Duke Energy Ohio Seeks Approval of Market Rate Offer for Default Service Customers

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November 16, 2010

Duke Energy Ohio has proposed a market rate offer to procure and price the electric supplies of Standard Service Offer (SSO) customers for the period beginning January 1, 2012, with the rate design including a potentially nonbypassable generation cost reconciliation rider (10-2586-EL-SSO).

Duke Energy Ohio's intent to file for a Market Rate Offer was first reported in Matters (10/29).

The Market Rate Offer (MRO) would use staggered, descending clock auctions for what are termed full requirements, load following, slice-of-system tranches.  Renewable costs and Network Integration Transmission Service would not be included in the full requirements product.

While a new retail rate structure under the Market Rate Offer would eliminate several current nonbypassable charges, such as capacity riders like Rider SRA-CD, it would introduce several new nonbypassable riders under certain conditions.

Chief among these is a rider to reconcile generation costs with revenue from Standard Service Offers customers, which will be nonbypassable if the balance to be reconciled exceeds a certain threshold.

Rider SCR (Supplier Cost Reconciliation) will recover both reconciliations of actual generation costs from the procurements and revenues from SSO customers, as well as recovering the costs associated with conducting, administering, and implementing the procurement auctions, including the cost of independent consultants.

Rider SCR, which would be updated quarterly, would be nonbypassable if the deferral balance exceeds 5% of the Standard Service Offer supply cost.  Duke Energy Ohio said that making the rider unavoidable under such circumstances is required to prevent a perpetual increase in Rider SCR costs, which would prompt even more customers to migrate to competitive supply, which in turn would raise the costs to be reconciled over a smaller SSO customer base.  Rider SCR would be bypassable if the deferral is 5% or less than the Standard Service Offer supply cost.

Additionally, Duke Energy Ohio will introduce new nonbypassable Rider RECON (Fuel and Reserve Capacity Reconciliation Rider) to true-up the costs and revenue for certain riders being eliminated or zeroed out under the company's proposed Market Rate Offer.  Among these riders are generation-related riders such as Rider PTC-FPP (fuel and purchased power) and Rider SRA-SRT (capacity, system reliability tracker).

Duke Energy Ohio would make an application to establish the Rider RECON rates no later than April 1, 2012, and the rate would only be billed for twelve months after implementation, and subject to a final true-up after the twelve month period.

Finally, new Rider BTR (Base Transmission Rider) would be nonbypassable, and would recover Network Integrated Transmission Service (NITS) costs and certain other costs billed to Duke Energy Ohio under tariffs approved by FERC.

Bypassable riders will include the following:

• Rider GEN: Applicable in the first two years of a transition period, representing the fixed electric security plan price to be blended with market rates under Rider MRO.  Includes costs under existing riders for base generation (Rider PTC-BG), purchased power (Rider PTC-FPP), capacity (SRA-SRT, SRA-CD), and annual adjustments (Rider PTC-AAC).
• Rider MRO: Represents rates for the generation products as determined by competitive procurements
• Rider RTO: Bypassable RTO costs such as ancillaries, includes costs under current Rider TCR
• Rider AERR: Alterative Energy Recovery Rider, represents costs for compliance with alterative energy portfolio standards.
• Rider UE-GEN: Uncollectible Expense Rider for Generation
• Rider SCR: Reconciliation, bypassable only under certain conditions as discussed above.

Duke has proposed a three-year transition to a Market-Rate Offer, with 10% of supplies bid competitively in the first "year" of the transition, which would run from January 1, 2012 through May 31, 2013 to align the year with the PJM delivery year.  The balance of generation would be priced at a frozen electric security plan price, which is expected to be above the market price from the auctions.  In year two (June 2013 through May 2014), 20% of supplies would be procured via auction, with the balance supplied under the fixed electric security plan price.  For the period beginning June 2014, or year three, 100% of requirements would be procured via the competitive auctions.  Entering year three, Duke Energy Ohio expects that market prices will have converged with the fixed electric security plan price.

Though legislation envisions a five-year transition to full market rates, Duke Energy Ohio said that PUCO retains discretion to implement a shorter transition.  "Moreover, the shorter transition to full market rates will undoubtedly attract more suppliers to the competitive arena as substantially more auction products would become available beginning in the third year of the MRO," Duke Energy Ohio said.

For year one of the transition, the auction would only procure 17-month contracts with delivery beginning January 1, 2012.  For year two, the competitive procurement would acquire 24-month contracts with a start date of June 1, 2013, with the supplies extending into year three of the transition plan and beginning a blending process.  For all procurements thereafter, Duke Energy Ohio would acquire a mix of 12, 24, and 36-month contracts.

The auctions will procure Energy, Capacity, Ancillary Services, and Firm Transmission Service.  As noted previously, the auctions will not procure requirements for compliance with renewable and alternative energy obligations.  Duke Energy Ohio said it would meet such requirements through both spot purchases and long-term contracts.

Duke Energy Ohio said that contrary to the Market Rate Offer proposed by the FirstEnergy utilities, which was ultimately rejected in favor of an electric security plan, Duke's proposal includes time-differentiated and dynamic retail pricing options, and is open to participation by distributed and small generation facilities and cost-effective and demand-side management resources.

For residential customers, Duke Energy Ohio will continue to offer Rate TD-AM, a time-of-use rate for customers with installed and certified smart meters; Rate PTR, a peak time rebate rate; Rate CPP, a rate that provides rebates to customers for curtailing usage during peak hours; and (pending approval) Rate TD-LITE, a refined time-of-use rate with slightly different parameters.  For non-residential customers, Rider LM (Load Management Rider) and Rate RTP (Real Time Pricing Program) will continue under the MRO.  Additionally, the company's non-residential customers will continue to have access to the PowerShare curtailment program.

Duke Energy Ohio also intends to transfer its legacy generation to an affiliate no later than June 2014; however, it will file an application to do so in a separate proceeding.

"With regard to the issues related to market power, Duke Energy Ohio notes that there has not been - and could not be - any suggestion of market power with regard to it or its affiliates.  Although Duke Energy Ohio's retail marketing affiliate has been certified for several years, it has only recently acquired more than a nominal portion of the retail market," Duke Energy Ohio said.

As only reported by Matters, Duke Energy Retail Sales has acquired approximately 60% of migrated load, or 38% of total load, in its affiliated service area (10/29).  Duke Corp. is serving about 74% of retail load in the Duke Energy Ohio territory when combining the load of the utility and Duke Energy Retail Sales.

   
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