Stomach Punch: Recommended Decision to Subject Shopping Customers at PPL to Migration Rider

A Pennsylvania ALJ would subject customers leaving default service at PPL Electric Utilities to a migration rider, similar to those in place at Pennsylvania's natural gas distribution companies, to recover (or refund) under/over-collections which accumulated during their time on default service (P-2011-2256365).

Such under/over-collections are currently included in the bypassable Price to Compare (PTC), and result from a misalignment between revenues under the Price to Compare and actual cost of default service. Under-collections, therefore, mean the default service rate was set at a level below actual cost.

Under the recommended decision, the amount of the under/over-collection would be removed from the Price to Compare, and would no longer be bypassable for newly shopping customers. In other words, newly shopping customers would still be responsible for paying a share of default service costs.

PPL's proposal for a migration rider was first reported in Matters.

Though not final and subject to modification by the Commission, the recommended decision is yet another example of PUC policy not living up to the lofty rhetoric of its commissioners with respect to supporting a competitive retail market (similar to the pending recommended decision favoring market-timed portfolio purchases at Pike County).

Additionally, Matters would note that: (1) the PUC has consistently refused to eliminate migration riders in the gas market, and (2) PUC Staff said that a migration rider, in principle, has merit, though Staff objected to the inclusion of Time of Use program costs in the PPL proposal.

Most notable is the following analysis from the ALJ:

"While the higher PTC may promote shopping, it does not result in a fair price to the default service customers, which is also a requirement of the Competition Act, as well as a standard goal to ratemaking in general. The Commission not only fosters competitive markets, but it balances the needs of the consumers with utilities to ensure safe and reliable utility service at reasonable rates. That balance is not limited to the consumers who shop. There are default service customers who do not or cannot shop, and there is simply no basis for charging them unfairly because of their circumstances. Default service prices must cover the cost of delivering default service but they must still comply with the statutory requirement that 'every rate made, demanded, or received by any public utility ... shall be just and reasonable ....' In other words, they may not be unfairly inflated to encourage customers to leave default service." [citations omitted]

Had the recommended decision not been labeled as related to a Pennsylvania proceeding, a reader might have thought it was something coming out Maryland, with the "inflated" discourse mirroring the arguments of ALJs in Maryland who are seeking to remove the bypassable administrative charge from SOS rates (in proposed orders that remain pending).

Also notable is that in Maryland -- certainly not a state where regulators can be accused of promoting shopping at the expense of non-shopping customers -- the reconciliation of SOS costs is fully bypassable (under the procurement cost adjustment or energy cost adjustment).

Specifically, the ALJ's recommended migration rider at PPL would impose default service under/over-collections on newly shopping customers for the time during which they were on default service under which the under/over-collection occurred, for up to 12 months after they leave default service for competitive supply. The migration rider, to be known as the reconciliation rider, will be applied on a 12-month rolling period, with the reconciliation rider (RR) amount updated quarterly.

Currently, the fully bypassable reconciliations are performed quarterly.

"A chart supplied by OSBA [Office of Small Business Advocate] highlights how the quarterly reconciliation has a long-term negative effect on both the PTC and rates for the default customers. Regardless of whether remaining with default service is a good idea, those who do so for whatever reason are entitled to rates which are fair and which represent the cost of the commodity," the ALJ said.

"Once the RR is in place, the correct PTC for a new default service customer will not include the reconciliation amount. This makes sense, because a new customer will not pay the reconciliation amount. Existing customers will have the reconciliation amount added to the PTC, and customers new to shopping will have the same fee. After the reconciliation, the amount to be refunded or added to the bill will appear as a separate line item on the bill," the ALJ recommended.

"It is difficult to see how this mechanism can be harmful to competition when continuing default service customers and those new to competition will pay or receive the same reconciliation amount. Shopping customers will pay or receive it for a set period of time, after which time, the line item will disappear. This is no more confusing than figuring out which EGS will provide the best prices and contract terms," the ALJ said.

"The RR should make the PTC simpler and easier to understand because it will remove from the PTC all balances arising from reconciliation and will more accurately reflect the actual cost to acquire default service," the ALJ said.

The ALJ noted that the "pro-ration" of generation rates in January 2010, as the billing cycle crossed the date where the new (uncapped) default service rules took effect, caused PPL to count a full month of expenses against only two weeks of revenues. "This created a deficit which was magnified when the reconciliation was calculated quarterly instead of the more common annually, and the high deficit, coupled with the customers' exodus to competitive generation suppliers, left both an inflated PTC and a dwindling number of customers to pay the reconciliation shortfall," the ALJ said.

