competition - HMS Legal

Second Time is the Charm for Natural Gas Supplier Parties!

Todd Stewart on September 18, 2015

In a binding poll of the issues taken at its September 17, 2015 Public Meeting, the Pennsylvania Public Utility Commission (“PUC”) unanimously voted in support of the Natural Gas Supplier Parties’ (“NGS Parties”) request to modify the way Columbia Gas of Pennsylvania (“Columbia”) refunds back to customers’ their share of off-system sales revenue.

In Columbia’s 2014 gas cost reconciliation filing under 66 Pa. C.S. § 1307(f), (Docket No. R-2014-2408268) the NGS Parties raised the issue of the inequity of Columbia’s Universal Sharing Mechanism (“USM”). The USM flows back to customers 75% of the revenue generated from so-called off-system sales and capacity release activities that allow the company to maximize the return on the assets paid for by rate payers. Columbia is permitted to retain 25% of the revenue. The NGS Parties contended that the 75% customer share was allocated disproportionately to default service customers, causing customers who shop—Choice customers–to subsidize default service. The NGS Parties argued that because sales revenues were such a small portion of the revenue, and that capacity release was a critical component of every type of transaction, that the fairest allocation was that all customers share the revenue on an equal basis. The Office of Consumer Advocate (“OCA”) and others contended that the current allocation, 60% to default service customers, 40% to all customers (which in reality amounted to 93% to default service and 7% to Choice customers) was fair, and was possibly too generous to Choice customers. In its decision on the 2014 case the PUC did not decide the merits, but instead required Columbia to provide more detailed information regarding how such revenue is generated as part of its next 1307(f) filing.

In its 2015 filing (Docket No. R-2015-2468056), Columbia included the required study. The study showed that all off-system sales transactions required the release of capacity, but that the converse was not true, that is, all capacity releases did not involve the sale of gas. Importantly, there was no evidence that any gas purchased for default service customers was ever sold as part of an off-system sale transaction. In this year’s case the same basic argument were made, including a new one presented by Columbia and supported by the Bureau of Investigation and Enforcement (“I&E”), that hypothesized that because the sharing mechanism would become more heavily weighted towards default service customers as shopping increased, that the only “problem” with the current allocation was the potential for increased shopping. Thus, it was suggested that an adjustment mechanism that changed the allocation percentages as shopping levels change over time was all that was needed. The obvious flaws to this approach are that shopping levels have no influence on the way off-system sales revenue is generated, and the starting point for the adjustment would have been the current inequitable allocation.

In the recent binding poll, the PUC sided with the NGS Parties who contended that the I&E proposal was unreasonable; and sided with the NGS Parties on the reasonableness of allocating 100% of the revenue to all customers on the same basis. The order has not yet been issued, but the poll represents a win for ending subsidies and reducing the current barriers to truly competitive markets.

PUC Issues Long Awaited End-State Order

Todd Stewart on February 21, 2013

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.

End State Or Just The “End”

Todd Stewart on December 6, 2012

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.

First Energy Pays Price for Being First

Todd Stewart on September 24, 2012

The Pennsylvania Public Utility Commission (“PUC”) caused quite a stir with its August 16, 2012 Order[1] that partially approved the jointly filed default service plans of the four First Energy electric utility affiliates serving in Pennsylvania.

[1] Joint Petition of Metropolitan Edison Company, Pennsylvania Electric Company, Pennsylvania Power Company and West Penn Power Company for Approval of their Default Service Programs, Docket Nos. P-2011-2273650 et al. (Order entered August 16, 2012)(“First Energy Order”) .

The First Energy Order, the result of a binding pole of the issues conducted at the PUC’s August 2, 2012 Public Meeting, made substantial changes to ALJ Elizabeth Barnes’ Recommended Decision which had been issued earlier in the summer. Prominent among the modifications were the PUC’s changes to a Retail Opt-In (“ROI”) Auction program. The ROI program is intended to encourage default service customers to shop by offering a discount off of the Price to Compare (“PTC”) and a $50 rebate to customers and has been the centerpiece of the PUC’s suite of proposed market enhancements.

