6. ESP Financial Security Requirements
The Commission previously adopted requirements in D.03-12-015 for registration of all ESPs, including requirements for each ESP to furnish various forms of documentation, fees, and security deposits with the Commission. Among the requirements, ESPs were to post a security deposit in amounts of up to $100,000, depending on the number of customers served. Since D.03-12-015 previously established administrative procedures for the posting of ESP financial security deposits with the Commission, those procedures shall continue to apply, subject to any revisions in the amount or form of ESP financial security based on the results of this proceeding. In this proceeding, we adopt modified financial security requirements for ESPs pursuant to Pub. Util. Code § 394.25(e) to cover estimated re-entry fees due to DA customers that may be involuntarily returned to IOU procurement service. Although § 394.25(e) imposes the obligation to post a bond or to demonstrate insurance sufficient to cover re-entry fees on both Community Choice Aggregators (CCAs) and ESPs, the scope of this decision only addresses the applicability of the re-entry fee and financial security requirements to ESPs. We make no prejudgment here concerning whether the provisions should be interepreted similarly or differently for CCAs or whether the bond amounts would be different.
The statute requires that ESPs cover the appropriate amount of any re-entry fees to avoid imposing costs on other customers of the electric corporation. The statute provides that the ESP or CCA post a bond or demonstrate insurance "sufficient to cover those re-entry fees as a condition of its registration." (§ 394.25(e)).
AB 117 (Stats. 2002, ch. 838) amended § 394.25 by adding subdivision (e), which addresses re-entry procedures that might be obligatory as a demonstration of fitness to serve in the event an ESP fails to meet its contractual obligations. The addition of subdivision (e) to § 394.25 requires that if a customer of an ESP is returned to utility electric service due to the fault of the ESP, any re-entry fee imposed by the IOU, if deemed necessary by the Commission to avoid imposing costs on other customers of the utility, must be paid for by the ESP or the CCA. The statute also provides that the ESP shall post a bond or demonstrate insurance sufficient to cover those re-entry fees as a condition of registration. The re-entry fee is imposed to prevent shifting of costs to other customers of the IOU.
The existing maximum bond amount of $100,000 was established prior to AB 117, and was never intended to meet the requirements of § 394.25(e). It was established as a means for ESPs to prove financial viability (per § 394(b)(9)) to the satisfaction of the Commission at that time. After AB 117 was enacted, the Commission expressed uncertainty as to whether the $100,000 amount was sufficient to cover re-entry fees required in § 394.25(e). In D.03-12-015, the Commission asked for further comments on the issue. Comments filed indicated that it was difficult to address the issue without an adopted means of calculating the re-entry fees. This matter has not previously been resolved in any Commission proceeding, and is now before us here.
The primary legal issues in dispute concern (a) whether § 394.25(e) requires the ESP customers to post a bond or insurance to cover re-entry fees; and (b) whether the statute should be interpreted to protect only bundled utility customers, or also to protect ESP customers in the event of an ESP failure.
The statute reads:
If a customer of an electric service provider or a community choice aggregator is involuntarily returned to service provided by an electrical corporation, any re-entry fee imposed on that customer that the commission deems is necessary to avoid imposing costs on other customers of the electrical corporation shall be the obligation of the electric service provider or a community choice aggregator, except in the case of a customer returned due to default in payment or other contractual obligations or because the customer's contract has expired. As a condition of its registration, an electric service provider or a community choice aggregator shall post a bond or demonstrate insurance sufficient to cover those re-entry fees. In the event that an electric service provider becomes insolvent and is unable to discharge its obligation to pay re-entry fees, the fees shall be allocated to the returning customers.
6.1. Necessity for ESPs to Post Financial Security Instruments
Parties dispute whether it is necessary for the Commission to require ESPs to post a security bond to be in compliance with the requirements of § 394.25(e). SCE, PG&E, DRA, and TURN argue that an ESP security bond or a related security instrument is required under § 394.25(e) to cover the risks that could result from the involuntary return of DA customers. These parties interpret the ESP's obligation for re-entry fees as including all incremental procurement costs irrespective of whether some of those costs may be paid by a returning DA customer through a TBS rate. As a result, the IOUs argue that each ESP must be required to post a bond or related security instrument sufficient to cover all incremental costs resulting from an involuntary return of the ESP's customers.
SDG&E and parties representing DA interests argue that § 394.25 (e) grants the Commission discretion to find that no ESP bond requirement is necessary. SDG&E and DA parties argue that any ESP bond should be limited to covering incremental administrative costs. Commercial Energy argues that the TBS rate, if set appropriately, will provide revenues sufficient to prevent cost shifting to bundled customers, and that no additional re-entry fee needs to be paid by the ESP. In particular, SDG&E and the DA parties believe that if returning DA customers absorb incremental procurement costs through payment of the TBS rates, any remaining re-entry costs would be nominal and not be large enough to warrant a significant ESP bond.
CLECA argues that the extraordinary regulatory and market conditions which led to the mass return of DA customers in 2000-2001 do not exist today and will not exist in the future. Further, the utilities' purchases of power are now hedged rather than fully dependent on the spot market as they were in 2000. Utility retail rates are no longer frozen as they were in 2000. CLECA argues that given these changed conditions, it is very unlikely that there will be another mass return of DA customers because the conditions which might lead to such are no longer present, and ESPs are not exposed financially to the sudden loss of payments.
The ESP security requirements prescribed in § 394.25(e) address the risk of cost shifting in the event of an involuntary return, and by assigning responsibility to the ESP for any resulting re-entry fees. The question of whether an ESP security instrument is necessary, or how large it should be, turns largely on parties' disagreements concerning whether the ESP would ultimately be legally responsible for all incremental procurement costs resulting from an involuntary return, or whether the returning DA customers, themselves, should bear sole responsibility at least for incremental costs covered through a TBS rate.
We conclude that mass involuntarily returned DA customers are to be protected by the ESP's financial security instrument covering re-entry fees imposed on those returned customers. Consistent with our interpretation of § 394.25(e), we conclude that re-entry fees cover the administrative costs resulting from switching an involuntary return of its customers to IOU bundled procurement, and for residential and small commercial DA customers, re-entry fees also cover procurement costs. As discussed in § 6.2, we determine that an ESP bond or equivalent financial security is required, sufficient to cover such re-entry costs. We recognize that the stressed market conditions that prevailed during the 2000-2001 energy crisis are not currently present. Nonetheless, the procurement market could become stressed in the future, and an ESP could be forced to terminate service and immediately return its customers to the IOU without prior notice.
An ESP could default or otherwise cease service resulting in the ESP's customers being involuntarily returned to the IOU. This involuntary return could occur at a time when market rates are higher than bundled electric rates. A mass involuntary return of DA customers would require additional bundled procurement beyond what was originally forecasted. If this occurs, the IOU and its bundled customers will be protected from cost shifting by requiring returning DA customers to pay the TBS tariff rate.
We are concerned that a bond that covers all incremental procurement costs could be commercially infeasible for an ESP. The DA Parties argue that if the ESP bonds were to include procurement cost exposure, as proposed by SCE and PG&E, that the exposure could result in excessive amounts, thereby undermining the viability of DA. The DA Parties point to historical prices during the commodity price run-up in 2008, which would have resulted in a bond amount in SCE's service area of $55/MWh, or about $112 million for an ESP with 2 million MWh in annual sales.
