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PUC Declines To Implement Amount For Default Service Adder To Reflect Costs Not Unbundled From Distribution Rates, Defers Issue To Delivery Rate Case

PUC Approves Supplier Consolidated Billing, Enroll-By-Wallet Provisions In Default Service Settlement

Concurrence: Use Of Wholesale Product For Default Retail Supply, Without Measures To Address Inherent Cost Imbalances, Distorts Market, Eventually Leads To Re-monopolization

April 26, 2018

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Reporting by Paul Ring • ring@energychoicematters.com

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The Public Utilities Commission of Ohio adopted a stipulation governing default service via an electric security plan at AEP Ohio which includes several retail market enhancements, but which declined to implement at this time an amount for a new bypassable default service adder that is intended to reflect certain costs of providing default service that remain embedded in distribution rates

Specifically, PUCO adopted a bypassable Competition Incentive Rider (CIR) (renamed as noted below) at AEP Ohio, but ordered that such rider shall initially be set at $0 as a placeholder until AEP Ohio's next rate case

Under a non-unanimous stipulation, PUCO Staff, AEP Ohio and retail suppliers had proposed that, on a temporary basis until AEP Ohio's next base rate case, the bypassable CIR would be set at $1.05/MWh. AEP Ohio agreed under the stipulation to file a base distribution case by June 1, 2020.

A nonbypassable SSO Credit Rider (SSOCR) was also proposed to be established, which would flow amounts collected under the bypassable CIR to all distribution customers (less amounts used to fund a discount on AEP Ohio receivables paid to the utility by suppliers using a supplier consolidated billing pilot)

"Upon review of the proposal, the Commission finds that it should be modified and approved, such that the CIR and the SSOCR should be established as placeholder riders set at zero. AEP Ohio witness Allen testified that the $1.05/MWh charge proposed for the CIR is a negotiated value, because the various parties have differing views as to what it should be. Noting that the CIR is intended to include costs such as bad debt expense and the Commission and OCC assessments, Mr. Allen also explained that the recommended amount is significantly less than what it would be based on RESA witness White's analysis. Specifically, RESA witness White testified that, although the stipulated amount is a reasonable outcome for the time being, the CIR should be at least $4.60/MWh to reflect uncollectible expenses, the Commission and OCC assessments, legal and regulatory expenses, payroll taxes, call center costs, infrastructure costs, and other costs incurred to support default service," PUCO said

"Based on the record, we find that it is reasonable to establish the CIR and SSOCR as placeholder riders, until a thorough analysis of AEP Ohio's distribution costs can be conducted by the Commission in the next rate case. Following that review, the Commission will determine whether there are known, quantifiable costs that are collected from all customers through distribution rates and that are clearly incurred by AEP Ohio to support the SSO. We note that many of the costs identified by RESA witness White may be incurred by AEP Ohio to support either the SSO or the customer choice program, as Mr. White acknowledged through his use of an allocation factor. Additional analysis is needed to determine whether and how AEP Ohio's Customer Accounts Expense, Customer Service and Information Expense, Administrative and General Expense, and Taxes Other than Income Taxes should be reallocated through the CIR and SSOCR," PUCO said

"Although we agree that there may be costs recovered through AEP Ohio's distribution rates that are attributable to the SSO, the Company's distribution rates likewise may include call center costs solely incurred to promote competition or other costs related to the customer choice program. The Commission, therefore, finds that AEP Ohio should carry out its commitment to analyze, as part of the rate case, its actual costs of providing SSO generation service. AEP Ohio should also analyze, in the rate case, its actual costs associated with the choice program. Following a thorough analysis of AEP Ohio's distribution rates in the rate case, the Commission will determine whether it is necessary to reallocate costs between shopping and non-shopping customers, in order to ensure that the Company's rates are fair and reasonable for all customers," PUCO said

"We find that this more measured approach is consistent with our obligations to ensure the availability of reasonably priced retail electric service and to avoid certain types of anticompetitive subsidies under R.C. 4928.02(A) and (H), respectively. Further, the Commission notes that 'Competition Incentive Rider' is a misnomer, given that the rider is not directly intended to promote customer shopping. In proposing the CIR and SSOCR, the Signatory Parties only claim to a limited extent that the CIR and the SSOCR will incent shopping. Instead, the Signatory Parties rely on proper allocation of costs between shopping and non-shopping customers as the basis for their support of the CIR and SSOCR. RESA witness White testified that the purpose of the CIR is to ensure that costs are properly reallocated to the SSO. We, therefore, find that the CIR should be renamed from 'Competition Incentive Rider' to 'Retail Reconciliation Rider,'" PUCO said

