PUBLIC SERVICE COMMISSION OF THE DISTRICT OF COLUMBIA

Transcription

1 BEFORE THE PUBLIC SERVICE COMMISSION OF THE DISTRICT OF COLUMBIA IN THE MATTER OF ) ) The Petition of the Office of the People s ) Formal Case No Counsel for the District of Columbia ) for an Investigation into the Structure ) of the Procurement Process for ) Residential Consumer Standard ) Offer Service ) COMMENTS OF THE RETAIL ENERGY SUPPLY ASSOCIATION ON THE PORTFOLIO MANAGEMENT ISSUES IN THE SOS ISSUES LIST The Retail Energy Supply Association ( RESA ), 1 by counsel, submits the following comments relating to the Portfolio Management Issues on the Issues List developed for this proceeding. Portfolio Management Issues and RESA s Answers 9. Should an Integrated Resource Plan (IRP) be part of the SOS procurement process? If so: a. What function would an IRP have if the present RFP process is retained? b. Who should be responsible for the IRP? c. How should an IRP be integrated into the SOS procurement process? d. What period of time should the IRP cover? In restructured states such as D.C., the competitive market, not investor-owned utilities, select, construct, and operate generation facilities. In RESA s view, this is the 1 RESA s members include Consolidated Edison Solutions, Inc; Direct Energy Services, LLC; Gexa Energy; Hess Corporation; Liberty Power Corp.; Reliant Energy Retail Services, LLC; Sempra Energy Solutions; Strategic Energy, LLC; SUEZ Energy Resources NA, Inc. and US Energy Savings Corp. The comments expressed in this filing represent the position of RESA as an organization but may not represent the views of any particular member of RESA.

2 Page 2 of 9 best outcome for ratepayers, and IRP is not required to facilitate the construction of new generation. IRP should not be a part of the SOS procurement process. Utility-owned generation is not a component of a well-functioning competitive market. Given appropriate market signals to construct new generation based on the supply/demand situation of the region, and the ability to recover investment cost through an appropriately designed competitive market, the investment community has demonstrated a willingness to fund construction of units without a long term contract. As an example, in Texas, as reserve margins are projected to narrow, there is currently about 22,500 MW of capacity either under construction, planned or announced over the 2007 to 2012 time period. 2 This represents more than $22.5 billion of investment in generating capacity, without ratepayer risk. Further, in February, 2007 TXU Corporation announced the cancellation of plans to construct 8 out of 11 proposed coal-fired generating plants. The $463 million cost associated with canceling those plans was charged against earnings. 3 In the regulated environment, at least some of this cost would have been borne by the ratepayer. In fact, since 1995 approximately 30,000 MWs of new generation has been constructed in ERCOT. 4 Not a single MW of this was rate-based. Furthermore, this past week, Maryland-headquartered Competitive Power Ventures ( CPV ) unveiled plans to build a 600 megawatt natural gas-fired combined 2 ERCOT February 8, 2007, 2007 Draft Report on the Capacity, Demand, and Reserves in the ERCOT Region. This includes 50% of DC Tie Capacity, a portion of mothballed generating capacity and additional new capacity for units with signed interconnection agreements and approved air permits. Remaining publicly-announced capacity includes projects without signed interconnection agreements and/or air permits per June 1, 2006 completed project listing, and Calpine s February 28, 2007 announced Deer Park 400 MW expansion. 3 TXU Corp. Press Release, May 9,

