Ohio Gas Marketers Seek Use of Financial Instruments for Columbia SCO Cross Collateral

May 11, 2011
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Several Ohio retail gas suppliers have requested that PUCO require Columbia Gas to allow the use of financial instruments for the required "cross collateral" which winning suppliers must post under Columbia's proposed Standard Choice Offer (08-1344-GA-EXM).

As proposed, Columbia would only accept cash for such cross collateral, which is security posted by suppliers covering 50% of their obligations in case of default, to be disbursed to non-defaulting suppliers who must assume the defaulting supplier's load.

The Ohio Gas Marketers Group requested that Columbia allow the use of letters of credit or surety bonds for cross collateral, stating that cash will increase risks as well as costs to SCO customers. Filing comments jointly were Commerce Energy, Constellation NewEnergy, Direct Energy Services, Exelon Energy, Hess Corporation, Integrys Energy Services, Interstate Gas Supply, SouthStar Energy Services, and Vectren Retail.

The marketers objected to cash since it is less secure than other financial instruments, especially as, in connection with the past SSO auctions, Columbia did not establish the supplier pool in a separate account in a bank or insured financial institution. Columbia's use of cash, "exposed the Supplier to the potential loss of the Cross Collateral cash deposits should Columbia's creditors make claims or file liens upon Columbia's general assets," the marketers said.

Marketers further said that by failing to bank or invest the cash deposit, "Columbia usurped the time value of the Cross Collateral."

Additionally, suppliers said that, "the use of a cash deposit is more expensive than a letter of Credit or surety bond from a bank or financial institution, thereby potentially raising the cost of participation and thus the cost to the retail customers."

Both Dominion East Ohio and Vectren Energy Delivery allow the use of use financial instruments for cross collateral, the marketers noted.

As expected, the Ohio Consumers Counsel and Ohio Partners for Affordable Energy asked PUCO to maintain the current wholesale SSO auction at Columbia, rather than moving to a retail SCO.

Due to a change in taxation associated with the SCO, OCC said that the SCO, "will impose quantifiable and unavoidable higher costs on residential customers." As a result of SCO service, residential customers pay a higher sales tax rate versus the gross receipts tax levied on SSO service.

OCC further argued that there, "are no tangible, objectively quantifiable benefits for residential customers," from the SCO, noting that SSO auctions have successfully driven down the cost of gas, while any additional savings from the SCO will be offset by the higher tax rates.

Further, OCC said that there are "a number" of marketers, "including some very large marketers" that bid in the wholesale SSO auctions but do not compete in the SCO auctions as they are not interested in serving customers at retail. OCC did not identify any such marketers.

Based on public information (which consists of winning bidders in both SSO and SCO auctions and the number of bidders), it appears the vast majority of SSO bidders participate in the SCO auction, or at the very least have retail licenses and would be able to do so if they so chose, and the reason for any potential non-participation in the SCO is not, as OCC suggests, merely due to the requirement to serve customers at retail.

At the most recent Dominion East Ohio concurrent SSO/SCO auctions, the SCO auction saw 13 bidders, versus 10 for SSO service. In the final SSO auction before the SCO was introduced at Dominion East Ohio (e.g. the last SSO auction for all customers versus just non-choice eligible customers), Dominion East Ohio saw 13 bidders, which is identical to the current level of participation in the SCO auction.

At Vectren Energy Delivery, where there is no longer an SSO, the final SSO auction saw six bidders, and the two first (and current) SCO auctions saw six of bidders as well.

Furthermore, at least one wholesale supplier, DTE Energy Trading, which has no interest in marketing to individual retail customers, nevertheless went through the retail licensing process and has participated in, and won, SCO load.

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