SCE observes that the price of a $112 million bond would be expected to cost about 1% of the face value of the bond - or $1.1 million - in the above example for an ESP with investment grade credit. SCE argues that an ESP with investment grade credit should have little difficulty obtaining a bond or insurance policy on the commercial market at an annual cost of about one percent (1%) of the face value of the bond/policy. An ESP with less than investment grade credit would be expected to provide sufficient collateral (most typically cash and/or letters of credit, up to one hundred percent of the value of the bond) to obtain a commercial bond or insurance policy. We conclude that requiring all incremental procurement costs to be covered under an ESP bond in the manner proposed by PG&E and SCE could potentially have a material adverse impact on the viability of DA. Because PG&E and SCE have only presented illustrative bond calculations, there is uncertainty concerning how large an ESP's resulting bond obligation could be, which could tend to make DA less cost effective. Particularly in view of the uncertainties over the potential magnitude of procurement costs under the PG&E/SCE proposed bond methodology, as discussed further below, we find insufficient justification to expand the ESP bonding requirement to include all incremental procurement costs. Instead, involuntarily returned large commercial and industrial DA customers shall bear the risk for increased procurement costs through payment of the TBS rate as discussed further in Sec. 6.2 . This arrangement preserves stability in the DA market while protecting bundled customers from cost shifting.
We address below the rationale for our findings regarding what constitutes re-entry fees and the resulting financial security requirements for purposes of covering those fees in compliance with § 394.25(e).
6.2. Definition of Reentry Fees
In order to implement the § 394.25(e) security requirement for ESPs sufficient to cover re-entry fees, we must determine what costs are to be included as re-entry fees to ensure bundled service customer indifference in the event of involuntary returns of ESP customers to IOU procurement service. The statute does not define what costs must be included in re-entry fees. We must accordingly determine what costs are necessary to include in the re-entry fees. We must also consider how to forecast the amount of re-entry costs to establish the bond or insurance during registration; and how to determine the re-entry fees when an involuntary return occurs.
Parties disagree concerning what costs constitute the ESP's obligation for "re-entry fees" as used in § 394.25. Pub. Util. Code § 394.25(e) specifies that "in the event that an electrical service provider become insolvent and is unable to discharge its obligation to pay re-entry fees, the fees shall be allocated to the returning customers." The actual term "re-entry fee" is not defined in the statute, but we apply the statute's guiding principles concerning how re-entry fees are intended to implemented.
The re-entry fees cover those costs incurred by the IOU attributable to serving the involuntarily returned DA customers. Parties generally agree that incremental administrative costs are reasonable to include as re-entry fees.
The principal controversy relating to re-entry fees concerns whether the ESP bears legal responsibility for incremental procurement costs resulting from an involuntary return of its customers to IOU service. In particular, parties disagree concerning whether payment of a TBS rate by involuntarily returned customers would count as a re-entry fee within the meaning of § 394.25(e), and whether, the ESP should ultimately be liable through a bond obligation for such procurement costs paid by the DA customer.
The TBS rate covers the IOU's costs of incremental procurement to serve returning customers. Charging the DA customers the TBS rate protects bundled customers against cost-shifting. Since the TBS rate is based on the spot market price, the returning customer may pay more procurement than do bundled IOU customers.
SDG&E and the DA parties argue that imposing a re-entry fee on the ESP is unnecessary if the Commission adopts appropriate terms and conditions for the IOU service provided for involuntarily returned customers. The DA Parties argue that DA customers involuntarily returned to bundled utility service should be allowed to be placed on TBS for a period of up to six months. The TBS rate would reflect the utility's short-term procurement costs, and include a capacity adder to reflect RA requirements. At the end of the six-month period, the customer would take service under the otherwise applicable bundled utility rate unless the customer had previously elected to return to DA service.
SDG&E proposes a six-month TBS period for voluntarily returned customers and a 12-month TBS period for involuntarily returned DA customers in order to provide the IOU with sufficient time to accommodate the returning customers.
If involuntarily returning DA customers pay the TBS rate, CLECA/CMTA argue that re-entry fees should be based on the ESP's expected load over a six-month period multiplied by expected, reasonable differences between the TBS rate and market prices, if any, plus estimated administrative fees to enroll the expected ESP load into utility bundled service.
CLECA/CMTA argue that if returning DA/CCA customers cover incremental costs through the TBS rate, it would be redundant to include such costs in posting ESP/CCA bonds as re-entry fees. CLECA/CMTA argue that such a requirement would make ESP/CCA bond requirements so large as to act as a market entry barrier and deterrent. CLECA/CMTA argue that ESPs and CCAs would consequently be less competitive compared to the IOUs and would likely pass along such bond costs to their customers.
Commercial Energy similarly argues that if the Commission provides that all customers returning to utility service without six months notice will return to the TBS rate, no re-entry fee is necessary except for nominal administrative fees already provided for in the utilities' tariffs. Commercial Energy argues that it the TBS rate is fully compensatory, actual costs incurred in a return of DA customers to utility service are de minimus (a tariffed administrative fee). Commercial Energy contends that there is no evidence that commercial or industrial DA customers or their ESPs will be unable to pay the small administrative fee, and thus, no justification for imposing what it deems to be a significant and burdensome security requirement on ESPs.
The DA Parties believe that the ESP's financial security obligations protect only bundled customers, but do not extend to the ESP's own customers. The statute requires the ESP to post a bond sufficient to avoid imposing costs on other customers of the IOU. AReM argues that the reference to other customers means bundled service customers at the time of an involuntary return, but does not extend to involuntarily returned DA customers. AReM argues that the common sense meaning of other customers must be a reference to customers of the IOU other than the involuntarily returned customer. The DA parties thus argue that involuntarily returned DA customers may absorb the costs associated with a mass involuntary return - particularly procurement related costs.
SDG&E proposes that customers who elect to transfer to DA be required to sign an affidavit acknowledging that they accept the risks associated with a potential en masse involuntary return to IOU procurement whereby they would pay a TBS rate that is potentially higher than the BPS rate. Commercial Energy would be agreeable to provide the respective IOU with a standardized disclosure duly signed by the DA customer, acknowledging the risks associated with opting for DA service. This disclosure would apply to new DA customers and would be forwarded to the utility along with the Direct Access Service Request (DASR) for the utility's safekeeping. The same disclosure would be generated for existing customers at the time of future contract renewals and thereafter promptly forwarded to the utility.
The DA parties argue that imposing a re-entry fee on ESPs is not required to the extent that the TBS rate provisions adequately guards against shifting costs to bundled customers. The DA parties argue that nothing in § 394.25(e) precludes adoption of their proposal to hold involuntarily returned ESP customers responsible for incremental procurement costs through payment of TBS tariffs for up to six months
DA Parties' Witness Fulmer agreed that if the incremental cost to serve involuntarily returned customers dragged on for nine months, the utility should recover this incremental cost from the involuntarily returned customers for the full nine months. (DA Parties/Fulmer, Tr. Vol. 2, at 433-436.) Fulmer also stated that after six months, all incremental costs should be shared by all bundled ratepayers, but admitted that this may result in cost shifting to bundled service customers. (DA Parties/Fulmer, Tr. Vol. 3, at 534:11-28, 535:1-3.)
