Pennsylvania Proposes to Reduce Retail Supplier Bonding Requirements

The Pennsylvania PUC has issued a tentative order proposing to reduce the bonding requirements after the initial year of licensure for an electric generation supplier, stating that the current requirements, "may present a barrier to entry,"

Under current regulations, the initial security level required from each EGS license applicant that intends to take title to electricity is $250,000. Typically this requirement has been fulfilled by Letters of Credit (LOC) or Surety Bonds.

After the first year that the license is in effect, the security level for each license is reviewed annually and modified primarily based on the licensee's reported annual gross receipts information. The current security level to be maintained by the licensee is 10% of the licensee's reported gross receipts

"[I]t appears that our current requirement for an initial bonding amount of $250,000 for EGSs that intend to take title to electricity is reasonable and should remain in force for the initial year of operation," the PUC said.

"It also appears, however, that the subsequent requirement of a bond or LOC in the amount of 10% of annual gross receipts may be excessive in relation to the risk intended to be secured, may be unnecessarily burdensome and may present a barrier to entry into Pennsylvania's retail electric market. As such, the Commission is proposing to maintain the current requirement for an initial bonding amount of $250,000 for the first year and to reduce the subsequent security requirement from 10% of annual gross receipts to 5%," the PUC said.

The PUC also said that it appears that it would be reasonable to expand the types of security instruments that should be accepted by the Commission. Specifically, the PUC said that it appears that the following types of security should be acceptable:

• Parental guarantee, in a form acceptable to the Commission, where the parent maintains an investment-grade long-term bond rating from two of the four rating agencies:

Standard & Poors                BBB- or higher
Moody's Investors' Services     Baa3 or higher
Fitch IBCA                      BBB- or higher
Duff and Phelps                 BBB- or higher

• Segregated cash accounts, held by federally insured financial institutions, specific to Pennsylvania customers and callable only by the Commission

• A mix of bonds; LOCs; parental guarantees and/or segregated cash accounts as set forth above sufficient to meet the required security in the amount of 5% of annual gross receipts.