Electricity - HMS Legal

Facts Not Fiction – Debunking Claims of Net Metering Harm

Todd Stewart on January 31, 2025

The Senate Consumer Affairs Committee held a hearing this week (Jan 28) to receive testimony on what is causing energy prices to increase. Rather than talk about the main drivers of increasing costs – such as the massive and expected increase in transmission costs driven by last year’s 10-fold increase in capacity prices from the PJM base residual auction – the representative from First Energy (Joanne Savage) attempted to blame net metering instead. She testified that the Price to Compare (“PTC”, the price paid by customers who do not shop for electricity) will increase because of net metering. Once you unpack her testimony, however, it is obvious that her theory is inaccurate and was intended to mislead the Committee and the public. The purpose of this post is to unravel the fallacy of FirstEnergy’s testimony.

In order to understand the deception, it is necessary to understand the “PTC”. The mechanism for calculating the PTC, sometimes referred-to as the default service rate, is established by regulation. See 52 Pa. Code § 54.182. The PTC is supposed to equal the “sum of all unbundled generation and transmission related charges to a default service customer.” Id. One major component of the PTC is the cost of the energy used to provide default service, but in the past several years, transmission and distribution costs have increased at greater rates than the energy cost. Electric utilities typically engage in what are known as “full requirements” service contracts for default service, which are a complete package; energy, ancillary services, and transmission which delivers the energy to the utility at specified locations from where the utility’s distribution network carries the energy to the customers. To recap, the PTC is the cost of the energy and the cost of transmitting the energy to the utility distribution system. There are other administrative costs but those are negligible in comparison.

Net metering is a program authorized in the Alternative Energy Portfolio Standards Act, (“AEPSA”) through which a Customer-Generator can produce more energy than it requires and deliver the excess to the utility for distribution to other customer. The utility then compensates the Customer-Generator at “full retail value” for the excess. 73 P.S. § 1648.1, et seq. While full retail value arguably should include distribution charges, the Public Utility Commission (“PUC”) determined in its regulations, that for purposes of net metering compensation, full retail value equals the PTC. The PUC’s logic is that the PTC represents the cost of energy delivered to the distribution system and Customer-Generators do the same thing – they provide energy to the utility distribution system – so the measure of full retail value for Customer-Generators is the PTC. In short, the utility sells the excess energy at the PTC at the same time that it buys energy (again, at the PTC) from Customer-Generators.

The slight of hand in Ms. Savage’s testimony, was in the discussion of “PTC Prices” as being higher than wholesale prices and then suggesting that because Customer-Generators are compensated at the PTC and not a wholesale rate that the difference is a “cost” to customers who pay the default service rate. That is simply wrong and easily disproved. First of all, the PTC does not change based upon how many Customer-Generators are on the system, period. That is, regardless of whether there is one Customer-Generator on the EDC system or 1000, the customers pay the same PTC, which is derived from auction prices for default service load. The cost of the energy that is purchased from Customer-Generators, the PTC, is the exact same price that retail customers pay for that energy. It is a wash. To suggest that because the PTC is greater than the wholesale rate, default service customers bear a cost associated with Customer-Generators is a false statement, as is the notion that eliminating net metering will reduce energy costs paid by consumers. It will not. Importantly, the PUC collects reports from every utility that would provide specific numbers if this were happening. Despite repeated requests for the PUC to simply produce the reports, they have not.

Ms. Savage’s mathematical gymnastics begin with suggesting that a customer generator could earn $350,000 more being paid the price to compare as opposed to being compensated at the “wholesale rate”. She then labels that $350,000 difference as a cost to customers; it is not. The price to compare is set based on the results of wholesale auctions and the costs of providing default service; and payments to customer generators are not part of the PTC except to the extent that buying energy produced locally by customer generators reduces the cost of transmission and actually lowers the PTC. Adding the alleged $350,000 per customer generator into the costs recovered by the PTC and then recalculating the PTC is double counting and is the only way the PTC could rise to $89/kwh in 2030 – it will not. The difference between the PTC and the wholesale rate is already accounted for in the PTC and adding it again is wrong. The chart found in Ms. Savage’s testimony aptly demonstrates this fallacious formula.