SCE and PG&E believe that in order to avoid imposing costs on bundled service customers, § 394.25(e) re-entry fees must include all incremental costs (including procurement and administrative) arising out of an involuntary return to IOU procurement service. PG&E and SCE argue that including all incremental costs in the § 394.25(e) is consistent with the intent in AB 117 to prevent any shifting of recoverable costs between customers, and indemnifies the involuntarily returned customers.
PG&E, SCE, TURN, and DRA disagree that payment of the TBS rate would relieve ESPs of incremental procurement costs as re-entry fees. SCE believes that the re-entry fee obligations of ESPs under Pub. Util. Code § 394.25(e) apply irrespective of whether DA customers pay the TBS rather than BPS rate when they are involuntarily returned en masse to IOU procurement service. They argue that TBS should not be viewed as a substitute for the ESP's bond and
re-entry fee obligations under Pub. Util. Code § 394.25(e).
SCE, PG&E, DRA and TURN interpret the "other customers" referenced in § 394.25(e) to include both bundled service customers and ESP/CCA customers that are involuntarily returned to bundled service. They argue that the ESP ultimately bears responsibility for any incremental procurement costs in excess of the BPS rate even if the returned customers pay the TBS rate.
DRA agrees that if the DA customers indeed prefer to address the risk of an ESP failure in the contract between the DA customer and the ESP, involuntary returns should already be anticipated and will not be a total surprise to the customer. Therefore, these customers will not need additional time beyond the sixty-day safe harbor period to find another ESP. If the Commission determines that additional protection for involuntarily returned customers is warranted, DRA urges the Commission to apply this principle consistently in determining the bonding requirements as recourse to contract damages can be less than ideal for some customers, particularly smaller business and residential customers.
SCE believes that nothing in § 394.25(e) requires mass involuntarily returned DA customers to be placed directly onto BPS. SCE argues that the Commission can implement the bond protections of § 394.25(e) and also require these customers to be placed on TBS to doubly ensure that bundled service customers do not experience cost shifting as a result of DA customers' mass involuntary returns to IOU procurement service. SCE argues that doing so would place additional administrative burdens on the IOU to credit the DA customers for the monies collected from their ESPs for the re-entry fees, but it would likely be comparable to the process of charging the DA customers who are placed directly on BPS for any residual re-entry fees not collected from the ESP, which may be necessary under SCE's proposal.
SCE claims that involuntarily returned DA customer re-entry fees should include all incremental costs to which bundled customers would be exposed in the following categories: (a) administrative,(e.g., meter reading, billing, processing; (b) procurement (e.g., energy, RA, RPS), and (c) other incremental costs (e.g., Carbon Emission Reduction).
To forecast incremental procurement costs for purposes of establishing the bond, SCE proposes to forecast assuming a 95 percent confidence interval, to include the average price of power, RA and renewables necessary to serve the DA customers for the first year after their return. SCE would compare this projected total procurement cost to projected procurement costs to serve bundled service customers for this same time period assuming a stressed market, given the composition of the bundled portfolio. If the projected procurement cost added to SCE's bundled portfolio to serve the DA customers exceeds the projected procurement cost to serve bundled service customers assuming a stressed market, the difference would be multiplied by the volume (in MWh) of returning DA load to established the forecast incremental procurement costs to be covered by the bond.
PG&E proposes that an ESP bond be required to protect against mass involuntarily returned DA customers covering the IOU's incremental and administrative costs to serve those customers for a one year period. PG&E leaves open the possibility, however, that those customers could be placed on TBS rather than directly onto BPS. Under such a scenario, funds collected from the ESP's bond would presumably be credited to the DA customers to offset the costs they incur on the TBS rate. Other parties, including SDG&E and the DA Parties, proposed that mass involuntarily returned DA customers be placed on TBS.
DRA believes that involuntarily returned customers should be responsible for all incremental costs; otherwise, the result would be cost shifting to bundled service customers. While the TBS period is designed to recover the incremental costs of involuntarily returned customers, this period, in some cases, is no more than an estimate of how long it will take to recover the incremental costs from involuntary return customers. Thus, DRA believes that the proposed six-month TBS period alone may be insufficient to cover all costs.
DRA argues that involuntarily returned customers are responsible for all re-entry fees and incremental costs, regardless of the time period over which they are incurred, to prevent cost shifting to bundled service customers.
DRA argues that even if load serving entities are better hedged and have a greater portion of long term contracts as compared with those that defaulted in 2001, a sudden, en mass return of ESP customers to bundled service remains a possibility. DRA argues that these factors should be taken into consideration in determining the ESP security requirement.
We interpret § 394.25 (e) as holding the ESP financially responsible for all re-entry fees, from a mass involuntary return of its DA customers to the IOU. The financial security requirement specified in § 394.25(e) must be sufficient to cover "any re-entry fee imposed on [the involuntarily returned DA customer] that the commission deems is necessary to avoid imposing costs on other customers of the electrical corporation..."
Section 394.25(e) gives the Commission discretion to determine "any
re-entry fee" deemed necessary to avoid imposing costs on "other customers" of the IOU. Once the Commission defines the relevant "re-entry fees", however, the requirement for an ESP to "post a bond or demonstrate insurance sufficient to cover those re-entry fees" is mandatory as a matter of law under § 394.25(e). We exercise our discretion to define the re-entry fee applicable to large commercial and industrial customers as covering only the administrative costs relating to switching the customer back to bundled service. We do NOT define the procurement costs to serve large commercial and industrial involuntarily returned DA customers as a reentry fee under § 394.25(e), provided that such returning customers bear full responsibility for such procurement costs through payment of a TBS rate. By paying the TBS rate, such returning DA customers avoid shifting costs to utility bundled customers, and therefore, there is no need for a reentry fee to cover large commercial and industrial procurement costs in order to satisfy Section 394.25(e). Defining the reentry fee for large commercial and industrial customers in this way prevents shifting costs to bundled customers.
A very small percentage of DA load currently serves residential and small commercial customers. Residential and small commercial customers are not similarly situated to large commercial and industrial customers. As sophisticated businesses with experience in obtaining goods and services via contracts, large commercial and industrial customers should be able to negotiate contractual provisions with their ESP to protect themselves in event of a breach, recognizing the potential to be subject to TBS rates if they return to the IOU.
Residential and small commercial customers subscribing to DA, however, may not possess the same degree of business sophistication in terms of protecting themselves in the event of a breach by their ESP. Accordingly, additional measures are appropriate to protect residential and small commercial customers from the risk of higher procurement costs resulting from an involuntary return to bundled service. To the extent that an ESP provides DA service to small commercial and residential customers, therefore, we shall require that the ESP bond requirement include a provision for the expected IOU incremental procurement costs to serve those DA customers.
Correspondingly, the small commercial and residential customer shall be limited to paying the BPS rate upon their involuntary return to bundled service. Any additional procurement costs relating to serving such involuntarily returned customers will be covered by the ESP bond. We shall otherwise provide small commercial and residential DA the same rights and restrictions with respect to switching back to DA as applies to large commercial and industrial DA, including the safe harbor provisions, six-month notice, and 18-month minimum stay requirements.
Consistent with our determination to require the ESP bond to incorporate the risk for incremental procurement costs for involuntarily returned small commercial and residential customers, we exercise our discretion to define reentry fees as including such procurement costs only in reference to such customers. We thus interpret § 394.25(e) as providing broad discretion for the Commission to interpret the scope of reentry fees as covering a different range of costs for small commercial and residential in contrast to large commercial and industrial DA customers, recognizing the different characteristics of each customer group.
