Pa. PUC Allows Citizens'/Wellsboro to Use Non-Cleared Financial Transactions for Default Service

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February 14, 2011  

The Pennsylvania PUC adopted without modification a recommended decision which allows Citizens' Electric Company of Lewisburg and Wellsboro Electric Company to use certain non-cleared financial transactions and options in their default service plan (P-2009-2110780 et. al., 9/13/10).

The recommended decision endorsed an unopposed settlement which allows Citizens' and Wellsboro to use non-cleared financial transactions in the form of fixed for floating swaps and call options, as well as physical options, subject to the following requirements:

1. All non-cleared financial transactions will be restricted to settlement at PJM West Hub and will be limited to either swaps or call options;

2. All non-cleared financial swaps will be fixed for floating swaps;

3. Non-cleared financial swaps may be used to meet up to 60% of baseload (7x24) hedge target thresholds, and up to 50% of intermediate (5x16) hedge target thresholds;

4. All non-cleared financial options or swaptions will be purchases of call options;

5. Swaptions, together with any physical call options, may be used to meet up to 20% of summer peak requirements during June through September and up to 20% of winter peak requirements during December through March.

The authorization is limited to Citizens' and Wellsboro's current default service plan, which runs through May 31, 2013.

Under the approved settlement, the utilities may request to amend the current default service plan to include a multiple year product with a duration of longer than one year, and may propose to use a non-cleared financial product for this transaction.  However the only non-cleared financial products that may be proposed by the companies in such a filing are fixed-for-floating swaps or options, and other parties may oppose this request, which is subject to PUC approval.

"The joint settlement petition will provide the Companies with additional tools to cost effectively manage their joint portfolio and help them to provide reliable and adequate service at the least cost to customers over time ... The ability of the Companies to use non-cleared financial transactions and physical call options in their Joint DSP may result in lower rates for default service in several ways," an ALJ had noted.

First, the ALJ found that financial products are more heavily traded than physical products in the PJM markets.  "Increasing the number of potential counterparties will provide the Companies with access to additional markets and greater product diversity and, consequently, more competitive pricing," the ALJ said.

Second, including financial products in their portfolio could provide more flexibility in small lot purchases since the companies need to obtain monthly financial products in smaller increments than the standardized increment of 50 MW.  "The more precise the procurements and products, the greater potential for costs savings as the Companies will avoid unnecessary purchases.  The ability to purchase smaller increments will limit situations where the Companies have to sell back excess power," the ALJ added.   

Third, the use of financial products could reduce the companies' credit obligations and exposure in some instances.  "The use of non-cleared financial products will require substantially less upfront credit and, therefore, reduce the cost of credit passed through to ratepayers," the ALJ found.  

The ALJ also noted that the use of call options will assist the companies in managing the effect of any migration on the default service portfolio, though migration has been limited in each service area to date.

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