Calpine Implores PUC To Block Alleged "Predatory" Attempt By Other Retail Suppliers (EGSs) To Receive "Bailout"

EGSs Say Their Proposal Is Meant To Address Current, "Illegal And Discriminatory Treatment"

October 9, 2020

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In a recently filed brief at the Pennsylvania PUC in the default service proceeding of Duquesne Light, Calpine Retail Holdings, LLC urged the PUC to reject a proposal from some retail electric suppliers to make Network Integration Transmission Services (NITS) a nonbypassable cost, with Duquesne Light assuming the NITS obligation for all distribution customers, with retail electric generation suppliers (EGSs) no longer responsible for NITS costs.

See more background on the Duquesne Light default service case here

Calpine alleged, "Seven EGS companies comprising a small subset of the market and calling themselves the EGS Parties sponsored testimony to argue that NITS, which are currently assessed on each EGS based on such EGS’s own unique demand, should be shifted into a one size fits all charge for Non-Bypassable Transmission, or 'NBT' costs."

Calpine alleged, "The effect of this shift would be to shift risk to consumers in Duquesne’s service territory and force the spreading of these costs among all Duquesne customers, both those taking service under Duquesne Default Service Plan and also those who are served by EGS’s."

Calpine alleged, "The effect of such a shift would be that EGS’s who are currently supplying and managing their customers’ loads would no longer be able to offer NITS-associated products and services in the marketplace and provide those benefits to customers in Duquesne’s service territory and indeed throughout Pennsylvania. This one size fits all bailout of NITS costs at the request of this subset of suppliers would remove an important incentive that exists in today’s competitive marketplace to pursue load management strategies and apply operational and management expertise that encourages efficient use of the transmission grid."

Calpine alleged, "This proposal is not new. It has been considered by the Commission on numerous occasions, and consistently rejected. Yet certain market participants , [sic] the so-called EGS Parties, keep trying to seek protection for their own business and management decisions. Calpine Retail urges the Commission to make it clear that the EGS Parties need to stop coming to the Commission for a bailout , [sic] and instead need to figure out how to compete more efficiently."

Calpine alleged, "Both Calpine Retail and the EGS Parties incur NITS costs. Calpine Retail has been able to manage these costs and still offer products and services that its customers desire. As explained by [Calpine witness] Ms. Merola, Calpine Retail does this by managing the customers loads served by Calpine Retail. Apparently, the EGS Parties have not been as successful in this regard. Subsequently, their collective response has been not to improve their expertise at load management, but instead to try to shed retail business risk and move it from the competitive retail market to all customers of the utility, regardless of existing market, contracts and products and services."

Calpine alleged, "When it comes to servicing customers who do not take default service, but who instead rely on EGS’s such as Calpine Retail, such cost shifting would simultaneously limit existing and potential customers’ product and service choices. Not only would this harm the competitive retail market, it would remove any incentive and opportunity to create customized products and services that are, or potentially might be formulated, to assist EGS customers in addressing these costs. This is nothing more than a bailout and predatory attempt to remove a competitors products and services from the market."

While the EGS parties have noted a change in how NITS is set at FERC for Duquesne Light, Calpine alleged, "the formulas now used by FERC are still subject to a ratemaking process at FERC. There is a regulatory process in place at FERC for determining those rates as well as the ability to challenge those rates. This process at FERC does not negate the ability of EGS companies to manage their loads and manage their NITS costs."

Calpine alleged, "In sum, Calpine Retail submits that the EGS Parties, which represent a subset of the marketplace, are looking for ways to not take responsibility for their own business decisions, level of risk management expertise and associated management decisions, valuation of risk, and products they choose to offer. In brief, they are trying to shed and shift market risk associated with their own demand-driven costs. Rather than using expertise to manage these costs and associated risks, they are asking for Duquesne’s DSP [default service] customers to bail them out. As a result, one of the principal benefits of moving to retail competition would be eliminated, by removing products and services and any competitive discipline for a specific LSE demand based cost in the marketplace."

Duquesne Light also opposes making NITS a nonbypassable charge for which it assumes the obligation on behalf of all delivery service customers

Interstate Gas Supply, Inc., Shipley Choice LLC, NRG Energy, Inc., Vistra Energy Corp., ENGIE Resources LLC., WGL Energy Services, Inc., and Direct Energy Services, LLC (the EGS Parties), which proposed the change in treatment of NITS costs, said in a brief that NITS costs are changing in a more volatile manner. "The net result of these changes is that an [sic] Load Serving Entity’s (Utility or EGS) NITS obligation on behalf of an individual customer, and its total NITS payment, can be difficult to predict, and even more difficult to influence," the EGS Parties said

The EGS Parties said, "Network Integrated Transmission Services ('NITS') is the service that provides energy consumers with access to generation supply throughout the Regional Transmission Operator ('RTO'), in this case PJM, control area in which the customer is located. Customers served by the same distribution utility pay the same rate for this service regardless of where they are located on the system in relation to generation resources. In many utility service areas, including Duquesne, NITS rates are formula-based rates adjusted annually through FERC-approved formula rate filings. This is to account for changes in operating costs, system loads, or cost recovery requirements for new transmission projects. (EGS St. No. 1, 26:15-22). NITS rates are based on a number of factors: 1) Transmission Owners Cost of Service; 2) Cost of Capital in Rate Base, including allowed Return on Equity and Interest costs; 3) Depreciation and Amortization; and, 4) Taxes, Operation and Maintenance expenses. (EGS Parties’ St. No. 1, 26:23-27:3). The problematic part of NITS charges is that they change annually, because both the FERC-approved NITS rate and the individual customer’s Network Transmission Service Peak Load Contribution can and usually do change from year to year; and recently are changing in a more volatile manner. The net result of these changes is that an [sic] Load Serving Entity’s (Utility or EGS) NITS obligation on behalf of an individual customer, and its total NITS payment, can be difficult to predict, and even more difficult to influence. (EGS Parties’ St. No. 1, 27:15-19). There are many examples of NITS rates to customers varying by as much as 30% per year. The rates change frequently and suddenly. (EGS Parties’ St. No. 1: 29:3-12). NITS rates have been increasing over the years at some dramatic rates. (EGS St. No. 1, 30:4-5)."