Because the ESP bond calculation proposed by SCE and PG&E anticipated covering energy procurement risks for all involuntarily returned DA customers, the degree of complexity in the bond formulas and assumptions underlying those calculations may not be necessary for a bond that covers a much more modest procurement risk limited only to small commercial and residential DA. In view of the more limited risk exposure involved in covering procurement for this limited customer group, more simplified assumptions may be appropriate with respect to the methodology for estimating the incremental amount of the ESP bond necessary to cover such risks. Accordingly, we defer to a subsequent decision the determination of how incremental ESP bond amounts limited to procurement costs for involuntarily returned small commercial and residential DA customers should be determined. For purposes of defining small commercial DA customers applicable to the ESP bond requirements, we shall treat small customers affiliated with a large commercial or industrial DA customer as being subject to the same ESP bond requirements as the large customer. We shall likewise defer to a subsequent decision the precise determination and criteria as to how to distinguish small versus large commercial DA customers for purposes of the ESP bond calculation. For purposes of our subsequent discussion in this decision, unless otherwise specified, all references to the ESP bond presume that this additional protection for the involuntarily returned small commercial and residential DA customers will be provided as determined in a subsequent decision.
The payment of the TBS rate, together with the safe harbor provisions in existing tariff rules, will allow an involuntarily returned customer to find a new ESP and to resume DA service after completion of a six-month notice period. A period of six months to find a new ESP also allows time for the utility to adjust its portfolio so that bundled customers do not bear costs due to involuntarily returned DA customers. Thus the ESP's obligation for re-entry fees under § 394.25(e) only includes administrative costs associated with implementing the involuntary return of ESP customers to IOU bundled service, to ensure that no cost shifting results from the involuntary return of DA customers.
The determination of re-entry fees serves as the basis for determining the dollar amount of bonds to be covered by an ESP bond.
The administrative costs of an involuntary return include any incremental meter reading, billing, and tracking and monitoring costs. Parties offered no specific dollar estimate of the administrative costs necessary to process involuntarily returned DA customers, and no Commission approved cost figure has previously been adopted. To determine the incremental administrative costs to use for purposes of an ESP security bond, we shall thus adopt use of the re-entry fee approved for a CCA customer, as proposed by SCE. We conclude that the existing Commission-approved CCA re-entry fee offers the best available proxy for forecasting the incremental administrative costs in relation to an involuntary return of an ESP's customers to IOU procurement service.
We therefore authorize that administrative fees to cover involuntarily returned DA customers be set using the IOU's authorized service fee rate for voluntarily returning CCA accounts. The per-customer fee would be multiplied by the relevant number of ESP customers. The currently applicable administrative fees per customer account would be for PG&E, $3.94; for SCE, $1.49; and for SDG&E, $1.12.
We conclude that the re-entry fee obligation of the ESP does not include incremental procurement costs for large commercial and industrial DA customers in excess of the costs covered in the BPS rate paid by bundled customers. We shall instead direct that such involuntarily returned DA customer be placed on the TBS rate schedule for reasons discussed above. The TBS rate is for transitional service that imposes spot prices on migrating customers to avoid shifting any incremental procurement costs to bundled customers.
As mandated by § 394.25(e) , ESPs are responsible for re-entry fees necessary to avoid imposing costs on the other customers of the electric corporation when a customer is "involuntarily returned to service provided by an electrical corporation." The term "electric/electrical corporation" used here refers to utility service.
If a DA customer of an ESP is involuntarily returned to IOU procurement service and pays its own re-entry fee, that re-entry fee remains the obligation of the ESP, which must be covered through a bond or insurance. The statute requires ESPs to indemnify their customers from the re-entry fees imposed on them as a result of an involuntary return to IOU procurement service. Under § 394.25(e), if an ESP becomes insolvent and cannot discharge its bonding obligation and cover the re-entry fees, the returning customers will then be responsible for re-entry fees as necessary to avoid imposing costs on "other customers" of the electric utility.
In any event, if the ESP bond amount in combination with the TBS rate assigned to the large commercial and industrial customer, provides insufficient revenues to cover the incremental costs incurred by the IOU in connection with providing involuntarily returned customers with bundled service, the DA customer shall bear the cost responsibility for such incremental costs. The bundled customer must be protected from any potential cost shifting.
We reach this conclusion regarding the ESP financial responsibility as a matter of law. While the DA customer bears responsibility for the financial consequences of entering into a DA contract with an ESP with respect to differences in prices charged by the ESP versus the IOU, the risks relating to re-entry fees for an involuntary return must be borne by the ESP.
We adopt the SCE proposal to calculate the re-entry fees within 60 days of the start of the involuntary return. To provide certainty to the ESP, re-entry fees should be calculated as a binding estimate of the incremental administrative costs (equal to the adopted re-entry fee approved for CCA customers) and procurement costs (applicable only to small commercial and residential DA customers) that the IOU expects to incur under then-current market conditions to serve those involuntarily returned DA customers for a safe harbor period starting on the actual date of the involuntary return and then for an additional six-month period for those customers remaining on bundled service. For such small commercial and residential DA customers, the IOU will be reimbursed for incremental procurement costs based on the difference between the TBS rate and the BPS rate multiplied by the actual kWh usage of the returned DA customer for the six-month period. As such, the re-entry fees, once demanded from the ESP, shall not be subject to true up.
6.3. Financial Instruments that Satisfy Section 394.25(e) Requirements
The DA parties recommend that ESPs be allowed maximum flexibility to meet any financial security requirements pursuant to § 394.25(e) through any of the following means: having an investment grade credit rating, a parent company guarantee, a surety bond, a letter of credit, or cash deposits.
SCE believes that the ESP may elect to use letters of credit or cash deposits to provide flexibility to an ESP as a supplemental tool to meet its bond obligation. Letters of credit are typically issued by banks. Like commercial bonds/insurance policies, letters of credit provide the advantage of being commercially available from banks that specialize in issuing credit guarantees.
Commercial bonds or insurance instruments have the advantage of being commercially available from surety companies that specialize in assessing risk and guaranteeing credit. As for risks, issuers of commercial bonds or insurance policies may pose counter-party risk to the IOU (i.e., risk that the issuer will not be able to pay upon the IOU's demand under the terms of the bond or insurance policy). SCE would seek to mitigate any counter-party risk through collateral arrangements with the issuer. Such risk typically arises with issuers having less than high quality credit (less than AA investment grade credit).
Another risk of commercial bonds/insurance policies is that the issuer may elect not to renew the credit guarantee upon the expiration of the bond or insurance policy. The ESP would then need to obtain another bond or insurance coverage or make other acceptable credit guarantee arrangements prior to the expiration of the bond or insurance policy. If unable to do so, the ESP would be subject to service termination (either at the ESP's election or on the Commission's order.
As with surety companies, some banks may pose counter-party risk to the IOU which may be mitigated through collateral arrangements with the bank. Additionally, the bank may elect not to renew the letter of credit upon its expiration, in which case the ESP would have to secure another letter of credit or make other acceptable credit guarantee arrangements prior to the expiration of the letter of credit. If the ESP is unable to do so, it should result in an ESP service termination (either at the ESP's election or on the Commission's order).
