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No Surprise: Despite Sound & Fury, Pennsylvania PUC Won’t Change Default Supplier Role, Structure

By: Energy Choice Matters |

In what had been the expected outcome of the Pennsylvania PUC’s investigation of the retail electric market design, despite much hot air to the contrary, the PUC has stopped short of a shift in the default service supplier role, declining to place retail suppliers in that role or otherwise conduct an opt-out retail auction with default service only being a true backstop for customers affirmatively selecting it.

Such an outcome was inescapable given statutory constraints (particularly the “prudent mix” standard for default service regardless of whether a retail supplier or utility serves the load), and retail suppliers’ unwillingness to accept PUC review of procurements, or alternatively pricing, had they stepped into the default supplier role.

Moreover, the PUC’s anticlimactic conclusion is consistent with its history in similar endeavors. As previously cautioned by Matters, twice the PUC has undertaken broad, all-encompassing rulemakings to jump-start the retail natural gas market, and while some progress has been made, retail gas choice is still largely languid for residential customers, and the market still lacks full unbundling or mandatory purchase of receivables.

The PUC’s action today is not a final order, but rather a Secretarial Letter setting forth its views on what the end-state of the retail markets investigation should look like. While the action is not final, the PUC voted 4-1 (with Commissioner James Cawley dissenting) to issue the proposed changes which lack a change in default supplier structure.

An order from the PUC regarding the retail markets investigation was not immediately available, but statements from various commissioners make clear that no change in the default supplier role will be proposed. Matters will follow up with specifics of today’s action when available.

The PUC will, however, seek to make default service more market-reflective.

PUC Chairman Robert Powelson said of the proposed retail market changes that, “[t]he main theme of these proposed changes is to remove barriers to competition so that default service prices more closely mirror actual market prices instead of being distorted by long-term contracts and our electric distribution companies’ inability to accurately project default service costs, which leads to large under and over-collections.”

Aside from lacking specifics such as how market-reflective the PUC seeks to make default service, it was also not immediately clear whether the PUC is proposing to undertake the changes under its existing authority, or whether statutory changes will be required (due to the “prudent mix” standard).

In describing the actions contemplated by the PUC, Commissioner James Cawley cited a, “recommendation to change the default service supply portfolio standard from a ‘prudent mix’ of short and long term contracts, meeting a ‘least cost over time standard,’ to a spot or very short term supply portfolio for default service.”

PUC Chairman Robert Powelson said of the PUC’s decision to maintain the utility in the default supplier role, and eschew an opt-out retail auction:

“[A]s a Public Utility Commissioner charged with protecting the public interest 15 years after passage of the Competition Act and three years after retail electricity competition was jump-started following the expiration of the rate caps for our largest electric distribution companies, I disagree that it is the government’s role to act as a surrogate for customers.”

“That is, to the extent customers do not make an affirmative choice for themselves, the government should not make that choice for them. Rather, I think that government’s function should be limited to making sure that default service, and the competitive market as a whole, is not structured in such a way that EGSs cannot compete in a long-term manner,” Powelson said.

Powelson continued: “[I]t is not acceptable that we allow regulated utilities here in the Commonwealth to provide a false sense of security that they are the provider of ‘first-choice’ when it comes to retail competition. In my view, that is what has failed us as we seek to provide customers with the best products and services on the market. My hope is that the market changes proposed today will alter that perception among utilities and customers alike.”

Commissioner James Cawley issued a concurring and dissenting statement, stating that the PUC’s contemplated policies do not go far enough.

Cawley supported a form of an opt-out retail auction, citing one potential design which would assign all non-shopping customers to a retail supplier. Default service similar to the traditional mechanism would also still exist (but likely based on shorter-term procurements and more market-reflective pricing), but non-shopping customers would have to affirmatively choose this default service by opting-out of the retail auction.

“[A]ttuning supply to market prices alone will not resolve the propensity of most customers to do nothing regarding their electricity supply, even in the face of very significant savings opportunities,” Cawley said.

“Why? For starters, basic human nature leads to decision avoidance when the subject is not readily or easily understood. Unreasoning adherence to the status quo. Misguided loyalty to the distribution company when, in fact, it is indifferent if its customers switch away from default service to an energy supplier because it is paid for delivery, not energy supply. Needless fear of delayed supply restoration when, in fact, distribution companies are held to reliability standards and wish to keep their customers satisfied about distribution service. Wealth, where saving a hundred or a few hundred dollars a year is insignificant. Or just plain apathy,” Cawley said.

Cawley noted that in New York, which features monthly adjustments to the default service price, the most vibrant territory for migration (O&R) only has about 37% residential shopping, while statewide residential shopping is only 24%.

“[I]t does not appear that merely changing the underlying supply portfolio will have a significant impact on encouraging most customers to shop for lower cost supply alternatives that are readily available on the Commission’s website and actively marketed daily by numerous EGSs. It is only by removing the barriers related to the current default service market structure that the full benefits of competitive markets can be delivered to consumers,” Cawley said.

Stopping short of an opt-out auction, and only reforming default service to be more market-based, “disserves the 70% of Pennsylvania customers who rely on this Commission to do what is necessary to make electricity choice really work,” Cawley said.

“They rely on us to fashion the program — with legislative help if needed — to make it as easy as possible for them to make a decision in their best interests,” Cawley said.