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ALJ Issues Recommended Decision On Retail Suppliers' Proposal To Relieve EGSs Of NITS Charges At PECO, Make Collection Nonbypasable

ALJ Would Adopt Partial Settlement Addressing Other Default Service Issues, Standard Offer Customer Referral Program, POR Discount

October 20, 2020

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Copyright 2010-20
Reporting by Paul Ring •

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A Pennsylvania ALJ has issued a recommended decision in PECO's default service proceeding that would establish parameters for default service for the period June 1, 2021 through May 31, 2025 (DSP V)

The ALJ recommends adoption of a previously reported non-unanimous partial settlement, and supplemental Time of Use (TOU) settlement, without modification.

In doing so, the only issue left to be addressed by the ALJ was a proposal from a coalition of electric generation suppliers (Electric Supplier Coalition or ESC) to have PECO assume the responsibility of Network Integration Transmission Service (NITS) costs for all delivery customers, with recovery on a nonbypassable basis, and with retail suppliers relieved of NITS responsibility

In proposing the change, the Electric Supplier Coalition argued that NITS costs are not market-based and are volatile, which requires retail suppliers to include risk premiums in fixed term prices. In contrast, the ESC said that since PECO recovers NITS costs through the Transmission Service Charge, and not through the wholesale full requirements contracts, wholesale suppliers do not bear the same risk and need not include a NITS risk premium, thereby producing a skewed market.

Calpine and PECO were among opponents of the ESC's NITS proposal. Calpine's similar opposition in a Duquesne Light default service proceeding was previously reported in our prior story here

The ALJ would deny the ESC's proposal to make NITS costs nonbypassable and to assign to PECO the NITS obligation for all distribution customers

"In this proceeding, ESC has failed to show that the NITS costs in PECO's service territory are so volatile that they cannot be predicted," the ALJ said

"[A] FERC-approved formula rate periodically sets a transmission provider's wholesale transmission rate using a cost-of-service formula, rather than separate rate cases, to determine the resulting NITS charge. See PAIEUG Main Brief at 9, referencing PAIEUG Statement No. 1 at 6. The formula emulates how transmission rates are set using a standard revenue requirement calculation and the applicable load. The formula uses FERC Form 1 data, and the formula are detailed and well-documented. As a result of the process no question exists regarding when periodic changes in NITS rates will become effective and EGSs can anticipate changes in NITS rates. The protocols that accompany a formula transmission rate specify when rates are to be reset – for PECO, new NITS rates are implemented on June 1 of each calendar year. Even though a formula rate may be forward-looking, there is a true-up that reconciles the forward-looking rate with the actual costs incurred to provide NITS, as published in each utility's FERC Form 1. Because the formula rate includes a true-up provision, a utility is allowed to recover only its actually incurred costs as reported in FERC Form 1," the ALJ said

"In addition, NITS rates are based on a standard cost-of-service calculation using the same type of information typically found in an EDC's FERC Form 1. Thus, the primary drivers of the NITS rates are transmission investment, transmission-related operating expenses, cost of capital, applicable income tax rates, and peak demand. Ultimately, the regulatory process in place at FERC does not negate the ability of EGSs to manage their loads and NITS costs. Calpine Statement No. 1 at 3," the ALJ said

"Furthermore, ESC does not provide any evidence of volatility for PECO's NITS rates. None of the examples of NITS rates volatility brought forth by the Coalition in this proceeding pertain to PECO. Instead, they involve other transmission owners. Contrary, to ESC’s claims of volatility, PAIEUG has shown that, since implementation of a formula rate, PECO's NITS rates have been stable and have decreased over the past two years. See PAIEUG Statement No. 1 at 7," the ALJ said

"Currently, Commission precedent holds that the collection of NITS for shopping customers should remain with the customer's EGS. In PECO DSP III, the Commission rejected the argument that the unpredictability of NITS costs lends itself to collection by PECO instead of EGSs. Finding no evidence that PECO's NITS costs were of such a volatile nature in PECO's service territory that it would render them unpredictable and difficult for the EGSs to hedge" the Commission concluded that "NITS related costs should not be collected within [PECO's] non-bypassable rider mechanism. PECO DSP III Order, at 53-54. Because the Coalition has failed to show that PECO’s NITS costs are volatile and unpredictable in nature, its argument for changing the status quo based upon a claim of volatility of PECO NITS rates is simply unconvincing," the ALJ said