First Energy had proposed the ROI in a form that largely reflected the PUC’s wishes for such programs as expressed in its Retail Markets Investigation Order,[1] and with a few exceptions, notably cost recovery, the ALJ had largely adopted First Energy’s proposal. First Energy had proposed a 12 month ROI product with the discount set by a descending clock auction among participating electric generation suppliers (“EGS”). The PUC rejected the descending clock auction, and the very concept of an auction, and replaced it with a ROI aggregation program in which any eligible supplier raising its hand can receive an assignment of a percentage of participating customers. The PUC also modified the offer that would be provided to customers, replacing the 12 month fixed price with a four month offering at a fixed five percent (5%) discount off of the PTC at the time of the offer. Customers will still receive a fifty dollar ($50) bonus payment if they stay with their assigned supplier for the initial four (4) month term. In a new wrinkle, however, the PUC added an eight (8) month component to follow the initial 4 month term, but did not specify a price for the that component other than to say that the PUC would review the terms and conditions. Importantly, the PUC deferred the issue of how to pay for the ROI to a collaborative process between First Energy and the supplier parties. First Energy is required to make a compliance filing to the PUC within sixty (60) days — by October 15, 2012 that reflects a consensus proposal.

The uncertainty created by several aspects of the First Energy Order, and the ROI program in particular, provoked Petitions for Reconsideration by the Office of Consumer Advocate (“OCA”) and the Retail Energy Supply Association (“RESA”) among others (including First Energy). Answers were filed by a number of parties. In general, most agree agree that the PUC should have provided more specific direction for the eight (8) month component of the ROI product, and should have addressed cost recovery more definitively.

First Energy, in its Petition for Clarification, raised concerns about the finality of the First Energy Order with regard to its procurement plan — First Energy’s procurement plan has it beginning to purchase energy in October 2012. In an apparent effort to emphasize its concern, on September 6, 2012 First Energy filed a revised Default Service Plan that made revisions to its procurement plan as required by the PUC’s Order.

At its September 13, 2012 Public Meeting, the PUC granted reconsideration of all six (6) Petitions for Reconsideration and/or Clarification that had been filed, pending further consideration on the merits. The Commission’s action allows it to retain jurisdiction and effectively stops the appeals clock from ticking until the PUC enters an Order that clarifies and/or reconsiders its original Order. The next Public Meeting is scheduled to be held on September 27^th.

All of this drama has occurred while the Default Service Plans of the other three (3) large electric distribution companies, PECO, PPL and Duquesne Light Company, are pending. A Recommended Decision on PECO’s plan already has been issued by ALJ Dennis Buckley, and Exceptions and Replies to Exceptions were filed by a number of parties. Both PPL and Duquesne have been through the hearing phase and briefs are due in early October, with ALJ decisions expected in November or early December.

The First Energy Order has created palpable uncertainty, particularly concerning the PUC’s intention to use the Order as a model for the default service plans yet to come before it. The uncertainty has caused parties in those other proceedings, which were at various stages of litigation, to introduce alternative proposals that address the potential for the PUC to use First Energy as the standard. A rapid and decisive PUC decision that clarifies the First Energy Order will allow parties in those ongoing proceedings to have the benefit of that information; at least for PPL and Duquesne, where the briefs have yet to be written.

In other related developments, the PUC is expected to issue a Secretarial Letter seeking comments in the RMI proceeding in late September. That Secretarial Letter is expected to outline the PUC’s vision of the “end state” of the electricity market, and seek comments of interested parties prior to issuing final guidance on the “end state” in late November or early December 2012.

[1]Investigation of Pennsylvania’s Retail Electricity Market; Intermediate Work Plan, Docket No. I-2011-2237952. (Order entered March 2, 2012)(“IWP Order”).

PA PUC Requested by Statutory Advocates and Two NGDCs to Examine The Practice of Natural Gas Flexible Pricing or Negotiated Discount Rates

Thomas Sniscak on July 6, 2012

Historically the Pennsylvania Public Utility Commission (PUC) has permitted natural gas distribution companies (NGDCs) to use flexible pricing or “flex” contract rates to attract or retain large customers who have other energy alternatives. The reasoning has been that “half a loaf is better than none,” and that such revenues, which cover and exceed marginal cost, contribute positively to overall cost of service. The result is a benefit to the large customer, the utility, and all customers generally. Moreover, in terms of retaining a customer, the argument in favor of the status quo is that other ratepayers benefit as they do not bear the revenue burden of stranded investment or a smaller revenue pot over which to apply costs. The NGDCs have generally been able to recover from other ratepayers the difference between the “flex” rate and what would have otherwise been charged under an ordinary general tariff rate.

