Duke Energy Ohio ESP Stipulation A Step Backwards from Original Proposal, Forces Retail Suppliers to Subsidize Competitors

A settlement among most parties to establish Duke Energy Ohio's procurement and pricing of the Standard Service Offer (SSO) for the period January 1, 2012 through May 31, 2015 forces certain retail suppliers to subsidize their competitors, by jettisoning an innovative proposal to remove capacity from the generation rate, and instead instituting reliance on the PJM capacity auction for the 2015-16 delivery year.

See 6/20 story for background on the earlier proposed treatment of capacity

For the term of the instant electric security plan (through May 31, 2015), Duke Energy Ohio will continue to supply, indirectly, all capacity to its distribution customers, except for customers of any retail suppliers which opted out of the Duke Fixed Resource Requirement.

There is a minor change in the implementation of the FRR during the ESP, in that capacity costs will remain in the bypassable generation rate; however, as Duke Energy Ohio will be supplying all capacity at the PJM clearing price, the capacity costs for SSO and competitive supply customers will be identical, except for any retail suppliers which previously opted out of the Duke FRR.

Specifically, under the FRR during the term of the ESP, Duke Energy Ohio will supply capacity to PJM, which in turn will charge wholesale suppliers of SSO load, and retail suppliers of competitive load, for such costs, with the capacity priced at the Final Zonal Capacity Price (FZCP) for the unconstrained region of PJM.

Separately, Duke Energy Ohio will be entitled to additional capacity revenue, above the PJM clearing price, on a nonbypassable basis under the Electric Service Stability Charge (ESSR) Rider, with the amount totaling $330 million.

However, the hitch for retail suppliers, specifically, those which do not own generation in PJM, comes after the term of the current ESP, or the period starting June 1, 2015. The stipulation requires Duke Energy Ohio to provide notice to PJM that its load will participate in the PJM Base Residual Auction starting with the 2015-16 Planning Year, instead of assuming all capacity requirements for the service area as previously proposed.

This reliance on the Base Residual Auction for capacity discriminates against and negatively impacts non-asset owning retail suppliers, who are compelled by federal law to pay guaranteed revenues to generation, most of which is owned by one of their competitors in the retail market. The originally proposed continued use of the FRR plan beyond 2015, under which retail suppliers are not charged for capacity, would have ended this inequity.

Now, if approved by PUCO, retail suppliers will again be forced to line the coffers of their competitors, who can use such mandated capacity revenues to squeeze out non-asset owning retail suppliers. Aside from a penal opt-out process which is unworkable due to customer churn (e.g. the 5-year FRR), retail suppliers are compelled to buy capacity through the mandated PJM auction, which is dominated by the owners of former incumbent assets due such assets' history of depreciation. With few exceptions, such asset owners, which receive windfall capacity revenues regardless of whether a true market without mandated purchases would support such revenues, also own retail books.

In short, mandated capacity auctions, which will now include Duke Energy Ohio, favor asset-owning retail suppliers not because of their superior business model of vertical integration, but because of government rules which compel capacity payments to such entities. Asset-owning retail suppliers, flush with capacity revenues not needed to operate most of their generation assets (which can be sufficiently sustained on energy market revenues) can use this excess cash to: buy up competing retail suppliers; engage in more expensive but more effective marketing channels for organic customer growth; or ultimately, offer lower retail electric rates than their competitors with such lower rates subsidized through capacity revenues which their competitors must pay.

Procurements and Retail Rates
Turning back to the structure of SSO procurements for the period through May 31, 2015, Duke Energy Ohio will utilize competitive descending clock auctions to acquire default service supply, in a fashion largely similar to its original proposal (see 6/21).

Contracts will be for slice of system, load following, full requirements (excluding renewables and NITS) supply, with term lengths varying from 12 to 41 months in a staggered portfolio. Duke Energy Ohio, which will eventually separate its generation from the utility, shall not compete in the SSO auctions during such time as it is receiving revenues from customers on a nonbypassable basis to support such generating assets, with the assets' output sold into the PJM market or sold bilaterally.

