5. DA Switching Rules
The Commission has adopted rules whereby customers may switch between DA and bundled service. The current process of managing customer switches from bundled service to DA is through Notices of Intent (NOI) supplied by the customer. This process requires the validation of the incoming forms and, in some cases, the clarification or correction of the forms.
DA switching rules accomplish several purposes. There are administrative issues and timing requirements related to switching a bundled customer to DA service, or allowing an existing DA customer to switch back to bundled service. The switching rules also guard against placing any burden on bundled customers while at the same time promoting customer choice and economic efficiency. Phase III of this proceeding is to address possible changes to the switching rules.
The switching rules prescribe both advance notice periods prior to switching and minimum durations for a customer to remain on bundled service before becoming able to switch back to DA. The four main components of the DA switching rules are:
a. Six-month advance notice to transfer from bundled back to DA service;
b. Six-month advance notice to return from DA to bundled portfolio service (BPS);
c. Three-year minimum BPS stay period; and
d. TBS option, which allows a DA customer to receive temporary procurement service from the IOU while switching to a new ESP, or returning to IOU procurement service in advance of the requisite six-month advance notice.
5.1. Minimum Stay Requirements
The current rules require that customers returning from DA to bundled service remain on bundled service for a minimum of three years. The Commission adopted this requirement to preserve bundled customer indifference without potential gaming. The three-year requirement was intended also to allow sufficient time for the IOUs to adjust their portfolios if returning DA customers elected to switch back to an ESP. Without a minimum stay requirement, the potential would exist for cost shifting if DA customers could abandon bundled service at will without responsibility for payment of ongoing utility costs incurred under multi-year contracts that were undertaken to serve the DA customer when that customer was served as part of bundled load.
No party advocates eliminating a minimum stay commitment, but parties disagree on the duration of stay necessary to reasonably protect bundled service customers from cost shifting. DRA supports maintaining the three-year commitment period adopted in D.03-05-034.
The IOUs propose to reduce the minimum stay to 18 months, claiming that an 18 month minimum stay is necessary for several reasons. First, consistent with D.03-05-034, a minimum stay requirement prevents returning DA customers from gaming the system to capture lower prices when the bundled service rates are lower. If a returning DA customer can elect to return to bundled service after giving six months notice, and has no requirement to stay on bundled service for a specific period of time, as soon as market prices change, the customer may try to return to DA service and capture lower prices. The Commission sought to address this type of price arbitrage when requiring a minimum stay for returning DA customers.
In addition to preventing gaming, the minimum stay requirement minimizes stranded costs. As noted in D.03-05-034, if DA customers were permitted to depart bundled service without restriction, they could leave
long-term supply commitments stranded, and thereby shifted to the remaining bundled customers. When DA customers return to bundled service, the IOU cannot simply enter into short-term energy transactions to serve these customers. Instead, the IOU must meet certain regulatory requirements, such as RA and RPS requirements, which require the IOU to enter into intermediate-term transactions on these customers' behalf.
SCE states that demand for DA service has fluctuated over the years, and the DA market can experience large swings depending on market conditions. When demand for DA service drops off, the cap on the DA load will not mitigate the risk of gaming. The DA Parties' conclusions depend on continued high demand for DA service, which itself indicates lower price power available in the competitive market. But these market conditions are not the circumstances with which the IOUs are concerned. According to SCE, as prices rise in the market and DA service becomes potentially less competitive with IOU service, opportunities for gaming increase at the same time customer interest in DA service would be expected to diminish. It is these changes over time in the competitive market prices which the minimum stay requirement is intended to address.
SCE testified that nothing prohibits the entire maximum DA load from returning to SCE's procurement service in stressed market conditions. If even half of that load returned to SCE's procurement service in a stressed market, without a long-term commitment to bundled service, the risk of stranded costs when that load departs for DA service would be substantial. It is also possible that a significant reduction in the minimum stay provision would, in the face of the potential for a mass return, result in a change in the mix of short, medium and long-term contracting by the IOUs over time. This could have the affect of increasing the average cost of procurement, which would impact all customers.
