Citing Failure of RPM, PUCO's Roberto Questions if Retail Competition is in Public Interest, as PUCO Adopts Duke Energy Ohio ESP Settlement

The Public Utilities Commission of Ohio approved, without modification at this time, an unopposed stipulation to establish an electric security plan governing default service at Duke Energy Ohio for the period January 1, 2012 through May 31, 2015, though PUCO expressed concerned about the use of multiple descending clock auctions per year to procure future Standard Service Offer supplies.

As previously reported, highlights of the settlement include the transfer of Duke Energy Ohio's generation assets to a competitive affiliate, and the use of descending clock auctions to obtain full requirements supply to serve Standard Service Offer (SSO) load.

Commissioner Cheryl Roberto issued a concurring opinion in voting to approve the settlement, citing the failure of RPM to build new baseload generation, and, as a result, expressing misgivings that, "reliance on retail electricity competition may not be in the public interest" [emphasis added].

Roberto's dissent and the blame assigned to retail competition for the unworkable capacity market in PJM -- even though it is asset owners and not retail suppliers who pushed for and reap the windfalls of RPM -- is yet another indication of the threat the Reliability Pricing Model, which is in no way a requirement for or even a facilitator of retail choice, poses to the continued success of customer choice -- an unmistakable conclusion many in the industry (especially those retail suppliers owning generation) are unwilling or unable to admit.

The initial Duke Energy Ohio SSO auction under the new electric security plan, to take place in December 2011, will be for multiple products of 17-month, 29-month and 41- month duration, with each product representing approximately one-third of the SSO supply.

As proposed in the stipulation, this initial auction would be followed by multiple auctions planned for 2012 to replace the 17-month product expiring at the end of May 2013, and multiple auctions planned for 2013 to replace the 29-month product expiring at the end of May 2014.

"Given the record evidence of significant shopping levels in Duke's service territory, the Commission is concerned that the remaining level of SSO load in years 2012 and 2013 may not be sufficiently large to justify holding multiple descending-clock auctions each year, pursuant to the planned schedule," PUCO said.

"Conducting these auctions is time consuming and costly, for both the company and the auction participants. The Commission would like to determine if there are more cost-effective methods to procure the necessary supply, while assuring broad bidder participation and procurement of the supply at minimal cost."

"Alternatives could include, among other things, combining the planned multiple auctions into single annual auctions, or conducting the solicitations pursuant to an RFP," PUCO said.

PUCO directed the auction manager and the Commission's consultant to file reports setting forth their evaluations and recommendations on this issue by January 20, 2012. Interested parties may file comments on the reports by January 27, 2012, and reply comments by February 3, 2012.

This expedited timeframe will allow the Commission to consider the information provided and issue a timely decision well in advance of the planned May 2012 auction, PUCO said.

SSO Structure
SSO load shall be served under competitively sourced contracts 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);

• 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 bypassable unless its balance reaches 10% or more of Duke Energy Ohio's total SSO revenue, at which time the rider will become nonbypassable.

Unlike in Duke Energy Ohio's original proposal, retail suppliers will remain responsible for the capacity obligation of their customers, and capacity shall be a bypassable cost included in the bypassable generation rate. During the reminder of Duke Energy Ohio's Fixed Resource Requirement plan, capacity shall be priced, for both retail suppliers and SSO suppliers, at the RPM clearing price. Upon expiration of the FRR plan, capacity needs for the territory shall be met through the Reliability Pricing Model auction.

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 adopted stipulation requires 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.

Roberto Concurrence
As noted above, Commissioner Cheryl Roberto issued a concurring opinion in approving the settlement, expressing concern about the development of baseload generation under the RPM market.

"I write separately to give voice to my apprehension that a truly competitive retail market in electricity, with our current technology, is an illusion. Fundamentally, I agree that load-following and peaking generation has reached the stage that competition is possible and that competition in this realm can thrive. Markets for demand response and energy efficiency bolster the competition in meeting these generation needs. Thus, I am fully supportive of competition to meet generation needs for load-following and peaking," Roberto said.

"However, I see no real economic potential, with our current technology, that baseload generation will be built in a competitive environment prior to the market experiencing damaging and painful shortages. Investment in base-load generation is tremendously capital intensive and cannot reasonably be achieved in modular fashion (with the exception of plant efficiency investments which can provide additional generation in an incremental fashion within incumbent generation facilities). It requires a huge commitment in capital that in a competitive environment is simply too risky without a benefit to cost ratio that can only be achieved when shortages exist. At that point, the time that it will take to plan, site, finance and build generation will only add to upward price pressures and economic damage to customers. Without the ability of competitors to enter freely the market for base-load generation, a truly competitive retail electric market cannot exist. In fact, with the current Reliability Pricing Model (RPM), incumbent generators reap RPM payments to prop up existing generation while those same RPM markets are insufficient in predictability or term to support investment by new entrants," Roberto noted.

"The current relatively low electricity rates offered in recent auctions for retail service represent one of the few silver linings in the storm clouds of our country's current sluggish economy. These rates are projected to rise, as the forward price curves submitted without contradiction in this matter do. In fact, even inside the window of this Electric Security Plan, the market is projected to be significantly higher than a price that would result from a regulated environment. When the economy recovers, electricity prices will rise and customers will be fully reliant on the market to meet generation needs," Roberto continued.

"Because, however, as a Commission, it is our responsibility to implement the regulatory structure prescribed by statute, I join my colleagues in adopting this stipulation which is designed to accomplish the given goal of relying upon retail electric competition to meet the comprehensive needs of Ohio's residents and commercial and industrial enterprises - despite my misgivings that reliance on retail electricity competition may not be in the public interest," Roberto concluded (emphasis added).

It must be stressed that all of the flaws Roberto cited with respect to new baseload generation (inability to clear RPM while fully depreciated assets enjoy windfalls) have nothing to do with retail competition, yet Roberto is assigning all of the baggage and fault of RPM to retail choice.

Indeed Duke Energy Ohio's original electric security plan filing included an innovative proposal which would have incubated retail competition while allowing new baseload generation to be built -- by removing capacity as a competitive service and treating it as a societal benefit for all customers on the distribution system (similar to, for example, the treatment of renewable generation obligations in New York, which are imposed on distribution customers and not specific LSEs).

Under Duke Energy Ohio's original proposal, retail suppliers would have been freed from the obligation to procure capacity on behalf of their customers, allowing retail suppliers to compete in offering services where there truly can be competition, due to the variety of physical and financial products for generation supply. In contrast, all retail suppliers can do with capacity is pass through to the customer the cost of their mandated obligation to serve a customer-specific tag, which the retail supplier may acquire well after the auction for capacity, without any customization or differentiation in the capacity product provided to the customer.

As retail suppliers cannot customize the capacity product assigned to customers, and since retail suppliers are obligated to procure the capacity product called for in the PJM tariff, there is nothing inherent in the current RPM construct that makes capacity a competitive retail product, and retail competition would in no way be harmed if capacity were removed from the competitive retail rate, as called for under the original Duke Energy Ohio proposal.

Continued reliance on the RPM market is, has always been, and will continue to be, a threat to the success of retail competition, because of the reactions embodied in Roberto's dissent. Unable to address the capacity market due to FERC's jurisdiction, state regulators frustrated with the continued transfer of wealth to capacity suppliers will take the only remedies available to them, which is altering their retail electric markets which are free from federal control, and, as Roberto intimates, eliminating retail choice.