Illinois Commissions Rules on Whether Full Requirements Contracts Legally Permissible for Default Service Under Statute

In a written order regarding the 2014-2015 Illinois Power Agency electric default service procurement plan, the Illinois Commerce Commission has squarely addressed whether full requirements contracts are permissible for use in the plan under statute.

Competitive suppliers had proposed using full requirements contracts to serve a portion of the default service portfolio. To date, block purchases and various swaps have been used to supply default service customers.

In addition to opposing full requirements contracts on policy grounds, certain stakeholders had argued that full requirements contracts may not legally be used as part of the default service portfolio, since statute requires the portfolio to consist of "standard wholesale products," and full requirements contracts are not cited by statute as a standard product.

"Having reviewed the statute and the parties' positions, the Commission agrees with Staff and the IPA that full requirements products should be considered a 'standard product' under Section 16-111.5," the ICC ruled.

"As Staff noted, while the statute does not single-out full requirements products as among those considered to be 'standard wholesale products,' the list that is provided is preceded by the phrase, 'including but not limited to.' 220 ILCS 5/16-111.5(b)(3)(iv). The Commission notes that full requirements products will still be subject to the same determination of their compliance with the PUA as other standard wholesale products on a case-by-case basis and encourages the IPA to provide any benchmarks it deems necessary to ensure that compliance prior to the procurement of such products," the ICC said.

While finding that full requirements contracts may legally be used in the default service plan, the ICC declined to rely on full requirements contracts at this time, citing a lack of sufficient evidence that they would be beneficial to customers.

"The Commission notes that the only uncontested argument on this issue is that full requirements products will likely be purchased at a premium to traditional products. Even ICEA concedes this fact. (ICEA Reply at 5) The question before the Commission now is whether those premiums are outweighed by the 'embedded' premiums included in the block and spot approach. The IPA and ICEA provide competing analyses on this question. It appears that the two competing analyses differ not in whether a premium exists for these products, but in the estimated size of the premium. While the Commission believes that fixed price full requirements products could prove to be appropriate risk hedging tools, to the extent those products satisfy the PUA, it does not believe sufficient evidence has been provided in this proceeding to make the policy shift at this time. Thus, the Commission declines to adopt ICEA's proposal," the ICC said.

The ICC instead approved the continued use of block energy purchases for default service. As noted in our prior story concerning the ICC's approval of the plan, these purchases may now potentially occur in two annual procurements rather than a single procurement -- in April and, if needed due to changes in migration, September.

However, for purposes of next year's plan, "the Commission directs the IPA to include a more thorough and accurate analysis of the impacts of incorporating full requirements products into its procurement strategy, including the balance of benefits-to-premium costs of those products and any significant implementation costs it believes will result from this shift in procurement strategy."

Noting that arguments in favor of full requirements contracts have related to such contracts' benefit in reducing volatility in the Purchased Electricity Adjustment (a reconciliation charge to default service customers), the ICC said that it, "encourages the parties to identify ways in which the PEA may be improved."

Docket 13-0546