Retail Supplier Says Changes in PJM Ancillaries, RPS Charges Affecting Profitability

An, "unexpected increase in PJM ancillary service and RPS compliance costs," negatively affected profitability at Washington Gas Energy Services, parent WGL Holdings recently said in reporting earnings.

WGES, "experienced sharp and unanticipated increases in certain PJM ancillary service charges and RPS compliance costs late in our fiscal year," executives said.

"While ancillary and RPS costs have fluctuated in the past, during the year they consistently reached higher levels than we had forecasted or previously experienced," executives said.

For the quarter ended September 30, 2013, WGL Holdings' retail energy-marketing segment posted non-GAAP operating earnings of $0.6 million, compared to $8.9 million for the same quarter of the prior fiscal year.

The decline was driven by lower realized electric unit margins due to higher costs of serving customers under fixed contract pricing in PJM, partially offset by higher natural gas unit margins on favorable supply timing issues. Operating expenses for the quarter were higher primarily due to higher customer acquisition costs.

For the fiscal year ended September 30, 2013, the retail energy-marketing segment posted non-GAAP operating earnings of $30.4 million, compared to $36.2 million for the prior fiscal year. Aside from the same factors which affected the quarter ended September 30, 2013, fiscal 2013 saw natural gas margins lifted by higher volumes resulting from colder weather and increased margins on portfolio optimization activities.

WGL Holdings said that the negative impacts on electric margins are weighing its estimates for 2014 performance for the retail segment as well.

"Higher capacity costs in the PJM electric market, combined with the trend for longer-term customer contracts, are shifting realized electric margins from fiscal year 2014 to future years," executives reported.

"The second issue involves the unexpected increase in PJM ancillary service and RPS compliance costs. These higher costs are affecting the profitability of existing contracts," executives said

The sharp rises in PJM ancillary costs and RPS compliance costs are impacting forecast retail energy results for 2014 by about $4 million, executives said.

Future business, industry-wide, will incorporate these higher costs, executives said, and thus they don't see such margin compression continuing into the future with new business.

Finally, "increased competition for large commercial and industrial electric customers" has put pressure on margins, executives added.

"While it's difficult to predict future trends in margins, we are beginning to see signs of stability, with a few of the smaller participants recently consolidating or exiting the business," executives said.

Washington Gas Energy Services was serving 347,800 customers as of September 30, 2013, versus 346,800 as of June 30, 2013, and 371,800 a year ago.

For much of fiscal 2013, WGES saw declining customer count, particularly among residential customers, due to increased competitive activity in the mass market. However, for the three months ended September 30, 2013, WGES saw increased residential additions, and increased its electric customer count by 1,700 accounts.

Specifically, as of September 30, 2013, WGES was serving 179,900 electric customers, versus 178,200 as of June 30, 2013 and 194,300 a year ago.

As of September 30, 2013, WGES was serving 167,900 natural gas customers, versus 168,600 as of June 30, 2013 and 177,500 a year ago.