Regulator Opens New Review of Default Service Procurement & Pricing, Issues Straw Proposal

Procurements Would Be Subject To New Price Benchmark

Revised Default Service Rate Periods To Lower Prices

Regulator, "Committed To Exploring Any Opportunity To Mitigate [Rate] Increases"

January 4, 2023

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Copyright 2010-21 EnergyChoiceMatters.com
Reporting by Paul Ring • ring@energychoicematters.com

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The Massachusetts DPU has opened a new investigation into the procurement and pricing of electricity basic service (default service), and set forth a straw proposal, "for ways in which the Department could consider modifying its existing basic service procurement and pricing policies to better serve customers."

"[T]he Department is very concerned about basic service rate impacts on customers and is committed to exploring any opportunity to mitigate such increases due to their effects on customers," the DPU said

The DPU said that its investigation is prompted by recent default service rate spikes as well as declining participation by wholesale suppliers in basic service solicitations

The DPU issued a straw proposal focused on near-term changes, but also said that a second phase of the investigation would examine further changes, including an examination of ways to improve the accuracy of the price signals sent to basic service customers

The straw proposal would address in the near-term: (1) establishing the criteria to be used by EDCs to determine if a procurement fails and how to address such failure, and (2) re-defining the fixed rate periods for the utilities such than the months of January and February would not be part of the same basic service rate period.

As described further below, the DPU proposes a benchmark price to be used to determine if a procurement should be rejected (similar to a mechanism in Maryland)

"While the Department does not have control over wholesale energy market dynamics, it is committed to exploring opportunities to mitigate the effects of wholesale energy costs on customers, as well as promoting the Commonwealth’s energy policies," the DPU said

"As such, in a second phase of this investigation, the Department will examine ways in which the existing basic service procurement and pricing policies can be modified to improve the accuracy of the price signals sent to basic service customers regarding the underlying cost of electricity, consistent with the Department’s Orders in New Technologies and Advanced Metering Infrastructure Proposals," the DPU said

"Providing customers with the opportunity to respond to the actual varying costs of electricity will allow them to reduce their electric bills by reducing their usage during hours in which electricity prices are highest," the DPU said

In the straw proposal, the DPU proposes a method to determine if a procurement should be considered failed, which would include a comparison to a benchmark price

As proposed, for residential and small C&I customers, each distribution company would calculate, for each supply block, an expected bid price for each month of the applicable six-month period, based on: (1) the NYMEX futures energy prices on the day prior to the day that the distribution company received final bid prices from wholesale suppliers and (2) the distribution company's projections of other capacity, ancillary services, and other wholesale costs for the month.

The distribution company would then calculate an expected bid price for the entire period as the load-weighted average of the monthly expected bid prices.

"A distribution company would deem a solicitation as having failed for a block if the 'best' bid price(s) submitted for that block for the period (as determined by the distribution company’s existing bid evaluation criteria) exceed the expected bid price by more than a specified amount (e.g., 20 percent)," the DPU said

"The Department would work with the distribution companies and stakeholders to develop a uniform method by which the distribution companies would calculate expected bid prices and the threshold over the expected price that would constitute a failed bid," the DPU said

For any unfilled tranches of basic service as a result of any procurement failure, the DPU proposed that, for residential and small C&I customers, the alternative procurement would depend on whether the supply block(s) applies to the first or second 50 percent of supply for a given six-month period. If the block applies to the first 50 percent of supply, the distribution company would attempt to procure supply for the block in its subsequent solicitation for large C&I customers (i.e., three months following the failed solicitation). If the distribution company is unable to procure supply for the block in this solicitation for large C&I customers, the distribution company would then attempt to procure such supply in its subsequent solicitation for residential and small C&I basic service supply by soliciting bids to provide the full 100 percent (rather than 50 percent) of the supply requirement for the upcoming six-month period.

If supply blocks remained unfilled -- that is, if a distribution company was unsuccessful in procuring supply (1) for a block that applies to the second 50 percent of supply for the upcoming six-month pricing period included in a solicitation for residential and small C&I customers or (2) for any block included in its solicitation for large C&I customers -- the DPU proposed that the distribution company would procure supply for the block directly from the wholesale markets administrated by ISO-NE.

