I/M/O
Provision of Basic Generation Service (“BGS”)
Pursuant to the Electric Discount and
Energy Competition Act
N.J.S.A. 48:3-57
BPU
Docket Number: EX01110754
Comments of the Division of the Ratepayer Advocate
This document lays out the principles and approaches that the Ratepayer Advocate believes are appropriate for the design of the fifth-year acquisition of BGS service. The Ratepayer Advocate intends to review the proposals of other parties, conduct discovery and subsequently provide the Board with comments regarding the merging of the methods of the other proposals with the principles and approaches presented in these comments.
BGS should be as simple a service as possible, while protecting small customers from market volatility. To the extent possible and consistent with the preceding goals, BGS service should provide customers with price signals that encourage conservation in high-cost periods.
In terms of simplicity, BGS should not include extra services, such as load control or multiple pricing options; if marketers are interested in providing such services, and customers are interested in paying for them, the customer can change supplier. BGS is a basic service for customers who do not want to shop for power supply, not a supermarket of supply options. Other than opting for more sophisticated metering to participate in time-of-use or real-time pricing, and participating in financial hedging, each customer should have one BGS supply available; any other services should be provided by marketers.
BGS is a utility service, and
customers on BGS should continue to be served through the utility. No customer
should be required to switch from utility power supply, although BGS service
could have a retail aspect as described below. No individual customer
information should be provided to BGS suppliers, except at the request of the
customer.
The following two sections lay out the Ratepayer Advocate’s design principles for BGS customers, first for small customers and then for large customers.
For residential and small commercial customers who do not choose to participate in the competitive market, BGS should be a simple, safe and stable refuge.
Small customers should pay rates determined by the cost of BGS service acquired at auction for a multi-month period. Rates should be set for each rate class, to reflect its load shape and losses, and to allow classes with more complex metering (time-of-use or demand metering) to be billed in the most appropriate manner for BGS.
While rates should be fixed in
advance, they should vary by the season, i.e., summer and winter. This
differentiation is likely to reduce supplier risks, and hence, reduce costs. For
example, suppliers are likely to specify higher prices for the summer months
than in other months to reflect the higher costs of energy in those months. If
the summer is very hot and summer sales are high, the supplier would receive the
higher price specified in its bid, rather than an average price that would
reflect the costs over a longer period. Seasonal (and time-of-use)
differentiation in the supplier prices will also provide better price signals to
consumers. For instance, higher summer prices will encourage more conservation
in the summer, reducing loads and prices.
Small-customer BGS can be made virtually retail, by identifying to each customer one supplier as the source of that customer’s energy, allocated in proportion to the fraction of supply provided. The BGS supplier should have the option to be identified as a BGS customer’s supplier if it chooses to do so. The supplier’s logo and contact information should be on the bill, but any direct contact or exchange of information should be initiated by the customer. As an example, if BGS supplier XYZ Energy supplies 20% of the BGS energy needs of ABC Electric Company's BGS customers, XYZ Energy's logo would appear in a designated location on the printed monthly bills of 20% of ABC's BGS customers, selected at random from ABC's list of BGS customers. If another BGS supplier supplies 30% of the BGS needs, its logo would appear on 30% of the BGS customers' bills, and so on. For the BGS supplier who does not opt to be identified on the customer bill, the customers associated with that supply could have another BGS supplier identified on their bills in proportion to the shares of the other BGS suppliers’ load. In this way, all BGS customers would have some supplier identified on their bills.
In all other substantive respects, the utility should acquire BGS for the customers. The utility should select the suppliers, confirm their qualifications and replace the suppliers if necessary. Of course, this process would be reviewed and approved by the BPU with full intervention by the Ratepayer Advocate. Utility affiliate bidding to supply BGS will require Board-supervised third-party operation of the procurement. Considering the large amount of capacity owned by an affiliate of Public Service Electric & Gas Company, affiliate involvement in the supply of BGS, and hence Board oversight, are inevitable for the foreseeable future.
All customers in a class should
have the same BGS rate, even customers who return to BGS in the middle of a rate
period. For large customers, this recommendation is conditioned on the use of
hourly (or other short-term) acquisition of BGS supply for large customers.
The virtual-retail approach avoids customer-assignment issues, since only a small space on the customer’s bill is effectively assigned to a supplier. No privacy concerns are raised. Yet, virtual retail competition can introduce small customers to the concept that they can be supplied by power from a party other than the utility, and encourage them to shop around for pricing and other features they find desirable.
