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Pennsylvania Launches Proceeding Which Could Lead To End Of "Plain Vanilla" Default Service (Or At Least Create Value-Add Default Options)

Review Arises Out Of Concern Only Shopping Customers Would Benefit From Smart Energy Behaviors (Load Shifting, Reductions, Etc.)

PUC May Scale Back Use Of Full Requirements Contracts For Default Service; Increase Use Of Long-Term Contracts

PUC May Revise Default Service Regulations, Policy Statement

"Other Energy Market Structures" To Be Considered

Proceeding Will Evaluate "Smarter" Default Service Rates, Procurement Changes

February 26, 2019

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Copyright 2010-19
Reporting by Paul Ring •

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The Pennsylvania PUC has launched a review of wholesale cost allocation and default service rate design and procurement reforms due to the installation of smart meters, which could lead to a significant change in how default service is procured and priced, including a departure from plain vanilla default service served primarily through load-following full requirements contracts

As was exclusively first reported by in January (see story here), Commissioner Andrew Place had requested that such a proceeding be opened as he expressed concern that non-shopping customers under current the default service rate design (flat pricing) would not be rewarded for "positive" behaviors, such as load shifting, peak reductions, etc.

Rather, under the current flat default service rates for mass market customers, any benefits of "positive" behaviors by default service customers flow only to the wholesale LSE. In contrast, customers who shop may contract for plans from retail suppliers which reward customers for "positive" behaviors, and indeed the Pennsylvania market already has several dynamic pricing and similar competitive retail products for customers who shop (including free weekends, peak time rebates, etc.)

In an order released today formally opening the proceeding, the PUC said, "The Commonwealth of Pennsylvania has invested a significant amount of customer funded utility resources in smart meter technology. The Commission seeks input on how this technology can be utilized to design default service rates in a way that better aligns associated wholesale cost allocation with retail cost allocation."

"Prior to installation of smart meters and associated data management systems, energy, capacity and transmission costs were allocated based on standardized profiles for similar customer categories. Such standardized profiles limited or muted translation of positive customer behaviors to positive customer benefits related to future avoided costs which would normally be rewarded in wholesale markets according to the wholesale allocation schemes for interval metered customers. 'Positive customer behaviors' include avoiding usage during peak RTO and utility peak usage periods and shifting usage to lower usage periods," the PUC said

"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 the 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. Without direct methods for rewarding customers in a timely manner for positive behaviors, customer responses to market prices will be stunted, or suboptimal," the PUC said

The PUC also noted that, "PJM will be filing shortly to significantly alter energy and ancillary market pricing mechanisms which are likely to significantly shift costs from wholesale capacity markets to wholesale energy markets. Such a shift in market design may have an impact on optimal default service rate designs."

As further discussed below, the PUC asked, among other things, if default service should have a Time of Use, critical peak, peak time rebate, or other dynamic pricing structure

The PUC also asked for comments on changes in the procurement and contract used for default service, including whether full requirements contracts remain appropriate or whether long-term contracts should be used

The PUC said that, as a result of its investigation, "the Commission may propose to amend our default service regulations, default service policy statement, or issue other orders as appropriate."

Regarding procurement of default service, the PUC asked, "what procurement charges, if any, should this Commission pursue?"

"For example, how will the recommended changes in energy and capacity market supply pricing [discussed below] impact full-requirements procurement methods in use today? Additionally, 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 per megawatt-hour may offer prudent hedges which could contribute to a portion of our default service portfolio. We welcome comments on the prudency of long-term contracts in today’s evolving marketplace," the PUC asked

The PUC welcomed 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:

    a. What type of request for proposal structure for energy or renewable attributes should be contracted for?

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

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

    d. 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 geographical limited proposal.

Regarding cost allocation, the PUC said, "As a starting point, we should review if wholesale cost allocation methods, as reflected in the Attachment M-2 in the PJM Tariff filed at the Federal Energy Regulatory Commission (FERC) for informational purposes, are reasonably aligned with cost allocation. Often capacity costs are allocated based on the top five summer peak hours, since the PJM RTO is summer peaking in aggregate. Similarly, transmission costs are often allocated on the peak five hours, or even a single peak hour, either at the RTO level or EDC level."

The PUC proposed the following preliminary questions:

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 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?

"Additionally, we find it prudent to analyze how the growth in advance metering and settlement technologies may facilitate our application of the default service design requirements enumerated in Act 129, 66 Pa. C.S. § 2807(f)(5). Given the wholesale cost allocation methods noted above, how can retail default service rates be better aligned with wholesale cost allocation? As is apparent from the example above, this question is principally targeted at the previously non‑interval customers with no access to HPS – more specifically residential and small commercial customers, generally smaller than 100 kilowatts. The current policy essentially charges customers a simple fixed kilowatt-hour (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, 66 Pa. C.S. § 2807(f)(5), we 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," the PUC said

As to energy related costs, the PUC welcomed responses to 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 priced service) rates for large customers?

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

1. Should we continue to have a simple, per kilowatt-hour 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?

Based on the feedback received, the Commission may propose to amend its default service regulations, default service policy statement, or issue other orders as appropriate.

The PUC opened a process for comment on the default service issues discussed above, and will conduct a series of stakeholder meetings.

Docket M-2019-3007101

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