A guarantee agreement would involve a creditworthy third party agreeing to guarantee the ESP's financial obligations to the IOU and its customers as a result of an involuntary return if the ESP is unable to satisfy such obligations. A guarantee agreement may provide an advantage to the ESP of allowing it to obtain a credit guarantee under more favorable terms than would otherwise be available on the commercial market.
SCE opposes allowing an ESP to use self-insurance to satisfy the security requirements of § 394.25(e). Self insurance typically involves payment of an insurance premium to a captive insurance company or making an on-balance sheet provision for the amount of money to be set aside to pay for possible losses. SCE believes that self insurance involves substantial risk to the IOU, because there is no way to ensure that the ESP is actually making self insurance premium payments or setting aside the money to cover the self-insured losses. Additionally, even if the ESP were to set aside self insurance funds, SCE does not believe it would have a security interest in those funds as a secured creditor of the ESP. As such the IOU would not be able to access the self insurance funds in the event the ESP were to file for bankruptcy protection. In such circumstances, as an unsecured creditor, the IOU would have no way to recover its losses fully in an involuntary return if the ESP were to file for bankruptcy protection.
We conclude that an ESP may satisfy the requirements of § 394.25(e) by posting a bond or demonstrating insurance sufficient to pay cover re-entry fees of the ESP, through comparable financial instruments that provide equivalent coverage. Acceptable instruments include surety bonds, letters of credit, cash deposits or third party guarantees with a credit worthy entity.
An ESP will not be permitted to meet the security obligation simply through use of self-insurance or by showing that it has an investment grade credit rating. As noted by SCE, there is no way to ensure that the ESP is actually making premium payments or setting aside the money sufficient to cover estimated self-insured losses. The IOU would have no assurance recovering its losses from the ESP through self-insurance of some or all of its re-entry fee obligations, if the ESP failed to set aside the necessary funds, and then become unable to discharge its obligations under § 394.25(e).
Third party guarantors may pose counter-party risk to the IOU, which may be mitigated through collateral arrangements with the third party. Third party guarantors should at least have investment grade credit. The essential requirement is that whatever instruments are used, the requisite re-entry fee obligations are covered. We address in the following section the applicable methodologies that should apply for calculating re-entry fees to be covered by an ESP's bond or related forms of insurance.
Risks associated with a cash security deposit would mainly arise if an ESP were to file for bankruptcy protection upon an involuntary return of its customers. In such a circumstance, the IOU may be obligated to seek relief in the bankruptcy court before applying the security deposit to involuntary return costs, including seeking relief from the bankruptcy court's stay or filing a secured claim, up to the amount of the security deposit, in the bankruptcy proceeding for the damages resulting from the involuntary return and awaiting the court's resolution of such claim.
Where surety companies typically accept only cash or letters of credit as collateral, banks may be willing to accept other forms of collateral, such as priority liens on assets (e.g., investment portfolio or treasury bills). An agreement with a creditworthy third party who will guarantee the ESP's financial obligation in the event the ESP cannot do so (a guarantee agreement) would also meet § 394.25(e) requirements.
6.4. ESP Financial Security Bond Methodology
PG&E and SCE were the only parties to propose a methodology to calculate an ESP security bond. SCE and PG&E propose a methodology for calculating ESP bonds based closely a proposed settlement in the CCA docket (Rulemaking 03-10-003) (proposed CCA settlement).12 PG&E attaches the CCA settlement to its testimony and advocates that the CCA methodology be used to calculate ESP bond requirements. We discuss the merits of their proposal below.
Their proposal is based on the CCA Bonding Settlement proposal previously presented in R.03-10-003. The details of their proposed bond model and re-entry fee calculations are provided in SCE's opening testimony, Attachment 1 of PG&E's opening testimony, which was previously submitted to the Commission as a Settlement Agreement, Attachment A in R.03-10-003, on September 8, 2010.
PG&E and SCE argue that the CCA bond model settlement methodology provides an appropriate, commercially feasible framework for quantifying re-entry fee exposure risk applicable to ESPs. PG&E believes that the proposed model provides a formula to derive a prudent level of security to protect the IOUs' bundled customer from involuntary DA or CCA customer returns.
The PG&E/SCE bond proposal incorporates a methodology for calculating both actual re-entry fees and the bond amount necessary to cover estimated re-entry fees. The methodology calculates re-entry fees for an en masse involuntary return of DA customers by estimating (a) the utility's incremental procurement costs to serve the returned load for a 12-month period plus, and
(b) the utility's administrative costs for processing the returned customers. In turn, the estimated incremental procurement costs are based on the difference between: (a) the market price for a one-year forward strip of power to serve the returned load, with certain adjustments, and (b) the average bundled price for electricity paid by the returning customers under the utility's applicable rates. If the market price were lower than the bundled customer price, there would be no incremental procurement costs associated with the involuntary return.
SCE presents its proposal for calculating the incremental costs of an ESP bond in Section V of its opening testimony.13 DA Parties oppose applying the proposed CCA settlement methodology as a basis to calculate ESP bonds, particularly with respect to procurement costs. CCSF disputes PG&E's claim that the prudency of the settlement's methodology is not under question. Prior to the service of PG&E's testimony in this proceeding, CCSF and MEA had filed comments in the CCA docket challenging the proposed settlement's methodology for calculating bond amounts and re-entry fees. CCSF states that for many of the same reasons that it opposed the settlement in the CCA docket, the proposed CCA settlement should likewise not be used to establish financial security requirements for ESPs.
Commercial Energy likewise objects to the SCE/PG&E proposal, claiming that the bond calculation proposed is very complex, but not fully developed. SCE and PG&E concede that certain figures in the bond calculations are illustrative only. Commercial Energy questions whether the sample bond calculations have any relationship to realistic market situations. Commercial Energy argues that the burden of proof is on SCE and PG&E to demonstrate with real dollars the practical determination of the costs they suggest be borne by ESPs in this market.
CCSF likewise argues that the CCA bond settlement produces unreasonably high bond requirements that go far beyond covering the risk against which the bonds are designed to insure. CCSF claims these excessive bond amounts are derived from a black-box model using unreliable inputs. CCSF expresses concern that other elements of the model are similarly suspect. CCSF argues that an unreasonable bond requirement could drive even a financially healthy ESP out of business, and it is critically important that the bond be calculated using reliable data.
CCSF claims that unreasonable bond amounts would increase the likelihood that an ESP that is fully meeting its other financial commitments would fail to meet the bond requirement and thereby be subject to termination. In this way, the proposed CCA settlement would have the counter-productive effect of making involuntary returns more likely. The bond is supposed to protect the utility and bundled customers from bona fide risks, not be so excessive as to increase those risks.
The DA parties object to the bond calculation designed to cover procurement cost risk is based on forecasted market prices -- with certain adjustments -- multiplied by a stress factor. The stress factor reflects the likelihood that an involuntary return would occur when markets are stressed and wholesale prices are high. The settlement then subtracts from this stressed market price a forecast stressed generation rate received by the utility, consisting of average bundled rates plus a $10/MWh stress adder. A key determinant of the bond amount is the stress factor mark-up of forecast market prices, which can be significant. In the sample calculation attached to the proposed bond settlement, the stress factor increases the market price by 57%. (Tr. 621: 17-21, Hessami/PG&E).
A key input used to determine the stress factor multiplier is an estimate of "implied volatility." The CCA settlement relied on implied volatility data to calculate the stress factor multiplier, but the settlement itself does not specify the data and data sources that would be used to calculate implied volatility. CCSF claims that PG&E and SCE fail to propose a viable source for volatility data that can be reliably used to calculate the stress factor multiplier for ESPs.
