END STATE OR JUST THE “END”

In a long anticipated Tentative Order, the Pennsylvania Public Utility Commission (“PUC”) finally revealed its vision for the “end state” of the retail electricity market in Pennsylvania.  The problem; many observers believe that the “cure” will kill the patient.

In a Tentative order issued on November 8, 2012, the PUC finally revealed its vision of the end state for the retail electricity market in the Commonwealth.  By most accounts, the retail electricity market in Pennsylvania is one of the most competitive, and the PUC has set for itself the goal of making it even better.  The PUC appears, however, to have eschewed the free market approach which holds that the only way to have effective competition is to eliminate the inherent conflict between true competitors and the quasi-regulated, risk-free default service which has become the de facto competitive benchmark price.  Instead the PUC seems to have adopted what appears to be an incremental approach, and simply opted to make changes to the way that default service is procured and priced.  That is, the PUC would continue to insist that the incumbent distribution utilities, known as electric distribution companies (“EDC”), provide default service at a reconciled price.

The proposed “change” is to eliminate the current diverse procurement strategy that requires EDCs to purchase generation supply through a mix of long term, short term and spot purchases which are geared to provide default service at the “least cost over time,” 
66 Pa. C.S. § 2807(e)(3.3), and to instead inject volatility into the default service price by requiring that EDCs purchase supply in successive ninety-day full requirements procurements.  This would mean that every ninety days a new array of full requirements contracts would begin at a new price that would include the reconciliation of the prior 90 day’s over and under collections.  Some interested parties have noted that this scheme will increase PTC volatility significantly and is likely to increase customer dissatisfaction in general.  There is little evidence to suggest, however, that PTC volatility alone will cause residential customers, in particular, to migrate.

The reasons why this new scheme is likely do more harm than good are complex, but foremost is that fact that most electric generation suppliers do not own significant generation assets.  This fact is critical because long-term wholesale electricity supply prices are higher than short-term market prices, meaning the market is contango (the market condition wherein the price of a forward or futures contract is trading above the expected spot price at contract maturity).  What that means is that non-generation owning suppliers will be limited to offering customers short-term prices at or near the level of the default service price i.e. ninety (90) days, because longer term prices will demand too much risk premium.  Only suppliers that own generation, and that are not subject to the non-discriminatory sales regimen enforced by the Federal Energy Regulatory Commission (“FERC”), will be able to able to absorb the risk of offering longer term stable prices that have become the staple of competitive offerings.

The Commission will be receiving comments from interested parties that are due on December 10, 2012, before rendering a final decision on the End State.  Whatever they decide, let’s hope it is not the end of retail electricity competition as we know it.