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Pa. ALJs Issue Recommendation On Proposed Re-allocation Of $100 Million From PECO Distribution Rates To Default Service

October 19, 2018

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Reporting by Paul Ring • ring@energychoicematters.com

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Two Pennsylvania ALJs have recommended denying a proposal from NRG Energy to re-allocate approximately $100 million in costs at PECO which NRG argued are attributable to electricity default service and thus should be allocated to generation rates rather than nonbypassable distribution rates, as is done currently

As previously reported, NRG proposed reallocating approximately $101 million dollars of costs from PECO’s residential distribution customers to those PECO customers receiving default service. Specifically, NRG's proposal would allocate to the Price to Compare a portion of PECO’s fixed costs related to customer service expenses (customer assistance, information advertisement, and miscellaneous customer service), sales expenses (demonstrating & selling), A&G expenses (administrative salaries, office supplies & expense, outside services employed property insurance, injuries & damages, employee pensions & benefits, regulatory commission, duplicate charges – credit, miscellaneous general, and maintenance of general plant), and depreciation & amortization expense (relating to intangible plant, general plant, and common plant).

NRG argued that such a reallocation would ensure that PECO’s distribution charges more accurately reflect the costs of providing residential distribution service.

The ALJs said in the recommended decision on a PECO rate case that, "We disagree. We find that PECO is properly allocating costs for the provision of default service."

"In short, default service exists for all customers, both shopping and non-shopping, and as noted by both PECO and the OCA, the Code requires PECO to stand ready to service 100% of customers’ power needs on a moment’s notice," the ALJs said

The ALJs noted that currently the default service rates include all of the costs of the wholesale power supply contracts, including the costs of energy, transmission, congestion, and alternative energy portfolio standards (AEPS) compliance. Additionally, the ALJs said that supply procurement and administrative costs that are associated with PECO’s wholesale power supply contracts, including the costs of a default service independent evaluator to oversee the procurement process and a charge for working capital, are also included in the PTC (Price to Compare). The ALJs also said that regulatory and litigation costs associated with PECO’s default service plans are also recovered through the PTC. Further, the ALJs said that IT costs that relate specifically to the provision of default service are included in the PTC, and education costs associated with educating customers about retail market enhancements not paid for by EGSs may be included in the PTC.

Accordingly, the ALJs said that, "the PTC currently includes all costs incurred by PECO in providing default service. PECO makes no profit from providing default service to distribution customers or from standing ready to serve customers who return to default service after shopping with an EGS. It should also be noted that, to date, the Commission has approved the PTC in four PECO default service plans (DSP), with the current plan in effect until May 31, 2021. Although prior approval of PECO’s PTC is not conclusive to a determination in this proceeding as to whether the PTC is lawful, just and reasonable, we do find the Commission’s prior approval of PECO’s PTC computation to be persuasive."

The ALJs further said that, "we agree with the OCA that only avoidable costs, which are those costs that PECO avoids when a customer switches to an alternative supplier, are properly allocated to its PTC. The fixed costs NRG witness Peterson seeks to allocate to default service are not avoided by PECO when a customer switches to an alternative supplier. As noted by OCA witness Johnson, PECO does quantify and collect from default customers the direct expense of providing default service, and these costs include the acquired power cost, the cost of compliance with the law, transmission and ancillary service costs, and the administrative costs of operating the solicitation process. Mr. Peterson has not identified any costs that can be considered avoidable. If Mr. Peterson’s allocation method were followed, PECO would run the risk of not being reimbursed for costs it incurs as the customers’ distribution company."

The ALJs further said that, "We also agree with PECO witness Cohn that the primary goal in cost allocation is appropriate recognition of cost causality, and that Mr. Peterson has not shown that the costs he has proposed reallocating to default service are caused by, or even vary with, his chosen allocators. The costs that Mr. Peterson proposes reallocating are not caused by customers being default customers, but rather, by them being distribution customers, which all default customers are as well. PECO would incur the same costs to distribute electricity even if every customer shopped for electricity and there were no default customers. If this scenario became an actuality and PECO did not have any default customers, under Mr. Peterson’s proposed cost allocation, PECO would not be able to recover a significant amount of costs it incurs to distribute electricity to those customers. Therefore, we find that the costs that NRG proposes reallocating to default service are properly included in PECO’s distribution rates and not the PTC."

"Accordingly, we recommend that PECO continue to calculate its price-to-compare as previously approved by the Commission in prior default service and base-rate proceedings, and as set out in its proposed tariff," the ALJs said

Docket R-2018-3000164

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