Just as historically, the statutory advocates that represent residential ratepayers, small business ratepayers, and PUC prosecutorial rate staff, oppose the practice as uneconomical or inequitable. Specifically, they dislike the PUC’s allowing the NGDC to recover the flex discount from other customers. They are focused, at this point, on the use of flex contracts in portions of western Pennsylvania where NGDCs often have overlapping territories and compete for customers.

The statutory advocates have been able to convince two NGDCs, Peoples Natural Gas Co. and Columbia Gas of PA, as part of rate case settlements, to agree to be parties with them to ask the PUC to institute a generic proceeding to examine whether flex rates should continue in “gas on gas” competition instances. That joint petition has been submitted at PUC Docket No. P-2011-2277868.

While supporters of the request to investigate the practice maintain that it only applies to “gas on gas” competition, the proceeding may have, or at a minimum may lead, to broader implications as the arguments for and against flex rates for “gas on gas” competition could be used by those who oppose the practice to challenge any flex rate situation that was created to address competition by energy options other than from NGDCs. Clearly, this proceeding will impact large customers with energy alternatives, and presents important policy considerations involving Pennsylvania’s ability to attract or retain large customers and the many jobs and contributions to the economy they create.

One would expect any involved NGDC , particularly those who have “gas on gas” based flex agreements in place, and the large customers under those agreements, to defend and support the practice vigorously. It is important to large business and to NGDCs to keep rate flexibility to address competition and avoid loss of customers or to attract new customers or additional usage.

There is no deadline under the PUC’s regulations as to when it must decide if the subject should be examined. The firm’s contact on these issues is tjsniscak@hmslegal.com.

PUC Proposes Structure for Transitional Electricity Market

Todd Stewart on March 5, 2012

The PUC yesterday took a big first step toward creating an electricity market where most customers are served by competitive suppliers, and not by utilities, and unanimously voted to adopt recommendations for the next round of default service plans that will be filed by Pennsylvania’s electric utilities.

As part of its ongoing Retail Markets Investigation, on March 1, 2012, the PUC issued and Order at Docket No. I-2011-2237952 that addresses how default service will be provided after June 1, 2013. Among the most innovative provisions, the Order requires the inclusion of a number of “competitive enhancements” aimed at stimulating shopping in the short run. Among the competitive enhancements are a standard offer referral program that will provide customers with a minimum 4 month, 7% discount offer from suppliers, and an opt-in retail auction, where suppliers will bid to provide service to customers who volunteer, at a fixed price, with a minimum $50 signing bonus to be paid if the customer stays at least 3 months. The Order addresses many of the specifics of these programs including the timing and structure of the offers, the auction process and the security requirements for participating suppliers.

The timing of this Order is expected to complicate the plans of the First Energy Companies and PECO Energy, since both already have filed their default service plans for the upcoming period, and their filed plans, in more than a few aspects, differ from the guidelines.

The Commission’s Final Order is available here.

Electricity Default Service Plans – The Next Generation

Todd Stewart on February 24, 2012

Two electric distribution companies, First Energy and PECO Energy Company, have filed their default service plans for service that will begin in 2013 – before the PUC has issued final guidance on what those plans should include.

In an apparent effort to be the first ones through the gate, both companies have filed their plans, and are litigating those plans, before the Commission has issued final guidance as to what it expects to be contained in those plans. The Commission Order addressing the specifics of the next generation default service plans is expected to be issued in the first week of March.

The Commission issued a Tentative Order at Docket No. I-2011-2237952, proposing requirements for default service plans for the June 1, 2013 through May 31, 2015 time period. Shortly thereafter, the First Energy Companies submitted a Joint Petition seeking approval of their own view of what default service should look like in the future. The First Energy plan, which does not exactly track the Commission Order, does include competitive enhancements such as a retail opt-in auction and customer referral program. Perhaps the most novel proposal is First Energy’s market adjustment charge which would be a half cent adder to the price to compare that will compensate the companies for the risk of providing default service. The First Energy matter is being litigated before a Commission ALJ and should be resolved in the fall of 2012.

Following close behind the First Energy Companies, PECO filed its default service plan for the June 2013 through May 2015 in early January. It too has proposed retail opt-in auctions and customer referral programs. A prehearing conference in that case will be held in early March.

