Pennsylvania ALJ Recommends Use of 24-Month Contracts for Commercial, Residential Default Service

A Pennsylvania ALJ has recommended exclusively using 24-month contracts for the full requirements portion of the non-hourly default service portfolio at Met-Ed, Penelec, Penn Power and West Penn Power, and has recommended denying a bypassable retail adder proposed by the companies.

The ALJ's recommended decision addressed the FirstEnergy electric distribution companies' default service plan for the period June 1, 2013 through May 31, 2015.

As first reported by Matters, for both residential and commercial customers, the FirstEnergy EDCs had proposed to serve 90% of default service load through full requirements contracts lasting 24 months in length. Two procurements would be held for the 24-month full requirements contracts: in November 2012 and January 2013.

The companies proposed that the remainder of default service residential load at Met-Ed, Penelec, and Penn Power would be served by spot purchases priced at the hourly PJM LMP, and by an existing 50 MW block energy product from their prior default service plan. The remainder of default service residential load at West Penn Power, and commercial load at all four EDCs, would be served by spot purchases priced at the hourly PJM LMP.

The ALJ agreed with this proposal, rejecting intervenors' recommendations for shorter-term full requirements products.

"The procurement length of twenty-four months is consistent with both the Public Utility Code's requirement for a 'prudent mix' of default supply contracts and the Commission's guidance for default service plans for the June 1, 2013-May 31, 2015 period," the ALJ said.

"I agree with the Companies that shorter contracts are unnecessary under the Companies' programs for both the Residential and Commercial Customer Classes," the ALJ said.

Furthermore, the ALJ recommended adoption of the proposed procurement dates of November 2012 and January 2013, rather than alternative proposals of procurements closer to the delivery date of June 1, 2013 (such as January and March 2013).

"Although [RESA witness] Ms. Williams is concerned that two-year contracts and advance procurements inhibit opportunities for competitive retail suppliers, it is entirely possible that the prices from these procurements could end up higher than future forward and spot prices, creating opportunity for competitive retail suppliers to increase their customer base by offering prices that may be significantly lower than default service prices," the ALJ said.

The ALJ would also adopt the EDCs' proposed 75% load cap for the default service auctions, rather than a lower cap.

As previously reported, the EDCs had sought the creation of a 5 mill per kWh bypassable Market Adjustment Charge (MAC) added to the Price to Compare designed to, "reasonably compensate the Companies for the obligation and attendant risk of procuring electric power for customers who choose not to shop."

The ALJ would deny the MAC as an "impermissible return" which, "fails to qualify as a legitimate retail market enhancement tool."

"Further, I find the MAC would probably result in increased EGS charges for consumers who accept a percent-off-the-default service price offering," the ALJ said.

The ALJ noted that, within the EDCs' obligations to serve as set forth in the Public Utility Code, EDCs are required to provide default service electric power to retail customers at no greater cost than the cost of obtaining generation [66 Pa. C.S. Section 2807(e)].

"I am persuaded by the testimony of OSBA's witness Robert D. Knecht who testified that the MAC exceeds identifiable costs, and is instable, unfair and unduly discriminatory in that it fails to reflect differences among rate classes," the ALJ said.

The ALJ also recommended that proposals requiring the EDCs to contract with electric generation suppliers to offer a Time of Use generation rate, "be deferred until there is a larger penetration of smart meters and a TOU rate option that is reasonable and typical of TOU rates in general."

"The proposed TOU rate options should not be approved as they need reform to select a reasonable TOU rate option for residential customers," the ALJ said.

The ALJ would also deny a migration rider sought by the Office of Small Business Advocate.

"I am not persuaded that a migration rider is needed at this time. A migration rider might become an appropriate remedy if, because of extensive shopping, the number of default service customers in a particular class became very low and, therefore, the reconciliation balance became disproportionally high relative to the customer base. However, this is not currently the case. In addition, instituting a migration rider would create additional, unnecessary EDC programming costs and could be confusing to customers, whose bills would display an EDC-imposed generation reconciliation charge long after they switched to an EGS," the ALJ said.

Opt-In Retail Auction, Standard Offer Referral Program
Generally, the ALJ recommended approval of a retail opt-in auction, for 12-months of service starting in June 2013, consistent with the guidelines previously issued by the PUC, rejecting intervenors' attempts to relitigate issues including participating customers and auction timing.

However, one notable departure from the PUC's guidelines is that the opt-in auction product would not include a bonus payment from retail suppliers to participating customers, which the PUC had suggested at $50, under the ALJ's recommendation. The ALJ agreed with the EDCs' concerns that a bonus payment would create, "an unacceptable risk of attracting bidders who plan to use the opt-in product as a 'loss leader' in order to take advantage of a perceived status quo bias so that they can charge above-market prices after the initial service period expires," which would in turn negatively affect customers' perception of shopping.

The retail opt-in auction price will be a fixed price at least 5% below the Price to Compare at the time the Retail Opt-In Auction is conducted, with the ultimate percentage determined by a descending clock auction.

The opt-in auction would be limited to 50% of each EDC's default service customer base, and, in an update to the companies' original proposal, would now include a supplier load cap of 50% of available tranches.

The ALJ rejected proposals to recover opt-in auction costs (as well as Standard Offer referral program costs) through a Purchase of Receivables discount, since some suppliers may choose to not participate in the auction.

Use a POR discount on all suppliers for auction costs, "would not follow cost causation principles and, therefore, would result in potential cross-subsidization between competitors," the ALJ said.

"Cross-subsidization could occur because an EGS that elected not to participate in the Retail Opt-In Aggregation Program would still be obligated to pay for it, while the costs the winning bidders would pay would be less than the benefit they receive from participating in the program," the ALJ said.

Instead, the ALJ recommended that the cost of the auction itself be divided equally among participating EGSs, with each EGS required to pay the EDCs its share before the auction is held. Winning EGSs would then be responsible for all costs associated with the marketing and mailing of opt-in notices to the residential customers included in the tranches that they win.

Regarding the Standard Offer Referral Program, the ALJ would adopt a plan consistent with the PUC's guidelines (7% off PTC for 12 months), but recommended that the Standard Offer Referral Program not be offered until June 2014, upon conclusion of the term of the retail opt-in auction.

The ALJ recommended costs of the Standard Offer Referral Program be addressed as allows: (1) Require each participating EGS, not less than six months before the program starts, to make a $100,000 payment toward initial start-up costs; (2) Provide that, beginning June 1, 2012, the ongoing costs for the Standard Offer Customer Referral Program Implementation team be billed monthly to participating EGSs by dividing the monthly expenses by the number of participating EGSs; (3) Specify that ongoing costs will include a two-year (June 1, 2013 to May 31, 2015) amortization of start-up costs that exceed the $100,000 up-front payments received from participating EGSs; and (4) Provide that the program only move forward if a minimum of five EGSs execute the Standard Offer Customer Referral Program Agreement and make the initial payments so that the EDCs will have some assurance that they will recover at least a portion of their start-up costs

As the Standard Offer referral program is being deferred, the ALJ recommended that the EDCs implement a New/Moving customer referral program by the end of the fourth quarter of 2012. The EDCs and retail suppliers had agreed to forego a New/Moving customer referral program so that resources were not diverted from implementing a Standard Offer Customer Referral Program, but that was premised on a June 2013 start for the program.

The dockets are P-2011-2273650 et. al.