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Integrated Generator-Retailer Recommends PUC Adopt Long-Term Capacity-Only Product For Default Service Load

Alternatively Suggests Five-Year Full Requirements Default Service Product

Retail Suppliers Oppose Capacity-Price Pass-Through For Default Service As Undue Preference

Retail Suppliers Suggest PUC Embrace Secondary Market For Capacity -- Encourage Transactions Between "Willing Buyers And Sellers", Rather Than Relying Entirely On The PJM RPM

April 17, 2020

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Copyright 2010-20
Reporting by Paul Ring •

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In comments on proposed changes to Ohio default service procurements due to the lack of a PJM capacity price beyond May 31, 2022, Energy Harbor LLC (the former FirstEnergy Solutions) proposed that PUCO adopt a capacity-only long-term hedge product for Standard Service Offer load

As previously reported, Staff proposed that, starting with the 2022/23 delivery year, the SSO auction products should be modified such that the capacity obligation is priced at $0/MW-day and SSO suppliers are made whole for all PJM RPM capacity costs incurred through a "pass-through" charge to customers. See more details here

Energy Harbor said in comments to PUCO that, "Energy Harbor recommends that the Commission approve Staff’s proposal of an energy-only product but substitute a capacity-only hedge product for the pass-through charge."

Energy Harbor proposed a separate capacity-only product with a term of five years, at each utility

Under Energy Harbor's proposal for a separate capacity-only product, "Each EDU would modify its SSO auction to solicit bids for capacity for the 2022/2023 DY and the following four delivery years (i.e., through the 2026/2027 DY), as well as for any other tranches not previously procured as a result of PJM capacity market disfunction," Energy Harbor said

"Suppliers would offer capacity at a fixed price for all years of the contract term, thereby guaranteeing the capacity price to be paid by consumers over the long-term. The winning bidder or bidders would assume the risk, and receive the concomitant benefit, that the PJM auction price in the applicable delivery years would be higher or lower than the SSO auction price. As such, this capacity-only auction product would function as a financial hedge that provides stability to Ohio consumers while locking in low prices," Energy Harbor said

Energy Harbor said that, "The state’s capacity procurement would extend beyond the term of existing electric security plans ('ESPs'), but the Commission should view this as an added benefit of Energy Harbor’s proposal. The Entry attributes to Staff the statement that all of the Ohio EDUs’ ESPs are set to expire by the end of the 2023/2024 DY (i.e., by May 31, 2024). Entry ¶ 6. This is true for the FirstEnergy EDUs and Ohio Power, but Duke Energy Ohio’s ESP runs through the 2024/2025 DY and DP&L’s ESP is indeterminate. Regardless, extending the capacity procurement to include four or five delivery years will provide needed stability to customers while having no negative impact on existing and future SSOs. Whether provided in the future under R.C. 4928.142 or R.C. 4928.143, future SSOs will necessarily include market-based capacity as is proposed here."

Energy Harbor's comments were filed on April 16, and argued that its proposed capacity procurement would not have any impact on the "PJM process."

Energy Harbor said that, "It is important to note that while this proposal provides a valuable hedge to Ohio customers, it would not have any impact on the PJM process whatsoever. This capacity hedge product is not dependent on any specific unit(s) clearing in the PJM auction or the outcome of any FERC or PJM process. It is merely a financially settled hedge product within Ohio’s control for the benefit of Ohio customers. Accordingly, Ohio can lock in fair and attractive capacity prices without impacting the PJM market."

However, as previously reported today, FERC on April 17 ruled that default service contracts constitute a state subsidy, and units receiving "indirect" payments from default service auctions (e.g. a power marketing affiliate of a generator) would be subject to the Minimum Offer Price Rule (MOPR) in the PJM capacity market.

With respect to New Jersey's default service procurement, FERC said, "Nor do we find it meaningful that the New Jersey Basic Generation Service auction is voluntary or used by power marketers because a state default service auction qualifies as a State Subsidy because it is a state-sponsored process and includes indirect payments to the resource."