3 Page 3 of 9 cycle power plant in Charles County, MD, just 25 minutes south of D.C. Also, at a recent Maryland hearing, Constellation announced it will be upgrading an existing 364 MW unit to essentially make it easier to ramp the facility up and down, thereby making the facility more reliable. Constellation also has filed with PJM two studies to look at the transmission capability of adding a total of 800 MW at existing sites. 5 NRG Energy, Inc. recently purchased a significant amount of baseload generation in Texas without any customer contracts. 6 Finally, Reliant built a 521 MW clean-coal project in Pennsylvania which was recognized as POWER magazine s Plant of the Year. 7 Experience shows that in well functioning markets there is no need for mandated long-term contracts for generation to be built. Perhaps more importantly, IRP implementation would do more harm than good to ratepayers. There is concern that IRP could end up selecting the most expensive resource and not the least cost resource. Moreover, due to the inherent uncertainty of forecasting, projecting future electric requirements and identifying long term electricity resource needs may result in uneconomic and inefficient decisions. IRP could move millions, if not billions, of dollars of economic risk from economic and financial stakeholders directly to D.C. ratepayers. Finally, under IRP designs, customers would have fewer product options and would be left with a one-source system effectively devoid of competition. Basically, customers would be returned to the regulated environment that restructuring sought to 5 See MPSC Case No. 9099, Tr. at (Apr. 23, 2007). A decision from PJM is expected sometime in the Fall 2007 and the new generation could be put into service within approximately three years. Id e=en_us&i_full_format=jsp.

4 Page 4 of 9 change. This Commission should be evaluating alternatives for advancing the competitive retail market in D.C., not removing choice from consumers Should the existing three-year ladder portfolio approach be changed? a. If so, what mix of contract durations should be used for SOS procurement? Why? b. If so, what mix of block sizes should be used for SOS procurements? Why? c. Should spot market purchases, either real-time or day ahead, be included in the portfolio used for SOS service? i. If so, what percentage of total energy use should be in spot market purchases and why? ii. If so, who should manage the spot purchases? The existing three-year ladder portfolio approach needs to be changed because it has stifled the development of D.C. s competitive retail electricity market and has, in the process, deprived customers of multiple product offerings from retail suppliers. 9 The key feature of any successful competitive market design is that the SOS price must be market responsive. SOS prices that have a lag effect when compared to wholesale market prices for example, longer term SOS contracts such as the three-year contracts in place today thwart the development of retail competition. This is because three-year contracts provide customers with price signals that become stale over time and that bear little relationship to actual energy market conditions. In essence, the current 8 The Maryland Commission Staff and numerous parties rejected the OPC s call for an IRP design in Case No. 9063, currently pending before the Maryland Commission. Staff testified: [OPC s] managed portfolio concept, while no doubt well-intended, fails to make a compelling argument for displacing the current full requirements procurement method. OPC s concept is not less costly; it entails risk to residential ratepayers, and it causes utilities concern about cost recovery and credit-worthiness. The approach is acknowledged by most if not all parties to be problematic to the development of the competitive retail and wholesale market. See MPSC Case No. 9063, Staff Exh. 8 at New Jersey has a similar three-year structure. No residential customers are shopping in New Jersey.

5 Page 5 of 9 SOS procurement method produces prices that are, most of the time, not in synch with prevailing market conditions. Moreover, the averaging of prices from different time periods results in an SOS price that never reflects current market priced even immediately following a price reset. The three-year laddered methodology is an improperly designed approach that has discouraged suppliers from entering the D.C. residential market. With respect to 10.a and 10.b, RESA has, in other jurisdictions, advocated the implementation of market responsive pricing for residential customers. Market reflective pricing assures that customers who stay on SOS service will receive a competitive, market-responsive price. Customers who choose to remain on SOS are empowered with an appropriate price signal which allows them to manage electricity buying decisions for their respective businesses and homes in an economic manner. The most significant benefit is that such an SOS structure will afford customers a competitive electric market and the ability to choose the product that best fits their needs. Further, customers who see more market reflective pricing are able to manage their consumption and make better decisions about energy efficiency and conservation. With respect to 10.c, RESA would not object to the inclusion of wholesale spotmarket purchases to acquire the power needed to serve residential and small commercial customers. Residential customers, however, are not ready at this time for an SOS that is overly-dependent upon hourly pricing. That said, hourly SOS retail prices are not the only way to achieve a competitive market for residential customers. The key is that the SOS price must be responsive to changes in market prices.

