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PA Bulletin, Doc. No. 05-1285


Petition of Pike County Light & Power Company for Exception to Rate Cap Limitations Under 66 Pa.C.S. § 2804(4)(iii)(D) and for Expedited Proceedings Under 66 Pa.C.S. § 2804(4)(iv); Doc. No. P-00011872

[35 Pa.B. 3743]

Default Service Implementation Plan


   By its Opinion and Order entered August 9, 2002 in the above-referenced Docket (''August 9 Order''), the Pennsylvania Public Utility Commission (''Commission'') approved a Settlement Petition (''Settlement Petition'') entered into by Pike County Light & Power Company (''Pike''), the Office of Trial Staff (''OTS''), the Office of Consumer Advocate (''OCA'') and the Small Business Advocate (''OSBA''). That Settlement Petition, among other things, established revised Provider of Last Resort (''POLR'') rates for Pike through December 31, 2005. Section 11(e) of the Settlement Petition provides that if the Commission has not issued final regulations to implement Section 2807(e)(3) of the Public Utility Code1 by June 1, 2005, Pike will file a plan to establish POLR rates pursuant to Section 2807(e)(3), to become effective January 1, 2006. Although the Commission has issued a proposed rulemaking that seeks to implement Section 2807(e)(3)2 , the Commission will not issue final regulations by June 1, 2005. As a result, pursuant to the terms of the Commission-approved Settlement Petition, Pike submits this Default Service Implementation Plan (''Plan'') to the Commission for its review and approval.3 In light of the fact that Pike needs to have revised default service rates in effect by January 1, 2006, Pike requests that the Commission order an expedited proceeding for the consideration and review of Pike's proposed Plan. Specifically, Pike requests that the Commission issue an order approving the Plan by no later than August 15, 2005.


   Pike is an electric distribution company that serves approximately 4,200 residential and commercial customers in Pike County, Pennsylvania. For calendar year 2004, the electric requirements of Pike County's customers were 73,000 MWH, with a peak demand of 16 MW. Currently, all of Pike's electric customers take default service from Pike. Pike is a wholly-owned subsidiary of Orange and Rockland Utilities, Inc. (''Orange and Rockland''). Orange and Rockland4 provides electric service to approximately 204,000 customers in Orange, Rockland and Sullivan counties in the State of New York. Another subsidiary of Orange and Rockland, Rockland Electric Company (''RECO''), serves approximately 68,000 customers in the State of New Jersey. Pike, Orange and Rockland, and RECO operate a fully integrated electric system serving parts of Pennsylvania, New York and New Jersey (collectively referred to as the ''System''). Pike receives all of its electricity through two 34.5 KV radial circuits that cross the Delaware River from Port Jervis, New York.

   Unlike the other utilities in Pennsylvania, Pike, as a member of the System, operates in the New York Control Area that is administered by the New York Independent System Operator (''NYISO''). In contrast, the other Pennsylvania utilities are members of the PJM Interconnection, LLC (''PJM'').5

   Given its size, location in the far northeast corner of Pennsylvania, and affiliation with both the System and the NYISO (rather than PJM), Pike is plainly unique among Pennsylvania utilities. In light of these fundamental differences, Pike should not be viewed as a bellwether for the other Pennsylvania utilities on issues regarding default service protocols, procedures and requirements. Rather, in reviewing this filing, the Commission, as well as OTS, OCA, OSBA and any other potentially interested parties, should consider Pike a special case, readily distinguishable from the other Pennsylvania utilities.6

RFP for Financial Swaps

   Given its size and non-PJM affiliation, Pike is concerned that it will not be able to attract the interest of a sufficient number of suppliers if it issued a request for proposals (''RFP'') for the provision and delivery of the physical supply needed to serve its default service customers. To increase its ability to achieve the goal of default coverage in an economic fashion, Pike proposes to utilize commodity swap transactions rather than physical purchases. Specifically, Pike proposes to utilize two separate financial swaps, one pertaining to the forecasted capacity requirement, and the other pertaining to the forecasted energy requirement.7 Each of these financial swaps would be for Pike's full requirements. A sample RFP for these financial swaps is Exhibit A.

   Pike would utilize an auction format to seek separate proposals for calendar years 2006, 2007 and 2008 for both of these swaps. Specifically, Pike would utilize a web-based reverse blind auction with pre-approved bidders.8 This auction would be administered by an independent third-party. For each swap, on the day of the auction, Pike would establish a predetermined opening bid, based upon then current market prices, plus an adder (e.g., 10%). The auction would last for a predetermined period (e.g., 15 minutes), during which bidders could submit bids. The auction would employ a ''hard stop,'' which means that at the conclusion of the predetermined period, the auction would end and the lowest bidder at that point would be declared the winner. During the auction, each bidder only would be allowed to see its own bid as well as the current lowest bid. Bidders would be ''blind'' to all other bids, as well as the identity of the bidder submitting the then current lowest bid. Representatives of both Pike and the Commission would be allowed to view the bids submitted by all bidders, although they would not be informed as to the identities of the bidders.

   At the end of the auction, Pike would evaluate the proposals submitted by bidders to determine which proposals, over what annual time periods, are in the best economic interests of its default service customers.9 Pike then would present its recommendation(s) to the Commission's representatives. The Commission (or its representatives) would then determine whether the winning bid(s) should be accepted or rejected. Pike reserves the right to reject any and all winning bids. A major benefit of obtaining bids through a web-based auction is that this auction format significantly reduces the award time (to as little as a few hours). This expedited decision making process reduces the time (and corresponding risk) that a bid remains open, thereby allowing bidders to reduce the risk premium included in their bids. This results in savings to customers. Orange and Rockland successfully utilized this auction format for its spring 2005 hedging procurement.