"As a final matter, the Commission notes that the Stipulation provides that the SSOCR should be used to collect the discount rate costs related to the SCB pilot program. In light of our decision to establish the SSOCR as a placeholder rider set at zero, we direct that the discount rate costs associated with the SCB pilot program be collected through the BDR [bad debt rider]," PUCO said

As part of the stipulation, AEP Ohio agreed to remove the Commission and OCC assessment fees from the bypassable Riders GEN-E (energy), GEN-C (capacity), and ACRR (reconciliation). Issues relating to unbundling of SSO costs will be addressed in the next base rate case

Commissioner Lawrence Friedeman issued a concurring opinion noting the problems caused by using a wholesale product for a retail product such as SSO service, when there is no adjustment to address inherent cost imbalances under such a model

"I agree in recasting the 'Competition Incentive Rider' as the 'Retail Reconciliation Rider' (RRR). I do not believe the rider's purpose should be as originally and imprecisely described simply to incent the further development of the competitive market; but, rather I believe the value of the RRR is to more surgically eliminate any demonstrable cost disparities between default and retail service which impede the continued evolution of the competitive retail market. The retail prices charged by a competitive retail electric supplier (CRES) imbed costs, including many to ensure regulatory compliance, which are not incurred by the Standard Service Offer (SSO) suppliers nor reflected in the SSO price," Friedeman wrote

"Admittedly, the price of the SSO default service is determined through a competitive bidding process. However, that process constitutes a wholesale pricing process, not a retail pricing process. Introducing a wholesale product into a retail market without concomitant measures to address inherent cost imbalances will tend to distort that market, particularly when that wholesale price is juxtaposed against the retail prices and described as the price to compare," Friedeman wrote

"In its Order, the Commission cites state policy, as set forth in R.C. 4928.02(C), (D), and (G), to promote customer choice, encourage innovation, and facilitate the development of the competitive retail electric market through flexible regulatory treatment. I would suggest that the market distortion caused by cost imbalances and the resulting cost advantage afforded to the SSO wholesale product in the retail market erect market barriers which have a tendency not to promote retail competition, but rather to have an anti-competitive impact or, in an extreme eventuality, to re-monopolize the retail market inconsistent with enunciated state policy," Friedeman wrote

"I acknowledge the wisdom of providing a forum in which to conduct a comprehensive identification of regulatory requirements that drive additional non-market based costs to CRES product offerings. This is an important and complex discussion in which to engage to ensure proper cost allocation for the ultimate benefit of the consumer. The Commission's action in establishing the placeholder RRR in this Order is, in my opinion, an important first step in balancing the costs and interest of market participants, including retail consumers," Friedeman wrote

Other Retail Market Enhancements

The stipulation adopted other retail market enhancements without substantive modification.

PUCO adopted the stipulation's modifications to AEP Ohio's Supplier Consolidated Billing (SCB) pilot to allow more supplier participants, and to include a collection discount to the receivables paid by suppliers to AEP Ohio.

The total number of SCB pilot participants will now be five suppliers (currently limited to four specific suppliers). The adopted settlement provides that an additional two suppliers will be selected from certified CRES providers in good standing who submit a formal request in the docket within 30 days of the approval of the stipulation. If more than two certified CRES providers in good standing apply by the deadline, the additional two participants will be selected in a random manner

The number of customers that suppliers are allowed to bill under SCB will be expanded to a maximum of 80,000 customers

The SCB pilot will now apply a collection fee or discount rate, as applicable, for AEP Ohio's receivables of 0.66%

The settlement will cap expenditures for the SCB pilot at $2 million -- $1 million funded by the CRES Participants, $1 million funded by customers

While PUCO adopted the SCB provisions, including the allocation of $1 million in costs to ratepayers, PUCO said, "We note that SCB costs are typical of costs incurred to promote retail competition. However, the costs associated with the SCB pilot program do not appear to have been accounted for in the Signatory Parties' estimation of the CIR and SSOCR, which further supports our decision to establish the CIR/SSOCR as placeholder riders at this time, pending further review in the next rate case, as discussed above."

