Say What? Pennsylvania Commish Says Retail Suppliers Breathing "Sigh of Relief" with Close of Retail Market Investigation

Retail suppliers are, "probably breathing a sigh of relief" that the Pennsylvania PUC has finally concluded its retail electric market investigation, PUC Vice Chair John Coleman said during the annual DNV KEMA retail energy executive forum.

Despite two years of hype and self-congratulatory fanfare, the PUC ultimately adopted no material retail market changes in its final order, delegating recommendations to the legislature for even policies the PUC had previously said it had the authority to implement (e.g. PUC deferring to lawmakers on the preferred exclusive use of short-term default supply contracts, when the PUC had already ruled at Pike County that exclusive use spot pricing meets the current "prudent mix" standard).

Accordingly, while retail suppliers may have been sighing with the close of the investigation, we doubt they were sighs of relief -- because the PUC granted retail suppliers virtually none of the relief they had sought from the proceeding.

Coleman said that as early as the PUC's second en banc hearing in the retail market investigation (which occurred in November 2011), it began to realize that the "political reality" would not allow for adoption of the Texas model. If this was the case, it did not stop the PUC from continuing to speak about transformative change until late 2012.

Moreover, had the PUC reached this conclusion so quickly, it should have abandoned its bifurcated approach to the investigation, in which the PUC adopted an intermediate work-plan for changes which were not transformative and could be implemented quickly (retail opt-in auctions, since shelved; referral programs; customer education) and a second phase of the proceeding for transformative changes which the PUC said could not be implemented in time for the default service plans commencing June 1, 2013.

Originally, the second phase was tiered because the PUC said it anticipated significant changes to default service which could not be adjudicated prior to the filing of the default service plans for the period starting June 1, 2013. Depending on utility, these plans were filed from about November 2011 through May 2012.

Had the PUC in November 2011 reached the conclusion that it was not adopting the Texas model, rather than take an additional year-and-a-half to share this conclusion with everyone, it should have worked to adopt changes to the June 1, 2013 default service plans that it was comfortable in adopting under its current authority.

Notably, depending on utility, some of the June 1, 2013 default service plans still rely on residential contracts lasting up to 24 months to serve customers (notably at PECO and the FirstEnergy utilities). At other utilities (PPL and Duquesne Light), however, the PUC under its existing authority adopted June 1, 2013 default service plans that rely on residential portfolios with contracts lasting no longer than 12 months.

This inconsistency clearly could have been addressed by the PUC under its current authority. At the time, not adjusting the June 1, 2013 default service plans was not seen as a major impediment, because it was expected that starting June 1, 2015, any barriers would be removed, and retail suppliers could tough it out under the imperfect plans in the interim.

However, given that the PUC is not going to adopt a market-reflective default service structure absent legislative changes, the current default service plans suddenly carry new weight, because the hoped-for legislative changes may never happen.

The use of 24-month contracts under some of the June 1, 2013 default service plans creates the potential for the very "cliff" that Coleman and PUC Chair Robert Powelson have previously expressed concern about -- that is, if market prices rise, the non-market-reflective default service structure could force retail suppliers out of the state similar to what happened during the rate cap period.

Coleman spoke about the "profound negative impact" on the retail market if the legislature does not fix the current default service procurement model.

While it would not have been a permanent solution to barriers to workable retail competition, the PUC could have appreciably addressed this "cliff" concern by rejecting the use of 24 month contracts for default service at PECO and the FirstEnergy EDCs, and instead set 12 months as the longest supply contract length. While 24 month contracts may have had evidentiary support as constituting one type of prudent mix, there is no justifiable reason that 12-month contracts were appropriate at only some utilities, but not at others which were similarly situated (indeed, Duquesne Light, which previously offered a 36-month fixed generation rate, was moved to 12-month default service contracts, so claims about utilities' prior plans necessitating terms longer than 12 months do not hold water).