Rather than demonize net metering, it should be recognized for the benefits it provides. It can provide energy in rural areas that may have reliability problems, and distributed generation reduces capacity costs for all customers, because it avoids the use of the transmission system. Moreover, customer generators pay for the system upgrades that are needed for them to interconnect, a benefit to all customers.

Community Solar – Inching Its Way to Pennsylvania

Todd Stewart on August 6, 2019

There have been at least two bills recently introduced in the Pennsylvania General Assembly[1] introducing a new model for expanding the deployment of solar energy production in the Keystone State. Community Solar is not a technology but rather a business model that allows “community solar organizations” (community-based organizations or for-profit entities), to develop “Community solar facilities” (solar installations no larger than 3 MW under most circumstances) that have “subscribers” (individuals or businesses who pay a subscription fee to receive a specified percentage of the solar output). The subscription is transferable and provides a credit on the local electric utility bill for their subscribed portion of the output. Legislation is required because this arrangement is not contemplated by the current renewables law, the Alternative Energy Portfolio Standards Act (“AEPS Act”), 73 P.S. §§ 1648.1, et seq., or the Electricity Generation Customer Choice and Competition Act (“Choice Act”), 66 Pa. C.S. §§ 2801, et seq.,- creating new obligations for both electric distribution companies (“EDC”) and the Public Utility Commission (“PUC”).

[1] Senate Bill 705 sponsored by Sen. Scavello, and House Bill 531 sponsored by Rep. Kaufer.

The concept of Community Solar is not new, it has been deployed in other states for several years, largely as a means of democratizing access to renewable energy for those who: cannot afford the investment in the technology, have no physical ability to install such equipment, or rent. Consequently, many community organizations that advocate for, and/or provide services to low to moderate income customers, have branched into community solar as an approach to controlling the energy costs of their constituents while at the same time providing benefits to the community at large. In fact, both bills have provisions that require the PUC to: 1) establish targets for participation in Community Solar projects; 2) protect those customers who do participate from losing other low-income-related funding; and, 3) allow such funding to be used to support community solar charges. Despite this intention of ensuring that low- and moderate-income customers are able to participate in Community Solar, participation in Community Solar projects should not be viewed as a low-income only solution. Rather, it provides a platform for the efficient deployment of solar technology in a way than can serve an entire community and residents from all income strata as well as businesses. One of the many benefits of Community Solar is that it provides a means of financing solar installations while repurposing unused or derelict land, or large expanses of otherwise unused rooftops, which provides further benefits for communities, albeit for differing reasons.

How does Community Solar work? The mechanics of the Community Solar proposal are fairly simple — the households and businesses that subscribe to a project have their meters read every month, the same as before, and their bill is calculated at their regular electricity rates. The subscriber’s bill is then reduced by the bill credit provided by the Community Solar project. The bill credit is the actual cents-per-kilowatt hour charge established by the PUC, multiplied by the number of kilowatt hours credited to that subscriber for the month. That amount, the number of kilowatt hours credited, is the product of the total output of the facility for the month times the subscribed percentage of the output. For example, if a customer subscribed to .10% of the output of a Community Solar project, and the project produced 100,000 kwh per month on average, that subscriber would be credited for 1000 kwh per month. If the 1000 kwh is less than the subscriber’s total consumption, the credit is simply netted against the bill and they are responsible for the remaining usage. If, however, the 1000 kwh is in excess of the subscriber’s usage, they would receive a credit on their bill. If at the end of the year, the subscriber has a positive balance in their account, the utility would cut them a check. This example is demonstrative of a few points. First, even a relatively small solar installation can, over time, produce a significant amount of energy[2]. Second, a relatively small share of such a project can provide a substantial portion of the energy consumed by an ordinary household.[3] In this example the 1/10 of 1 percent share would produce more energy than an average household would use in a month, which could provide a modest amount of additional income that could be used to offset the initial cost of the subscription. Finally, Community Solar projects provide an opportunity for real people to invest in energy production close to home that provides actual financial benefits to them.