"Specifically, the distribution company would be responsible for procuring all of the wholesale products and services (e.g., energy, capacity, and ancillary services) required to serve the basic service load included in the block(s) (the Department refers to this as 'self-supply')," the DPU said

"[I]n instances in which a distribution company procures one or more of the supply blocks for a pricing period through self-supply, the distribution company would set the monthly wholesale prices for the block equal to the distribution company’s expected monthly bid prices for the block (based on NYMEX futures prices, plus projections of other wholesale costs)," the DPU said

Under the Department’s proposal, the method by which the distribution companies calculate monthly wholesale prices would not change from the current method, i.e., the distribution companies would continue to calculate such prices as the average of their projected monthly wholesale prices of the blocks that comprise the period. Similarly, the proposal would not change the methods by which the distribution companies calculate retail basic service rates. Monthly rates would continue to be calculated as the sum of (1) wholesale price for the month and (2) adders for renewable, clean energy, and administrative costs. Fixed rates would continue to be calculated as the load-weighted average of the monthly rates that comprise the pricing period.

"The Department recognizes that there a number of details associated with implementing the self-supply approach (in particular the manner in which the distribution companies would procure wholesale energy directly from the ISO-NE energy markets). The Department would work with the distribution companies and stakeholders to establish these implementation details," the DPU said

As noted above, the DPU seeks to change the basic service rate period for small customers such that a six-month fixed rate does not include both the months of January and February

The fixed basic service rates reflect the average of each monthly rate, as established in the procurement, for the applicable pricing period. The DPU noted that, in recent years, January and February have been the months in which wholesale electricity prices are highest. At all EDCs, January and February are part of the six-month "winter" fixed price period (though Unitil is already transitioning to having January and February in separate rate periods)

"To minimize the significant changes in basic service rates that customers currently experience between Winter and Summer fixed-rate periods, the Department proposes that each distribution company place the monthly rates for January and February into separate periods," the DPU said

Consistent with this goal, the Department proposes that each distribution company adopt the following six-month fixed-rate periods for residential and small commercial customers: (1) February through July and (2) August through January.

For large C&I customers, the Department proposes that each distribution company adopt the following three-month fixed-rate periods: (1) February through April; (2) May through July; (3) August through October; and (4) November through January (except at Unitil which under a long-standing approach already serves large C&I basic service through self-supply).

This will require all distribution companies to adopt the same six-month fixed-rate periods, "which will serve to minimize the differences in basic service rates that historically have occurred across the distribution companies," the DPU said

While the EDCs have different start dates for the winter pricing fixed rate period, none of the EDCs currently have the month of January in a different rate period from the month of February

The DPU noted that instances of self-supply increases the potential for a wider range of under- and over-recoveries of basic service costs

The DPU did not propose to modify the current reconciliation process under which all basic service reconciliations are nonbypassable

However, the DPU proposes to allow for more frequent basic service rate changes (within a "fixed" price period, e.g. an update to the fixed rate) if an EDC is using self-supply, if a threshold is met

If, as a result of a divergence in actual costs under self-supply versus the current rates (set by formulaic estimate noted above), an updated fixed rate calculated by a distribution company for a customer class differs from the existing fixed rate by more than a specified amount (a specific threshold amount has not yet been proposed by the DPU), the distribution company would be required to file with the Department a request to revise the existing rate.

The Department would not provide discretion to a distribution company on updating its fixed basic service rate.

The new basic service investigation (Docket 23-50) replaces the DPU's investigation under Docket 15-40, which had been pending but which has now been closed

In 15-40, the Department had put forth the following potential changes to basic service procurement to address these issues: (1) increase the number of solicitations in which the distribution companies procure basic service supply for residential and small C&I customers, in an effort to provide greater rate stability for customers; (2) provide the distribution companies with greater discretion to structure their basic service supply procurement practice in responses to market conditions, in an effort to reduce rates; (3) change the existing "all requirements" obligation (i.e., by procuring fixed amounts of supply), in order to insulate suppliers from fluctuations in basic service load and thus reduce supplier risk; and (4) procure basic service supply directly from the ISO-NE wholesale energy markets.

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