The DA Parties advocate reducing the minimum stay requirement from
36 months to 12 months, arguing that "greater load stability" in the capped market justifies reducing the minimum stay, and that 12 months is sufficient to protect against seasonal gaming. To the extent six-month advance notices for migrating load are maintained, the existing DA load cap provides some mitigation of the risks of gaming and cost shifting as a result of migrating load, which supports some reduction to the minimum stay period.
The DA Parties recommend that the minimum stay for voluntary return customers should be 12 months, which begins at the end of the safe harbor period or when the customers returns to IOU service after having given six months notice. They propose a minimum stay for an involuntary return customer of 12 months to begin at the end of the six month TBS rate period.
The DA parties argue that given the limited nature of DA re-opening, a minimum stay is unnecessary or should be very short. They believe it is unclear whether DA will continue to be fully subscribed in future years. Moreover, some parties are advocating that DA be further re-opened in the future. They propose that the Commission adopt switching rules to prevent gaming now and in the future.
We adopt the IOUs' proposal to revise the minimum stay requirement to 18 months. We recognize that the SB 695 cap on the DA market provides some mitigation in the risk of stranded costs and supports some lowering of the minimum stay requirement from its current three years. We conclude, however, that a one-year period is too short to mitigate the risk of stranded costs. Under the current RA requirements, even with the six-month advance notice requirement, the risk of stranded costs with a one-year minimum stay requirement is high. The DA Parties conducted no studies or analysis to determine if their proposed 12-month minimum stay requirement provided the utilities adequate time to adjust their portfolios to reflect shifting load.9 During hearings, DA Parties Witness Fulmer admitted that this knowledge about the utilities' procurement adjustment practices was limited and that "[t]he utilities' procurement departments would obviously know more about how they procure than I would."10 When questioned if the DA Parties' 12-month proposal was tied to the utilities' procurement adjustment activities, DA Parties' Witness Fulmer testified that the 12-month proposal was based on "one instance where one of the procurement folks at Edison had noted their flexibility in their contracting. The 12 months notice is based on that quote and the fact that there's the indication that the six months is sufficient time for the notifications to come to and from."11
Therefore, given the lack of supporting evidence, we conclude the minimum stay requirement should be longer than one year, but shorter than three years. While the precise length of time is difficult to quantify, we conclude that the IOUs' proposed 18-month minimum stay requirement achieves a reasonable approximation, however, mitigating the risk of stranded RA and other potential stranded costs, while acknowledging that the capped DA market supports some lowering of the minimum stay requirement from its current length of three years. The IOU proposal represents the expertise of procurement planners who must maintain sufficient resources to serve bundled load.
The DA Parties assume continued high demand for DA service, which indicates lower priced power available in the competitive market. As market prices rise and DA service becomes potentially less competitive with IOU service, however, opportunities for gaming increase at the same time customer interest in DA service would be expected to diminish. This sort of change over time in competitive market prices is what the minimum stay requirement is intended to address.
Gaming is not the only concern the Commission seeks to address by the minimum stay requirement. The Commission also seeks to mitigate the risk of stranded costs from the utilities' prospective procurement obligations by considering the mix of resources and the average duration of contractual obligations. The minimum stay period is intended to mitigate the risk of stranded costs from the utilities' prospective procurement obligations by considering the mix of resources and the average duration of contractual obligations. The proposed 12-month minimum stay requirement increases the likelihood that costs will be misallocated from departing DA customers to remaining utility customers. Requiring returning DA customers to stay on bundled service for a minimum of 18 months will minimize stranded costs associated with intermediate-term procurement. If returning DA customers could leave bundled service without a minimum stay requirement, costs for transactions entered into on these customers' behalf would effectively be shifted to the remaining bundled customers.
