable compliance from the product (certain parties had suggested procuring SRECs separately)

While the PSC will continue to place Pepco in the role of SOS provider, the PSC did acknowledge concerns about Pepco's affiliation with wholesale supplier ExGen.

"[I]nterested persons [have] raised concerns regarding affiliate bidding," the PSC noted. "We have asked Pepco to describe in detail the procedures it employs to avoid potential conflicts of interests and otherwise ensure that ExGen does not receive any competitive advantage as an Exelon affiliate bidding in a Pepco-administered SOS auction ...[O]nce we review Pepco's response, the Commission will then determine if any additional safeguards are required."

"We do note, however, that banning ExGen from bidding, as Direct Energy suggests is an extreme measure and could mean less future competition in the District's SOS auctions which in turn could lead to higher prices for District consumers, when there is no evidence before us that ExGen has gained a competitive advantage in the SOS auction process," the PSC said

The PSC declined to institute another round of retail competition education as suggested by RESA

FC 1017

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