Retail Suppliers Suggest To PUC Allowing Retail Suppliers To Adjust Fixed Rates In Future Periods When PJM Capacity Price Not Known At Time Of Contracting

August 25, 2023

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Copyright 2010-23 EnergyChoiceMatters.com
Reporting by Paul Ring • ring@energychoicematters.com

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In comments to the PUC of Ohio concerning a proposed use of a capacity proxy price in electricity default service procurements, the Retail Energy Supply Association (RESA) has suggested that PUCO should authorize retail electric providers, "to offer fixed price contracts that contain provisions allowing for future adjustments once the capacity price becomes known."

As previously reported, PUCO Staff has proposed use of a capacity proxy price in SSO procurements for which the PJM base residual auction capacity price is unknown for the applicable delivery period, similar to use in other states. In general, this would remove a bidder-determined capacity price from the rate bid by wholesale suppliers (instead using a PUC-set proxy price for all bids), and is intended to avoid risk premiums associated with an unknown capacity price. As the capacity price becomes known, SSO suppliers would be responsible for the actual capacity costs from PJM, but would be fully compensated for their capacity costs via true-up versus the proxy price.

RESA said, "RESA would also note that while this proxy capacity concept is a way to reduce risk premiums in SSO generation supply if the supply would stretch into a future period with an unknown capacity price, the concept outlined by Staff would not impact the risk that CRES providers face when offering supply contract that stretch into the same future periods with unknown capacity prices. One competitively neutral solution would be to allow CRES providers to market in this scenario contracts as fixed price, provide notice to the customers of the potential future adjustment for when the capacity price becomes known, and ultimately make that adjustment to the actual capacity price in the future."

RESA said, "Although RESA understands [PUCO] Staff’s desire to use the proxy capacity price as a way to restore laddering and staggering to the SSO auctions, the concept is not without market distorting effects. As Staff notes ... if SSO auction participants were required to bid on tranches for future delivery periods (e.g., 24-month and 36-month products) where the capacity price was not known the SSO supplier would need to reflect a significant amount of risk premium in the bid. The proxy capacity concept would mitigate the risk faced by SSO suppliers in offering longer term generation supply products."

RESA said, "However, the proxy capacity price concept will not address the risk that CRES providers face when considering making supply offers for future periods when the capacity price is unknown. While CRES providers have an option with larger customers where each supply contract gets negotiated, that is not possible for mass market account offerings. To avoid the large risk premium for supply contracts for residential and other mass market offerings, CRES providers have to offer short (or shorter) term fixed price offerings or a variable rate offering. Accordingly, the PJM capacity auction delays are also negatively impacting shopping customers’ ability to secure long-term fixed price contracts."

RESA said, "One solution that would help address the market distortion that would be caused by only addressing the risk premium issue on the SSO side through the proxy capacity concept would be to authorize CRES [retail] providers to offer fixed price contracts that contain provisions allowing for future adjustments once the capacity price becomes known. This will permit shopping customers the ability to lock in longer-term contracts if they so choose. And, just like the restoration of laddered and staggered SSO auctions can help SSO customers reduce market price volatility in their retail generation rates, so too can longer term fixed price contracts for shopping customers."

In separately filed comments, IGS Energy said, "Interstate Gas Supply, LLC ('IGS' or the 'IGS Energy') respectfully requests that the Commission decline to adopt the proxy capacity process or in the alternative provide all competitive retail electric service providers ('CRES providers') the ability to true-up unknown capacity costs without running afoul of other Commission decisions or precedent."

IGS said, "a proxy price with a true-up process provides a clear and unfair advantage to the SSO auction bidders that is not afforded to other market participants. Many market participants, as evidenced by the current offerings on the Commission’s Apples to Apples website offer fixed priced products stretching up to 48 months. CRES providers offering fixed rates that stretch past the current known capacity auctions results are forced to manage the risk of fluctuating capacity without any true-up or passthrough process afforded to them. If the Commission were to adopt a proxy capacity price with an available true-up it would tilt the competitive playing field in favor of the SSO."

IGS added that, "IGS still believes the best course of action is to simply allow SSO auction bidders to undertake similar market risks to those faced by purveyors of similar products," and IGS's primary recommendation is to not use a capacity proxy price in SSO

The Ohio Consumers’ Counsel generally favors the PUCO Staff capacity price proposal, but renewed calls for other SSO changes -- namely, the use of a residential-only procurement to mitigate migration risk premiums for residential customer SSO rates

AEP Ohio and the FirstEnergy EDCs, each in separate comments, expressed general or specific support for the Staff proxy price proposal, while Duke Energy Ohio did not oppose the Staff proposal

Duke also reiterated its previously reported recommendation to consider other SSO changes, such as:

• Limiting the amount of load that can return to the standard service offer in each month.

• Relieving the load cap, currently at 80 percent.

• Releasing the credit-based tranche cap.

• Allowing for bilateral purchases of supply.

• Limiting the ability to switch, particularly for nonresidential parties.

• Providing for a Commission determination of a maximum allowable premium.

Case 23-781-EL-UNC / 23-0781-EL-UNC

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