Pennsylvania PUC Concedes Even Minimal Default Service Changes -- With Utility Staying in Default Supplier Role -- Require Legislation, But Won't Propose Large-Scale Reform

The Pennsylvania PUC, in a tentative order regarding the end-state design of electric default service issued minutes ago, has conceded that it, "recognizes that many of the proposals ... require changes to the existing legislation and Commission regulations," even though the changes that the PUC has proposed are relatively minimal, as the PUC has proposed to keep the electric distribution company (EDC) in the default supplier role.

"We are prepared to devote the resources needed to effectuate these changes so that our proposals for the default service product can go into effect on June 1, 2015," the PUC said.

A rapid scan of the tentative order did not suggest that the PUC specifically enumerated which proposals contained in the order require legislative approval.

However, at the top of any list, and most likely to be challenged in the courts if legislation does not change current statute, is the harmonization of the PUC's proposed mass market default service product and procurement schedule as contained in the tentative order with the current "prudent mix" standard required under Act 129.

Specifically, under Act 129, Section 2807(e)(3.2) mandates that the electric power procured by the default service provider include a prudent mix of spot market purchases, short-term contracts and long-term purchase contracts.

However, the PUC's tentative order recommends that default service for residential and small commercial customers be served solely under quarterly full requirements contracts, with the EDC acting as the default supplier.

Although the PUC has previously found that a single product can constitute a prudent mix, this is being challenged by the Office of Consumer Advocate on appeal (See prior story: Pennsylvania's Preferred End-State Retail Market Design at Risk in Appeal of Pike County Default Service Plan)

Specifically, the tentative order recommends that quarterly auctions shall be used to procure all mass market default service load, via tranches of full requirements, load-following contracts for the upcoming quarter. These auctions will be held one to two months in advance of the beginning delivery date for the upcoming quarter. As noted above, the EDCs will continue in the default supplier role.

Consistent with current procedures, EDCs will continue to provide estimates of the next quarterly Price to Compare (PTC) until the EDC has determined the tariffed PTC charge. The quarters should synchronize with the PJM energy year, the PUC said.

Although the PUC said that its proposal is required for Pennsylvania, "to achieve and sustain the robust competitive market that was envisioned in 1996 by the General Assembly," and did address harmonization of the quarterly auctions with the current "least cost over time" standard, a quick review of the order did not reveal any discussion in the PUC's tentative order of whether the quarterly auctions, due to the current "prudent mix" standard, is one of the proposals that, "require[s] changes to the existing legislation."

However, if legislation is ultimately needed to implement quarterly default service auctions for small customers, again with the EDC as the default supplier, then it's a slap to retail suppliers that the PUC is willing to go to the legislature to seek this minimal change in default service (essentially a return to the pre-Act 129 "prevailing market price" standard), but won't seek legislation to implement a default service model in which retail suppliers serve in the default supplier role.

Moreover, it cannot be stressed enough how minimal the PUC's proposed changes with respect to default service are. Not because the proposals, in and of themselves, are bad per se (quarterly auctions being about the best design if a utility is serving default load), but because there is no finality to them -- calling them an "end state" is a hope, not a guarantee.

Although the PUC states it is embarking on "fundamental long-term changes to the underlying default service structure," that is patently not the case. Nothing in the tentative order fundamentally changes the current statute, nor does, or can, the order assure that it is establishing a "long-term" market design.

Even under the current structure, default service procurement lengths -- the essence of the PUC's change -- have varied, and will likely vary in the future, regardless of what the current PUC adopts.

Before Act 129, Pennsylvania formerly had a more favorable statute with regard to default service, and a prevailing market price standard. While that had not necessarily been interpreted as requiring quarterly auctions at those EDCs which had price caps lifted early, it certainly allowed for such procurement, if the PUC had desired.

Then as a result of Pike County, and rate shock in other states, Pennsylvania passed Act 129, which brings us the "prudent mix" standard.

While adopting quarterly auctions, today, is well and good, nothing in the PUC's "end-state" design assures retail suppliers that quarterly auctions will be the end-state.

If the EDC maintains the default supplier role, it will be too easy to abandon quarterly auctions in times of price volatility or rate shock, in favor of "long-term" or "portfolio" procurements.

Remember, we've already been here before. While the PUC had never previously mandated quarterly auctions, its default service rules before Act 129 came pretty close. Specifically, those old rules recommended a portfolio of spot market purchases and short-term fixed contracts (one year or less). Though EDCs could petition for longer contracts, the PUC stated that it was "generally skeptical of the [default service provider's] ability to beat the market over periods of time greater than one year" and expressed a preference for short-term contracts over long-term contracts.

And then Act 129 happened. So the Pennsylvania retail market already lost what was a favorable default service structure once before. With EDCs proposed to be still in the procurement and default supplier role, what is going to make the quarterly auctions any more of an end-state than the pre-Act 129 rules?

A true fundamental change in default service, where the PUC is not overseeing procurements (such as under a retail auction) would avoid (or at least make much more difficult) this ever-present temptation for future commissioners or legislators to reject the "end state" that will be adopted under the current tentative order, and return to a prudent mix standard.

And although the PUC notes that existing regulation allows the selection of an alternative default supplier other than the EDC, such supplier must still conform to statute governing the procurement of default service. Just as the tentative order declines to replace the EDC as the default supplier, it is unlikely a future Commission would do so under current statute, because it is difficult to shoehorn how a retail supplier operates into the "prudent mix" standard.

Link to Tentative Order

Docket Number I-2011-2237952