Utility: Wholesale Market Mergers Negatively Impacting Default Service Procurements, Forces EDC To Seek Change At PUC

"[A]dverse impacts from recent merger and acquisition activity within the wholesale market," have forced Citizens' Electric Company and Wellsboro Electric Company to petition the Pennsylvania PUC for an amendment to their recently adopted default service plan.

As previously reported by EnergyChoiceMatters.com, Citizens' and Wellsboro received approval for a new default service plan, starting June 1, 2015, under which, for residential and small commercial customers (under 400 kW), the utilities would procure a single three-year load following contract at each company, to be served by a single supplier at each utility.

The default generation rate is to be a six-month fixed rate, based on PJM West Hub on-peak monthly forward pricing, plus a pass-through of NITS and capacity, plus a supplier-determined adder, which would reflect AEPS costs, ancillaries, congestion, losses, and volumetric and migration risk, plus reconciliations. The PJM forward pricing would be adjusted ahead of each six-month period on "trigger dates", with the supplier adder fixed for all three years.

The PUC adopted the plan broadly, but due to concerns that such a product would expose customers to the re-pricing of 100% of the energy supply every six months based on a single trigger date's pricing, the PUC introduced a modicum of laddering into the procurement design based on PJM pricing.

Specifically, as described by Commissioner James Cawley, "In order to assuage these valid concerns, the pricing for the energy component of this wholesale contract for Residential and Small C&I Default Service should be adjusted every six months based on PJM West Hub on-peak monthly forward pricing on the same predetermined Trigger Dates, using a formula based on the mathematical average of the monthly on-peak MWh strip pricing for a MWh sold to customers during a 12-month pricing period, accounting for half the portfolio. The other half should be composed of another 12-month period reflecting PJM West Hub on-peak monthly forward pricing of another 12-month period, six months hence. In order to achieve this laddered pricing, the first six months and last six months of the three year contract should reflect a blend of six-month and 12-month strip pricing. For all other contract periods, the energy component should reflect a blend or laddering of the 12-month forward pricing obtained from the two Trigger Dates six months apart."

Although the product is a decidedly wholesale product, with suppliers having no direct relationship with customers, EnergyChoiceMatters.com reported at the time that Cawley, noting that the supplier would serve all customers at the utility for a three-year period, "encourage[d] EGSs to step up to the plate here and bid, so as to demonstrate that they can effectively serve a constructive role in facilitating the provision of default service under more innovative default service designs."

Retail suppliers have apparently not "stepped up," as Citizens' and Wellsboro are reporting a lack of interest in bidding for the product, and sought an amendment to the plan to reflect the potential for fewer bidders.

One of the cited reasons for decreased bidder participation is, "adverse impacts from recent merger and acquisition activity within the wholesale market," Citizens' and Wellsboro said.

Specifically, Citizens' and Wellsboro reported the spinoff of PPL EnergyPlus into Talen Energy, "impacted the supplier's ability to participate in the RFP, as PPL Energy Plus representatives confirmed that the supplier would not entertain new contracts through approximately 3Q 2015 pending completion of significant internal restructuring."

The utilities also said that some suppliers expressed concern with the procurement plan as revised by the PUC with the blended market pricing, "with one supplier specifically declining to bid because the revised plan proposed unconventional pricing mechanisms, but bound suppliers to a compressed RFP schedule that would be more appropriate for standard products."

"[T]he unconventional nature of the product, and the limited RFP timeframe emerged as substantial impediments to interested bidders," the utilities said.

Citizens' and Wellsboro therefore sought an amendment to their plan to eliminate the requirement that at least three bidders participate. Instead, the utilities propose that at least two bidders participate, and if only two bidders participate, that the utilities also evaluate a benchmark price based on neighboring utility Prices to Compare as a proxy third bid.

"The benchmark report would compare the preliminary default service rates filed with the Commission by PPL and Penelec for the period June 1, 2015 - September 1, 2015, with the projected tariff rates that would result for each final bid received by the Companies. As another benchmark, the Companies intend to compare the projected rates to their recent PtCs. The Companies would use a format similar to the annual benchmark reports historically filed in compliance with the current DSP. The Companies aver that the benchmark report provides a reasonable proxy for a third bid and provides the Commission with sufficient information to affirm whether the RFP produced a competitive outcome," the utilities said.

The utilities asked for expedited approval of their amendment by April 23

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