Pennsylvania PUC: Near-Exclusive Use of Two Year Default Service Contracts Presents "Considerable Risk" to Customers

Relying almost solely on 24-month contracts for default service, "presents a considerable risk that default service rates would not remain economical relative to other electric supply options," the Pennsylvania PUC said in a written order on the FirstEnergy electric distribution companies' default service plan for the period June 1, 2013 through May 31, 2015.

The PUC had previously conducted a binding poll on the utilities' default service plan, which revealed the policies that a final order would adopt. Links to prior stories on the policies adopted in the binding poll are below. The written order, however, includes precedential language and findings not previously available under the binding poll.

As previously reported, the PUC rejected the use of 24-month contracts to serve 90% of default service load for residential and commercial customers at the FirstEnergy EDCs. The PUC, in its binding poll, instead adopted a mix of 12 and 24-month contracts for residential customers, and a mix of 6 and 12-month contracts for commercial customers (see prior story for specifics).

With respect to the length of small customer default service contracts, the PUC found in its written order:

"While the two-year procurements proposed by the Companies would certainly guarantee rate stability, we are not convinced that the Companies’ proposal would best meet the least cost over time criteria and presents a considerable risk that default service rates would not remain economical relative to other electric supply options. While default service rates should provide a level of price stability, two-year procurement contracts create a potential risk the default service rates may become inconsistent with competitive rates over an extended period of time. In addition, procuring default service supplies in two, two-year procurements creates an unnecessary risk that these procurements will be made at a time when market rates are significantly above average."

Additionally, the final order provides more granularity with respect to the timing of procurements. The PUC agreed with the Retail Energy Supply Association that shortening the lag time between the procurement date and delivery date for default service contracts will increase the probability that default service rates are more reflective of current market rates. The EDCs had proposed conducting procurements in November 2012 and January 2013 for the proposed 24-month contracts, which would have meant no procurements would have occurred after the start of the default service period.

The PUC, however, did not adopt RESA's specific procurement deadlines, and granted the EDCs some flexibility, but ordered that no procurements shall be made more than five months prior to the time the EDCs are scheduled to first provide service under those procurements.

Furthermore, regarding the use of block energy purchases for default service, the PUC wrote:

"While it is not our intention to establish a precedent in this proceeding regarding the utilization of block procurements for default service, we believe that the utilization of DCAs [descending clock auctions] as proposed by RESA and the OSBA may pose less risk for the Companies given our concern over the risk associated with the potential decline in default service load in the future."

Dockets: P-2011-2273650 et. al.

Link to PUC Final Order

Prior Binding Poll Stories:
Pennsylvania to Adopt More Market-Reflective Default Service at FirstEnergy EDCs, Versus ALJ Proposal

Pennsylvania Modifies Terms for Retail Opt-in Auction

Universe of Customers Eligible for Pennsylvania Retail Market Jump-start Programs Expanded

Pennsylvania PUC's Witmer Encourages Study of Bypassable Adders to Default Service Price

Pennsylvania Directs Office of Competitive Markets Oversight to Study, Report On Retail Supplier Data Access Issues