With Pennsylvania's Track Record, Not Much, Other than Sound & Fury, Should Be Expected from New Retail Natural Gas Market Investigation; Focus Should be on Threshold Legal Questions, Not Policy

Pennsylvania has launched its third investigation in the last 10 years to jumpstart the chronically "dismal" retail natural gas market, but the PUC's track record with its prior investigations, as well as its recently concluded retail electric market investigation, should counsel any retail suppliers from expecting anything substantive from the latest retail gas investigation.

As more fully detailed in our related story today, the PUC has opened a, "formal investigation into the current status of Pennsylvania's retail natural gas market to assess whether effective competition exists and make recommendations for improvements to ensure that a properly functioning and workable competitive retail natural gas market operates in the state."

See related story today for details on the new investigation

In the last decade, the PUC previously conducted two prior investigations into barriers in the retail natural gas market, and each of those proceedings failed to make a meaningful dent in continued barriers to workable retail gas choice.

Click here for prior story detailing fully the PUC's prior efforts, and how they fell short.

In brief, the PUC failed to mandate purchase of receivables for gas LDCs, nor did it require full unbundling to ensure the bypassable Price to Compare reflects all costs of serving default service customers. While POR has been adopted by most of the large gas LDCs in Pennsylvania, the terms are much less attractive for retail suppliers than POR programs in place at the electric utilities.

The PUC conceded yesterday in opening its third retail gas market investigation that the current retail market is "dismal."

Given the PUC's history with its prior retail gas market investigations, as well as the outcome of its recent retail electric market investigation, we do not encourage retail suppliers to hold their breath for any meaningful changes in the retail gas market.

Indeed, the PUC said that it would follow the same flawed process for the gas market investigation as used in the recent retail electric market investigation.

Specifically, the retail gas market investigation will proceed in two phases. The first phase will assess the status of the current retail gas market and explore what changes are needed to allow customers to best realize the benefits of choice. At the conclusion of the first phase, the Commission will initiate the second phase, headed by the Commission's Office of Competitive Market Oversight (OCMO). OCMO's charge will be to examine and address how to best resolve the issues raised and then how to implement the prudent changes identified to improve competition

This process proved inefficient in the retail electric market investigation, and ended up putting the cart before the horse when it came to the cuts the PUC was willing to make. Specifically, the PUC said at the conclusion of its Phase I retail electric investigation that it reached the, "inescapable conclusion that Pennsylvania's current retail market requires changes in order to bring about the robust competitive market envisioned by the General Assembly when it passed the Electricity Generation Customer Choice and Competition Act."

However, when the Phase II final electric order came out (for the long-term market changes) you needed a magnifying glass to find any changes actually adopted by the PUC (and those minimal changes did not move the needle on a workably competitive retail market), and worse, those changes which were previously adopted earlier in the investigation under a short-term Phase II order, (retail opt-in auctions) were shelved, after being approved multiple times, with no substantive reasoning.

Additionally, Phase I of the PUC's electric market investigation found that, "testimony and comments received during the first phase of this Investigation conclusively establish that the current default service model stands as a substantial impediment to a robust competitive retail market in Pennsylvania." (emphasis added)

Despite this "conclusive" evidence, the Phase II long-term final electric order adopted zero changes with respect to electric default service structure, procurement, or design.

Accordingly, we are fearful yet another retail gas investigation (the third), especially one patterned after the retail electric investigation, might be an inefficient use of parties' time. The issues in the retail natural gas market are well known, and little, if any, new ground will be covered in the PUC's Phase I of the gas market investigation. We understand a record must exist for the PUC to act, but the PUC has already expended significant effort to develop an exhaustive record on retail natural gas market barriers.

While a year or two has passed since the last rulemaking from the 2008 SEARCH proceeding, the PUC could conduct a simple 30-day comment period to update the Commission on any subsequent developments.

What the Commission should next do is, rather than directing OCMO to develop potential market changes for which the PUC may have no appetite due to statutory limitations on its authority, the Commission should instead first address legal questions of what changes it is able to adopt. We understand that this is unusual, for several reasons. First, the Commission typically deals with "live" controversies, not hypothetical changes, so thus is hesitant to stake out legal authority absent concrete policy proposals. Second, the Commission is loath to answer legal questions in a vacuum and being forced into a position that may be different if a specific proposal were in front of it.

But we feel some form of "gating" is necessary, or else this will all just be a waste of stakeholders' time.

Specifically, the PUC includes in its retail gas investigation issues regarding the question of whether utilities should continue to act as the Supplier of Last Resort. While we understand the PUC may want to see concrete recommendations from OCMO for alternative SOLR structures, the PUC's track record, specifically on default service issues, compel that it address some baseline questions regarding its statutory authority first, because otherwise, the PUC has shown it is shy to take on this question, even when concrete, vetted, cross-examined and briefed SOLR proposals are before it.

Specifically, the PUC has twice "let the pitch go by" when it comes to its legal authority to adopt alternatives to utility-provided default service when it comes to electricity.

First, in the FirstEnergy-Allegheny merger proceeding, the PUC kicked a proposal for a retail auction of default service customers to a generic statewide retail market proceeding, declining to answer, head-on, legal questions about the PUC's authority to adopt such an auction if it determined such auction was appropriate from a policy standpoint.

Second, when this generic statewide investigation finally came, the PUC also declined to answer the question of whether it has legal authority to approve an alternative to utility-provided default service in its final "end state" Phase II retail electric market investigation order. While the PUC made a passing reference to the statute allowing an alternative entity to petition to assume the default electric supplier role, the PUC did not discuss whether, absent such a petition from an alternative provider, it could adopt a change in default supplier on its own motion, or, for example, whether an auction of default customers fit this limited statutory mechanism of an alternative default service provider.

So forgive us if we're skeptical that the PUC's retail gas market investigation is really going to answer any questions, and that the two phase process is necessary to get to the heart of the matter.

If the PUC has any hesitancy about its authority to adopt retail gas market design changes needed to correct the "dismal" conditions in the current retail natural gas market (and based on its 2008 SEARCH proceeding, and retail electric proceeding, we presume that the PUC does have such hesitations), the goal should be to communicate those to stakeholders, and the legislature, immediately, or as soon as possible. A two-year, or longer, process is not needed to determine the current barriers to effective retail natural gas choice, nor do the decisions facing the PUC on what actions are necessary to change this require such a long process.

The retail electric market investigation took two years to simply reach the ultimate conclusion that the legislature, not the PUC, should take the lead on major retail market design changes. The PUC conceded that it became clear, very early in its hearing process during electric Phase I, that legislative issues were going to be a problem, but kept its "investigation" going for nearly two more years before officially reaching this conclusion. This simply delayed by two years the start of stakeholder discussion and lobbying at the legislature to enact retail market changes that the PUC felt, even if it had legal authority to implement, it lacked political support to implement and therefore deferred to lawmakers. The same waste of two years should not occur with the retail gas market.

Given that the PUC has been studying the retail natural gas market, and a lack of competition, for a decade, it should not take more than a few months to report to the legislature on current barriers to choice, express the most effective policies for creating more choices, express the Commission's view and whether it can enact these changes on its existing authority, and, if need be, make recommendations to the legislature on what changes are needed to the statute to reach lawmakers' vision of a workably competitive retail natural gas market.