Pennsylvania Talks, Connecticut Acts: CT Master Energy Plan Proposes Auctioning All Standard Service Customers to Retail Suppliers!

So long Pennsylvania; Hello Connecticut!

Connecticut's Comprehensive Energy Strategy, an energy master plan developed by the Department of Energy and Environmental Protection, proposes to auction off all remaining Standard Service customers to retail suppliers.

Standard Service customers are those customers under 500 kW on default service.

"This Strategy proposes that remaining standard service customers be given the same savings opportunity that customers who have already made the shift into the retail choice market are given," DEEP's strategy provides. The Public Utilities Regulatory Authority, which directly oversees the competitive retail electric market, is part of the Energy Branch of DEEP.

"This outcome could be achieved through a transitioning of customers to the competitive marketplace, with the additional benefit of raising revenue for the State's taxpayers in the process," DEEP's strategy states.

"DEEP and PURA should work together to divide standard service customers into tranches of 100,000 (based on the average load used by the customer, so that each tranche would have a roughly equal total average load) and make them available to the retail electricity supplier market, with the customer tranches being awarded to the highest bidder and the proceeds going to Connecticut taxpayers," the strategy states.

It was unclear whether Standard Service customers would be permitted to opt-out of the auction; however, after the auction, Standard Service will remain and customers would be allowed to return to Standard Service. The mechanism used to supply any residual Standard Service was not addressed.

"To assure that the transitioned customers realize savings in their electricity rates, the winning retail electricity supplier must guarantee that the rate offered to the customers for one year would be at least 5% below the utility standard offer on the date of the transaction," the strategy provides.

"Moreover, the transitioned customers must be allowed to return to standard service or to choose a different retail electricity supplier if they wish, with appropriate market information provided to these customers in coordination with PURA. This action could be initiated in 2013, with the transfers officially taking effect in 2014," the strategy provides.

It was unclear if DEEP's proposal is for a one-time auction [winning supplier(s) retain customers until affirmative action] or whether customers would be re-auctioned after a one-year period (similar to the Ohio SCO auctions). DEEP does compare the proposal to the Ohio natural gas auctions as well as Chicago's municipal electric aggregation, the latter of which is in one sense permanent (customers remain off default service unless the city ends the program, the city selects default service as the best alternative, or the customer opt-outs), but in another sense is time-limited given that the supplier of the aggregation is only chosen for a set period.

To the extent suppliers do not permanently retain customers won through the auction not making an affirmative election, it was unclear if DEEP would hold an annual auction to re-assign these customers to a new winning supplier (as in the Ohio SCO program), or if the market would revert to the current utility-provided Standard Service model.

"Pennsylvania's regulated electricity market and Ohio's regulated natural gas market have executed similar programs," DEEP said, with the Pennsylvania comment apparently referencing either (or both) the PECO market share threshold program and Pike County aggregation.

"Since the average electricity bill of an existing standard service customer is roughly $1,300 per year, under this scenario an existing standard service customer would see guaranteed savings of $65 per year as a result of this program," the strategy states.

"This approach will also require mechanisms that ensure consumer protections and DEEP should collaborate with PURA to ensure that such protections are in place," the strategy provides.

Matters would also note that although the use of tranches imply the use of multiple winning suppliers, there was no specific load cap discussed by DEEP. Given that all Standard Service customers would be included in the auction, the auction may become attractive for certain companies not currently engaged in the competitive retail space but eager to serve wholesale load, including certain affiliates of New England utilities currently engaged in projects to import low-cost hydropower from Quebec into the market.