Parties also disagree as to when the minimum stay requirement period would start. Under current rules, a returning DA customer must provide six months notice before returning to bundled service rates. A returning DA customer that gives six months notice is placed on the bundled rate when it returns to bundled service six months after giving notice. A returning DA customer who fails to give six months notice s placed on the TBS rate for six months. After the six months end, the customer goes on the bundled service rate.
As determined in D.03-05-034, the minimum stay period commences when a returning DA customer begins paying bundled service rates. Thus, if a customer provides six months notice and then returns to the bundled service rate, the minimum stay period commences when the DA customer returns. If a DA customer returns with no notice, and is on the TBS rate for six months, the customer's minimum stay period commences after the six months TBS rate period has concluded and it starts paying the bundled service rate.
No party offered evidence as to why the existing Commission rule as to when the minimum stay period commences should be modified. Requiring the minimum stay period to commence when a returning DA customer begins paying the bundled service rate treats all returning customers equally, whether they provide sufficient notice or not. Since no party has provided any reason to modify this aspect of the switching rules, the Commission should not modify its existing rule.
With regard to the minimum stay requirements, we conclude that the distinction between voluntary and involuntary returns is not relevant. Whether a customer returned voluntarily or involuntarily, the utility still must enter into short- and intermediate-term transactions to provide energy and satisfy regulatory requirements on behalf of that customer. The minimum stay requirement applies under whatever circumstances a DA customer returns to bundled service, and commences when the returning customer begins paying the bundled service rate.
5.2. Advance Notice Period to Switch Service
A six-month advance notice is currently required for customers returning to BPS or departing to DA service, as adopted in D.03-05-034. The advance notice period is designed to preserve bundled service customer indifference to migrating load. The Commission in D.03-05-034 found that a six-month advance notice to return to bundled service was a necessary added precaution to give the IOUs sufficient time to adjust their procurement to accommodate the change in load. The Commission noted that the six-month advance notice, together with the minimum BPS commitment period, would guard against arbitrage or other gaming practices that could be detrimental to bundled customers.
There are two exceptions to the six-month notice requirement. First, if a customer is involuntarily returned to bundled service by an ESP, the customer obviously cannot give six months notice before returning. This situation may occur when, for example, an ESP goes bankrupt and suddenly stops providing service. In this case, the customer would be immediately returned to their utility's TBS tariff.
Second, a DA customer may voluntarily return to utility service for a 60 day safe harbor period if they are transitioning to a new ESP. However, the voluntarily returning DA customer needs to give notice when it returns that it is electing to use the safe harbor option. The safe harbor period starts on the day that the voluntarily returning DA customer returns to bundled service, unless the customer gives notice to the IOU that it is not returning for a safe harbor period.
During the safe harbor period, voluntarily returning DA customers pay the TBS rate. A customer returning under a safe harbor period does not need to give six months advance notice, but the safe harbor period is limited to 60 days and commences on the first day the customer returns to bundled service. If the DA customer does not find a new ESP and submit a DA Service Request (DASR) to be switched to the new ESP during the 60-day safe harbor period, the customer would then be considered a returned DA customer, would pay the TBS rate for the six month notice period and then would be required to stay on bundled service, and pay bundled rates, for 18 months under the minimum stay provision.
The IOUs, the DA Parties, CLECA/CMTA and DRA all support the continuation of the six month advance notice for DA customers to return to bundled service. No party opposes the requirement. DA customers may serve out the six-month advance notice period while on DA service, in which case they will return directly onto BPS, or they may elect to take the IOU's TBS during the advance notice period. Therefore, customers have reasonable flexibility under the rule.
The DA Parties, however, propose eliminating the six-month notice requirement for a customer departing from bundled service to be served by an ESP. The DA Parties do not believe there is any justification to impose this restriction on the movement of DA customers, particularly since DA caps have been established by D.10-03-022, thus mitigating uncertainty as to the load changes.
