Pa. OCA Seeks Fixed Price Hedge for Pike County Default Service

The Pennsylvania Office of Consumer Advocate is seeking to include a 1 MW fixed price hedge for on-peak residential default supply at Pike County Light and Power, in contrast to the utility's proposal to continue to rely exclusively on the spot market for default service needs (P-2011-2252042).

Pike County's proposal to continue use of the spot market for default supply, for the period June 1, 2012 through May 31, 2014, was first reported by Matters (7/18)

OCA, however, believes that since the Direct Energy aggregation program has ended at Pike County, an alternative to the spot purchases is appropriate.

"The OCA submits that as Pike has now fully returned to the default service role and its residential default service load is better known, a more robust procurement plan is needed to achieve the goals of Act 129."

With about only 25% of residential customers on default service, the residential default service peak load is 1.7 MW, with annual sales for the 12 months ending June 2011 of 7,178 MWh (i.e., average load of about 1 MW).

However, OCA cited the "upward trend" of residential customers taking default service, from 650 (18%) in 2008 to 844 (23%) in 2011. OCA noted that the default service load is growing, in part, as Pike County adds new customers who are placed on default service at service initiation.

As previously reported, Pike County did not recommend any hedging of default service supplies given the premium which would be incurred, based on a historical analysis undertaken by the company comparing spot pries to expected hedged prices.

However, OCA said that only the year 2009 would have seen significant premiums associated with hedging, with premiums in other years estimated at only 2-3% for an on-peak, 50% hedge.

While substantial premiums would have been experienced had Pike County used a hedge in 2009, OCA dismissed these premiums as an "anomaly."

However, Direct Energy, in a brief supporting Pike County's filed plan, noted that OCA does not dispute the calculations of the premiums under Pike County's historical analysis, "and [OCA] even concedes that 'no one can predict with accuracy what will happen with the spot market prices over the next two years.'"

"Nonetheless, OCA witness Mr. Kahal argues that there is no future risk of a reduction in energy prices that occurred in late 2008/early 2009 that would result in a similar significant price premium passed on to default service customers," Direct noted, as Direct argued that OCA, "never seriously disputes that if the Commission attempted to redirect this risk to wholesale suppliers by directing PCL&P to purchase one year or longer full requirements contracts, then wholesale suppliers would have to factor risk into their bids and that such premium will be passed on to default service customers."

"The presence of these potential premiums or stranded costs, at any rate, render OCA's proposal inconsistent with the Competition Act's requirements regarding least cost over time," Direct Energy said.

Furthermore, while the "least cost over time" is a statutory requirement for default service plans, Direct Energy noted that "rate stability," which OCA said compels the hedging, is not a legal requirement of Act 129, and is merely a "consideration" that was raised by the Legislature in the non-binding "Preamble to Act 129," which is not part of the law itself.

Pike County also argued that, aside from excluding the 2009 premium from its analysis, OCA failed to consider the costs of hedging such a small volume of load via non-standard products.