Link to DEEP Comprehensive Energy Strategy (retail auction starts on page 123 in terms of PDF pagination)

Ironically, DEEP's proposal is much closer to the retail auction proposal offered by Direct Energy in a 2010 Pennsylvania merger proceeding than the Pennsylvania PUC's end-state default service design, even though Pennsylvania's end-state design resulted from an investigation specifically prompted by the Direct Energy proposal (after the PUC narrowly refused to consider the auction proposal in the confines of a merger proceeding rather than a statewide investigation). See prior story for details on the Direct Energy auction proposal, and how little the PUC end-state design provides in light of the originally sought changes which prompted the 3-year retail market investigation

DEEP's auction proposal comes as the Connecticut retail market has slowed due to market saturation (~50% of residential accounts switched) and an unfavorable regulatory climate, due to stricter marketing rules, and adoption of a managed portfolio for a portion of Standard Service load.

It was unclear how lawmakers' stated preference for a managed portfolio for Standard Service would interact with the retail auction.

The Comprehensive Energy Strategy does make various recommendations concerning contracting for energy capacity and/or supply (for a variety of public policy goals including renewables, new capacity, and peak load reduction); however, all of these policy goals could be met using competitively neutral contracts which are treated on a nonbypassable basis, with any products under the contracts sold into the wholesale market, with costs/benefits shared among all customers, thereby not impacting the bypassable generation rate or default service portfolio.

For example, DEEP also raises the potential of, "lowering electricity costs through contracting for low-cost generation at times of peak demand." Other than a citation in an executive summary, Matters could not find additional details on this provision in DEEP's strategy, so it was unclear if this is intended to be executed through the Standard Service portfolio, but there is no reason that the contracting could not occur outside of the Standard Service portfolio in a competitively neutral manner as a public policy contract.

Aside from various renewable contracts, DEEP also proposes to, "[e]xplore opportunities for large-scale hydropower to provide low-cost, clean base-load generation as well as the potential for load-following (and thus 'peak shaving') electricity." Again, how this fits with Standard Service and the retail auction is unclear.

DEEP's strategy also provides support for Time of Use rates, presumably generation rates, and how this fits with the retail auction is also uncertain.

Specifically, DEEP's strategy recommends that Connecticut Light & Power submit a detailed plan to the Public Utilities Regulatory Authority (PURA) for a multi-stage roll out of advanced meters over a five to ten year time frame in a manner that minimizes stranded costs, prioritizes adoption by customers most likely to benefit from their use, and provides for hybrid rate structures and/or affordable basic service for customers opting out of any installation program.

The strategy also recommends that CL&P not promote time-of-use rates to its residential customers until advanced meters are available, but that time-of-use rates be reactivated as these meters are installed. The "reactivation" refers to a prior PURA decision to phase-in time-of-use rates for CL&P business customers with a monthly demand of 100-350 kilowatts. Customers with demands of 200-350 kilowatts were placed on time-of-use rates, but the phase-in was suspended for customers with monthly demands of 100-200 kilowatts.

The strategy recommends that PURA consider a flat rate for a base level of usage such that real time pricing applies only at higher levels of use. Such a hybrid structure should be designed to still provide low use customers an incentive to shift non-essential uses to off-peak time periods, DEEP said.

Given its different metering technology, the strategy recommends that United Illuminating promote time-of-use rates to all of its customers. "UI should also develop and promote additional dynamic pricing options for its customers," the plan provides

As noted above, the retail auction would encompass only Standard Service customers, and not Last Resort Service customers (those at or over 500 kW).

DEEP's strategy does note that, "one industry-specific opportunity to reduce rates is fully within the control of industrial consumers."

"Any industrial customers served by the utilities through the standard service [sic] would currently see decreases in their electricity costs if they switched to using a competitive retail electric supplier. More than 90% of large industrial customers have switched off of the standard offer and are now paying anywhere between 5 and 14 ¢/kWh for electric generation. This significant price range is due in part to the fact that some companies locked into long-term contracts at a time when electric generation rates were higher than they are today. Many firms will have an opportunity over the next year or two to purchase power from less expensive electric retail suppliers," DEEP noted.

DEEP proposes to, "ensure that industrial customers who are not currently being served by competitive suppliers are informed of the potential savings they could achieve."