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Retail Supplier Alleges Utility "Unilaterally" Changed Bond Remedy Time Period

Utility Also Adopted New Collateral Requirement Formula Increasing Costs To Suppliers

July 17, 2018

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Copyright 2010-17
Reporting by Paul Ring •

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In testimony in a Dayton Power & Light rate case, IGS Energy submitted testimony that Dayton Power & Light recently increased its credit requirements for retail suppliers, with IGS's witness alleging that DP&L also made a "unilateral" change to the remedy period.

Under DP&L's supplier tariff, retail suppliers owned by public companies with investment grade long-term bond ratings are deemed to satisfy their creditworthiness and receive an unsecured credit limit. Privately owned companies which do not have bond ratings must make alternative credit arrangements with Dayton.

A witness for IGS testified that, "After the Finding and Order in Case No. 16-0395-EL-SSO, Dayton changed how it calculated the required credit amount, applying its credit requirements in a manner inconsistent with historical practice. This new calculation significantly increases the amount of collateral a supplier is required to post."

According to the witness from IGS, Dayton now determines a supplier's collateral requirement by multiplying 30 days of the supplier’s estimated summer usage by the highest monthly average megawatt-hour price from the prior summer’s PJM Day Ahead market and by multiplying by 30 days of the supplier’s capacity obligation by the final Dayton zonal capacity megawatt-day price for the upcoming delivery year

"Including capacity obligation at peak forward pricing and calculating energy and capacity exposure based on 30 days can potentially add millions to the collateral requirement," IGS's witness said

"Having to post millions of dollars in collateral is unduly burdensome to privately held companies with strong balance sheets. Similar public companies with credit ratings are not required to post any collateral and yet, financially strong private companies are required to post collateral. Typically speaking, privately held, unrated companies such as IGS may have little or no business reason to get a credit rating; therefore, DP&L’s tariff is structured to the disadvantage of companies like IGS," IGS's witness said

IGS's witness testified that, in the past, Dayton did require a de minimus amount of collateral, but then changed it to zero. "It remained at zero until earlier this year, although it had a tariff based method for calculating collateral requirements," IGS's witness said

IGS's witness said that Dayton's supplier tariff provides that, "[t]he amount of the security required must be and remain commensurate with the financial risks placed on the Company by that supplier, including recognition of that supplier’s performance."

However, IGS's witness alleged that DP&L did not give any weight to IGS's actual risk and performance in determining collateral requirements.

IGS's witness said, "IGS has over 25 years of experience serving retail customers in the state of Ohio and serves in total one million customers without defaulting on its obligations. Moreover, the IGS family of companies are involved in a diverse range of businesses. This diversity provides additional resiliency and strength to IGS’ balance sheet. These factors are not considered in any fashion when Dayton determines if or what level of collateral IGS must provide."

IGS's witness said that the other EDCs in Ohio do not include capacity obligations in their collateral requirement formulas.

IGS's witness said that the FirstEnergy EDCs require suppliers to post $250,000 in collateral. After that amount, the FirstEnergy EDCs calculate any additional requirement based on peak summer energy usage for 5 days times peak pricing.

IGS's witness said that Duke Energy Ohio's credit requirement for collateral is based on estimated summer usage for 30 days multiplied by July peak prices. Duke also provides a credit if the supplier is participating in the Purchase of Receivables program.

IGS's witness said that AEP Ohio's credit requirement formula is similar to the FirstEnergy EDCs and Duke in that it uses an estimate to calculate the collateral payment, but AEP Ohio estimates peak summer energy usage for 15 days and multiplies that times July peak prices.

IGS's witness also alleged in testimony that, "Dayton also unilaterally modified the time period upon which it may demand collateral must be paid following default."

IGS's witness alleged in testimony that, "The bond form Dayton had posted on its website stated a 30-day remedy period. When IGS submitted its collateral payment, Dayton informed us that the required remedy period was now five days. That shortened time period puts a lot of pressure on the bond company to commit to that obligation. It is also my understanding Dayton did not obtain Commission authorization to make this change."

IGS's witness further said that, "The bond form on the Dayton website now states a 2-day remedy period which is very aggressive."

IGS's witness testified that, "I recommend that Dayton give full effect to the requirement in its tariff that the amount of the security required be and remain commensurate with the financial risks placed on the Company by that supplier, including recognition of that supplier’s performance. I further recommend that Dayton revise the collateral requirements to be more in line with the other electric utilities in the state. Either a standard collateral amount or a calculation based on energy only based upon 15 days’ exposure. I recommend more advance notice to changes on any large collateral requirements. I recommend that the remedy time on the bond form be set at no less than 10 days. And finally, I recommend Dayton obtain Commission approval before making collateral changes."

Case No. 15-1832-EL-ATA

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