The EGS Parties said, "For default service customers, Duquesne recovers NITS and other non-market-based charges ('NMB') in a manner that allows the customer to pay the actual cost of those charges on a fully reconciling basis. That means no one takes any risk on the charges, the customer will be asked to pay the exact amount and Duquesne will eventually charge and remit only the exact amount. (NGS St. No. 1, 31:3-6)."

"For customers who shop, however, the picture is quite different," the EGS Parties said

The EGS Parties said, "As [EGS Parties witness] Mr. Kallaher notes, 'The impact of NITS and other NMBs on customers who shop is far more profound and negative. A customer’s EGS is responsible for paying the NITS charges and as discussed above, these charges can vary wildly from year to year. For larger customers in particular, most suppliers cannot absorb the risk of the volatile charges and instead contracts often pass-through this risk to the customer. Thus, for example, if a customer signed a contract with an EGS for a fixed-price contract with a term of 24 months that began on July 1, 2018 and expired on June 30, 2020, the contract would span three separate planning years for purposes of Duquesne’s NITS charges such that the charges the EGS would have to pay on that customer’s behalf would change twice during the term of the contract. (EGS Parties St. No. 1, 31:12-21).'

The EGS Parties said that, "Mr. Kallaher has significant concerns about how this disparate means of collecting NITS charges will continue to negatively impact the competitive market: 'One is that EGSs may avoid making fixed price offers to customers due to the risk presented by the variability of NITS charges. This does a disservice to customers who are looking for price certainty against a PTC that changes on a quarterly basis. Another implication is that when an EGS does make fixed-price offers, they will tend to include a risk premium to reflect the likelihood that the customer’s share of NITS charges will change and could well increase. The robust competition among EGSs that exists in the Duquesne service territory undoubtedly puts downward pressure on that risk premium, but the net result is that and EGS customer is almost certain to either overpay or underpay for their share of NITS charges. This stands in sharp contrast to default service customers, who pay exactly their share of Duquesne’s NITS charges, no more and no less. Considering that these charges are unpredictable, as noted above, and cannot be effectively hedged by EGSs, the result with respect to EGS customers is plainly inefficient, with some customers paying too much and others paying too little based only on the arbitrary factor of their EGS’s ability to predict a charge that, by its nature, is unpredictable. (EGS Parties’ St. No. 1, 31:1-6).'"

"The need to shoulder this risk for shopping customers or their suppliers, and the converse lack of risk for default service customers is an obvious and profound difference between the two services. And because NITS is a passthrough of PJM charges, Duquesne’s role in this is merely as collection agent, not as the payee. This differential collection mechanism favors default service over shopping customers and their suppliers," the EGS Parties said

"The Public Utility Code prohibits the granting of an advantage to one class of customers to the detriment of others, and requires that Electric Distribution Companies, such as Duquesne, provide terms of access for EGSs and customers that are comparable to their own abilities. To do otherwise is to illegally discriminate in the provision of public utility service," the EGS Parties said

"In [a recent] Columbia case the Commission found that the provision of billing service for 'non-commodity products and services' was a public utility service and must comply with the non-discrimination provisions of the Code. There can be no doubt that Duquesne’s billing of NITS charges is likewise a Public Utility Service and subject to the same non-discrimination requirements. Simply put, if Duquesne is going to continue to bill default service customers for NITS charges that are identical to their shopping counterparts on a basis that differs only because of a customer’s status as default or shopping, that counts as discrimination and is prohibited," the EGS Parties said

"To avoid this discrimination, Mr. Kallaher proposed a simple solution; have Duquesne collect and remit NITS charges on behalf of all customers, not just default service customers. Such a process would not harm other default service customers as the same costs that are now embedded in default service rates would be recovered through a non-by passable charge," the EGS Parties said

The EGS Parties quoted Mr. Kallaher's testimony as stating, " Collecting NITS through a nonbypassable charge would eliminate the risk premiums that EGSs must currently include for offers that extend beyond the next change in the utility’s NITS calculation. Assuming that EGSs are likely erring on the side of a higher versus lower risk premium to avoid being short, my proposed change would result in shopping customers paying less than they do now for NITS. The change would also likely encourage more longer term offers from EGSs, which would also benefit customers looking for price certainty, especially at a time when prices are generally relatively low and stable. In fact, one of the unintended consequences of the current treatment of NITS is that the need for EGSs to take on the risk of a cost like NITS, which cannot be effectively predicted or hedged, tends to reduce the robustness of the offers EGSs can make that manage the risks related to commodity costs, which EGSs are well-placed to predict, hedge and even influence."

"In short, the record is clear that the current collection of NITS charges is transparent and risk free for default service customers while presenting significant risk and opacity for shopping customers and their suppliers. The means to address the illegal and discriminatory treatment is easily at hand and will harm no one. The choice is clear; NITS charges should be collected via a non-bypassable charge for all customers, shopping and default service, based upon each customers’ contribution to the overall charge," the EGS Parties said

Docket No. P-2020-3019522

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