6 Page 6 of What should be the goal of the Portfolio? Long term stable prices? a. If so, what hedge premium over market prices is acceptable? b. How much price volatility is acceptable? c. How can vulnerable ratepayers be protected from volatile electric prices? d. Should RAD customers be subject to the same price volatility as the general body of ratepayers? RESA does not believe that a portfolio approach is an appropriate means to improve upon the current SOS structure. Allowing multi-year wholesale contracts to be included in the SOS service price along with annual and even spot purchases can result in the lag effect that has hindered competitive development in the current three-year structure. If the SOS design is based on long term contracting, customers are denied the many benefits that come from a competitive market where competitive suppliers develop innovative new products and services to meet customers individual needs. Experience in other markets demonstrates that customers have varying preferences and needs. Some customers may want a price that is locked in for a long period of time, but other customers may want renewable-only products. Some customers may use very little electricity and desire a price that fluctuates over the course of a day to take advantage of those times of day when the price is very low. Still other customers may choose a supplier that allows them to earn airline miles when they buy electricity. RESA recommends that long-term contracting provisions be excluded from any SOS design. With respect to 11.a, 11.b, and 11.c, the best manner in which to protect customers is to design and implement an SOS structure that allows for competition to thrive. The competitive market must be allowed to work and customers can then decide their own personalized solution to deal with wholesale market forces.

7 Page 7 of Should the SOS franchisee be constrained to obtaining SOS products through an RFP or auction process, or should the franchisee be allowed to take advantage of other supply opportunities? a. If so, what is the range of supply options the franchisee should consider? b. Should the franchisee be allowed to use hedging instruments? If so, which ones? c. Are legislative changes required in order to implement such an approach? The SOS franchisee should continue to obtain SOS electricity through an RFP or auction process. The franchisee should not be allowed to purchase SOS through competitive or negotiated contracts of various durations. There should be no long term contracts as explained above, and the Commission must ensure that the SOS franchisee does not favor affiliates or cross-subsidize different classes of customers. Nor should the franchisee be allowed to purchase or lease generation to meet SOS requirements. Allowing the utilities to purchase or lease generation gives rise to the same problems that existed in the regulated environment. Cost overruns, overbuild situations, and the lack of incentive to efficiently operate generation facilities can all occur. One of the main reasons that the industry was restructured was to appropriately place risk where it is best managed. 13. Should the dates of the District s procurement be changed from December/January to another time of the year when there may possibly be less competition from other jurisdictions? The Commission should determine whether changing the procurement date would benefit ratepayers. If so, it should change the date.

8 Page 8 of Should the frequency of procurements be changed, e.g., every six months, as is done in Maryland? More frequent procurement generally translates into a more market reflective price. That said, while the new Maryland two-year laddered contracts are an improvement over the blended 1, 2, and 3 year contracts that were in existence, it is not the answer to developing competition. The Maryland system, with twice-per-year laddered procurements, allows for the lag effect that hinders competition. 15. Should there be a limit on the amount that a single supplier can win in each procurement solicitation? If so, what should that limit be? RESA does not have a position on this issue, but it would seem that if one wholesale supplier offers the lowest wholesale price, it should win the load since that would result in the lowest SOS price. Thus, there should be no limit on the amount that a single supplier can win. The Commission should ensure that proper safeguards are in place to monitor the SOS franchisee s dealings with its affiliate. 16. What is the minimum number of bids acceptable during a competitive procurement? Should the Commission accept a bid if it is the only bid? RESA reserves the right to comment at a later time. 17. When and how can goals such as fuel diversity and diversity of suppliers be incorporated into the procurement process? a. Can these goals be met without sacrificing long term stable pricing? b. Should there be a limit on the amount of supply that is generated from a single fuel source or fuel type in each solicitation? c. How can diversity of the portfolio s fuel type and fuel source be ensured over time and across multiple procurement solicitations? d. What, if any, legislative actions or document changes would be required to implement these goals?

9 Page 9 of 9 SOS should be a plain vanilla service with no special features such as fuel diversity unless required by law. If a customer desires a different fuel mix, renewable products, or so forth, it can go to the competitive market. Respectfully submitted, RETAIL ENERGY SUPPLY ASSOCIATION By Counsel Brian R. Greene SeltzerGreene, PLC Bank of America Center 1111 East Main St., Suite 1720 Richmond, Virginia Tel Fax bgreene@seltzergreene.com CERTIFICATE OF SERVICE I certify that a copy of the foregoing Comments was ed this 14 th day of August, 2007, to all those identified on the service list for Case No Brian R. Greene SG