The primary external threat to Community Solar is the electric utility industry. Such projects will require the utilities to do extra work that they do not do now, and even though the current versions of the bill allow for full cost recovery, utilities are never happy about taking on new responsibilities that do not allow them the opportunity to earn a regulated rate of return – cost recovery is not the same thing. Second, utilities will not like the additional burden of adding new, larger scale, solar generation onto their distribution systems. Without storage, these types of projects can cause system operators the headache of having to supply power to support the households when the sun does not shine, which, ironically, is when the price of energy is typically at its lowest, meaning the fossil generating plants are not normally incentivized to generate. The anomalies that can be caused by adding large amounts of solar energy to a particular electric grid are well documented but can be addressed if the players are willing to adapt. Solutions include such diverse approaches as incentivizing larger customers to shift consumption to the peak production hours (the middle of the day), or coupling a solar project with battery storage that can level out the flow of energy into the grid and allow a facility to potentially earn additional revenue if it is able to provide additional services. Finally, utilities are always looking for capital projects to add to their rate base, and renewable generation has been a popular target as of late. If utilities want to build and own utility scale renewables projects, it cannot be on the customer’s dime, they must be separate affiliates that compete on a fair basis with all other market participants.

The bottom line is that there are no “problems” with community solar that have not been solved or cannot be solved. The concept is an excellent example of a clear win/win and should be promoted and passed through the General Assembly post haste.

[1] Senate Bill 705 sponsored by Sen. Scavello, and House Bill 531 sponsored by Rep. Kaufer.

[2] A facility that produced 100,000 kwh of energy per month would have a nameplate capacity of just over half a megawatt which cover about 1.5 acres.

[3] The average monthly electricity consumption across the US is about 900 kwh.

PA Supreme Court Upholds Narrow Application of the Service Point Doctrine to Impose Duty to Warn of Danger on Customer Premises Where Utility Has Actual or Constructive Knowledge of Danger

Whitney Snyder on December 29, 2014

In a 4-2 decision,[1] the Pennsylvania Supreme Court upheld a Superior Court decision overturning the trial court and denying Duquesne Light summary judgment on the issue of whether a utility has a duty to warn a customer of potential danger on the customer’s side of the service point where the utility has taken affirmative action to restore service and has actual or constructive knowledge of such danger. Alderwoods, Inc. v. Duquesne Light Co., No. 12 WAP 2013 (Pa. December 15, 2014). The case arose from a fire caused by an electrical panel in the basement of Alderwoods’ funeral home after Duquesne restored service to the premises by making substantial repairs to a utility pole downed by a car crash outside the funeral home. Slip op. at 2.

Under Pennsylvania law, a utility’s maintenance and inspection duties are divided at the service point – a utility “does not have a freestanding duty to inspect customer-owned electrical equipment and services” on the customer’s premises. Slip op at 17. However, the Court framed the issue as imposing a duty to “warn[ ] a customer proximate to downed lines prior to restoring power after an outage, where the utility has actual or constructive notice of a dangerous condition within the customer’s premises.” Slip op. at 17-18. The Court pointed out that Duquesne focused solely on opposing the Superior Court’s imposition of a duty to inspect, and that Duquesne failed to argue against a duty to warn. Slip op. at 18-19.

Amicus Public Utility Commission (PUC), like Duquesne, argued against imposing on a utility a duty to inspect customer equipment after outages, likewise failing to address the Superior Court’s duty to warn holding. The Court marginalized the PUC’s policy position that imposition of a duty to inspect would be cost prohibitive, would cause delays in restoration of service and is best left to the PUC’s regulatory authority, see slip op. at 14-15, focusing on the “more modest avenue” of some form of warning as a “reasonable effort[] to avert harm prior to restoring power.” Slip op. at 17-18, 20. The Court reasoned that a policy decision to completely insulate a public utility from the common law duty to warn is best left to legislature. Slip op. at 20-21.

The Court’s decision upholding summary judgment entails a remand to the trial court for Alderwoods to pursue its claim that Duquesne in fact had actual or constructive knowledge of the danger on Alderwoods property and failed to warn Alderwoods of potential danger resulting from Duquesne’s restoration of service.

[1] Justice Saylor authored the opinion with Justices Castille, Baer, and Stevens joining. Justices Eakin and Todd dissented. Former Justice McCaffery did not participate.

What does the future hold for Pennsylvania’s competitive energy markets?

Todd Stewart on October 17, 2014

As the PA PUC embarks on its investigation of the natural gas markets, what evidence can we discern about how the agency sees competitive energy markets and how those markets should evolve?

