PSC Orders That Capacity Price Be Removed From SOS Bidding Due To Delay Of PJM Auction, Directs That Wholesale Suppliers Later Be Reimbursed With Final Capacity Price

Change Decreases Normal Risk Undertaken By SOS Wholesale Suppliers, Has Potential To Skew Price To Compare

September 27, 2019

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

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The District of Columbia PSC has ordered that bidders in an upcoming Pepco SOS procurement for the June 2022 to May 2023 delivery year shall include a $0/MW-day cost for capacity in their bids, with winning bidders instead reimbursed the actual final price of capacity once determined.

The PSC made the change due to the previously reported indefinite delay of the PJM Base Residual Auction for capacity for the June 2022 to May 2023 delivery year, due to continued FERC inaction on pending potential changes in market design.

In D.C., Pepco's SOS is implicated because an upcoming procurement includes, for residential and small commercial customers, a three-year contract, for approximately one-third of the load, that is to start on June 1, 2020 and extend into the June 2022 to May 2023 delivery year.

The contract is a full requirements contract, including the obligation for bidders to assume the load's capacity obligation extending into the 2022-2023 delivery period, for which the BRA has not yet been conducted and the capacity price is unknown.

Stakeholders presented several options for consideration on how to address the situation given the lack of a known capacity price.

Shortening the contracts to be procured in the upcoming procurement to two years, with the June 2022 to May 2023 supplies procured later, was among those options considered.

However, the PSC ordered adoption of an alternative that maintains the procurement of a three-year SOS supply contract for residential and small commercial customers, covering the period June 1, 2020 to May 31, 2023.

To take into account the uncertain capacity price, the PSC modified the normal SOS contract for the June 1, 2020 to May 31, 2023 term to provide that wholesale suppliers shall incorporate a capacity price of $0/MW-day into their bids for the delivery year June 1, 2022, through May 31, 2023. Pepco will reimburse SOS suppliers, "for the final Pepco zone capacity price for that year times the daily unforced capacity obligation."

It should be noted that this option decreases the risk borne by the SOS wholesale suppliers versus the risk incurred under the ordinary bid conditions (when the Base Residual Auction capacity price is known). Under normal circumstances, while the BRA capacity price is known at the time of the SOS bidding, the final capacity price is not known, and could vary in the future due to the impact of prices from incremental auctions. Accordingly, some "normal" risk premium for capacity likely is included in the SOS bids even when the BRA capacity price is known at the time of the SOS bid. By simply reimbursing SOS suppliers with the final Pepco zone capacity price, such risk is removed.

The PSC noted that its adopted option, "allow[s] the Commission to maintain the three (3)-year term for residential and small commercial service."

The PSC noted that its adopted option allows Pepco to, "secure otherwise fixed-price supply for the June 2022 to May 2023 period thus avoiding a supplemental procurement at a later date."

"Because Option 4 [the adopted option], in addition to being the preferred option of those [wholesale] suppliers responding to Pepco’s poll, would, in contrast to Options 2 and 3, leave the current three (3)-year term bidding process for residential and small commercial SOS load which has worked so well in the past in place with a couple of relatively minor adjustments and without the need for a supplemental auction, we believe this is a reasonable approach," the PSC said

FC 1017

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