OSBA: Retail Opt-In Auction Unlawful Under Pennsylvania Law

A retail opt-in auction in Pennsylvania would be "unlawful" because it would prevent the offering of default service at the, "least cost to customers over time," as required by statute, the Office of Small Business Advocate said in comments to the PUC (I-2011-2237952).

In a tentative order (see 10/17), the PUC would recommend that distribution companies incorporate an opt-in retail auction into their next default service plans.

However, OSBA argued that because of the uncertainty about the ultimate size and profile of the default service load in territories where an opt-in retail auction also exists, "wholesale suppliers would likely include a significant migration risk premium in their bids on full-requirements contracts, both for the year in which the opt-in aggregation would be in effect and for the first year thereafter."

"This risk premium would inflate default service rates, thereby preventing the DSP [default service provider] from meeting its obligation under Act 129 to 'ensure least cost to customers over time,'" OSBA said.

Under an auction proposal from retail suppliers, a small commercial and industrial customer could voluntarily choose to leave default service and be randomly assigned to an electric generation supplier as part of an aggregation of small commercial customers. The customer would receive a pre-established, one-time "signing bonus" (such as $100, payable if the customer remained with the supplier for at least three months), and would pay a generation rate based on a market clearing price for the opt-in customer group.

At the end of the first year, the customer would remain with the supplier to which it had been randomly assigned unless the customer acted affirmatively to switch to a different supplier or to return to default service. If the customer remained with the supplier to which it had been randomly assigned, the future terms and conditions of service would be at the discretion of the supplier.

OSBA noted that under the currently contemplated schedules, at least one full requirements procurement for the default service period June 1, 2013 through May 31, 2014 would occur before customers opt into the auction during the March 2013 through May 2013 timeframe. Moreover, small commercial customers that participate in the opt-in auction would be permitted to return to default service at any time during the first year of the aggregation (i.e., at any time from June 1, 2013, through May 31, 2014). "Significantly, they could do so after three months (i.e., at any time after August 31, 2013) without forfeiting the $100 signing bonus," OSBA said.

Furthermore, OSBA said that the opt-in auction would deprive customers of "real" choice, particularly with respect to offers after the initial year of service under the auction.

"In theory, each Small C&I customer (including one with an unattractive load profile, e.g., a customer with a low load factor or with a 'peakier' consumption pattern than the average customer in the same procurement group) would receive offers from other EGSs to help the customer evaluate whether to remain with the randomly-assigned EGS, move to a different EGS, or return to default service. However, there is no evidentiary record to support a Commission finding that such a Small C&I customer would actually have competitive alternatives for the second year. For example, one purported 'justification' for the opt-in auction proposal is that it is too costly for EGSs to attract Small C&I customers through mass marketing or through individual customer contacts. If such marketing actually is too costly, there is no basis for concluding that an EGS would market to a Small C&I customer of another EGS for service in the second year or subsequent years," OSBA said.

Furthermore, the auction proposal from suppliers would be a one-time auction (with winners retaining customers not making an affirmative selection to leave after one year).

As OSBA put it, "an EGS would be able to retain customers through inertia."

"In fact, a one-time auction could become a mechanism by which EGSs divide up the shopping customers among themselves, thereby reducing competition rather than increasing it," OSBA said.

OSBA said that there is no need to "jumpstart" the small commercial market through an auction given that about 56% of the small commercial and industrial load is already being served by retail suppliers.

"The implicit assumptions underlying the opt-in auction proposal are that it is too costly for EGSs to attract smaller customers through mass marketing and through one-to-one selling and that these smaller customers require an extra incentive to shop (e.g.. a $100 signing bonus). Those assumptions are inconsistent with shopping statistics provided to the opt-in auction subgroup by PECO and PPL. Specifically, PECO reported that 37% of its smallest Small C&I customers, i.e., those with maximum peak loads of 0-25 kW, are shopping. Similarly, PPL reported that 33% of its Small C&I customers with maximum peak loads of 0-25 kW and 67% of its Small C&I customers with maximum peak loads of 25-300 kW are shopping," OSBA said.

"The PECO and PPL statistics show that the business plans of some EGSs are already succeeding. EGSs which are not successfully marketing to the smallest Small C&I customers should adopt the marketing approaches that are working, instead of jeopardizing default service through an opt-in auction with a $100 signing bonus," OSBA argued.