Pennsylvania PUC: Single Product Can Meet Statutory Requirement for "Prudent Mix" of Default Service Supply

In accepting the continued exclusive reliance on the New York ISO spot market for default service at Pike County Light and Power, the Pennsylvania PUC made a finding with implications for not only future default service proceedings, but the PUC's investigation of the continued future of default supply, and possible use of retail suppliers to fill the default supplier role (P-2011-2252042).

The PUC's written order confirms, as first reported by Matters yesterday, that the Commission rejected the use of a 1 MW hedge for Pike County Light & Power default service as proposed in a recommended decision, and ordered that Pike County default service shall be served entirely under the NYISO spot market.

One of the PUC's key findings regarded the "prudent mix" standard required of default service plans under Act 129.

"Here, the Commission must determine whether a 'prudent mix' of contracts may include only one product if that product is the least cost over time. Upon review, the record establishes that requiring Pike to follow the [hedged] procurement approach advocated by the OCA [Office of Consumer Advocate] would produce an unreasonable result: namely, higher prices with little or no customer benefits. Thus, the OCA's recommended approach of spot purchases plus hedging does not appear to comply with least cost procurement. In contrast, we believe the record establishes the prudency of Pike's proposed spot market approach in this unique case, which the record demonstrates meets the statutory requirements, including least cost over time. We find that a prudent mix can include only one product when it is the option most likely to produce the least cost over time," the PUC said [emphasis added].

The Pike County case is the first default service proceeding adjudicated since the PUC codified regulations implementing Act 129, and thus serves as important precedent for the ongoing default service cases of all of the major EDCs which are presently before the PUC.

However, the PUC's conclusions may also support later findings with respect to default service provided by entities other than the utilities.

First, while noting the unique record in the case, the PUC has said that a single product meets the Act 129 prudent mix standard if it is, "the option most likely to produce the least cost over time." By extension, the PUC's language suggests that so long as the source of default supply, "is the option most likely to produce the least cost over time," such supply constitutes a prudent mix.

Accordingly, if retail suppliers assumed the default service role, if the PUC found the retail suppliers' offerings to be the option most likely to produce the least cost over time, the PUC could find that the retail suppliers' portfolio to serve default service customers meets the prudent mix standard, regardless of how the retail suppliers assembled the portfolio and whether it included single or multiple products, and whether long-term products were included.

There are still differences between the Pike County case and any potential retail supplier-offered default service, of course, most notably in that, in Pike County, the PUC reached its least cost over time conclusion based on knowing the specific procurement plan of the default service supplier (reliance on spot market), while with respect to retail supplier-offered default service, there is a question of how the PUC could make an evidentiary finding regarding least cost over time if the retail suppliers do not propose specific procurement methodologies (several retail suppliers have said that if the PUC approves retail supplier-offered default service, procurement plans should not be subject to Commission approval).

Nonetheless, the PUC's findings in Pike County bode well for interpreting Act 129 in a way that could allow retail supplier-offered default service.

Turning more to the specifics of Pike County, the PUC said that the recommended decision's use of a 1 MW hedge was inappropriate given the small number of customers remaining on default service (only 27%).

"We agree with Pike that, while its default service customer base has decreased over recent years, the costs of hedging supply for these remaining customers has and may continue to increase on a per-customer basis. The remaining default service customers are already at risk of increased cost responsibility if their number declines by any significant degree, so to add the cost risk of a financial hedge would serve only as an increase in cost responsibility," the PUC said.

"While we are concerned about price volatility and how it impacts a customer's bill, as is the OCA, we support the Company's position that the cost of a financial hedge against spot market price volatility could be more costly to default service customers than a change in the spot market price of energy. Further, Pike clarified in its Exceptions that the delivery charge, the tax components, the capacity and ancillary services portion of the supply costs, and the remaining on-peak and off-peak energy costs at market would not be affected by the OCA's hedging proposal. Also, the financial hedge proposed by the OCA would impact only one quarter of a customer's monthly bill," the PUC said in denying the hedge.

The PUC further said that the ALJ placed too great an emphasis on Act 129's preamble, which cites price stability, in concluding a hedge was appropriate. The rules of statutory construction dictate that the findings and declarations found in the Preamble of a statute do not take precedence over the specific statutory provisions contained in the law, but the rules of statutory construction provide that the Preamble may be considered in the construction of a statute, the PUC noted.

"In our Act 129 Final Rulemaking Order, we found that a default service plan that meets the least cost over time standard should not have, as its singular focus, the achievement of the absolute lowest cost over the default service plan time frame but rather a cost for power that is relatively stable and also economical relative to other options. We do not support the OCA's and the ALJ's position that Pike must employ a financial hedge to meet this objective. The creation of a supply portfolio for default service need not be burdened with the cost of a financial hedge for the sole purpose of adding an envisioned stability to the default service rate. Accordingly, we find that the ALJ relied too heavily upon the Preamble to Act 129 in recommending that Pike employ a financial hedge within its default service portfolio," the PUC said.