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Utility Proposes Alternative Default Service Procurement Methodology, Potential Mitigation

February 21, 2022

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Copyright 2010-21
Reporting by Paul Ring •

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Fitchburg Gas and Electric Light Company d/b/a Unitil has proposed to the Massachusetts DPU an alternative procurement methodology for basic service (default service) electricity supply

Unitil made the proposal in light of uncertainty related to the opt-out municipal aggregation proposed by the City of Fitchburg and pending before the Department in D.P.U. 20-117. the City of Fitchburg constitutes a significant portion of Unitil's load. Unitil had expected that the City of Fitchburg would receive an order on its proposed aggregation plan in D.P.U. 20-117 by the end of February 2022, and that it would intend to launch sometime in the summer of 2022 based upon that approval, but said that, at present, it is not clear that those events will occur on the schedule previously anticipated.

For the upcoming summer period of June 1, 2022 through November 30, 2022, Unitil intends to issue an RFP seeking 100 percent of its supply requirements for that period for its small customer group (including residential customers) and its medium customer group. That RFP will seek bids for wholesale supply of two types -- fixed price and varying price. Fixed price bids are those consistent with prior bids where prices are fixed by contract throughout the supply term. Such bids would be consistent with the traditional Basic Service supply solicited by Unitil and would require no unique retail rate considerations.

The RFP would also permit bidders to offer varying wholesale prices where they would specify monthly fixed adders to be added to the relevant load-weighted average real-time locational marginal price (LMP). "Allowing varying price offers is intended to remove volume and price risk from wholesale suppliers, thereby reducing potential risk premiums. The intent in allowing bidders to present different types of bids is to encourage additional bidders to participate by potentially allowing them to evaluate and address the risks relating to the launch of the Fitchburg aggregation as suits their risk and supply evaluations," Unitil said

In the event that Unitil receives both fixed and varying price offers that otherwise qualify, it would evaluate those offers based upon the lower overall prices from each offer given the Company’s projected monthly purchase requirements (defined as Evaluation Loads in the RFP) with varying price offers valued based on the as bid fixed adders and a weighting of forward prices of the ISO New England Peak and Off-Peak LMP Futures contracts (ISO LMP Futures). Unitil would also apply a preference for fixed price offers as well as consideration of non-price criteria such as the financial strength of the bidder.

Should Unitil not receive any offers, or should it receive offers that are unreasonably high priced, then it would deem the RFP to have failed and Unitil would propose to serve all customers directly, as it presently does with its large customer group. While Unitil cannot specify what would qualify as an objectively unreasonable offer, the reasonableness of the offers would be judged by comparison of offers to the expected cost of the Company directly serving the load.

In addition to the solicitation for 100 percent of the summer period supply, Unitil would also seek bids to supply 50 percent of the anticipated supply for the winter period of December 1, 2022 to May 31, 2023. For this period, only fixed price offers consistent with typical Basic Service procurement practice would be accepted. Any bids for the winter period would be evaluated separately from those relating to the summer period, and would be evaluated on relative price with consideration of non-price criteria such as the financial strength of the bidder, consistent with typical practice.

If Unitil is unable to secure basic service contracts for either the summer period or the winter period, Unitil proposes to issue a supplemental RFP once the launch date for the Fitchburg aggregation is known, so long as the timing of such RFP would be more than one month prior to the next scheduled RFP, anticipated to issue on August 23, 2022. In that the date of the launch of the aggregation is the single largest factor affecting the viability of the RFP and the likelihood of receiving bids, it is Unitil’s assessment that issuing a supplemental RFP once that issue has been addressed will likely be more successful than a prior RFP that had failed.

Should Unitil issue a supplemental RFP, it would seek 100 percent of the supply obligation for the remainder of the summer period (if any) under both fixed and varying prices and for 50 percent of the winter obligation under fixed prices, both consistent with the initial RFP. The bids received in response to the supplemental RFP would be evaluated on the same criteria described above.

Notably, "regardless of how the wholesale procurement process occurs, the Company intends to set retail rates at a fixed level during the service period in the manner to which customers have been accustomed of many years," Unitil said

"Further, although the Company intends to set and maintain fixed retail pricing, that may not be a viable option, and the Company, therefore, has included potential mitigation measures as part of this proposal," Unitil said

With respect to the rate setting, should the impending RFP result in one or more reasonable fixed price bids for wholesale service, Unitil would set retail rates consistent with past practice and no special actions or approvals would be needed. If, however, only varying wholesale prices are available, either through competitively supplied service or on account of serving the load directly, then Unitil proposes to vary its calculation to assure that customers receive appropriate pricing.

In the event the Company contracts with a wholesale supplier with a varying price bid, which would be applicable only to the summer rate period under the structure of the RFP as described, Unitil proposes to calculate rates based on the winning fixed adder bid, along with the ISO LMP Futures and Evaluation Loads. All other retail charges and adjustments would be added to this rate consistent with prior practice and precedent. If, however, the solicitation fails and Unitil is required to serve the load directly, it will set the retail rates based upon Forward Capacity prices, ISO LMP Futures and Evaluation Loads, plus a set percentage for Ancillary Services. As with the supplier provided price, the other retail charges and adjustments would be added to this rate consistent with prior practice and precedent. "Ultimately, the goal will be to produce retail rates that are stable and consistent across the service period, including a single price (or a fixed price, as the term is used to describe retail rates) for the summer rate period and monthly prices (or variable prices, as the term is used to describe retail rates) throughout the rate period, in line with wholesale pricing trends, and reflective of appropriate market prices," Unitil said

"With respect to potential mitigation, in instances where the Company is serving customers either from a contract that includes varying price provisions or directly there could be substantial changes in the ISO LMP Futures prices from what is anticipated at the time the rate is set. Such a change, if it occurs, could lead to significant over- or under-collections. Reconciling those variances could lead to inappropriate cost shifting into future periods. A potential means of mitigating that impact would be through interim adjustments to the retail rate. Accordingly, the Company proposes that it be permitted to seek an adjustment of the fixed and monthly retail rates if the projected wholesale power supply costs for the balance of the period vary by more than twenty percent (20%) from the wholesale power supply costs projected over the same period at the time the retail rates were set. This approach balances rate stability, which is an important aspect of the Department’s approach to basic service pricing while mitigating the potential for significant over- or under-collections," Unitil said

To be clear, interim adjustments are not preferred by the Company, but may be necessary to avoid large out-of-period impacts," a witness for Unitil said

Notably, a prior mitigation approved by the DPU due to aggregation-related premiums, which did not include the newly proposed interim adjustments, made the entirety of any reconciliation nonbypassable (see story here)

D.P.U. 22-BSF-A2

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