BEFORE THE PENNSYLVANIA PUBLIC UTILITY COMMISSION COMMENTS OF COMPERIO ENERGY LLC

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1 BEFORE THE PENNSYLVANIA PUBLIC UTILITY COMMISSION Policies to Mitigate Potential Electricity Price Increases Docket No. M COMMENTS OF COMPERIO ENERGY LLC Comperio Energy LLC ( Comperio ) hereby provides these Comments to the Pennsylvania Public Utility Commission ( Commission ) in response to the Commission s Tentative Order of February 8, 2007 seeking comments on its Policies to Mitigate Electricity Price Increases. Comperio is in a unique position to provide comments to the Commission on this subject as its staff has participated in deregulated energy markets since 1990, and has provided strategic advisory services to residential, commercial and industrial consumers, as well as utilities, wholesale and retail electric suppliers throughout North America, including ten other states with retail electric competition. A. Consumer Education We agree with the Commission s proposal to develop consumer education programs. This is especially critical in the residential sector as they are typically the last consumers to move to lower priced alternatives from POLR service. We suggest the state s efforts include education specific to aggregation opportunities either at a local municipal level, or through industry associations. Aggregation through a trusted entity is often key to obtaining lower priced electric service, particularly for residential and small commercial consumers. To the extent the state can highlight savings against the utility tariffs (which often ranges between 10 and 30 percent), this would be an important aspect of the education. 1

2 B. Alternatives to Abrupt Price Increases We disagree with the proposal to allow generation rate increases prior to the expiration of rate caps. This proposal would allow utilities to collect money today to offset unknown future costs. These unknown costs depend both on the level of future wholesale prices, and the amount of customer load migration away from the utility. Both of these variables are inherently unpredictable with customer migration linked to the level of future wholesale prices. If such a program were allowed, any upfront funding of future costs should be set aside in a segregated, interest-bearing account for the benefit of customers and not co-mingled with other utility funds. These funds would have to be applied as a credit against future costs, and to the extent the customer chose an alternative supplier, those credits would have to move along with the customer. This strategy seems to increase (rather than decrease) electric prices and if not properly administered, could undermine the development of Pennsylvania s competitive market. We are somewhat, but not completely, opposed to a laddered procurement strategy for POLR obligations. This strategy would be acceptable for some customers, with three provisos: 1. The procurement transactions with any third party or utility affiliated power generator are arms length transactions similar to prices that could be obtained by unrelated parties; 2. The resulting fixed price rates include a risk premium to offset risk that customer load staying with the utility during the fixed price term may be either over or under subscribed; and, 2

3 3. The resulting rates reflect the true cost (which includes the above mentioned risk premiums) of serving the customer s load profile without cross subsidization from other customers. Failure to incorporate these three provisos into the rate setting process puts the utility, and therefore ratepayers, at risk which in turn could lead to higher electric rates, as well as undermine the development of Pennsylvania s competitive market. C. POLR Rules While we understand the attractiveness of having a stable fixed or semi-fixed rate resulting from the laddered procurement strategy, we caution the Commission that this strategy is not without several risks. Because customer load that subscribes to a fixed rate is not locked up for a contract term, customers are likely to migrate away from the utility during periods of declining and low wholesale prices, and migrate back to the utility during periods of increasing and high wholesale prices. Offering a fixed or semi fixed electric rate puts the utility in a position where it may either buy too much power, and then have to sell it back into the grid at a loss, or buy too little power and later have to buy from the grid at a loss. The later situation is a strategy of writing uncovered call options, a risk strategy that is unacceptable to most prudent investors. It either adds costs in the form of risk premiums upfront, or else adds costs which may be significant later if the call options are exercised. In both cases, this procurement strategy creates risk which leads to cost increases for ratepayers. The second significant risk associated with the laddered procurement strategy is that it creates uncertainties which undermine the development of a competitive electric 3

4 market which is meant to reduce electric prices. One only needs to look slightly west of Pennsylvania to Ohio and Michigan to see rate setting regulatory policies that have prohibited the development of electric competition. Competitive power retailers can only compete in a market if there is an opportunity for customers to save money by switching away from the utility. This opportunity occurs when the retailers costs, as represented by wholesale electric prices plus retail adders that cover other service related costs, are lower than the utility s tariff rates. A laddered procurement strategy adds significant uncertainty to utility rates and as wholesale electric prices decrease/increase, it creates an on again, off again market for competitive retailers. These profit seeking entities are hesitant to make investments in a market where opportunities exist one month and vanish the next. A laddered procurement strategy is not the best policy choice if the Commission truly seeks to develop a competitive electric market. We are concerned that in the face of rising electric prices, pricing for the Provider of Last Resort ( POLR ) is suddenly becoming POPR (Provider of Preferred Resort). If the objective of the Commission is to reduce utility prices for generation supply, then it will become more difficult for competitive retailers to be successful in the Pennsylvania electric market, and there will be fewer competitive alternatives for customers. The Commission s policy on POLR rates also impacts the Commonwealth s goals with respect to developing alternative energy projects. Utilities are reluctant to buy alternative energy under long-term Power Purchase Agreements ( PPAs ) when they are at risk of losing their customer load to competitive retailers, and also because credit rating agencies treat PPA s as long-term debt on the utility s balance sheet, which impacts the utility s credit ratings and cost of capital. In a number of states with retail deregulation (including 4

