Large Customers Oppose Accelerated Transition to Market Rates Proposed by Duke Energy Ohio

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December 24, 2010

Several large non-residential customers have objected to Duke Energy Ohio's proposed Market Rate Offer for accelerating the transition to full market rates versus a five-year transition envisioned by statute, while retail suppliers sought to make several additional charges bypassable.

As previously reported (11/16), Duke Energy Ohio would institute Standard Service Offer pricing based 100% on competitive auctions in June 2014, with minimal blending of market rates with the electric security plan price for the delivery periods starting January 2012 and June 2013.

The Ohio Energy Group and Kroger called such a transition plan inconsistent with the five-year blending process envisioned by statute.

Ohio Revised Code 4928.142 provides, for utilities owning generation as of 2008, that a market rate offer shall competitively bid load under the following provisions in a transition plan: "ten per cent of the load in year one, not more than twenty per cent in year two, thirty per cent in year three, forty per cent in year four, and fifty per cent in year five."

"Consistent with those percentages, the commission shall determine the actual percentages for each year of years one through five," the code states.

OEG and Kroger argued that PUCO's discretion is limited to extending the term of the transition plan (up to 10 years), and that the Commission cannot accelerate the plan.

Kroger said that Duke Energy Ohio's failure to present a policy compatible with the statute requires PUCO to reject the Market Rate Offer application as deficient.

OEG noted that, under a five-year transition, full market rates would not be implemented until 2017, yet Duke Energy Ohio offered no projections of market and electric security plan rates beyond 2014, the final year of its proposed transition.  OEG further noted that Duke Energy Ohio testified that, "2014 prices are 40% above the prices of the last 12 months and 52% above 2009 prices."

"Since [Duke Energy Ohio] expects substantial increases in markets prices through 2014, which closes the gap with the Company's ESP SSO rates by May of 2014, it certainly seems reasonable to believe that market rates could begin accelerating beyond the ESP SSO rates in 2015 and 2016," OEG said.

Furthermore, while Duke Energy Ohio is not seeking approval for a transfer of its generating assets to an affiliate in the market rate offer application, Duke Energy Ohio did state its intention to seek such approval at a later date.  

"If Duke's generation assets are transferred to an unregulated affiliate that is not subject to this Commission's jurisdiction, then Duke would look like FirstEnergy," OEG said.  OEG raised concern that any asset transfer would preclude the continued blending of the electric security plan (ESP) and market rate offer price.

"This would mean that consumers would not have access to ESP SSO generation at legacy pricing.  This would harm consumers, which is presumably why the MRO statute contains a 5-10 year transition to full market pricing for those who do not shop for competitive generation," OEG testified.

Kroger further argued that, "[i]t remains to be seen how diverse the CRES [competitive retail electric service] supply will ultimately become [at Duke Energy Ohio] over time and how it will fare after economic recovery has been sustained."  Kroger noted that thus far Duke Energy Retail Sales has captured 60% of migrated load at Duke Energy Ohio, and said that a longer transition period to full market rates, "will allow the Commission to monitor this retail market development."

Wal-Mart had no objection to Duke Energy Ohio's proposed transition plan.

Bypassable Rates
Retail suppliers sought to make Riders EIR (Environmental Investment Rider), RECON (Fuel and Reserve Capacity Reconciliation Rider), and SCR (Supplier Cost Reconciliation) fully bypassable, since such riders relate to generation service.

Rider EIR would recover various environmental compliance costs related to generation assets currently being recovered in bypassable Rider PTC-AAC.  Rider EIR, which is nonbypassable, would initially be set at $0, but could be modified as needed to recover costs during the blending period.  The rider would expire once full market rates are implemented.

Constellation Energy, the Retail Energy Supply Association, and Wal-Mart argued that since Rider EIR relates only to SSO service, and since Rider PTC-AAC is already bypassable, Rider EIR should also be bypassable.

Nonbypassable Rider RECON would true-up the costs and revenue for certain riders being eliminated or zeroed out under Duke Energy Ohio's 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).

Since Rider PTC-FPP and Rider SRA-SRT (for eligible customers signing a waiver) are currently bypassable, retail suppliers argued that Rider RECON should by bypassable.

Alternatively, Wal-Mart said that Rider RECON should be nonbypassable only for those customers who took SSO service during the period in which the costs that are being recovered by Rider RECON were originally incurred.

Additionally, FirstEnergy Solutions noted that the rates charged in Rider PTC-FPP are several orders of magnitude larger than those in Rider SRA-SRT.  "It is therefore reasonable to assume that any net over- or under-recovery of these two riders will be largely due to Rider PTC-FPP, which is bypassable [for all customers]," FirstEnergy Solutions said.

"The reconciliation component of Rider PTC-FPP has averaged around 3 mils for the non-residential customer class since the first quarter of 2009.  If the reconciliation factor continues this trend, shopping customers will be required to pay for the over-collection of a bypassable item simply because it is more convenient for Duke to treat Rider RECON as non-bypassable," FirstEnergy Solutions testified.

Furthermore, FirstEnergy Solutions expressed concern with the level of Rider PTC-FPP embedded in the legacy electric security plan price (Rider GEN) which will be blended with market rates.

Rider PTC-FPP charges are the largest portion of the price to compare (PTC), making up 44% of the total.  "Rider PTC-FPP is extremely volatile, moving as much as 1.656¢ per kWh in a single quarter.  With this type of volatility, there is no way to guarantee that the rate will not be unusually high or low in December of 2011.  An unusually low PTC-FPP rate will lead to a depressed PTC, which decreases the ability of suppliers to offer savings to customers who would otherwise shop," FirstEnergy Solutions said.

"[I]t is more appropriate to take the conservative approach and utilize a simple average of the prior 8 quarters to set the FPP component of Rider GEN," FirstEnergy Solutions argued.

As proposed, Rider SCR will be bypassable but may become nonbypassable if the deferral balance under the rider exceeds 5% of the Standard Service Offer supply cost.

Retail suppliers favor eliminating this "circuit breaker" provision, or, alternatively, raising the threshold for making the rider nonbypassable to 10% and making any modification of the rider's bypassability subject to PUCO approval.

Other Issues
RESA recommended transitioning Duke Energy Ohio's POR program from the current discount rate-based plan to a program which mirrors its gas POR program, where retailers are paid for their full receivables and uncollectible costs are recovered through a nonbypassable tracker.

As an alternative to an improved POR program, FirstEnergy Solutions also suggested revising the payment processing order at Duke Energy Ohio to conform to the standard in place at other Ohio utilities which is (1) supplier arrears, (2) utility arrears, (3) current utility charges, and (4) current supplier charges.  Duke Energy Ohio had received a waiver from this requirement due to its POR program.

Constellation and RESA both sought improved customer lists, and Constellation recommended that Duke Energy Ohio improve other data and access to such data available to suppliers.  Constellation also sought to make bill ready billing functional at Duke Energy Ohio, which was available 10 years ago but has not been maintained due to lack of interest from suppliers.

Kroger objected to the elimination of a demand component in charging customers for capacity costs, and suggested a mitigation credit to be paid to high-usage customers who will be allocated a greater share of such costs under the new proposed energy-only rate.  While suggesting a bypassable credit (i.e., not available to shopping customers), Kroger said that the credit could be designed to be nonbypassable as well.

Ohio Advanced Energy, presenting testimony from Iberdrola Renewables' director of origination, argued for 20-year bundled energy and REC contracts between load serving entities, such as Duke Energy Ohio, and renewable developers.

Duke Energy Ohio, in asking for a one week extension in the hearing date, reported that parties have begun discussing possible settlement.

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