New Default Service Structure Approved at Unitil, Laddering Removed

The New Hampshire PUC has approved a modified default service structure at Unitil, which includes the termination of a laddered portfolio to serve small volume customers (DE 12-003).

Under current practice, for Non-G1 customers [residential and small commercial (G2) customers], Unitil uses a portfolio of contracts, and solicits blocks of 25% of load requirements every six months for either 12-month or 24-month periods.

Under the newly approved structure, 100% of Non-G1 default service will consist of six-month contracts procured in a single procurement, held approximately two months prior to the start date for delivery of power.

Furthermore, Non-G1 default service will be separated into two customer groups: DOM (domestic), or the "small customer group," and G2OL, or the "medium customer group." These customer groups will be served by separate contracts, but both will follow the same six-month structure and be procured in the same solicitation.

The PUC approved the termination of the laddered portfolio by noting its prior observation in Order No. 24,511 that, "one disadvantage with the portfolio approach is that the aggregation of several long-term contracts with different start dates and terms could widen the gap between [default service] prices and market prices, consequently slowing the development of a competitive retail market to serve small customers."

"Phasing out the laddered portfolio and soliciting for 100% of supply for a six month period will result in rates that are more reflective of market rates and will thus provide more efficient price signals for Non-G1 customers. This development could lead to greater competitive options for small customers, which is consistent with the restructuring principles," the PUC said.

Unitil had also said that moving to six-month contracts would present less risk for wholesale suppliers, increase supplier participation in the solicitation, and result in improved pricing for customers.

Splitting Non-G1 customers into small and medium customer groupings reflects the differences in load factors and in the rate of migration to third party supply experienced by the customers in each subgroup, Unitil had said.

Unitil had reported that the current rate of migration of residential customers is roughly 1.0% of total energy sales for that group, while the current rate of migration for the medium customer group exceeds 30%. The load factor for the residential customer group is 56%, while the load factor for the medium customer group is 63%.

Splitting the Non-G1 customer group would avoid the cross-subsidization that occurs as a result of the differing migration rates and load factors, and should result in more bids and more efficient prices for each group, Unitil had said.

Due to the existing portfolio, a transition period to the new Non-G1 default service is necessary to allow contracts to roll-off (new start dates of June 1 and December 1 for default service contracts were also adopted). The RFP issued on September 1, 2013, for service starting December 1, 2013, will be the first RFP under which 100% of Non-G1 default service is served under the six-month contracts.

The PUC also approved changes to G1 (large customer) default service.

Instead of the current process which sets in advance G1 rates for a thee-month period, Unitil will implement an LMP-based default service.

Specifically, for G1 customers, Unitil will solicit bids for monthly adders to be added to the real-time LMP for the New Hampshire load zone weighted by the hourly loads of all G1 customers who receive default service. The adders and LMP combined will serve as the default service price. The adders will include capacity costs and ancillary costs, as well as a margin of profit for the supplier.

Unitil will solicit G1 adders for six-month periods. The adders will be fixed for a specific month but may vary month-to-month within the six-month period.

"We find that the price structure and supplier contract based on the LMP with an adder for capacity and ancillary costs will provide an appropriate price signal to the G1 customers taking default service; would likely off-set any increased risk associated with a six-month versus three-month contract; may discourage 'gaming' behavior thus eliminating the cost of suppliers’ hedges; and, may prompt some of those customers to seek supply from the competitive market," the PUC said.

About 84% of G1 sales are served by competitive suppliers.