On August 21, 2014, the PUC issued a Tentative Order that identified a laundry list of issues that its Office of Competitive Market Oversight (“OCMO”) will be tasked with investigating. The list includes such items as the assignment of storage and pipeline capacity, tolerances/penalties for system balancing, customer education and switching timeframes, to name a few. However, the list is perhaps most notable for issues not included. There will be no discussion of the natural gas distribution companies (“NGDC”) exiting the merchant function and no discussion of standard offer referral programs.

Looking first at the issues that will be examined, many involve nuts and bolts operational issues. Capacity assignment, switching timeframes, access to on-system delivery points, and so on. Improvements in the efficiency and fairness of these aspects of the interaction between natural gas suppliers (“NGS”) and NGDCs will make the market more seamless, reduce costs for NGSs and potentially NGDCs, and will provide a better customer experience. All of these would be good outcomes, and I am not aware of any party that opposes taking a look to see what tweaks or even more substantial changes are needed. This operational focus– regulating the market and making sure the existing structure works as best it can – is something the PUC views as within its wheelhouse, an area of core competency.

Devoting time to competitive market operational details, however, diverts resources and attention from the larger issues that will decide whether Pennsylvania’s competitive market will endure and thrive. For now, at least, it appears the PUC wants nothing to do with any discussion of NGDCs exiting the merchant function. There could be several reasons for the Commission’s reticence, considering that only a few short years ago, the Commission appeared to be seriously considering programs in the electricity markets that could have transitioned many customers into the competitive market, and at least one electric distribution company was seriously considering a formal exit. One possible explanation is that the Commission has what golfers call a case of the “yips” — the inescapable feeling that you have lost your “game” which results, inexorably, in losing your game. The loss of confidence started with the abrupt manner in which the electric market RMI process was turned around at the last possible minute, dropping programs that would have transitioned many customers to competitive service. Last year’s “polar vortex,” which brought the PUC undeserved criticism for “allowing” a roiling of the retail electric markets, when the problem was a wholesale market issue, slowed forward progress even more. The fallout from that period is still being felt. The Commission promulgated regulations to police disclosure of variable rates; while House Consumer Affairs Committee Chairman Godshall wanted legislation that would have imposed rate regulation on “deregulated” retail EGS rates. The resulting, and rather public, falling out between Chairman Godshall and Commission Chairman Powelson seems to have made the PUC even more reluctant to take bold action. It seems clear that there simply is not the political will, and possibly not the political capital, to advance the deregulation agenda that the Commission clearly signaled in the past, especially in light of the impending gubernatorial election.

But neither the polar vortex aftermath nor politics explains why the PUC has shied away from at least examining whether standard offer programs, so successful in electric deregulation, should be used in natural gas retail choice programs. Standard offers were responsible for migrating many customers off of default service and into one year fixed rate electric contracts. Perhaps the Commission is taking a practical approach, waiting to see what happens at the transition when the one year electricity contracts expire to make sure that it has a handle on the issues that can crop up. Perhaps the Commission wanted to wait and see whom the voters pick on the first Tuesday in November, to see how things change across the street—if at all. Regardless, it may be that the very fact that the Commission chose to wait and see rather than move ahead with a program, even if doing so appears, by most accounts, to be rational, is a signal of a change in attitude at the PUC. More practical, less policy – at least for now. The recent focus on the passage of House Bill 939, the re-authorization of Chapter 14, which also includes the authorization for the Commission to assess NGSs and EGSs, may be further evidence of this approach.

What does all this mean for the future of energy markets, natural gas and electricity, in Pennsylvania? In the short term it probably means that the Commission will appear to be unwilling to go down the road of opening the natural gas RMI proceeding to include issues related to merchant function exit, even if the enabling legislation expressly provides for such a result. It means the RMI will remain focused on operational issues. In the electricity markets, it appears unlikely that there will be any new proceedings to address the competitive market, at least until people stop holding their collective breath over concern about the potential repeat of last winter’s extreme run-up in wholesale prices. In other words, nuts and bolts are fine, but let’s not get into any policy fights just now.

In the long term, things may be more hopeful for those seeking change in the structure of the retail energy markets, if we can put the remnants of the recent past behind us and step out from under the microscope long enough. Both gubernatorial candidates appear to favor competitive markets, although it is not clear how far either would go toward endorsing significant market changes at this juncture. It does not appear that the positions of the individual Commissioners on competitive markets have changed, either. Rather, it appears that circumstances outside their control have forced them to take the practical road for now.