See our story today for details on FERC's order

In any case, in its April 16 comments, Energy Harbor said that, "the [Ohio] Commission should modify Staff’s proposal so that it also includes a long-term capacity-only product that functions as a hedge against future capacity price increases and volatility."

Under Energy Harbor's proposal, the "energy-only" SSO product could continue to employ the traditional staggering and laddering.

To the extent its capacity-only proposal is not adopted, Energy Harbor said that retaining the full requirements product is a better alternative to Staff’s capacity pass-through charge.

"Energy Harbor agrees with Staff that the current PJM situation creates uncertainty that needs to be addressed. What should be recognized, however, is that PJM currently is experiencing a surplus of capacity that should result in low capacity pricing. As such, consumers would benefit from locking in existing pricing today instead of remaining subject to the vagaries of the PJM base residual auction rollercoaster over the next four to five years. Instead of placing that risk on retail consumers as Staff’s proposed capacity pass-through charge does, the Commission should direct all EDUs to conduct auctions for a full requirements product that includes capacity for multiple future delivery years. As has always been the case, this approach appropriately places capacity pricing risk on the supplier or suppliers most willing to bear it," Energy Harbor said

"Energy Harbor recommends a full requirements product for all or a portion of SSO load with delivery periods from two to five years. Winning bidders would assume the risk of inaccuracy in their capacity pricing projections," Energy Harbor said

"The Staff’s proposal correctly identifies the need to modify the current SSO product to allow these procurements to occur, but fails to provide a method to leverage current market conditions to provide long term benefit and price stability to consumers. Allowing suppliers the ability to offer a capacity only or full requirements offer for an extended term would be superior to Staff’s proposed solution," Energy Harbor said

Retail Suppliers Oppose Default Service Capacity Pass-Through

Separately, Interstate Gas Supply and Direct Energy filed joint comments opposing Staff's recommended pass-through of the capacity price, stating that such a pass-through mechanism would distort the competitive market by providing preferential treatment to the SSO product, and because the pass-through would insulate SSO auction bidders from the risk associated with unknown capacity prices, when retail suppliers face the same risk

IGS and Direct said, "The challenges identified by the Staff are not relevant only to the EDUs. Competitive retail electric service ('CRES') providers face the exact same issue when setting prices for future years. Therefore, it would distort the competitive market to insulate SSO auction bidders from the risk associated with unknown capacity prices. Moreover, the Staff’s proposal would arbitrarily and unreasonably provide preferential treatment to the SSO product in a time when all market participants must address the same challenge."

Direct and IGS further said, "although PJM capacity auction clearing prices may not be known, physical generation resources are in fact selling capacity to load serving entities for delivery years that are not known. Based upon this fact, CRES providers are able to contract with generation resources bilaterally to lock in a capacity price and provide fixed rate certainty to customers for at least three years into the future. If CRES providers are able to contend with this risk and provide a fixed-rate product for time periods when PJM has not established capacity prices, the SSO auction bidders should be able to as well. Since there is a functional secondary market for capacity, there is simply no need to modify the current auction structure and transfer the capacity price risk away from auction bidders and onto customers."

Direct and IGS further said, "Indeed, many have historically criticized the lack of a liquid secondary market for capacity. Now that one has formed, it should be embraced. Holding the SSO auctions without modification would place additional confidence in the secondary capacity market and encourage transactions between willing buyers and sellers -- a policy that has successfully guided the natural gas market without the need for regional transmission organizations -- rather than relying entirely on the PJM capacity market. The Commission should not miss this important opportunity."

If PUCO, however, feels a change is needed to the current process due to the unknown future capacity price, IGS and Direct said that PUCO should shorten the SSO contract length

"To the extent that the Commission feels it is necessary to modify the auction process -- something that is not necessary -- it should compress the SSO product to the timeframe that capacity prices are known. Nothing requires the EDUs to provide a multiyear product. And the Commission should not bend over backwards to do so and in the process wholly insulate one product from the risk that all other entities must face," IGS and Direct said

Case No. 17-2391-EL-UNC et al.

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