TKO: Pennsylvania Deals Another Blow to Retail Suppliers, Proposes to Shelve Retail Opt-In Aggregation!

The Pennsylvania retail electric market continues to take on water in 2013 as the PUC has dealt another stomach punch to retail suppliers -- proposing to indefinitely delay the retail opt-in aggregation programs just approved at each of the major electric distribution companies.

This action, or rather inaction, follows an end-state retail market order which authorized no substantive change in market design, and comes as Pennsylvania is seeing residential shopping decline at several large utilities.

The opt-in aggregation programs -- themselves a retrenchment from the PUC's earlier adoption of an opt-in retail auction for a capped amount of customers -- were essentially glorified customer referral programs. Under the opt-in programs, which were still capped at 50% of default service customers, all mass market default service customers were to be mailed a letter from the EDC containing an offer from a pre-assigned retail supplier, offering the customers a 5% discount to the Price to Compare for an initial four months, with an EGS-determined fixed price (to be set in the future) for the following eight months.

The opt-in programs were to begin customer solicitation this spring, with service starting on or about June 1, 2013.

Yesterday, however, the PUC issued a tentative order proposing to indefinitely delay the retail opt-in aggregation programs at PECO, PPL, Duquesne Light, and the FirstEnergy EDCs.

The reason? The PUC said that, upon further reflection, it is concerned that the implementation of the opt-in aggregation program at the originally scheduled time will cause confusion, as the programs are scheduled to be immediately followed by the launch of the utilities' Standard Offer customer referral programs.

The Standard Offer customer referral programs differ from the retail opt-in programs in several material respects. Most notably, the Standard Offer customer referral programs will reach a vastly smaller universe of customers. As noted above, the retail opt-in program was to include a letter, mailed by the EDC with its logo, containing a retail supply offer to all non-shopping customers in the eligible customer classes. In contrast, the Standard Offer customer referral programs will only be marketed to customers affirmatively contacting the EDCs regarding certain discrete issues (mostly new service and high bills inquiries), rather than all default service customers.

Furthermore, although final costs have not been determined, in several service areas the cost of the Standard Offer program is expected to be significantly higher than the retail opt-in program. For example, the EGS's share of retail opt-in costs was capped at $1/assigned customer, while the EGS's share of the Standard Offer program was capped at $30/customer.

"[W]e tentatively plan to postpone implementation of the ROI Program in each of the affected EDC service territories in order to permit the Standard Offer Customer Referral Program to move forward on its own. The Commission will revisit the ROI Program after we have had the opportunity to consider the ongoing results of the Standard Offer Referral Program," the PUC said (emphasis added).

The PUC did not provide a timeframe for when the opt-in programs may be revived, but based on the above statement, the delay is not expected to be short, as the PUC has stated it wants to review ongoing results from the Standard Offer program prior to making a decision on the opt-in program, and therefore, the market must have a long-enough experience with the Standard Offer program prior to the PUC making its retail opt-in decision.

"We also direct that each of the affected EDCs immediately postpone the implementation of their ROI Programs, pending the outcome of our reconsideration set forth herein. Further, to the extent that the above-referenced Orders have directed that collaboratives be developed as well as other specific ROI [retail opt-in] implementation dates, those schedules are hereby held in abeyance, pending the outcome of our reconsideration stated in this Tentative Order," the PUC said.

Ultimately, the delay of the retail opt-in program in and of itself is not a major barrier to retail competition, although the expectation of large amounts of load taking competitive supply under the opt-in program was used by some parties to argue against drastic changes to the structure of default service as unnecessary (although the PUC may not have explicitly adopted this reasoning, the end result was the same as the PUC has not adopted large changes in default service structure). But Matters did not have high expectations for the opt-in programs. They offered significantly smaller savings to customers than retail suppliers' current marketing efforts, and the only factor favoring an increase customer uptake would have been that the offer was sent in a letter with the EDC logo and therefore might have been more likely to have been opened by the customer.

Moreover, the design of the retail opt-in programs was rushed and never subject to rigorous scrutiny in the evidentiary process. Rather, the programs sprung from the PUC's own motion in dealing with the EDC's default service plans, which the PUC had ordered were to include opt-in auctions for a select number of customers, and the proceedings therefore did not fully vet the non-auction alternative which came from the PUC bench (in some of the later default service cases, the PUC's preference for the revised, non-auction aggregation may have been known prior to exceptions, but this came after direct testimony in most cases. Additionally, while collaboratives addressed several aspects of the non-auction programs at the direction of the PUC, these talks mainly addressed cost recovery and customer assignment, and not overall program design which was set on the PUC's own motion -- e.g. non-auction opt-in program with a short-term 5% discount followed by fixed price -- without any input from parties).

However, of the two programs (opt-in aggregation and Standard Offer customer referral), the opt-in aggregation was likely to produce more shopping customers at a much lower cost. Moreover, one of the main goals of the Standard Offer program (touching new delivery service customers and educating them on retail supply) may be addressed by efforts to facilitate switch-at-connect functionality. While the Standard Offer programs are ongoing, in contrast to the one-time opt-in aggregation, the amount of customers touched is severely reduced under the Standard Offer program as noted above.

Additionally, while programs similar to the Standard Offer customer referral programs have been successful in other states, this has largely been used to take residential shopping from negligible levels to 30% or so. The Standard Offer programs have no track record of being successfully used to reduce barriers in more mature markets, like Pennsylvania, where about 30% or more of residential customers are already shopping, and the remaining barriers to customer shopping aren't simply awareness of or hesitation about customer choice (which is what the Standard Offer programs are designed to combat by allowing customers to "test drive" retail choice at a fixed discount).

Rather, Pennsylvania's primary challenge for greater residential shopping is the obvious status quo bias to default service, including customer loyalty to their EDC, and the Standard Offer program is comparatively ill-equipped to address this barrier when viewed against alternatives.

In other words, Standard Offer customer referral programs have been used to jump-start retail choice programs in other states. The Pennsylvania market is already cruising along at 55mph and doesn't need a jump-start, but what it does need is a sustainable, long-term market design (think moving from backroads to an interstate highway and getting rid of any speed bumps). Relying so heavily on the Standard Offer program, especially in the absence of the opt-in aggregation, is not the answer to this challenge.