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PUC Issues Long Awaited End-State Order

In an effort that is likely to fall short of the expectations of more than a few participants, the Pennsylvania Public Utility Commission (“Commission”) officially shared its vision of the next steps for encouraging more competitive electricity markets in the Commonwealth.

The Commission’s Order at Docket No. I-2011-2237952, issued at its February 14, 2013 Public Meeting, will produce a result that is nearly identical to the Tentative Order issued last year.  The center-piece of the Order is the Commission’s commitment to eliminating the current default service procurement requirements that require a mixed portfolio of longer and shorter term contracts geared toward providing default service at the “least cost over time”, and to instead go nearly to the opposite extreme—quarterly procured and priced service.  The Commission’s rationale relies on the assumption that a short-term market driven default service price will provide customers with the lowest prices over time, which is probably correct.  The Commission also hypothesizes that a short-term market driven default service price will force suppliers to reduce their prices to the bare minimum in order to compete with that default service price.  This also is probably correct.  The Commission then concludes that its plan of reducing retail suppliers’ opportunity for profit, and forcing them to be price takers as they struggle to convince customers that a one year fixed price that is higher than the current quarterly default service will be a better deal for the customer in the long run.  The Commission goes on to suggest that hitching the default service price to the shooting star variability of a quarterly wholesale price will eliminate the boom and bust cycles in the competitive retail market and increase the level of competition in the retail market.

It is in these last two points that the Commission’s reasoning goes off of the rails.  First, while it may be true that the quarterly procured and priced default service will reduce the price to compare or PTC, the rate at which default service is provided, such a pricing scheme will not encourage the development of a robust competitive market.  Short-term pricing will erode supplier margins, if there are margins to be had at all.

The crux of the problem is the current market fundamentals.  The market currently is contango, which means that short term prices are lower than longer term prices.  The reason this is a problem is that suppliers who do not own generation will need to buy power in a long term market at prices that are higher than the short term market.  This means that it is difficult, if not impossible, for suppliers to make offers to customers, for contracts over 3 months duration, that appear to be at a discount to the quarterly PTC.  Consequently, unless suppliers are willing to sell at a loss, or to offer what can be deceptive teaser rate contracts, they will not be able to offer customers the level of discounts that are typically understood to be necessary to convince customers to switch.  That is, a supplier may be able to offer short term pricing that is at, or slightly below, the quarterly PTC over the short term, but this process is not sustainable, and is likely to produce booms and busts. No matter what, it will drive supplier’s margins down to the point where they may simply choose to leave the market.  And don’t forget, the PTC will continue to be reconciled so that if a default service provider were to mis-price in one quarter, and for the sake of argument, issue a PTC that is lower than the market would otherwise indicate, it could re-coup that money in the next quarter, while the suppliers that lost customers, and possibly went belly-up as a result, have no such opportunity and no recourse.  Recent history has shown that Pennsylvania’s EDCs have had some problems in this regard, layering on even more risk for suppliers.

As this commentator and others have stated, the quarterly procured and priced PTC will likely result in a retail market where only those suppliers that own generation will be able to participate, and eventually will lead to an oligopolistic retail energy supply market in the Commonwealth of Pennsylvania.  It would have been better for the Commission to remove this issue from the proposal and to instead focus on the other aspects of the Order, which actually will improve competition.  These include the first switch capability so that customers can sign up for competitive supply that will begin on the first day of service, so that they need never take default service.  This capability will dovetail nicely into a requirement that new and moving customers must choose a supplier from a list that could include utility service, rather than being placed on that service by default.

In conclusion the Commission should not be in a rush to go further than its soon-to-be implemented retail market enhancements. The Commission should let the electricity market absorb and adjust to these programs before embarking on such further drastic measures.

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