So what does the future hold? The answer is, it depends. As is so often the case, policy in this area is dictated by reactions to current events. It depends on how volatile the retail markets become, and to a lesser extent, the cause of that volatility; it depends on who wins the race for governor, and the makeup of the Commission; and it depends on the marketers deciding to remain in Pennsylvania and staying engaged in the process. This last factor may be the most important.

PUC To Consider Revised Labeling Requirements for Electricity Suppliers

Todd Stewart on June 28, 2013

The Public Utility Commission (“PUC”) recently issued a Tentative Order in the matter of: The Use of Fixed Price Labels for Products With a Pass-Through Clause, Docket No. M-2013-2362961 (Tentative Order entered May 23, 2013), in which it requested interested parties to comment on what it views as an emerging problem: certain Electric Generation Suppliers (“EGS”) offering products labeled as “fixed price” when the products clearly are “variable price” products. Comments were filed June 24 and a PUC decision is expected soon.

A number of EGSs recently have begun offering longer-term products (3-7 years) under the label of a “fixed price” despite the fact that the products contain “pass-through” clauses that allow those EGSs to substantially increase the overall price customers are asked to pay, without notice. Such contracts often have substantial early termination fees, effectively trapping customers who are unhappy about unexpected increases. The typical pass-through clause does not permit the EGS to increase the commodity price component, but does allow increases to track changes in transmission charges, reliability charges, etc., and which substantially lessen the risk of long term contracts for those EGSs, by placing that risk on the customer.

In its Tentative Order, the PUC expressed concern that customers could be misled into believing that the products were fixed price; that the price was indeed fixed for the life of the contract, and that customers would not pay attention to the fact that their price could rise over the contract period of time, and that even if the customers did pay attention, they would be helpless to do anything. Moreover, those suppliers who have abided by the Commission’s rules–which require that a product offered as a fixed-price product be a fixed-price product—are continuing to be competitively disadvantaged, because customers are attracted to these misleadingly lower-priced offers.

A number of parties submitted comments. The parties can be divided into two groups. The first group, exemplified by First Energy Solutions (“FES”), believes that offering a product as “fixed price” when it contains a substantial pass-through clause is perfectly acceptable and that the Commission should not be permitted to regulate the words used to describe these products, as that would constitute impermissible rate regulation. It should be no surprise that FES has been actively offering these pass-through products.

On the other side of the debate are the “playing by the rules” suppliers, such as Dominion Retail, who believe that labeling a product as fixed price when it contains an expansive pass-through clause which could result in substantial price increases to customers is, at best, a matter of false advertising. Dominion and others are gravely concerned that changing the rules to allow for such contracts to be labeled as anything other than variable price contracts could leave customers with no ability to assess the basis for those charges, to understand the risks associated with such charges or to adjust their behavior (including leaving the contract without substantial penalty) in the event of a price hike. These commenters believe that any product labeled as fixed must be fixed for the initial term of the contract. To do otherwise will lead to substantial customer dissatisfaction and further disaffection with the competitive market. The PUC is expected to issue an order by the end of summer.

For Pennsylvania’s energy markets to mature, suppliers need to adopt sustainable marketing techniques that foster the long-term best interests of the market. If the marketers will not police themselves and curb this type of behavior, it is clear that the Commission will come under increasing pressure to do so, from the public and the General Assembly. Making questionable offers to customers results in negative attitudes about competitive markets and is a sure way to endanger the gains that have been achieved in Pennsylvania to date.

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”).

PUC Denies PPL Migration Rider

Todd Stewart on July 23, 2012

Providing a win to competitive suppliers, the Pennsylvania Public Utility Commission (“PUC”) at its July 19 public meeting unanimously denied PPL’s request for a migration rider for default service customers.

In a decision that should help sustain the momentum of competitive market enhancement in Pennsylvania, all five PUC Commissioners voted to reverse Administrative Law Judge Susan D. Colwell’s Recommended Decision (“RD”) in which she would have approved a migration rider proposed by PPL Electric Utilities Corporation (“PPL”). PPL had dubbed its migration rider a “reconciliation” rider, or “RR.” Petition of PPL Electric Utilities Corporation for Approval to Implement a Reconciliation Rider for Default Supply Service, Docket No. P-2011-2256365 (Opinion and Order entered July 19, 2012).

