Pennsylvania Proposes New Policy for Interest Charged on Default Service Over, Under-collections, To More Accurately Reflect Supply Costs

The Pennsylvania PUC issued an advanced notice of proposed rulemaking to implement a uniform interest rate applicable to over- and under-collections of electric default service costs via reconciliation of automatic adjustment clauses.

RetailEnergyX.com had first reported earlier this month the PUC's intent to institute a review of automatic adjustment clauses.

Specifically, the PUC is proposing that a uniform interest rate apply to over- and under-collections of the following automatic adjustment clauses related to electric default service:

• Price-to-Compare (PTC)
• Hourly Pricing Default Service Rider (HPDSR)
• Transmission Service Charge (TSC)
• Generation Supply Charges 1 & 2 (GSC-1 & GSC-2)
• Generation Supply Adjustment 1, 2, 3, 4 (GSA 1-4)
• Generation Supply Service Rate (GSSR)
• Default Service (DS)
• Default Service Supply (DSS)

The PUC said that interest rates on under- and over-collections are often asymmetrical. "Asymmetrical interest rates create an incentive for the utilities to under project or under collect in order to avoid over collection penalties and to receive an interest rate higher than that which can be found in the market. This practice can lead to an understated price-to-compare (PTC). An understated PTC undermines the competitive market because electric generation suppliers (EGSs) cannot under collect and then make-up that under collection later as can the utilities."

"At this time the Commission is not aware of any intentional over or under collecting being done by EDCs in order to earn more interest. However, in addition to the volatility of rates caused by unpredictable weather and shopping patterns of customers, there is the widely-recognized possibility that an EDC could attempt to use the automatic adjustment clause methodology related to electric default service to increase interest earnings. In general, EDCs have a 50/50 split in over collections versus under collections relating to electric default service. Additionally, the over and under collections by month are well within a reasonable percentage of allowable costs in the associated months. However, in order to ensure accurate projections and to create uniformity, the Commission proposes to apply a symmetrical interest rate, reflective of market conditions, to under and over collections as set forth below," the PUC said.

"The Commission's current use of the legal rate of interest for under collections and the legal rate of interest plus 2% for over collections, used for most electric default service automatic adjustment clauses, results in interest rates that are well above current market-based rates," the PUC said

The PUC sought comment on a proposal to use the prime interest rate for the calculation of interest on both over-and under-collections resulting from automatic adjustment clauses related to electric default service. The prime rate would specifically be the prime rate for commercial borrowing in effect on the last day of the month the over-or under-collection occurred, as reported in the Wall Street Journal or other publicly available source identified by the Commission

"In the event the Commission finds that the application of the symmetrical rate of interest set forth above does not adequately prevent EDCs from using automatic adjustment clause methodology related to electric default service to increase interest earnings, the Commission may consider the application of a modified interest rate applicable to 'excessive' portions of over and under collections. In addition to the prime rate of interest applicable to the 'non-excessive' portion of all over and under collections, the Commission may consider applying a modified interest rate of prime rate plus 100 basis points on the 'excessive' portion of all over collections and a modified interest rate of prime rate minus 100 basis points on the 'excessive' portion of all under collections," the PUC said.

"Although the Commission cannot completely eradicate all imbalances in the amount of costs that are overcollected and undercollected, the proposed symmetrical interest rate structure set forth herein will deter utilities from inaccurately forecasting costs and sales to improperly increase interest earnings," the PUC said.

Docket No. L-2014-2421001