PG&E states that implied volatility would be based on "independent broker quotes" from independent brokers North of Path (NP) 15 and South of Path (SP) 15 forward and options prices and implied volatilities. For any ESPs that return load to PG&E, the applicable market prices and implied volatilities would be for NP 15. The DA Parties testified that implied volatility data is not readily available for NP 15 for PG&E's service area. PG&E's Hessami admitted that there is no product available from any broker that estimates the volatility of NP 15 prices. The table of data sources in that testimony listed only one provider of volatility data, Amerex. PG&E's Hessami acknowledged that Amerex does not provide NP 15 volatility data.
CCSF argues that the relatively new idea in the CCA settlement of using historical data is inherently suspect given the questionable premise that past price volatility is a good predictor of future volatility. Given the stakes involved and the concern by CCAs and ESPs that security requirements can be used for anti-competitive purposes, CCSF argues that utility persistence in making volatilities and a stress factor multiplier a centerpiece of their proposal is sure to be vigorously contested.
The DA Parties testified that certain brokers declined to provide implied volatility data quotes to consultants. The DA Parties thus concluded that this data is not publicly available. SCE disputes this conclusion, observing that the data may not be directly available to a consultant if that consultant is viewed as a competitor by a broker. However, just as the IOUs do with their own consultants, an ESP can access a broker's data under a subscription and share the data with a consultant pursuant to appropriate confidentiality and non-disclosure obligations. Even if a broker may decline to provide its data directly to a competitor who is consulting for an ESP, the ESP, itself, may be able to access such data from the broker.
In order to forecast the bond amount necessary to cover procurement costs, SCE proposes to forecast using a 95% confidence interval the average price of power, RA and renewables that will have to be added to the IOU portfolio to serve the returning DA customers for the first year after their return. The DA parties object to the assumption of a 95% confidence interval, arguing that it produces an unreasonably high assessment of risk.
CCSF claims that the bond amounts produced by the proposed CCA settlement would significantly exceed the utility exposure from involuntary returns of DA customers and would have the perverse effect of increasing the risk that otherwise healthy ESPs would default and involuntarily return their customers to bundled utility service.
Commercial Energy argues that the bond proposal would unfairly impose a new, costly methodology on existing contractual relationships, where the costs for compliance cannot be passed through the same way a cost of service regulated utility can. Approximately 12% of the California energy market is exposed to these excessive new security costs, while only the remaining 1% of customers representing the DA load in the final open season will have the time to address this issue prior to contracting in the 2013 queue.
Commercial Energy argues that the IOUs' proposed bond calculation seems premised on the idea that because ESPs are not regulated and are required to have certain business practices that they therefore do not utilize sound business practices. While ESPs are not regulated to the same extent as utilities, Commercial Energy claims that there are legal, regulatory, credit, business and practical factors effectively controlling how ESPs conduct their business. Part of that business is planning future exposure to risk and mitigating such risks accordingly. Today, many more tools exist to manage risk exposure and no prudent executive in the industry lacks the tools to survive. PG&E Witness Hessami pointed out that although there were no bank failures from 2000 to 2007, but that does not mean there would never be any such failures.
Commercial Energy further argues that the IOUs' proposed bond calculation is based on the premise that anomalously high price spikes will last for a year. In addition, the concerns of SCE and PG&E about procurement costs appear to assume that the majority of ESP-served load fails simultaneously.
Commercial Energy asserts there is no evidence that the failure of one ESP in any given service territory would necessitate adjustments to a utility's resource portfolio that would exceed the amount of flexibility in a utility's portfolio already required to respond to annual changes in weather, economic and other conditions. In fact, there is only one example of a mass return of DA customers since the energy crisis, and that return took place in an orderly manner based on a decision of one ESP to exit the California market in 2008-2009.
We conclude that although an ESP bond or evidence of other forms of insurance is required to comply with § 394.25(e), the proposed bond model offered by PG&E/SCE does not offer a suitable framework for determining the applicable ESP bond amount.
The SCE/PG&E proposed bond model was originally developed through a settlement in R.03-10-003 for the limited purpose of determining CCA financial responsibility pursuant to § 394.25(e). The Commission has not yet adopted any decision in that proceeding regarding the proposed settlement. Although the PG&E/SCE bond proposal here is based on a settlement in a proceeding dealing with CCAs, our settlement rules do not apply for purposes of evaluating the proposal in this proceeding. Instead, since the proposal was not developed through a settlement in this proceeding, we evaluate the bond proposal on its substantive merits.
We conclude that the PG&E/SCE proposed timeframe of one year for calculating incremental costs is excessive. Also, a one-year timeframe is consistent with the presumption in CCA tariffs that one year is likely to be sufficient to reintegrate mass returns of CCA customers to bundled service.
The DA Parties claim that the proposed bond methodology is flawed in applying a 95% confidence interval for forecasting procurement costs. They argue that even if the market events that result in wholesale costs are above the 95th percentile, simply because wholesale prices are exceptionally high does not in itself indicate the likelihood that an ESP would default. They argue that the probability of the ESP actually defaulting is not accounted for in the proposed bond calculation.
As noted by SCE, however, the probability of an ESP actually defaulting is accounted for in the bond calculation's assumption that stressed market prices correlate with increased risk of default. The bond model cannot reasonably account for each ESP's unique circumstances. The underwriter of an ESP's financial security instrument, however, can assess each ESP's individual circumstance in pricing the bond.
We are not persuaded that the bond methodology is reasonable in calculating forecast incremental procurement costs based on a 95% confidence interval. The 95% confidence interval was adopted in D.07-12-052 as the risk level used to manage rate level risk for bundled customers.
We conclude the proposed steps to calculating incremental procurement costs for determining the ESP bond amount set forth in SCE's testimony14 conflict with our determination to exclude procurement costs from the ESP bond requirement for large commercial and industrial customers. Accordingly, we do not approve the use of these formulas for calculating bond amounts for procurement costs.
We recognize, however, that questions have been raised concerning the approach used in the PG&E/SCE proposal to measure implied procurement cost volatility, particularly for NP 15. The proposed formula would use implied volatility data from a third-party broker. PG&E provides information in its testimony on sources available to parties to access market prices and volatilities, although access to the information requires a fee-based subscription. Such data is available for SP 15, but is not available for NP 15.
In light of the unavailability of this NP 15 data, PG&E offered two alternatives for the NP 15 implied volatility calculations. PG&E's first choice would be to use SP 15 data as a proxy for NP 15 prices. However, PG&E's witness did not know whether NP 15 prices are generally more or less volatile than SP 15 prices. PG&E has not performed a study of volatilities comparing NP15 and SP 15. Thus, we have no basis for concluding that SP 15 volatilities would serve as a reasonable proxy for NP 15 volatilities or whether SP 15 volatilities could be adjusted to become a reliable proxy.
PG&E's second suggested alternative was to use historical volatility data. However, PG&E witness Hessami testified although that the period to use for calculating historical volatility would be important, PG&E had no proposal for an appropriate time period. In view of the unresolved factual issues regarding an accurate measurement of implied volatility and its effect on the potential size of any ESP bond in a stressed market, we find that the PG&E/SCE proposal is not sufficiently developed to determine the magnitude of re-entry fees and the resulting size of an ESP bond. Moreover, because PG&E and SCE have only presented illustrative bond calculations, and omitted key inputs relating to implied volatility, there is uncertainty concerning how large an ESP's resulting bond obligation which could tend to make DA service less cost effective. In view of these uncertainties, we find insufficient basis to determine the specific magnitude or financial impacts of the PG&E/SCE proposal.
