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Compete Coalition Claims Duke Energy Ohio ESP Would Double Charge Migrated Customers
August 30, 2011
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The Compete Coalition yesterday claimed in a blog posting that customers of competitive retail suppliers would be "doublecharged" under Duke Energy Ohio's proposed electric security plan. However, that is not Matters' understanding of the Duke Energy Ohio proposal.
As first reported by Matters (6/20 and 6/21), Duke Energy Ohio has proposed assuming the entirety of the PJM capacity obligations for all of its distribution customers, to be served by Duke Energy Ohio's retained assets, with costs recovered on a nonbypassable basis (essentially removing capacity costs from the bypassable generation rate while also relieving retail suppliers of capacity charges).
As such, Matters sees no potential for double charging in terms of capacity.
During an interview with Matters this afternoon, Bill Massey, Counsel to the COMPETE Coalition and former FERC Commissioner, could not cite specifics as to the potential double charges. Rather, Massey said that customers in Ohio who are Compete members are raising concerns regarding double charging.
However, even when it comes to existing retail supply contracts, which already include capacity charges whose need would be obviated, Duke Energy Ohio said that retail suppliers would not be double charged for capacity. If the supplier did not opt out of the Duke Energy Ohio Fixed Resource Requirement, then the supplier is already paying capacity charges to Duke Energy Ohio, and such charges would simply be eliminated.
To the extent the retail supplier opted out of the Duke Energy Ohio FRR, Duke Energy Ohio said that such suppliers would be made whole for any capacity purchased.
"The only term for which CRES [competitive] providers have opted out of the Company's Transitional FRR Plan was for the partial year from January 1, 2012, through May 31, 2012. Approximately 800 MW of switched load suppliers opted out of the plan for that period. The Transitional FRR Plan states that all wholesale load within the Duke Energy Ohio transmission boundaries that did not opt out or enter into its own independent FRR plan will pay to PJM the FRR Reliability Charge, which is currently defined at a price equal to the RPM price. For opt-out entities, PJM will net the amount of the load against the quantity of opt-out resources, and the CRES provider would then subsequently either pay or be paid the RPM price depending on the sign convention of the netting. Under the terms of the proposed ESP, Duke Energy Ohio will assume the capacity requirement for all retail electric distribution customers, and, therefore, the capacity obligation of the CRES supplier that has opted out becomes zero. As a result, the CRES supplier would simply be paid the RPM price for the capacity that the opted-out CRES supplier has committed. Thus, the CRES provider that opted out is ultimately kept whole to the market," Duke Energy Ohio said in earlier testimony.
While Matters is not definitively saying the operation of this mechanism will be competitively neutral to retail suppliers (though it appears to be), Compete offered no specific rebuttal other than the concern voiced by its members.
Compete's blog stated that "[c]ustomers using alternate suppliers ... will be charged first for the power they have purchased through voluntary contracts and, second, for Duke Energy Ohio's guaranteed cost recovery for power plants and other generation-related costs," and labeled such guaranteed cost recovery a "tax."
First, while Compete may be technically correct that shopping customers will be paying the power (energy) they have purchased through voluntary contracts, and then a capacity charge for Duke Energy Ohio's plants, the key point is that this mechanism is no different than what non-shopping customers will pay.
One area which does merit closer review is the disposition of energy from the capacity assets for which all customers are paying certain going-forward fixed costs. Although all customers will share equally in the revenue from any energy sales from the plants, regardless of shopping status, selling the energy bilaterally to specific parties (e.g. retail suppliers) could potentially raise concerns, since the underlying energy rate is arguably subsidized by the fixed capacity cost recovery paid by ratepayers.
For the non-coal assets, such energy will be sold in the PJM day-ahead and real-time market, eliminating any concerns with the disposition of power.
However, the coal-fired generation will be actively managed by Duke Energy Ohio.
"As part of this strategy, Duke Energy Ohio will sell economic generation on a forward basis, and correspondingly plan to buy coal and EAs [emission allowances]. The Company proposes to align the initiation of active management of energy from the economic generation to commence within five business days of the Commission approval of the corresponding load auction. For each time period of auction, the percent of the portfolio that is managed will match with the percent of load auctioned. The Company believes that this approach will minimize the risk of price exposure for customers by attempting to match the timing of the price of the energy component of the energy credit with the cost of the energy component of the customer's auctioned load," Duke Energy Ohio said in testimony.
What is not clear is the mechanism for such forward sales, and whether bilateral contracts would be used, and who the counterparties would be. While it does seem that the Duke Energy Ohio plants themselves will not compete in the default service load auctions since decisions on management will take into account the resulting price (eliminating one potential concern regarding disposition), bilateral sales outside of the PJM market (where the generation would simply run as a price-taker with output to the market as a whole rather than specific load), raise concerns about potential affiliate transactions and the process by which such power is sold on a forward basis (e.g. competitive access to all potential bidders).
However, as intervenor testimony has not yet been submitted (see below), it remains to be seen whether this has been adequately addressed to retail stakeholders' satisfaction. Compete did not raise this specific issue, and this issue would not amount to double charging as much as it could potentially lead to cross subsidization (generation paid for by all customers accruing to a single supplier which then undercuts market pricing).
In any event, the larger issue is that while there may still be a question on the specific mechanism for Duke Energy Ohio's generation sales, a mechanism can be designed that would allow capacity to be treated nonbypassably with no impact on the competitive retail market (e.g. generation sales are assured to be sold in a competitively neutral manner), and any specific concerns (if any) about the proposed disposition do not require the abandonment of Duke Energy Ohio's innovative approach to capacity obligations.
Additionally, the use of the term "tax" by Compete is particularly amusing to Matters, not because we dispute it, but because Compete's alternative, the Reliability Pricing Model, is a tax as well.
Indeed, Massey told Matters that customers at Duke Energy Ohio should be given choice and not locked into paying for Duke Energy Ohio's assets for a period of 9.5 years, since customers may not want or need the assets.
However, Matters sees no difference in compelling customers to pay Duke Energy Ohio for capacity versus forcing customers to pay PJM suppliers for capacity for a three-year forward period under RPM. In neither case does the customer have choice.
Compete also says Duke Energy's ESP has the potential to raise costs, and Compete opposes granting a single supplier the right to supply capacity.
While the two arguments above may or may not have merit, it must be stressed that neither of the two arguments have anything to do with retail choice, or the competitive retail market structure. Whether Duke Energy Ohio's self-supplied capacity results in higher/lower costs for customers, or whether it is appropriate to remove Duke Energy Ohio load from the RPM auction, the capacity mechanism does not, as apparently structured by Duke Energy Ohio, alter a customer's economic decision to shop, impact the comparison of default versus competitive rates, or create barriers to retail competition. For those reasons, Matters fails to see how the Duke Energy Ohio proposal would harm customer choice.
Separately, PUCO has extended until October 5 the deadline for intervenor testimony in the case. That's shorter than the November 7 deadline requested by most parties, but about one month later than original deadline of September 7, which Duke Energy Ohio supported maintaining.
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