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PSC Initiates New Review Of SOS Design By Asking If Long-Term PPAs Should Be Used

August 10, 2018

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Copyright 2010-17
Reporting by Paul Ring •

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The District of Columbia PSC initiated a biennial review of electricity Standard Offer Service (SOS)

In doing so, the PSC highlighted four issues for review:

• The Use Of Long-Term PPAs For SOS

• The SOS Adder

• The Margin Or Return Pepco Earns On SOS

• The Minimum Stay Provision

Regarding long-term PPAs, the PSC said that it, "seeks to obtain additional information about the potential advantages and disadvantages of incorporating PPAs for renewable energy and long-term purchase agreements for Renewable Energy Credits ('RECs') into the SOS procurement process."

The PSC noted that Mayor Muriel Bowser pledged that the District will achieve its goal of GHG neutrality by 2050

Moreover, the most recent draft of Clean Energy DC’s: District of Columbia Climate and Energy Plan suggests that, in transitioning to a low-carbon District, one tool to help achieve this goal is the use of PPAs to buy renewable energy when procuring electricity for SOS

The PSC specifically asked regarding PPAs:

• Should a certain percentage of the SOS load be procured through long-term PPAs for renewable energy generation (clean energy PPAs)? If so, what should that percentage be? What percentage of the SOS load should continue to be procured through the Wholesale Full Requirements Service Agreement?

• Should the clean energy PPAs supply energy for all customers classes – Residential, Small Commercial, and Large Commercial – or only some classes?

• What is the optimum contract term for clean energy PPAs? 5 or 10 years or longer? Should there be one contract term for all clean energy PPAs or a mix of contract terms?

• What renewable sources should be included in long-term clean energy PPAs? Wind and solar only, or should additional sources such as biomass and hydro or other Tier One resources be considered?

• What would the impact of the implementation of clean energy PPAs be in terms of the estimated reduction of GHG?

• Assuming less than 100 percent of the SOS is procured through clean energy PPAs, what impact, if any, will the use of PPAs have on the bid prices for the remainder of the SOS load?

• States can procure their SOS energy and RECs (including solar renewable energy credits (SRECs)) to meet their Renewable Energy Portfolio Standards in a bundled fashion or purchase them separately. Which method is more economical for long-term purchase agreements? Which method will better promote the goal of reducing GHG? Will the use of clean energy PPAs for SOS energy bundled with RECs and SRECs have any impact on the retail market for RECs and SRECs?

• If, as part of the procurement of SOS generation, the clean energy PPAs are entered into with extremely low per kWh prices, how would this affect competition between SOS and competitive electricity suppliers?

• How can the Commission avoid a scenario where clean energy PPAs are entered into for what may turn out to be at rather high prices, especially in the out years, and a large proportion of SOS customers migrate to competitive electricity suppliers as a result? (Under this scenario, substantially more generation would be procured than what is needed, resulting in excess generation being sold at a loss and thus increasing the remaining SOS customers’ costs per kWh of electricity.)

• Would the use of long-term clean energy PPAs for SOS procurement be viewed by the credit agencies (Moody’s, S&P, and Fitch) as an increase in Pepco’s debt and, thereby, adversely impact Pepco’s credit worthiness? If yes, could this be avoided by Pepco restructuring its position as the SOS administrator or by the use of a third-party entity as the SOS administrator?

• Would clean energy PPAs constitute an out-of-market financial subsidy to renewable energy generation facility owners that sell wholesale electricity supply services in PJM’s markets? And, if yes, would such subsidies have an adverse impact on the PJM capacity market’s ability to promote robust supply competition and the selection of the least-cost supply resources?

Regarding Pepco's return on SOS, the PSC noted that in Pepco’s latest retail SOS rate filing submitted on February 12, 2018, the company noted that it made an annual return of approximately $6 million for its services as the SOS Administrator for the SOS service year ending May 31, 2017, while Pepco’s incremental costs for administering SOS were around $900,000.

"This filing appears to suggest that cash working capital is being treated as an expense for which Pepco is being reimbursed annually. If the Commission were to reduce the current level of the margin by, for example, having the margin calculated as a percentage of Pepco’s incremental costs for administering SOS, this could lower the price of SOS and could make it more difficult for competitive electricity suppliers to compete in the D.C. market," the PSC noted

The PSC asked: What is the appropriate return for Pepco to earn as SOS Administrator? What should be the relationship between this return and cash working capital?

Regarding the bypassable SOS adder, the PSC said that given this lapse of time since first introduced, and potential changes in the competitive marketplace, "commenters should consider what evidence suggests that the adder has accomplished what it was designed to do. That is to reflect retail electricity suppliers’ marketing costs in SOS rates to ensure that these electricity suppliers are not placed at a competitive disadvantage. The alternative is for commenters to consider what evidence supports the elimination of the adder."

As previously reported, the PSC in its most recent biennial review initially eliminated the SOS adder (see story here), effective June 1, 2018, before reinstating the adder on reconsideration (see story here)

The PSC asked: Should the adder be eliminated? If so, why; if not, why not.

Regarding the minimum stay, the PSC asked: Should the 12-month minimum stay provision for commercial customers be eliminated? If so, why; if not, why not.

"When commenting, proponents of this provision should provide evidence that the minimum stay has, in fact, allowed SOS suppliers to better manage migration and thereby avoid bidding higher SOS prices. Opponents, by contrast, should provide evidence that this has not been the case and the minimum stay provision should now be eliminated," the PSC said

Finally, the Commission invited comment on any other recommended changes to the SOS program in light of competitive developments in the District of Columbia.

FC 1017

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