Utility Proposes To Cease Use Of 36-Month Contracts In Default Service

Seeks To Reduce Risk Premiums In SOS Pricing, Cites "Inequity"

Says Generation Build Component Under Default Service Might Be Needed In Future If RTO Resource Adequacy Problems Continue

April 1, 2024

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

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Duke Energy Ohio (Duke) has filed for approval of a proposed electric security plan (ESP V) covering the period June 1, 2025 through May 31, 2028

Duke's proposed ESP would largely continue the current approach to default service procurement and pricing, with certain modifications

Notably, Duke Energy Ohio proposed to rely on only 12- and 24-month contracts for Standard Service Offer (SSO) supplies, eliminating the use of 36-month contracts as part of the procurement mix.

Complete testimony from Duke's proposal was not immediately available, and it was unclear what portion of Duke's laddered portfolio would be 12-month contracts, and what portion would be 24-month contracts, under the new proposal

Duke proposed eliminating the 36-month SSO contracts as one of several measures to reduce risk premiums in SSO pricing (with other measures noted further below)

"Duke Energy Ohio is proposing to change the auction products for bidding by eliminating the longest, 36-month, contract term. The Company will continue procuring 24-month and 12-month products through its SSO auctions. The Company will also maintain the laddered and staggered procurement approach," Duke said

"The 36-month contract typically has fewer bidders than other products. Longer-duration contracts are often associated with higher risk premiums and require bidders to forecast market conditions further into the future," Duke said

"Eliminating the longest duration contract will hopefully result in more aggressive bidding by better aligning the schedule of products to bidder preferences," Duke said

Additionally, consistent with PUCO directives, Duke proposes that its procurements will include a capacity proxy price for years in which PJM has not completed its delivery year capacity auction

"Duke Energy Ohio anticipates using a CPP value calculated as the average of the two most recent PJM capacity year values," Duke said

While Duke would continue to hold two SSO procurements each year, Duke is proposing to advance the date of the second procurement, from February to the preceding December (with the other procurement still occurring in September)

"Duke Energy Ohio is proposing a change in the schedule of CBP auctions, adopting a September / December schedule rather than a September / February schedule. The proposed schedule change is designed to allow winning bidders ample time to participate on their own in the PJM Auction Revenue Rights process that takes place in late February, early March of each year," Duke said

Duke described the elimination of the 36-month contract, and use of a capacity proxy price, as the first phase of measures to reduce risk premiums in SSO prices

Under its application, Duke sought authority to propose in the future further modifications to reduce risk premiums in default service rates, during the term of the proposed ESP

While discussing potential measures under a second phase of actions to reduce risk premiums, Duke did not in its instant application seek authority for any of the potential second phase proposals noted below. Rather, Duke is seeking to codify its ability to later seek changes to SSO procurement during the term of the ESP, subject to later PUCO approval

Notably, Duke said that one potential second phase change that it may propose in the future to further reduce risk premiums is to cap the volumetric risk assigned to wholesale suppliers from load which returns to default service

Duke said, "The next most likely step, for future SSO auction procurements, would be applying a volumetric responsibility threshold on the amount of load that could revert to SSO providers. This responsibility threshold would directly correspond to the SSO supplier’s tranche commitment previously awarded in a preceding auction. Under such a proposal, any volume that returned to the SSO and that exceeded the volumetric responsibility threshold would not be the obligation of the SSO suppliers, but instead would be managed by Duke Energy Ohio in the real time energy market."

Duke continued, "Importantly, if the responsibility threshold were exceeded, causing Duke Energy Ohio to take prompt action to procure supply through the wholesale market, all SSO customers would still pay the same price, with that price being a blend of the auction price and the market price secured by Duke Energy Ohio. The Company believes that this structure would mitigate the risk to suppliers of large volumes of migration and, in turn, would lower the migration risk premium that suppliers would include in their auction bids and that customers would therefore pay."

"It would be the Company’s intention that the costs of such procurement would flow directly through the existing rate mechanisms ratably to all SSO customers, likely through the quarterly adjusted Supplier Cost Recovery rider (Rider SCR)," Duke said

Notably, Duke further said, "The Company would include any necessary and appropriate accounting requests to mitigate significant volatility for customers and any significant SCR adjustments as a result of this possible, but unlikely event. In any event, the total SSO price would be adjusted and blended over time to account for the additional costs (or credits) of the additional MWs procured directly by Duke Energy Ohio from the market."

Again, Duke is not seeking approval of the volumetric risk cap in its current filing, but is seeking to preserve its right to propose further changes to the SSO during the ESP term.

If Duke availed itself of this right, "the Company would make proposals for the Commission to consider, including any changes to existing cost recovery mechanisms or accounting/deferral requests necessary to support such modifications," Duke noted

Justifying the need to address risk premiums in SSO rates, Duke said, "The current auction protocol has become one of inequity between customer classes. The unintended consequence of switching freely between competitive and SSO suppliers is that less sophisticated customers, who tend not to switch, are subsidizing more sophisticated customers, who monitor and switch frequently, through higher auction clearing prices."

Duke also floated the idea of potentially proposing to build new generation under an ESP, while not proposing any such action in the instant filing

Duke stated, "the Company is closely monitoring the deterioration of available and dispatchable capacity in PJM due to retirements and a slow-to-approve interconnection queue. Should this path not be corrected in a timely manner, PJM’s identified resource adequacy concerns could come to fruition within the next decade."

"Moreover, and on a more immediate time frame, the DEOK delivery zone has separated from the rest of the PJM RTO in multiple recent auction procurements, resulting in higher capacity prices. As more generation retires and is not replaced in a timely manner, the risk of a resource adequacy deficiency and higher prices will not only persist, but will likely exacerbate. The risks of relying on PJM-incentivized generation continues to move the market toward crossing an inflection point that could have significant consequences for Ohio customers," Duke said

"A generation component in future ESPs could potentially mitigate those risk," Duke said

Other Issues

Duke proposed to continue its purchase of accounts receivables program, provided that PUCO also continues to authorize Rider UE-GEN, through which the Company recovers uncollectible generation expense

Case 24-0278-EL-SSO

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