SCE argues that even though the Commission has established caps on maximum DA load pursuant to D.10-03-022, demand for DA service will vary with market conditions, in which case the cap will not mitigate the risks of cost shifting, arbitrage, or similar activities by customers.
We adopt the uncontested proposal to continue to apply the six-month notice requirements for customers seeking to return from DA to bundled service. The six-month notice is necessary in order to allow the IOUs to reasonably mitigate the risk of having to dump energy and RA capacity in a depressed market due to departing load, which increase the risk of stranded costs. The six-month advance notice of customers returning to be served by an ESP is also needed to allow the IOUs to reasonably mitigate the sudden swings in bundled service customers' load that make it difficult for the IOU to reasonably procure for its bundled service customers.
We thus conclude that the six-month advance notice requirement remains reasonable even though maximum DA load caps were established by D.10-03-022. Representatives from customer groups have indicated that the six-month advance notice requirement to switch to DA does not pose a problem for DA customers.
All customers returning to BPS, including those that fail to timely switch to DA out of the safe harbor, should provide the same advance notice. We find no evidence to show that the IOUs can adjust their portfolios to accommodate returning DA load in as little as four months. The IOUs testified that six months advance notice is required to adjust their portfolios to accommodate DA load returning to BPS.
5.3. Preservation of the Safe Harbor
In D.03-05-034, the Commission found that DA customers should be permitted to return to the safe harbor of bundled service for a temporary period of not more than 60 days while switching ESPs. Limiting the safe harbor to 60 days addresses concerns regarding the possible need for limits on the amount of load that can elect the safe harbor during a particular year. The Commission found that "imposing this 60-day time limit should have some effect on limiting the amount of DA load in the safe harbor at any given time." Customers failing to switch to DA from the safe harbor remain on TBS during the requisite six-month advance notice period and are subject to the minimum stay requirement. Thus, under the current DA switching rules, a customer that elects the safe harbor but fails to timely switch to DA will be on TBS for the safe harbor period plus an additional six months before returning to BPS.
Under current rules, if a customer does not submit a DASR during the 60-day safe harbor period, the six-month period for notice to return to bundled service is initiated. The DA Parties propose, however, that the safe harbor period count as the first 60 days of the 6-month advance notice requirement. The DA Parties thus propose to modify the safe harbor rule, such that any DA customer that elects the safe harbor but fails to timely switch to DA would serve out a total of six months on TBS before going to BPS.
The IOUs oppose the DA Parties' proposed change, arguing that it would effectively leave the IOUs with only four months to adjust their procurement portfolio to accommodate DA customers' return to bundled service. SCE argues that the IOUs cannot adjust their portfolios for returning DA load in as little as four months.
The current safe harbor rules are reasonable and shall be maintained without modification for voluntarily returning DA customers. We do not adopt the proposal to treat the six-month advance notice period as starting concurrently with the 60-day safe harbor period. This change would effectively reduce the six-month advance notice to only four months. In order for the IOUs to change their procurement to accommodate customers electing to return from DA to bundled service, the IOUs must know which customers will elect to return. Yet, during the 60-day safe harbor period, the IOU has no way of knowing for which DA customers will return unless the customer provides notice before or during the safe harbor. Accordingly, reducing the notice period from six months to four months would create undue risk and uncertainty to bundled ratepayers. In order to maintain bundled customer indifference, the existing safe harbor rules should continue to apply.
9 When asked if the DA Parties conducted any studies or analysis to determine if the
12-month minimum stay would ensure bundled customer indifference, DA Parties Witness Fulmer testified that "Due to the confidentiality of returns, I wouldn't be able to do a detailed study to demonstrate that. That's just based on my readings of other testimonies and inferences from that." Transcript of March 28 Hearing, at 518.
10 Transcript of March 28 Hearing, at 527.
11 Transcript of March 30 Hearing, at 516.