As the litigation of these two cases proceeds, the parties will have to wait and see what the Commission’s expected Final Order in the Retail Markets Investigation process yields with regard to guidance on the default service plans for that same time period. Based upon ALJ Elizabeth Barnes’ recent ruling in the First Energy case, we may see testimony adjustments in those ongoing cases as a result.

The Commission has been investigating ways to improve the competitiveness of the retail electricity market in Pennsylvania for nearly a year and the Final Order on the next default service plans, which is expected to be issued shortly, will likely not be the final word.

Stay Tuned….

PUC Proposes Rules For Improving Competitiveness Of Electricity Markets

Todd Stewart on December 16, 2011

On December 15, 2011 the PUC issued two orders designed to make Pennsylvania’s retail electricity market fully competitive. Both orders are a product of the PUC’s ongoing Investigation of Pennsylvania’s Retail Electricity Market (“RMI”), Docket No. I-2011-2237952. The first order (“RMI Final Order”) addresses the desired features of soon-to-be-filed electric utility default service plans and programs that will be implemented as part of those plans. The second order (“RMI Work Plan Order”) provides granular detail on specific components, including consumer education, accelerating of switching time frames, customer referral programs, and retail opt-in auctions.

PUC Announces Agenda for November 10th Retail Electricity Markets Investigation Hearing

William Lehman on November 7, 2011

The Pennsylvania Public Utility Commission (PUC) recently announced the Agenda for their November 10, 2011, en banc hearing, which is part of the PUC’s ongoing investigation into Pennsylvania’s competitive retail electricity markets.

Following a presentation of consumer survey results, the en banc hearing will be divided into five panels addressing issues such as consumer survey results; a statewide consumer-education campaign; accelerated switching timeframes; customer referral programs; retail opt-in auction; and default service plans beyond June 2013. The panels include a mix of consumer advocates as well as utility and supplier representatives.

The hearing is to be held:
12:30 p.m. Nov. 10, 2011
Hearing Room 1
Commonwealth Keystone Building
400 North St., Harrisburg, PA

The hearing is designed to provide insight on key issues that the PUC plans to address either before or as part of the intermediate work plan to promote competition. The PUC has selected panel participants representing a diverse set of perspectives. Panel participants will make a short presentation then the Commissioners will conduct a question and answer session of each panel.

Interested parties are welcome to submit written comments after the en banc hearing no later than Nov. 23, 2011. Comments along with any questions about the hearing should be directed to ra-rmi@pa.gov. The comments will be considered as part of the process to develop an intermediate work plan.

PUC en banc Hearing: A Resounding Success

Judith Cassel on June 17, 2011

The PA PUC’s recent public hearing to explore the future of the competitive electricity markets in Pennsylvania was no less than a resounding success according to Chairman Robert Powelson of the Commission.

On June 9, 2011, four panels of witnesses provided testimony before all five Commissioners sitting en banc. The witnesses included Former Secretary of the Department of Environmental Protection, John Hanger; Chairman of the Texas Public Utilities Commission, Barry Smitherman; the Chief Executive Officers of all Pennsylvania’s electric distribution companies; and a number of representatives of electric generation suppliers operating in the Commonwealth. As expected, the witnesses representing “consumer” interests testified that the existing market structure and performance are well within acceptable limits. As part of his concluding remarks, however, Chairman Powelson responded to those contentions, stating that “the status quo is not an option.” Also notable was that the CEOs of each of Pennsylvania’s electric distribution companies agreed (some more than others) with Chairman Powelson’s suggestion that the best use of the talents of the EDCs is to be “infrastructure companies,” rather than default suppliers, assuming the opportunity for an orderly transition out of the default service business.

There were a number of other constructive proposals for near term changes that could be made to the electricity markets to make robust competition more likely, short of requiring the electric utilities to exit the merchant function, though most would require legislative change. John Hanger, himself a former PUC commissioner, had a number of excellent suggestions, including requiring new customers to affirmatively choose a supplier out of a list of suppliers that may include default service as an option. This same requirement would apply to customers who move within a service territory or who are disconnected for whatever reason.

Comments have been filed by well over twenty (20) parties not including those that testified, which shows a tremendous amount of interest in the development of competition in Pennsylvania’s electricity markets on a going forward basis. The Commission expects to hold at least one more en banc hearing, possibly two, to thoroughly vet all of the ideas before reaching any final decisions.