The RR would have allowed PPL to continue to charge customers for some portion of the costs of default service for up to a year after the customer had switched to a competitive supplier and, likewise, would have excused customers who switch back to PPL’s default service from paying a potentially significant portion of those default service costs for up to a full year. Thus, the RR would have created a perverse incentive for customers to switch back to default service. The PUC denied PPL’s request for an RR but without prejudice, which would allow PPL to file another similar petition in the future.

The decision, however, may prove to be less than fully satisfying for the competitive suppliers in the case in that the PUC found only that PPL failed to carry its burden of proving that the RR was necessary and did not reach the legal argument raised by some suppliers that migration riders generally are prohibited under the statute and the PUC’s regulations. The PUC also rejected PPL’s exceptions to a separate part of the RD in which the ALJ had rejected PPL’s request for a competitive transition rider (“CTR”), which would have allowed PPL to charge all customers for any unrecovered default service costs incurred before June 1, 2012. The PUC similarly found that PPL had not sustained its burden of proving that the CTR is necessary and that PPL had failed to provide evidence that the CTR would recover a substantial variance that “could not be recovered through its currently existing reconciliation mechanism.” (slip op. at 23).

As a result of this process, the PUC recognized that “traditional methods of reconciliation accounting associated with default service costs in this post-rate cap era may have resulted in excessive rate volatility and inaccurate price signals for electricity consumers in Pennsylvania.” (slip op. at 38). The PUC now believes that any revisions to the current reconciliation process that would be required to limit volatility should be made on a prospective basis in a generic proceeding where all affected utilities and interested parties would have the opportunity to participate.

Also on July 19, the PUC adopted Commissioner Cawley’s motion to open a generic proceeding on default service reconciliation issues. Default Service Reconciliation Interim Guidelines, Docket No. M-2012-2314313

A copy of the Opinion and Order is available from the PUC’s website by clicking here.

A copy of the Commissioner Cawley’s Motion opening the generic proceeding is available from the PUC’s website by clicking here.

Migration Riders for Electricity?

Todd Stewart on May 8, 2012

The Pennsylvania Public Utility Commission will now decide whether migration riders will be permitted for electricity customers, at the same time it is moving forward with its Retail Markets Investigation and its notable efforts to make the electricity markets more competitive.

As of Friday, May 4, the Replies to Exceptions have been filed with the Commission by the various parties, seeking to support or overturn the Recommended Decision of Administrative Law Judge Susan D. Colwell in the case that may well have a dramatic impact on the future direction of electricity competition in Pennsylvania. The case, Petition of PPL Electric Utilities Corporation for Approval to Implement a Reconciliation Rider for Default Service Supply, Docket No. P-2011-2256365, involves PPL Electric’s request to implement a migration rider, labeled as a Reconciliation Rider (“RR”) and a competitive transition rider (“CTR”).

If approved, the RR will permit PPL Electric to charge customers for the costs of default service for up to a full year after customers switch to competitive supply. Likewise, the RR would allow PPL Electric to not charge customers this same migration rider charge after they switch from competitive supply to default service supply. This scheme, according to the suppliers in the case, provides incentives for customers to switch to, and stay on default service supply. These types of migration riders are common in the natural gas industry in Pennsylvania and suppliers have argued that they are one of the primary reasons why natural gas markets are far less competitive than electricity markets.

In her Recommended Decision issued on April 4, 2012, ALJ Colwell recommended approval of the RR, brushing aside without analysis the claims of the suppliers and the Office of Consumer Advocate that the migration rider would have negative effects on competition. The ALJ recommended rejection of the Company’s proposed CTR, however, which would also have allowed the Company to charge customers for the cost of default service after they had shopped. The CTR would have allowed PPL to recover balances that accumulated after PPL’s rate caps expired in 2010. The ALJ’s legal basis for rejecting the CTR is surprisingly similar to the legal theory proposed by the marketers for why the ALJ should have rejected both the RR and CTR.

The PUC must now decide whether it will continue with the trajectory that has been firmly established in its RMI proceeding, and accept the marketers’ view that the RR will damage the competitive markets, or accept PPL’s view that its migration rider is competitively neutral. This will be a crucial decision for the Commission to show the depth of its support for further development of the competitive market in the electricity sector in Pennsylvania. Stay tuned.