5 Pennsylvania) competitive retailers are stepping up to fill this void and entering into long-term contracts with the project developers. These competitive retailers are fast becoming a necessary and critical part of the renewable energy market, signing long term agreements for energy that allows wind and other project developers to obtain project financing necessary for the projects to move forward. If Pennsylvania s POLR policy undermines development of the competitive electric market, it will negatively affect the Commonwealth s ability to achieve its goals for development of alternative energy. We suggest the Commission limit the amount of customer load for which fixed or semi-fixed POLR rates are offered to those customers for whom few competitive alternatives are available. This is traditionally residential and low credit quality business customers. We also suggest that POLR rates (for all customers) include a real-time hourly pricing option in addition to the laddered rates. Even though many customers do not have the metering technology in place to cut demand in response to real-time prices, those real-time prices are often significantly less than longer-term, fixed price alternatives. For profiled accounts that do not mind prices changing with each month s bill, real-time pricing options are often the cheapest way to purchase power. When interval data meters are installed, customers taking the hourly price option will be more familiar with pricing signals that encourage them to cut demand during higher priced hours. We would encourage the Commission to remove any generation supply related costs from the EDCs distribution rates, putting them into the supply tariffs if necessary. Pennsylvania s high distribution rates unduly burden small and medium size commercial businesses, reduce the effectiveness of state s competitive electric market, and put these 5

6 businesses at a competitive disadvantage within their industries when compared to their peers in other states. (Pennsylvania s distribution rates for many commercial entities are as much as four times that for similar entities in other states.) D. The Relationship between Wholesale Markets and Retail Rates We agree with the general consensus that retail rates are directly influenced by wholesale rates. While we believe PJM s wholesale market operates competitively, we do believe it is important for the Commission to stay actively involved in proceedings before the FERC. It is equally important for the Commission to participate in the development of market rules at PJM, since PJM (as well as other RTO s/iso s) tend to be dominated by power generators and many market rules tend to be biased in favor of those parties. In addition to meeting annually with PJM via OPSI, the Commission should consider seeking member status within PJM and having an active role on PJM s policy making committees as well as a seat on PJM s Board of Directors. PJM s market rules and procedures for economic dispatch of generation directly impact retail market prices and the Commission should be an active participant in this policy making forum. E. Enhancing the Competitiveness of Pennsylvania s Electric Markets Based on current state regulatory frameworks, by 2011 Pennsylvania will become the third largest competitive retail electric market in the country, behind Texas and New York. This not only represents a significant opportunity for reducing costs through competitive supply options, but is also significant in terms of potential job creation within the state. Both Texas and New York have seen approximately one hundred new retail competitors come into their markets. In addition to new retail competitors, those states 6

7 saw jobs created in other professional services, from law and consulting firms, to new technology providers within the industry. Electric competition brought high paying professional jobs to these states in fields including law, accounting, engineering, and business. In considering its policies relating to retail competition we strongly urge the Commission to not deviate from its course of promoting a competitive electric market which will inevitably bring thousands of new jobs to the state. The state s policies should be aimed at increasing the viability of the competitive electric market. Specifically, we recommend the following: 1. In order to reduce costs, for both state regulators as well as market participants, we urge the Commission to require all electric utilities under its jurisdiction operate within the PJM region. This would affect only two small utilities, Penn Power which currently operates in MISO, and Pike County which operates within the New York ISO. Moving these two utilities into PJM would also increase the size of the competitive electric market within the Pennsylvania portion of PJM, making Pennsylvania more attractive to competitive power retailers and provide more competitive alternatives to customers within these utility control areas. 2. Develop and implement uniform rules (involving billing, electronic data exchange, obtaining historical usage and load profiles, etc.) across all electric utilities under the Commission s jurisdiction. This should involve easy and timely access to load data at no cost to the 7

8 competitive retailer, customer or a third party working on the customer s behalf. In closing, nearly twelve years have gone by since the state legislature passed a law to implement retail competition. During this period of time, Duquesne Light customers have seen real benefits associated with moving to competition, not to mention that by the end of 2010, Pennsylvania s electric customers will have paid $12 billion in utility stranded costs as the price tag for the industry restructuring necessary to achieve a competitive electric market. We believe the state s policies in this area should be driven by a desire to enhance competition by increasing the size and viability of the competitive market and lowering the costs to new entrants. This will benefit Pennsylvania consumers by enabling lower priced, competitive supply alternatives, support the development of alternative energy projects, and help to create new, high paying jobs within the Commonwealth. Respectfully submitted, Carolyn Pengidore, Esq. President/CEO Comperio Energy LLC 2352 Willowbrook Road Pittsburgh, PA Dated March 2,