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Pennsylvania PUC Opens Proceeding To Evaluate "Smarter" Default Service Rates, Procurement Changes

Commissioner Place Concerned Non-shopping Customers Won't Benefit From "Positive" Behaviors (Load Shifting, Peak Reductions, Etc.)

Also Says Long-Term Contracts For Default Service May Offer "Prudent" Hedges

January 17, 2019

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Copyright 2010-19 EnergyChoiceMatters.com
Reporting by Paul Ring • ring@energychoicematters.com

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Note: This story was first published on Jan. 17 with an alert to our email subscribers

Takeaway: As further discussed below, the potential movement to "smarter" default service rates may result in value-added pricing typically not associated with a plain vanilla product

The Pennsylvania PUC has opened a review of wholesale cost allocation and default service rate design and procurement reforms due to the installation of smart meters, as Commissioner Andrew Place expressed concern that non-shopping customers under current default service rate design would not be rewarded for "positive" behaviors

Place noted that with interval data, wholesale costs may be more precisely assigned compared to standard load profiles used for cost allocation

In a motion, Place wrote, "With the installation of smart meters, the long-term benefits associated with positive customer usage behaviors can be flowed back to customers if changes in retail rate design for previously non-interval customers are more aligned with wholesale cost allocation methods. Absent a change in retail rate design for default service, such benefits will only flow to the wholesale LSEs, such as wholesale DSPs or EGSs [electric generation suppliers, aka retail suppliers]. Without direct methods for rewarding customers in a timely manner for positive behaviors, customer responses to market prices will be stunted, or suboptimal."

"Positive customer behaviors" include avoiding usage during peak RTO and utility peak usage periods and shifting usage to lower usage periods, Place wrote

At Place's recommendation, the PUC opened a proceeding to discuss how the Commission should mesh smart meter investments with, "smarter default service rates and smarter cost allocation methods."

Place stressed that the investigation will address, "basic default service rate design," and not TOU rate design options for non-shopping customers under Act 129

Place wrote, "The current policy essentially charges customers a simple fixed kwh charge for energy, capacity and transmission. Unfortunately, while such a charge is easy to describe and understand, it does not align well with actual cost causation at the wholesale level. Recognizing that there are many principles of rate design, and, recognizing the statutory requirements under Act 129, I welcome comments on how Pennsylvania can begin the process of evolving default service retail rate design and structure given the new meter infrastructure and wholesale market design of the future."

Place offered several questions for discussion

Regarding allocation of capacity and transmission costs to default service, Place asked:

1. What number of peak hours should be averaged to determine an optimal basis for allocation of capacity and transmission costs to LSEs? Should we include consecutive peak hours, or just one hour per peak day?

2. Should selected hours be based on the RTO peak or the EDC peak usage periods for capacity and/or transmission cost allocation?

3. Should we examine seasonal cost allocators for capacity and/or transmission to incent lower usage during, for example, the summer and winter periods?

4. Assuming some reform is ultimately implemented, what transitional period should this Commission adopt, recognizing that existing contracts could, in theory, be affected by changes in wholesale cost allocation?

As to energy related costs, Place proposed the following questions:

1. Should default service rates evolve to include Time of Use (TOU) structures, such as on and off- peak rates, super off-peak rates, critical peak pricing (CPP) periods, or peak time rebate structures? If so, what specific TOU structures do interested parties believe are most optimal, and why?

2. What other energy market structures should we consider?

3. What modifications or standardization should be considered with regard to the design of HPS (hourly) rates for large customers?

As to the demand component of electricity supply service related to PJM capacity charges, Place welcomed responses to these additional questions:

1. Should we continue to have a simple, per kwh adder to the energy and ancillary supply price, as we do today?

2. Should we design a critical peak price to collect these PJM capacity costs from default service customers? If so, how should such a charge be designed and determined?

3. Should we switch to a demand charge equal to or similar to the PLC and NSPL tickets?

4. Should we switch to a demand charge with some other design feature, and if so, please describe the design element, and why this would be appropriate?

Place also asked: "what procurement changes, if any, should this Commission pursue?"

For example, Place asked: how will the recommended changes in energy and capacity market supply pricing impact full-requirements procurement methods in use today?

Furthermore, Place said, "the advancement of renewable wind and solar technologies have driven down the costs of clean energy resources, which raises the issue as to whether or not EDC default service plans should have a stronger long-term contract component." "Previously, long term contracts for renewable contracts were often well above market. However, recent contracts for energy below $25/MWh may offer prudent hedges which could contribute to a portion of our default service portfolio," Place said

Place "welcome[d]" comments on the prudency of long-term contracts in today's evolving marketplace. Specifically, Place asked comments on the following questions:

1. What evidence is there in PJM markets that long term contracts can be obtained in PJM markets that offer cost-effective hedges relative to status quo default service plans?

2. Assuming prudent opportunities exist:

-- What type of RFP structure for energy or renewable attributes should be contracted for?

-- Is there an optimal length for such long-term contracts?

-- Is there an optimal amount of long-term contracting?

-- Should contracting be limited to resources in a certain geographical area, and if so, what geographical area? Discuss the legal and cost impacts of any geographically limited proposal.

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