6.5. Tariff Service for Involuntarily Returned DA Customers
As noted above, parties dispute whether involuntarily returned DA customers should be automatically placed on the BPS or TBS rate. The Commission realized based on experience with the 2000-2001 market collapse, that there should also be provisions for customers who are involuntarily returned to the IOU by their ESP but who wish to find another ESP without having to wait multiple years for the opportunity to arrive. Thus, a Safe Harbor provision was adopted, providing the IOU with 60 days notice of a customer's intent to take DA service or to return to bundled service.
The Commission in D.03-05-034 found that by charging DA customers for the incremental costs of short-term power during the six-month advance notice period or the safe harbor period, no costs would be shifted to bundled service customers. With the addition of RA and RPS requirements to the IOUs' procurement obligations, as well as recognition of CAISO's load-related costs, recovery of incremental power cost requires recognition of such requirements to avoid cost shifting from DA customers on TBS to bundled service customers. We have adopted appropriate measure to recognize such requirements, as adopted in Section 3 above.
SCE testified that providing a temporary safe harbor in the context of mass involuntary returns is not feasible because the IOU needs certainty as to the load it will be obligated to serve so that it can continue to reasonably procure for its bundled service customers, begin to hedge for the returned customers, and to calculate the re-entry fees due from the ESP and/or the returning customers (for residual re-entry fees) as a result of the involuntary return.
SCE recommends that ESPs provide their customers with as much advance notice of an involuntary return as possible to allow customers to switch ESPs prior to being involuntarily returned to the IOU's procurement service. Otherwise, SCE proposes that DA customers included in an ESP's mass involuntarily return to IOU procurement service be placed on bundled service, which would not provide for a safe harbor; however, they should be permitted to provide the IOU with a six-month advance notice to depart to DA.
SCE's Default Bundled Service is defined in Rule 22 as "service [that] preserves traditional SCE electric services, where SCE performs all energy services for the end-use customer." SCE believes the rule contemplates placing mass involuntarily returned DA customers on BPS, not TBS. SCE believes that TBS is designed for customers that elect to return to the IOU's procurement service for a safe harbor or while serving out their six-month advance notice period (i.e., voluntarily returning customers).
SCE assumes that DA customers will be protected by ESP bonds sufficient to cover incremental administrative and procurements costs. SCE thus believes that the ESP is liable for all incremental costs associated with an involuntary return of DA customers to IOU procurement service, including procurement costs. SCE thus believes that involuntarily returned DA customers should be placed on BPS upon their involuntary return to IOU procurement service, and not be subject to TBS. SCE holds this view even if the IOU receives no advance notice from the ESP of the involuntary return.
SCE argues that placing involuntarily returned DA customers on TBS in such circumstances would be tantamount to penalizing them for the ESP's failure, because involuntary returns are most likely to occur during stressed markets, when spot market prices are high. DA customers placed on TBS would have substantial exposure to high spot market prices during a stressed market.
If, however, ESPs are not required to post security bonds to cover incremental procurement costs in an involuntary return of DA customers to IOU procurement service, SCE believes that only then should DA customers be subject to TBS upon their mass involuntary return to IOU procurement service, subject to a duration of a minimum of one year unless their ESP provided the IOU with a one-year advance written notice of the mass involuntary return.
PG&E proposes that involuntarily returning DA customers have the following option with regard to the safe harbor: (a) upon their return to the utility's bundled service, involuntarily returned DA customers will be given a 30 calendar day window to decide, via a formal written request to PG&E, if they wish to remain on DA by making use of the safe harbor provision; (b) those customers would then be placed on the TBS rate retroactively to the first day that they were returned to utility bundled service (Day 1); (c) they would then have to find a new ESP and submit their new DASR by Day 60; and (d) if the activities in (c) are not completed in time (i.e., by Day 60), those customers would remain on TBS for six months (from Day 1), be returned to the utility's bundled service, and be required to stay on bundled service and pay bundled rates for 18 months under the minimum stay provision.
In short, involuntarily returning DA customers electing to exercise the safe harbor provision within 30 days of returning to utility bundled service would be treated similarly to a voluntarily returning DA customer that elected the safe harbor provision. Both involuntarily and voluntarily returning DA customers have 60 days after returning to bundled service to find a new ESP and to submit a DASR. Both groups of customers are on the TBS rate the entire time they are in the "safe harbor." The only difference is that voluntarily returning DA customers have to give notice to the utility that they are exercising the safe harbor option when they return. Since involuntarily returning DA customers did not elect to return to bundled service, and may need some time to evaluate their options, these customers can elect the safe harbor any time within the first 30 days of their return.
Absent the TBS requirement under the DA switching rules and assuming involuntarily returning customers immediately begin receiving service under the utility's bundled portfolio service rate, there are essentially two types of costs incurred by the utility that might expose bundled customers to cost-shifting when a customer returns to bundled service without advance notice: a) the incremental costs associated with procuring additional resources to serve the returning load that increase average cost; and b) the costs associated with the administrative process to switch the customer from DA to utility procurement service. The Commission must therefore decide if the DA re-entry fee includes one or both sets of costs.
SDG&E proposes that customers involved in an en masse involuntarily return to bundled service should receive utility procurement service under the modified TBS rate for 12 months. Additionally, to ensure that customers realize and appreciate the risks associated with a potential en masse involuntary return to utility procurement service under the TBS rate, and to further provide comfort to SDG&E that it has provided its customers with information they need to make fully-informed decisions, SDG&E proposes that customers who elect to transfer to DA Service be required to sign and return an acknowledgement form to the utility at least five days prior to the ESP submitting a DA Service Request on behalf of the customer. By signing the form, customers transferring to DA acknowledge and agree to pay the TBS rate, even if it is higher than the utility's bundled service rate.
PG&E and SCE argue that the DA parties define "involuntary returns" in an overly narrow fashion. PG&E and SCE believe that involuntary returns should identify any returns to utility bundled service that are not initiated by the customer but instead are the result of a service termination by an ESP or CCA provider. The return to bundled service would not be considered "involuntary" if the customer defaulted on its payment obligation or if the service contract expired.
The DA Parties question how an IOU would determine whether a mass involuntary return has occurred. SCE acknowledges that in some instances, the circumstances of a return could be questionable, but believes the issue should turn on whether the ESP has ceased operations in California or has been forced to do so for cause. Thus, where an ESP serves two customers, and decides to cease operations or must do so for cause, and returns both customers back to the IOU's procurement service, both customers would be entitled to have their re-entry fees paid by the ESP. Likewise, if the ESP returns half its customers to the IOU's procurement service, and waits for some time before involuntarily returning the other half, SCE believes this would be a phased approach to involuntarily returning all of the ESP's customers to the IOU's procurement service, which should be considered a mass involuntary return.
The DA switching rules currently draw no distinction between DA customers that voluntarily return to the IOU's procurement service and those that are involuntarily returned as a result of service termination by their ESP. The statutory requirements for a bond (or financial security) for involuntarily returned customers under § 394.25(e) drives the need to distinguish between voluntarily and involuntarily returned DA customers for purposes of the switching rules.