Additionally, PUCO adopted the settlement's provision under which AEP Ohio agrees, within 9 months of approval of the stipulation, to implement an "enroll from your wallet" alternative, using AEP Ohio's CRES Portal for authorized CRES Providers in lieu of complete retail lists. The CRES participants will be notified by the utility if the customer has opted out of enrollment lists, in lieu of switching that customer. Customers that have opted out of enrollment lists will be initially excluded from this program. CRES providers will supply AEP Ohio with the same information that a customer would supply the utility with in order to release the account number associated to the customer account: (1) the customer's phone number assigned to the account; and (2) either (a) the last four digits of the customer's Social Security Number; or (b) the amount of one of the customer's last three bills, to the extent the utility possesses that information for the affected customer. This functionality will allow for batching of information.

The CRES provider must have the Letter of Authorization (LOA), as required by Rule 4901:1-10-24 (E) on file for release of the Service Identification number that AEP uses in lieu of the account number to enroll customers under the enroll-by-wallet program. AEP Ohio will conduct random audits of the CRES providers using this functionality to verify the CRES provider have and retain the LOA at a minimum of once a year.

The participating CRES providers will be charged a one-time authorization fee of $5,000 to cover the cost of enroll-by-wallet implementation. Once the cost of implementation has been recovered AEP Ohio will credit any additional funds through the Smart Grid Phase 2 rider to offset the costs of changes to the supplier portal/EDI protocol.

"The Commission finds the Enroll From Your Wallet provision of the Stipulation to be a convenient and customer-friendly benefit for customers that elect to shop. The Enroll From Your Wallet program does not affect the customer's access to information to evaluate the SSO and the offers of CRES providers, in addition to other factors that customers may consider," PUCO said in approving the provision.

Other Issues: Default Service Procurement, Renewable Generation, EVs, Microgrids

As previously reported, under the settlement AEP Ohio dropped an earlier proposal to use its entitlements in the Ohio Valley Electric Corporation (OVEC) generation to serve Standard Service Offer (SSO) customers

Under the settlement, and as approved by PUCO, AEP Ohio will retain the status quo recovery of OVEC costs through the non-bypassable PPA Rider through the extended ESP III term, which will run through May 31, 2024. Currently, products from OVEC are sold into the wholesale market, and are not used for SSO service.

With the stipulation maintaining the status quo for OVEC, default service will exclusively be supplied through full requirements contracts procured via competitive auction, with, generally, one-third of the load served on 12-month contracts; one-third on 24-month contracts, and one-third on 36-month contracts. Such design shall continue through May 31, 2024.

The settlement, and PUCO's order, affirm AEP Ohio's authorization, from a prior PUCO order, to develop new renewable generation, but would add the ability for AEP Ohio to enter into a contract (known as a reasonable arrangement) with a retail customer for such new generation

Specifically, the adopted stipulation allows AEP Ohio to seek PUCO approval for reasonable arrangement(s) under R.C. 4905.31 as follows. For a renewable project owned by an AEP affiliate or other non-affiliate entity and operated by AEP Ohio (through a long-term PPA by AEP Ohio under a 900 MW commitment established under a prior case), AEP Ohio may propose that some or all of the project's output be purchased through a bilateral contract with a retail customer conditioned upon approval by the Commission as a reasonable arrangement under R.C. 4905.31.

Prior to becoming effective, such a reasonable arrangement proposal must be approved by the Commission under R.C. 4905.31. If approved, the resulting revenues from such reasonable arrangement(s) will be credited against the cost for recovery in lieu of revenues being applied if the output were liquidated in the wholesale market, as would be the case for other renewable projects developed under this provision that are not subject to a reasonable arrangement

Under PUCO's order, AEP Ohio will pursue two programs throughout its territory related to the Smart City Columbus project. AEP Ohio will administer a $10 million rebate program for electric vehicle charging stations. The company will make rebates available to qualifying public, government, workplace and multi-unit residences, with a portion reserved for low-income areas. AEP Ohio will also pursue microgrid projects with non-profit or public-serving customers. AEP Ohio will collect up to $10.5 million during the term of the ESP for the microgrid projects.

Case 16-1852-EL-SSO

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