   Since the auction proposed by Pike involves commodity swap transactions, Pike must still purchase the physical electric supply needed to meet its default service obligations. Pike intends to make such purchases from markets administered by the NYISO. In making such physical purchases, Pike will comply with the requirements of the Alternative Energy Portfolio Standards Act. In addition, since the auction does not involve the purchase and delivery of physical electric supply from electric generation supplier(s), Pike's replacement procurement process in the event of the failure of such electric generation supplier(s) is not an issue.

Rate Design Methodology

   On or before December 15, 2005, Pike will file with the Commission default service rates to be effective for the period January 1, 2006 through December 31, 2006. Based on the results of the RFP and Pike's forecast of 2006 sales to its default service customers, a forecast will be made of 2006 default service costs. These costs will be allocated among Pike's customer classes in the same manner POLR revenues are currently allocated among the classes at current rates. Default service rates within each class will be established by applying the ratio of forecast default service revenue to POLR revenue, computed at current rates, to each rate per kWh, kW or luminaire as applicable. This is consistent with the methodology used to change Pike's POLR service rates effective July 1, 2002 and January 1, 2005. Illustrative workpapers showing these calculations are attached as Exhibit B. Assuming that Pike accepts bids for calendar years 2007 and 2008, similar filings will be made on or before December 1, 2006 and December 1, 2007 to set default service rates for 2007 and 2008, respectively.

Accounting and Cost Recovery

   Pike will track and defer, on a monthly basis, any differences between default service revenue and default service costs.

   Default service costs are comprised of the following:

   1.  Pike's pro-rata share of any procurement of capacity, energy, and ancillary services procured by Orange and Rockland on behalf of the System, pursuant to its FERC-approved Power Supply Agreement; and

   2.  Hedging gains and losses associated with the RFP.

   A reconciliation charge is necessary to reconcile the differences between monthly default service costs and default service revenues. A default service reconciliation charge, applicable to all default service customers, will be calculated on an annual basis and assessed for a ten month period on a cents per kWh basis. The default service reconciliation charge will be published on a separate statement. Pike will file this statement with the Commission on January 31 of each year to become effective on the following March 1. Such statement will reflect the reconciliation of default service costs and revenues, and revenues received through the reconciliation charge, for the previous calendar year.

Description of Default Service Tariff Changes

   This section briefly describes the tariff changes that will be needed to implement Pike's default service proposal. Draft tariff leaves containing these changes are attached as Exhibit C. Final tariff leaves including these changes and final default service rates will be filed with the Commission on or before December 1, 2005, to become effective on January 1, 2006.

   1.  Terminology Changes--Default Service

   Changes have been made to General Information Section Nos. 3, 5, 10, 13 and 23 and Service Classification Nos. 1, 2, 3 and 4 to implement the change in terminology from POLR service to default service as envisioned in the Commission's proposed rulemaking.

   2.  General Information Section No. 18

   General Information Section No. 18 has been renamed ''Default Service'' and has been revised to reflect the RFP and reconciliation mechanisms described above.

   3.  Default Service Rates

   Service Classification Nos. 1 through 4 have been revised to reflect the change in terminology from POLR service to default service and to indicate with ''X.XXX,'' the default service rates to be determined through the RFP process. The 2006 default service rates will replace the X.XXXs in the December 1, 2005 filing.


   Pike requests that the Commission expeditiously approve this filing so that Pike can commence the default service RFP process described above.

         Respectfully submitted,
John L. Carley
Assistant General Counsel
Consolidated Edison Company of New York, Inc.
4 Irving Place
New York, New York 10003
Phone: (212) 460-2097
Fax: (212) 677-5850
Counsel for Pike County Light & Power Company


[Pa.B. Doc. No. 05-1285. Filed for public inspection July 1, 2005, 9:00 a.m.]


1  66 Pa.C.S. Section 2807 (e)(3) provides as follows:
   (e)  Obligation to serve--An electric distribution company's obligation to provide electric service following implementation of restructuring and the choice of alternative generation by a customer is revised as follows: . . .
   (3)  If a customer contracts for electric energy and it is not delivered or if a customer does not choose an alternative electric generation supplier, the electric distribution company or commission-approved alternative supplier shall acquire electric energy at prevailing market prices to serve that customer and shall recover fully all reasonable costs.

2  35 Pa.B. 1421 (February 26, 2005).

3  Once the Commission has adopted final regulations, Pike will amend this Plan as necessary.

4  Orange and Rockland is a subsidiary of Consolidated Edison, Inc.

5  Pursuant to the Settlement Petition and the Commission's August 9 Order, Pike completed a study that investigated the costs and benefits that would be incurred of Pike were to interconnect with PJM. This study clearly indicated that such an interconnection project would not be economically feasible. Specifically, this study concluded that the annual savings associated with such interconnection would amount to approximately $1.2 million while the carrying charges on the needed system investment of $13 million to interconnect with PJM would amount to $2.6 million per year.

6  Pike will provide a copy of this Plan on OTS, OCA, OSBA and the NYISO.

7  Since there is no active, liquid market for ancillary services, Pike would be unable economically to utilize commodity swap transactions to lock in their price. Rather, Pike would purchase ancillary services, as required, through the NYISO.

8  In the event that any of Pike's affiliates participate in this auction, Pike will implement protocols to ensure that such affiliate does not receive an advantage in either the solicitation and evaluation of competitive bids, or any other aspect of the competitive process. The format employed in a web-based reverse blind auction, when administered by an independent third-party, is particularly well suited to ensuring the competitiveness of the procurement process.

9  By seeking bids for calendar years 2006, 2007 and 2008, Pike (after Commission review and approval) retains the flexibility to lock in prices for one, two or three years, depending on the relative attractiveness of the bids submitted in light of market price forecasts.

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