Pennsylvania Utility Seeks To Continue Use Of Financial Hedge For Default Service

November 24, 2020

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Reporting by Paul Ring • ring@energychoicematters.com

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Pike County Light & Power Company, Electric Division has filed a proposed default service plan (DSP) at the Pennsylvania PUC to cover the period June 1, 2021 to May 31, 2024.

Pike is essentially proposing the same DSP it currently has in place, which incorporates a financial hedge in addition to spot market energy purchases, with the following changes:

• The plan is proposed for three years instead of two, which Pike said results in lower legal and regulatory costs and efficiency;

• The plan modifies dates of hedging for Plan Year (PY) 2022 and 2023 to ensure Commission approval prior to hedge date execution; and

• The plan removes optional hedging of additional quantities that is dependent upon more granular usage and load shape data that Pike is unable to obtain.

Discussing how this general approach has worked in the current DSP term, Pike stated, "Pike was able to implement one hedge with one counterparty during the 2019-2021 plan years. The financial hedge is an energy swap, whereby Pike pays its counterparty a set price based on forward market pricing (within the limits set forth in the confidential portions of the Settlement) for a set quantity of energy. In return, the counterparty pays Pike the spot price of the energy. Thus, if the spot market price of energy is lower than forward market prices, Pike pays more for its energy than spot market prices. If spot market prices are greater than the contract price, Pike still pays the contract price instead of the higher spot market prices it would otherwise receive. Thus, as spot market prices fluctuate, Pike’s price for a subset of its default energy supply is constant, resulting in price stability."

Pike also proposes to continue use of its default service rate mechanism that is a fixed quarterly rate per kilowatt hour for each of its default service classes comprised of two components: the Market Price of Electric Supply and the Electric Supply Adjustment Charge Pike requests that it be allowed to continue to use this default service rate mechanism for its DSP.

The Market Price of Electric Supply is determined quarterly based on the Company's forecast of the wholesale supply costs for the quarter and reflects the Company's expected procurement costs from the NYISO. Annually, service classification-specific factors are developed to reflect each service classification's load characteristics, capacity obligation, forecast sales and applicable losses. These factors are applied to the quarterly forecast of the Company's default service cost per kWh to determine class-specific Market Prices of Electric Supply. Each Market Price of Electric Supply is then increased to permit the recovery of the Pennsylvania Gross Receipts Tax.

The Electric Supply Adjustment Charge is calculated quarterly to reconcile the monthly over-collections or under-collections of the preceding three months. After each month, the Company compares its actual default service costs for the month with default service revenues. Default service costs include all actual costs related to the procurement of: energy, capacity, and ancillary services, including any prior period reconciliation costs. Default service revenues include: recoveries of the Market Price of Electric Supply and the prior period Electric Supply Adjustment Charge. For each month, actual default service costs are divided by the total actual default service sales for the month being reconciled to determine the overall average rate that would have made the Company whole for the month, on an aggregate basis. The resulting average rate is then utilized to estimate the over- or under-collection applicable to each service classification. The resulting service classification-specific over- or under-collections are added together for the three months being reconciled and are divided by estimated service classification-specific default service sales for the quarter in which the Electric Supply Adjustment Charges will be billed. The resulting service classification-specific Electric Supply Adjustment Charges are then increased to permit recovery of Pennsylvania Gross Receipts Tax.

For any given quarter, the Electric Supply Adjustment Charges, including Gross Receipts Tax, shall not exceed a charge or a credit of 2.0 cents per kWh. In the event the 2.0 cents per kWh limit is imposed, any remaining over- or under-collection balance is included in the subsequent quarter's Electric Supply Adjustment Charges to the extent possible within the 2.0 cents per kWh limitation. Interest on under-collections is determined at the legal rate of interest pursuant to 41 P.S. § 202. Interest on over-collections is determined at the legal rate of interest plus two percent.

Pike currently obtains its default supply from Orange and Rockland Utilities pursuant to the Commission approved Energy Supply Agreement (ESA) between the parties. The ESA’s initial term ended on August 31, 2019, with an option for three (3) one (1) year extensions upon 30 days written notice to O&R. Pike renewed the ESA through 2022. Pike is currently negotiating with O&R for another ESA which will contain substantially the same terms. Pike will provide the new ESA when available. The electric supply service charges under the agreement are determined based on the following:

(i) Supply cost - based on Pike’s load-based allocated portion of O&R’s monthly NYISO charges for energy, capacity and any all other NYISO charges for the applicable month subject to subsequent NYISO true-ups.

(ii) Carrying cost - to reflect O&R’s cost of maintaining and operating the physical infrastructure of O&R required to deliver electric supply to Pike. The monthly charge is $48,973 for the first year and then escalates annually thereafter at 5%.

(iii) Service Fee – monthly service fee of $2,250 for the first year and then escalates annually thereafter at 5%.

Under the ESA, energy prices are passed through based on hourly rates which are subject to volatility driven by market conditions. While hourly rates have, for the most part, been lower than forward market rates (fixed rates for future delivery periods) over the last three years, January 2018 hourly rates were very high which resulted in a spike in rates for Pike’s default service customers. The bulk of Pike’s default service customers are residential, where stable electric prices are better suited for household budgets. Hourly prices over time do not provide the level of price stability preferred by household budgets.

"Pike recognizes that prices in the NYISO spot market are volatile and that its default supply customers, especially residential customers, may benefit from implementing strategies to limit the volatility of pricing passed on to customers. Thus, with its proposed plan to implement a hedge of a portion of its supply acquisition, Pike will limit some of the volatility that rate payers experience. While it is impossible to predict future prices, based on the historical volatility of NYISO spot market pricing, it is reasonable to expect some amount of volatility to continue. Pike notes that given evolving market conditions including the ample availability of low-cost natural gas brought about by fracking technology, spot market rate volatility has decreased significantly since the spring of 2016. Pike also notes that most, if not all, other utilities implement some form of hedging in their default supply plans," Pike said

Docket P-2020-3022988

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