Texas Take Note: Retail Suppliers Say Pass-Throughs of Generation Reliability Charges, "Cause Customer Confusion And Frustration"

A contractual pass-through by retail electric providers to customers of charges meant to assure the reliability of the electric grid, "cause customer confusion and frustration," a group of retail suppliers have said.

No, these retail suppliers were not referring to potential mandated capacity payments in Texas, and the presentation of such capacity costs to customers, but the retail suppliers' comments are instructive of customer reaction to such capacity pass-throughs in ERCOT should any capacity mandate be adopted.

The retail (and wholesale) suppliers filing the above-quoted comment -- Constellation Energy Commodities Group, Inc. and Constellation NewEnergy, Inc., and Exelon Generation Company, LLC and Exelon Energy Company, along with NextEra Energy Services Pennsylvania, LLC and NextEra Energy Power Marketing, LLC -- were actually addressing, in a Pennsylvania PUC proceeding, the treatment of "generation deactivation" costs in PJM, meaning costs associated with reliability must-run (RMR) contracts needed to maintain resource adequacy.

We'll pause here for a moment to let that sink in. In other words, notwithstanding over $50 billion in mandated capacity payments from load to capacity owners, PJM is still being forced to rely on an increasing number of costly RMR agreements to keep the lights on.

While such RMR contracts no doubt will be characterized as needed due to local transmission issues by capacity market supporters, the transmission issues are prompted by the retirement of generation, and PJM's capacity market has a locational requirement, with associated locational premiums, which extract additional payments from loads ostensibly to address any local transmission issues.

The retail suppliers noted that PJM's deactivation queue has over 14,000 MW of announced deactivations that PJM is in the process of reviewing. This amount of potential retirements dwarfs the net new steel-in-the-ground capacity procured in the PJM capacity market of only 6,000 MW since 2007 (e.g. excluding demand response and energy efficiency capacity resources).

"It must be considered that it is not known how many more MW of generation will be added to this [deactivation] list, and exactly how many of these units may continue to operate until appropriate transmission or other reliability upgrades come on-line, potentially resulting in the need for new Generation Deactivation charges to compensate such units in the interim," the retail suppliers said.

Retail suppliers noted that GenOn Power Midwest, LP recently received FERC approval for RMR payments for two PJM units, and that FirstEnergy Generation Corporation is seeking RMR payments for 1,700 MW in PJM.

Load has to wonder what exactly it has received for its $50 billion in capacity payments.

Whatever other faults may exist with the capacity market, clearly, it is not providing the additional revenues to the "right" generators, meaning those who actually need supplemental revenue outside of the energy market to continue to be available (meanwhile, low-cost assets with a favorable position in the energy bid stack continue to reap infra-marginal revenues from load through mandated capacity payments even though such generators would continue to be available in the energy market without a capacity payment).

Back to the comments of the Pennsylvania retail suppliers, whose comments were made in exceptions to a recommended decision regarding PECO's default service plan (see prior story) under which generation deactivation charges would continue to be assigned to the load serving supplier (retail supplier or default service supplier as applicable), and thus included in the bypassable generation rate on the generation side of the bill.

The retail suppliers said that, "Generation Deactivation charges are non-market-based, impossible to hedge, and are assessed by PJM to preserve system reliability. The costs represent administratively determined, 'surrogate' transmission charges that are temporarily in place until transmission system improvements come on line. The amount of these costs are determined by the PJM Tariff or by FERC in a litigated proceeding and then allocated by PJM" [emphasis added].

"These Generation Deactivation charges are potentially significant in size, and cannot be hedged because they are not market risks, such as commodity price risk and basis risk, for which EGSs and wholesale suppliers are appropriately tasked with managing," the retail suppliers added [emphasis added].