Section 394.25(e) does not expressly define an involuntary return. It only partially defines the term by carving out from its protections certain cases of involuntary returns.
We define an involuntary return of a DA customer to service from an IOU as when the IOU has initiated the DASR process to return a customer to IOU bundled service due to any of the following events:
a. The Commission has revoked the ESP registration.
b. The ESP-IOU Agreement has been terminated.
c. The ESP or its authorized CAISO Scheduling Coordinator (SC) has defaulted on its CAISO SC obligations, such that the ESP is no longer has an appropriately authorized CAISO SC.
An involuntary return of a DA customer to IOU bundled service has not occurred as a result of the following events:
a. A customer's contract with an ESP has expired.
b. An ESP discontinues service to a customer due to that customer's default under their service agreement with the ESP.
We conclude that involuntarily returned DA customers should be placed (a) on the TBS rate if they are large commercial and industrial DA and (b) on the BPS rate if they are small commercial and residential DA. If an involuntarily returned DA customer seeks to resume DA service with a new ESP, they may do so upon executing a DASR within the 60-day safe harbor period. Placing involuntarily returned large commercial and industrial DA customers on the TBS rate will hold them responsible for potential cost increases caused by the failure of their ESP, and would avoid shifting costs to bundled customers.
Under existing rules, DA customers that return to IOU service without six-months advance notice is placed on the TBS rate for six months. The TBS rate was designed for DA customers that elect to return to the IOU's procurement service for a safe harbor or while serving out their six-month advance notice period (i.e., voluntarily returning customers). We now conclude that the TBS rate is also suitable for involuntarily returned large commercial and industrial DA customers during their transition either to a new ESP or back to bundled service.
Involuntary DA customer returns are most likely to occur during stressed markets when spot market prices high. DA customers placed on TBS will thus bear the exposure risk to high spot market prices during a stressed market.
Although PG&E proposes that involuntarily returned DA customers be allowed to elect safe harbor status, PG&E does not address how or when an involuntarily returned customer would elect the safe harbor option and go on TBS. If the mass involuntary return occurs with little or no notice, presumably the customer cannot make this election prior to returning to IOU procurement service. In such case, the customer would have to elect a safe harbor while on BPS or TBS (depending on which rate the involuntarily returned customers is required to take).
Since IOUs require six months advance notice to place customers on BPS, safe harbor customers that fail to timely switch to DA will need to serve another six months advance notice period on TBS after the safe harbor period ends.
PG&E does not reconcile its proposed safe harbor option with the calculation of the ESP's re-entry fees under its bond proposal. It is unclear how the uncertainty surrounding the safe harbor customers factors into PG&E's demand for re-entry fees from the ESP.
We shall permit involuntarily returned customers to utilize the provisions of the 60-day safe harbor as follows. We shall direct the IOUs to reserve the involuntarily returned customers' space under the SB 695 cap for the duration of the 60-day safe harbor period. If the involuntarily returned customer finds a new ESP and submits a DASR within this 60-day period, the customer may utilize the reserved space under the cap to resume DA service upon execution of the DASR. If the returned customer fails to find a new ESP and to execute a DASR during the 60-day safe harbor period, the following rules apply: (a) In the case of large commercial and industrial DA, the customer would continue to pay the TBS rate for the six months following the end of the 60-day safe harbor period. (b) In the case of the small commercial and residential DA, the customer would continue to pay the BPS rate , and for the next six months, the ESP bond would cover reimbursement of the customer's incremental procurement costs. After that, all remaining involuntarily returned DA customers would pay the BPS rate and must remain on BPS service for the adopted minimum stay period of 18-months.
6.6. Timing of Bond Calculations and Posting
We shall require that the amount of an ESP's bond or demonstration of insurance be calculated once annually, by April 10 of each year. Bonds shall be posted by June 30, subject to approval by the Energy Division. The posting requirement applies to new and existing ESPs. For an ESP that begins service in Month M+2 (where M denotes the month when the IOU will calculate the bond amount, the bond calculation shall be performed using Month M-1 data, and the bond shall be for the period from the start date through the next annual calculation.
The initial bond calculation should be submitted to the Commission by each of the IOUs in a separate advice letter filings for each applicable ESP, designated as a Tier 2 advice letter. All subsequent years calculations shall be submitted as Tier 1 advice letters for each ESP to the Energy Division that should be deemed accepted unless the Energy Division suspends the advice letter during the review period (30 days). An unredacted version of each advice letter will be filed under confidential seal.
The ESP should be required to post the bond amounts in the advice letter within 30 days of notification by the Energy Division, subject to correction for any detected errors. If an ESP believes that its financial security amount has been calculated inaccurately or in conflict with the adopted processes, the ESP may file comments with the Energy Division, and served on the relevant IOU, indicating any appropriate corrections with relevant supporting explanation and detail within 20 days of the advice letter filing.
Upon Commission approval of the relevant ESP financial security amounts, the Energy Division shall notify each ESP of the final amount due on an aggregate statewide basis. In any event, for newly-registered ESPs, the ESP's bond should be required to be posted before ESP service is permitted to begin.
After the initial bond has been posted, the ESP's gross and posted bond amounts should be calculated annually, and adjusted if/when it is more than 10% above or below the then-current ESP posted bond amount. Posted bond may be in the form of a third-party guarantee from an investment grade guarantor, parental guarantee of a surety bond, letter of credit, cash or cash equivalent financial instrument or security, or such other instrument reasonably acceptable to the IOU and should be payable to the IOU directly in the event an ESP fails to timely pay the re-entry fees demanded by the IOU as discussed in the section below.
6.7. Collecting Re-entry Fees on an Involuntary Return
We adopt the SCE proposal to calculate the re-entry fees within 60 days of the earlier of (i) the start of the involuntary return, or (ii) the IOU's receipt of the ESP's written notice of involuntary return, using the method described below. The re-entry fees shall be calculated as a binding estimate of the incremental administrative costs the IOU expects to incur (based on the comparable fees for CCA customers) and the incremental procurement costs under then-current market conditions to serve the involuntarily returned small commercial and residential DA customers for the safe harbor period and the next six months. However, the re-entry fees shall be demanded from the ESP only after the involuntary return is initiated.
The IOU's demand for the re-entry fees shall be made no later than 60 calendar days after the start of the involuntary return of DA customers to IOU procurement service, and that re-entry fees be due and payable to the IOU within 15 calendar days after the issuance of the demand. This timeline will ensure that the bond will be available to the IOU to cover the re-entry fees, should the ESP fail to pay the fees upon the IOU's demand. This is because commercial financial instruments (like letters of credit or surety bonds) available to meet the bond obligation often contain a 90 day notice of termination provision in the event of a default. An ESP's involuntary return of DA customers to IOU procurement service is likely to be considered an event of default, which would trigger the creditor's right to terminate the credit line within 90 days. Accordingly, the demand process should take no longer than 75 days to permit at least 15 days for the IOU to call on the letter of credit, bond, etc. to cover the re-entry fees.
12 The Commission has not yet addressed the merits of the proposed CCA settlement in R.03-10-003.
13 See SCE Opening Testimony (Exh. 300), Section V.C.2, entitled "Method for Forecasting the Incremental Cost for the Bond.
14 See SCE Opening Testimony (Exh. 300 ) Sec. V. C. 2. b)