BGS bidders should be required to obtain a BGS license from the BPU before submitting a bid. The BPU should create a license specifically for BGS bidders that is separate from the existing retail supplier license. It is preferable to require the BGS license before bidding rather than after being awarded a BGS contract, so as to eliminate the delay caused by applying for a BGS license after the award. This will also ensure that bidders are sufficiently qualified to place a bid in the first instance. All BGS suppliers who opt to have their name, logo and contact information appear on the customer’s bill should also be required to have a separate retail supplier license.
While multi-month acquisition of BGS is desirable to provide price stability, procurement of power for long periods is likely to increase prices. Unless customers are prohibited from switching for specified periods (which would defeat the purpose of encouraging competition), suppliers bear the risk that customers will migrate to cheaper deals if market prices fall, leaving the supplier with supply commitments that it must resell into a weak market. If market prices are high, migration will be negligible. So the supplier faces losses in low markets and no opportunity for gains in high markets.
Realistically, however, migration rates by residential and small commercial customers are likely to be very low. Nonetheless, procurement should probably be for less than a year. The initial post-transition BGS rate period should be the ten months from August 1, 2003 through May 31, 2004. After that period, procurement should probably be for no less than six months and for no longer than twelve months, which would avoid splitting up critical seasonal pricing and loads and provide stability. Several New England utilities have acquired the equivalent of BGS service for periods of six months, at auctions conducted between one and three months prior to the beginning of delivery.
The auction could take many forms, including a variation of the simultaneous multi-round auction used to acquire BGS for Year 4. The Ratepayer Advocate’s initial analysis of the Year-4 auction results indicates that the prices were above wholesale market prices for the same services. If the concerns previously raised by the Ratepayer Advocate with respect to this method can be resolved, the Board may wish to use a simultaneous multi-round auction in future BGS procurements for small customers. The supply for each class of small customers, including residential and small commercial, would be bid as one or more tranches of supply. (Classes with little load may be combined with a larger class with a similar load profile.)
If the Board cannot find that the Year-4 auction was efficient, it should order the utilities to procure BGS service in a series of competitive acquisitions. Since bidders may wish to offer different patterns of prices over the months of a procurement, and different prices by time-of-use and for demand charges, the most suitable auction form may be a sealed-bid auction, with the utility selecting the bid that offers the lowest total cost to the affected class. Indeed, designing a simultaneous multi-round auction to accommodate alternative price structures may not be possible. For classes with time-of-use or demand meters, sealed-bid auctions may be the only practical design.
Large customers should be moved toward real-time prices, with an option of utility-facilitated hedging through the purchase of forward contracts or futures. The utility can procure energy, capacity and ancillary services directly from the PJM markets. The utility facilitation of these services for the large customers would only be for the early post-transition period. Afterward, the customer would obtain these services through its own efforts.
Customers large enough to justify hourly metering and large enough to efficiently procure hedges or alternative supplies should be billed hourly at the PJM zonal price. These would probably include PSE&G rates LPL, HTS, HTS-C, and the customer on Hourly Energy Pricing; Atlantic rates AGS and TGS; JCP&L rates GST, GTX, GP, and GT; and RECo Service Classification No. 7.
The utilities should perform analyses, comparing the cost of the interval meters to the savings achievable from customer response to real-time prices, to determine the minimum size (in MWh/year) for customers to be put on real-time pricing. The utilities are the logical parties to conduct these analyses, since they have access to manufacturer pricing for utility-scale purchases. Any customer that currently has interval metering should be placed on real-time BGS.
The costs of any additional metering should be borne by the customers who receive the meters, as part of a tariffed rate. This should not be a substantial cost for large customers.
Since the utility will not be undertaking any significant obligations for large customers, those customers can be free to switch to or from an alternative generation supplier on very short notice.
Customers who are large enough
to justify hourly metering, but are not large enough to procure their own
hedges, may need some assistance in obtaining hedging, through a utility-run or
utility-facilitated program. This determination should be customer-driven.
Utilities should sell their committed supply (NUGs) and use the revenues to reduce stranded costs.
All BGS services should comply with the renewable
portfolio obligations. For BGS supply procured through real-time purchase of PJM
energy, the utility may meet the renewable portfolio by contracts for
simultaneous purchase of qualifying renewable energy and sale of non-renewable
energy.