The retail suppliers' description of the generation deactivation charges, and the inability to hedge such charges, are largely similar to the issue with any mandated capacity costs. While generators claim that capacity costs may be transparent due to the three-year forward pricing, and the use of an auction to determine pricing, capacity costs cannot be hedged by the vast majority of retail suppliers, due to uncertain future load obligations and migration.

Moreover, Matters would note that while 36 months may be the longest term residential contract generally offered in ERCOT, five-year contracts are currently offered to Texas customers (by Just Energy), and, in other retail markets, fixed price contracts as long as seven years are now being offered. When retail suppliers are forced to purchase capacity, but only know the capacity charge for three years out, they are precluded from offering fixed price contracts for terms longer than 36 months, unless they have a competitive advantage gifted to them under the capacity market construct.

Indeed, Matters would note that the retail supplier now offering seven-year fixed price electric contracts to residential customers in Ohio and Pennsylvania, FirstEnergy Solutions, owns a large amount of capacity in PJM, and thus has a natural hedge for the capacity cost risk beyond 3 years, through capacity revenues, extracted from competing retail suppliers, earned by its generating units. It is unclear if a retail supplier not owning generating units could offer such a long-term contract, and not because of the supplier's own non-integrated business model, but because of the mandated market rules which require the supplier to pay its competitors for capacity and unknown future capacity charges.

Again turning back to generation deactivation charges at PECO, a recommended decision from a Pennsylvania ALJ finds no issue with the treatment of the charges, and concludes that retail suppliers may simply construct their retail contracts to pass-through future generation deactivation costs to their customers on the generation side of the bill. Accordingly, the draft order would continue to assign cost responsibility for the generation deactivation charges to the customer's generation supplier (either a retail supplier or default service supplier).

In exceptions, the retail suppliers said, "these types of pass-throughs can cause customer confusion and frustration because they are not within the control of an EGS [retail electric generation supplier]."

"Use of these types of contractual 'pass-through' measures can be disruptive to the EGS-consumer relationship," the retail suppliers said [emphasis added].

"Use of these contractual measures moreover carries monetary and reputational risk that could potentially drive suppliers out of the Pennsylvania market, in favor of dedicating resources to other jurisdictions in which EGSs would not face the need to invoke such provisions," the retail suppliers added.

"In addition, invoking these types of contractual measures can damage customers' confidence in the shopping compact that exists between them and their EGSs," the retail suppliers said [emphasis added].

Ironically, one of the retail supplier's proposed solutions to the deactivation charge issue (and their preferred solution) is that the Pennsylvania PUC approve the use of a pass-through of the costs to customers -- just that the pass-through is on the distribution side of the bill as a nonbypassable charge, rather than being assigned to the retail generation supplier. Retail suppliers ask that the host distribution company assume all of the cost responsibility for the deactivation charges, rather than such costs being assigned to each customer's specific generation supplier.

Of course, in Texas, this "distribution bill" solution is inapplicable for any pass-throughs. All Texas pass-throughs, such as a capacity pass-through, would come to customers through their retail electric provider, given the nature of the Texas market. While certain delivery charges are handled on a pass-through basis by certain REPs, a mass market customer's contract with their retail electric provider provides for a specific, all-in, rate. By rule, pass-throughs must be included in the EFL-quoted price and, therefore, any change in the amount of the pass-through (as would occur every 12 months when capacity costs change) would disrupt the customer's expected price as listed on the EFL.

While the amount of the Texas customer's all-in rate may change due to legally permissible pass-throughs, it is clear that any such pass-throughs will cause, "customer confusion and frustration" as so ably described by the Pennsylvania retail suppliers. Indeed, Texas customers several years ago were already frustrated with fixed-price contract pass-throughs which prompted a major overhaul in the customer protection rules, and definition of product types, so one can only imagine what the pass-through of billions of dollars of capacity costs will mean for REPs' reputation and esteem, and customer satisfaction with the competitive market.

Link to Retail Suppliers' Comments on Pass-Throughs at PECO

PA PUC Docket: P-2012-2283641