In a separate (non-consolidated) but related case concerning the specific reconciliation of the GSC-1 rates (M-2011-2243137), OSBA described the situation thusly:

"Beginning January 1, 2010, PPL distributed electricity procured under the CBP [competitive bridge plan] to meet the needs of its default service customers. Pursuant to PPL's reconciliation accounting method, the Company recorded the costs associated with those purchases, i.e., the amounts paid to the wholesale suppliers plus the approved administrative charges and the GRT. Thus, PPL recorded an entire month of costs in January 2010

"However, revenues in January 2010 were handled differently. PPL recorded only about 15 days of billed revenues rather than 30 days of earned revenues. Because PPL's billing cycle does not follow a calendar month, roughly half of the revenues billed in January 2010 were for electricity supplied in December 2009. The January 2010 revenues associated with December 2009 consumption were 'pro-rated' to December 2009. Thus, only approximately 15 days of revenue billed in January were for January consumption. The other 15 days of January consumption were subsequently billed in February. Although PPL earned an entire month of revenue in January, only 15 days of billed revenue were recorded for reconciliation purposes in January. By the end of February 2010, PPL had incurred costs for two full months; it had billed for all of the January service, but had only billed for approximately half of February. This pattern continued throughout 2010.

"At the end of 2010, however, PPL did not pro-rate January 2011 billings to December 2010 in the same manner as it pro-rated January 2010 billings to December 2009. Therefore, at the end of 2010, PPL reported 12 months of costs and 11 ½ months of billed revenues, rather than 12 months of earned revenues. This resulted in a substantial reported 2010 'undercollection.'"

Despite the acknowledgement in the reconciliation rider case of the role that the initial switch to uncapped rates and pro-ration due to the billing cycle played, the ALJ dismissed as "pure speculation" arguments that the current under-collections were a one-time problem, and not likely to recur.

Furthermore, despite the ALJ's purported concern with cost causation in justifying the application of the reconciliation rider to newly shopping customers, the recommended decision would provide a subsidy to PPL's Time of Use customers, by assigning under-collections under the TOU generation program to the reconciliation rider to be paid by default service and newly shopping customers (provided the TOU costs are deemed reasonable in a separate proceeding). In other words, TOU customers who greatly benefited from rates which were well below the cost of serving them will be bailed out by not only other default service customers, but newly shopping customers as well.

The ALJ nonetheless reaches the conclusion that the TOU costs should be rolled into the reconciliation rider because they constitute default service costs, as the electric distribution company, "is required to implement the TOU program as part of the default service program."

"Once some measure of those [TOU] costs has been determined to be recoverable, that amount should be added to the RR for the rate classes which participate in the TOU program," the ALJ said.

The ALJ also said that the reconciliation of the large commercial and industrial classes shall be separate.

The ALJ would deny PPL's sought competitive transition rider, which would have been a fully nonbypassable charge for all of its under-collections accumulated January 1, 2010 through May 31, 2012. This competitive transition rider would have applied to all customers, regardless of when they left default service.

"Unlike the RR, where there is a scrupulous effort to assign the over/under collection to the ratepayers using the corresponding electricity as default customers, this [competitive transition rider] mechanism, as described, does not differentiate between default and shopping customers or make an attempt to align cost causation with the parties responsible for the costs. On its face, it appears to violate the statute and the regulation requiring the cost of default service to be borne by the default service customers," the ALJ said, in recommending that the charge be denied.

In OSBA's complaint in Docket M-2011-2243137 concerning the specific reconciliations computed by PPL, the same ALJ, in a separate recommended decision, would find:

- That the Complaint of the Office of Small Business Advocate is granted insofar as it seeks a determination that the accounting method used by PPL Electric Utilities Corporation which did not include two weeks of revenues in January 2010 but did include the entire month's expenses was inappropriate for the purposes of Section 1307(e).

- That the Complaint of the Office of Small Business Advocate is granted insofar as it seeks to require PPL Electric Utilities Corporation to reconcile the GSC-1 rate class annually.

- That the Complainant of the Office of Small Business Advocate is granted insofar as it seeks Commission direction to its Bureau of Audits to conduct an audit of PPL Electric.

The ALJ would direct the Bureau of Audits to:

a. Conduct a thorough audit of PPL's GSC-1 expenses and revenues beginning January 1, 2010 to the present day;

b. Audit the annual reconciliation proceedings and determine if PPL's calculations and supporting data are correct or if matching the expenses with revenues of the same time period result in a different result;

c. Report the results at the Company's 1307(e) reconciliations.

The ALJ said that it is premature to address OSBA's request for refunds, and said that the issue will be addressed by the Commission following the receipt of the audit.