A load cap of 80% shall apply in the SSO auctions.

The bypassable generation rate will consist of:

• Rider RC (Retail Capacity, priced at the PJM market price as discussed above);

• Rider RE (Retail Energy, with costs determined via descending clock auctions and including market-based transmission and ancillaries);

• Rider SCR (Supplier Cost Reconciliation, which includes reconciled generation costs which can become nonbypassable as discussed below);

• Rider AER-R (Alternative Energy Recovery, reflecting costs of renewable compliance)

• Rider RECON (a temporary rider reflecting a reconciliation of prior bypassable costs under the old electric security plan, which shall cease two quarters after a final PUCO order auditing prior ESP revenues)

Riders RC and RE will be set annually, but with a seasonal adjustment. Rider SCR and Rider AER-R will be filed quarterly.

Rider SCR will recover any difference between SSO retail rates and actual wholesale costs, as well as costs for administering procurements and costs from any supplier defaults. Rider SCR will be nonbypassable unless its balance reaches 10% or more of Duke Energy Ohio's total SSO revenue, at which time the rider will become nonbypassable.

Percentage of Income Payment Plan customers will remain retail generation customers of Duke Energy Ohio, but shall be supplied under a bilateral contract with FirstEnergy Solutions, priced at 5% less than the residential price to compare, excluding Rider AER-R.

For the term of the ESP, a revenue-neutral nonbypassable demand charge and nonbypassable energy credit will be established to stabilize rates and enhance benefits to high load factor customers. For rates DS, DP, and TP there will be a nonbypassable charge of $8 per kW per month and a nonbypassable credit of 2.0961 cents per kWh.

Retail Market Enhancements
The stipulation would require Duke Energy Ohio to, at the retail supplier's election, purchase the supplier's receivables at zero discount. Retail suppliers may designate some accounts for POR while retaining the right to exclude other accounts from POR, and may either dual bill, or use utility consolidated billing, for those accounts excluded from POR.

A largely nonbypassable uncollectible expense rider shall be charged to customers to reflect generation-related uncollectibles from both SSO and POR service. This Rider (Rider UE-GEN) shall be bypassable for accounts not included in POR.

Duke Energy Ohio will eliminate the current prohibition on participation in POR for accounts with arrearages of more than $50 or 30 days.

Duke Energy Ohio shall also work with retail suppliers to develop a secure website to access customer usage and account data. Customer addresses shall be made available in this manner by June 1 2012, and a host of other information (including 24 months of various data, PLC and NSPL values, and rate code and load profile indicators) by June 1, 2014. A shopping status indicator shall be added to the pre-enrollment list by June 1, 2012.

The stipulation provides for supplier sync lists, and that additional data be made available via EDI.

Bill ready billing shall be made available as soon as commercially and reasonably practicable, but no later than September 30, 2013. The per-bill charge for consolidated, bill ready billing shall be reduced to 50% of the currently tariffed rate. No charge per bill will be imposed for rate ready consolidated billing.

The switching fee shall be reduced to $5 from $7.

All energy efficiency programs and rebates shall be made available on the same terms to customers regardless of shopping status. Competitive supply customers will also now be eligible for Duke Energy Ohio's interruptible tariff while still on competitive supply.

Signatories to the stipulation included Duke Energy Ohio, PUCO Staff, Ohio Consumers' Counsel, Retail Energy Supply Association, FirstEnergy Solutions, Constellation NewEnergy, Direct Energy, AEP Retail, Vectren Retail, Duke Energy Retail Sales, Interstate Gas Supply, several industrial groups, the Compete Coalition, PJM Power Providers Group, Wal-Mart, and other parties. Certain parties only joined the stipulation in part, but do not oppose the section to which they did not agree.