Ohio Consumers' Counsel: Uncertainty in ATSI Zone Augurs Against Three-Year Default Supply Contract

"[E]xtraordinary uncertainty about future market conditions and prices," in the American Transmission Systems Inc. zone, in which the FirstEnergy Ohio distribution companies are located, augurs against the use of 36-month supply contracts procured in October 2012 and January 2013 to serve default service load beginning June 1, 2013, the Ohio Consumers' Counsel said in testimony.

As previously reported, as part of a non-unanimous stipulation for an electric security plan (ESP) for the term June 1, 2014 through May 31, 2016, stipulating parties, which include the FirstEnergy EDCs, PUCO Staff, and industrials, propose to modify a procurement under the current ESP such that 36-month default service supply contracts would be procured in October 2012 and January 2013 to serve a portion of SSO load for the period starting June 1, 2013, rather than procuring only a 12-month contract for the term June 1, 2013 through May 31, 2014.

OCC, in testimony from James Wilson of Wilson Energy Economics, noted that ATSI has now been modeled as a separate pricing zone for Reliability Pricing Model purposes (resulting in the divergent clearing price noted yesterday), and that, most importantly, the retirement of several major power plants serving the region has been announced.

"It is too soon to know the impact of the loss of generation, the timing and extent of transmission upgrades, the market reaction to provide new generation, demand response and energy efficiency, and the resulting supply-demand balance for this zone, in particular for the 2013-2016 period. Accordingly, these circumstances result in substantial uncertainty about future energy, ancillary services and capacity prices for the ATSI zone," OCC said.

These developments, along with the constrained nature of the zone, "create[] unusual risks for potential bidders in the auctions to be held in October 2012 and January 2013, which could reduce competition and raise offer prices," OCC said.

While the FirstEnergy EDCs have testified that the use of the three-year product represents an attempt to lock-in expected low prices, "this alleged benefit of the proposed change is doubtful," OCC said.

"First, it ignores the enormous uncertainty and risk, described above, resulting from the impending generation retirements and possibility that the ATSI zone will be a constrained zone with higher energy and ancillary services prices over the coming years. Second, it rests on the fallacious assumption that current low prices can be locked in for future years. Offer prices will reflect the forward curve, for which the trend has been downward. The forward curve reflects market participants' expectations of the future value of the commodity, and can move upward or downward from any point in time as new information becomes available and expectations change," OCC said.

While OCC said that, in general, including a three-year product will tend to smooth out generation costs, reducing consumers' exposure to the ups and downs of generation prices and forward expectations, "in light of the present and anticipated circumstances in the ATSI zone, it is not clear that the FE Companies' [EDCs'] proposal is advantageous at this time. The enormous changes in the zone and uncertainty about future supply conditions create significant uncertainty and risk for potential bidders in these auctions, especially for the out years, and this could result in higher risk premiums and generation prices," OCC said.

"The FE Companies' proposed change to a three-year product may not be in the interest of consumers at this time, and it may be more advantageous to acquire a two-year or one-year product in the auctions to be held in October 2012 and January 2013," OCC said.

OCC also testified that the cited risks are more acute for potential bidders with resources located outside of the ATSI zone. "If there are transmission constraints into the ATSI zone, such bidders would be exposed to congestion costs to serve loads in the ATSI zone. The uncertainty and risk of congestion costs will likely lead such bidders to raise their offer prices into the generation auctions, or even decline to participate, leading to higher clearing prices in the auctions," OCC said.

"Entities with resources located in the ATSI zone are less affected by the possibility of transmission constraints and congestion costs. Therefore, the proposal would appear to benefit the FE Companies' affiliate, FES [FirstEnergy Solutions], that owns most of the generation located in the ATSI zone. At the same time, FES stands to benefit from the higher auction clearing prices that will result from these uncertainties and risks that cause other bidders to raise their offer prices," OCC said.

In testimony from additional witnesses, OCC recommended that the ESP be rejected because it is not more favorable than expected results under a Market Rate Offer. OCC found the MRO to be more favorable in the aggregate than the ESP by $16 million, which results from OCC removing the claimed benefit of serving Percentage of Income Payment Plan customers at a 6% discount (as OCC said the PIPP load may be bid out at a discount under the MRO as well) and removing the benefit associated with the EDCs not charging customers $360 million in regional transmission expansion planning costs (as this commitment was made under ESP 2 and OCC said that it should not be double counted).

The Northeast Ohio Public Energy Council and the Northwest Ohio Aggregation Coalition said that, according to a discovery response from the EDCs, when the benefit of not recovering legacy regional transmission expansion planning costs is excluded from the benefits of the ESP, the ESP would be less favorable than an MRO by $7 million, on a net present value basis.

Retail Suppliers Seek POR, Other Enhancements
The Retail Energy Supply Association and Direct Energy Services, Exelon, and IGS Energy all presented testimony seeking a purchase of receivables program at the FirstEnergy EDCs.

Exelon said that the program should not have a discount, and should be open to residential and small commercial customers on EDC consolidated billing.

RESA called the lack of a POR program the "largest barrier" to retail competition in the FirstEnergy Ohio territory.

"A POR program would be one of the most significant steps the Commission could take to encourage more CRES [suppliers] to enter into the FirstEnergy market and help remedy the barriers to competition that are against the regulatory principles or practices that guide the Commission," RESA said.

IGS Energy noted that POR is essentially in place for governmental aggregation suppliers, since the EDCs must assure full recovery of all costs related to the aggregation supplier's recovery of its receivables. The EDCs may recover the costs of any accrued government aggregation receivables through a nonbypassable rider, IGS Energy noted.

"Because CRES suppliers are either directly or indirectly competing with aggregation suppliers to serve the load of customers, there are anticompetitive effects of benefiting one set of suppliers over the other," IGS Energy said.

Retail suppliers also sought implementation of supplier consolidated billing and various enhancements to customer information made available to suppliers.

RESA opposed the proposal in the stipulated ESP to extend the recovery period for bypassable alternative energy compliance costs.

"[T]he ESP proposal would artificially depress the alternative energy rider ('AER') between 56 and 65% of what it otherwise would be without this special treatment in the near term, then collect it subsequently. CRES [suppliers] shoulder the same alternative energy compliance requirements as FirstEnergy for its standard service, but CRES have no ability to manipulate customer compliance costs with guaranteed recovery similar to what FirstEnergy is proposing. Approval of the Stipulation would skew FirstEnergy's price to compare compared to CRES offers and therefore artificially dampen shopping in violation of the Commission's important policies and principles related to furthering the competitive marketplace in Ohio," RESA said.