"I find that Calpine presents the strongest counterargument to ESC’s position in this proceeding. Just like the members of the Coalition, Calpine incurs NITS costs; however, it has been able to manage NITS costs and still offer products and services that its customers desire. Calpine Main Brief at 3. It has achieved this by managing the customers loads served by Calpine. Id.; see also Calpine Statement No. 1 at 3. Unlike ECS, Calpine defends the allocation of NITS costs on EGSs as an aspect of a competitive retail market, and sees the cost shifting proposed by ECS as simultaneously limiting existing and potential customers’ product and service choices. Calpine paints a grim picture of the competitive retail market if ECS’s proposal is adopted. The cost shifting proposed by ECS would not only harm the retail market, but it would also remove any incentive and opportunity to create customized products and services that are, or potentially might be formulated, to assist EGS customers in addressing these costs. Calpine Main Brief at 3, citing PAIEUG Statement No. 1 at 8-9. Tellingly, Calpine, PAIEUG and PECO consider ESC’s proposal an attempt on the part of its members to shed and shift market risk associated with their own demand-driven costs," the ALJ said

"More importantly, having EDCs collect NITS costs, as proposed by ESC, constitutes rebundling of transmission and distribution service for certain groups of customers in clear contravention of the Competition Act. Also, Commission regulations designate transmission service as a load-following expense, meaning that the entity providing a customer's generation service must also take responsibility for the provision of transmission services and collection of the associated costs. See 52 Pa. Code §§ 54.182, 54.187(d). Consequently, the removal of NITS costs from products in the competitive market is contrary to the intent of the Competition Act and Commission regulation," the ALJ said

"In view of the above, I recommend that ESC’s proposal that PECO acquire NITS for all customer load and recover the associated PJM charges on a non-bypassable basis be denied as ESC did not establish any basis to change the existing Commission-approved assignment of responsibility for NITS to all LSEs, including EGSs," the ALJ said

Partial Settlement, Other Issues

As noted above, the ALJ recommends approval, without modification, of a partial settlement addressing all other default service issues, and a TOU settlement addressing TOU implementation cost allocation between residential and non-residential customers. Under the TOU settlement, PECO will allocate 70% of the costs incurred to implement its new TOU default service rate options based on the total number of default service customers in the Residential and Small Commercial procurement classes, and 30% of the costs on the number of default service kWh consumed by the Residential and Small Commercial procurement classes.

The partial settlement recommended for adoption addresses the following issues: procurement issues and the price to compare; changes to the Standard Offer Customer Referral Program including its impact on the POR discount; billing improvements for EGSs, Customer Assistance Program (CAP) customer shopping; and a TOU option or non-shopping customers.

See details of each of these issues and how they are addressed under the partial settlement, now recommended for adoption, in our prior story here

In recommending adoption of the partial settlement, the ALJ endorses its procurement mix of short-term and spot contracts for full requirements service, and rejected objections from environmental groups which had sought long-term renewable energy contracts

"It is the Environmental Stakeholders’ position in this proceeding that the Company failed to properly analyze and incorporate long-term renewable energy supply contracts in its preparation of the DSP V plan," the ALJ noted

"It is undisputed that PECO plans to procure supply for DSP V exclusively through short-term contracts and spot market purchases. For the Residential Class, approximately 61% will be met by 2-year FPFR contracts, approximately 38% of load will be met by 1-year FPFR contracts, and approximately 1% of load will be met by spot market purchases. Joint Petition ¶ 19. For the Small Commercial Class, approximately 50% of load will be met by 1-year FPFR contracts and 50% of load will be met by 2-year FPFR contracts," the ALJ said

"The only long-term contracts included in DSP V are the new ten-year Solar AEC contracts that will replace the existing ten-year Solar AEC contracts that will be expiring by the end of DSP IV," the ALJ noted

"It is also undisputed that the designs of PECO’s DSP I-IV also relied exclusively on short-term contracts and spot market purchases to meet load needs. However, there is no evidence on the record that PECO’s default service provider plans have performed poorly in the last decade or that the Commission has ever mandated that EDCs procure or manage a minimum quantity of long-term energy supply contracts. On the contrary, the Commission has emphasized the value of flexibility in the design of DSP plans," the ALJ said

"In the present case, PECO showed that laddering one year and two year full requirements contracts, along with some spot and some long-term contracts for Solar AECs to meet a portion of AEPS Act obligations, has been effective in addressing price volatility for its default service customers. Due to this assessment of the attributes of PECO’s Commission-approved DSP IV, the Company is following the same approach in DSP V. See PECO Statement No. 4-R at 11; PECO Statement No. 4 at 11-18. In addition, PECO’s plan ensures the least cost to customers through the procurement of full requirements supply products because bidders compete on the basis of the lowest price to satisfy all aspects of the default service customers’ load requirements, including the portfolio management function," the ALJ said


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