District of Columbia Revisits Its SOS Protocols

As required by law, the District of Columbia Public Service Commission has engaged in a periodic review of its standard offer service (SOS) program, under which the sole regulated electric utility serving the city must procure generation supply for those customers that elect not to obtain such from a competitive supplier. The commission noted that this latest review process was a little more complicated than in the past by virtue of the utility, Potomac Electric Power Company (Pepco), having been acquired by Illinois-based Exelon Corporation in 2016. 

One of the first matters discussed by the commission was whether Pepco should continue in its role as administrator of the SOS program or whether that function should be taken over by a third party, given Pepco's new status as an affiliate of Exelon. The commission observed that as presently structured, Pepco is responsible for contracting with wholesale suppliers for providing electricity to SOS customers. But some stakeholders had encouraged the commission to move away from that wholesale SOS model in favor of a retail SOS precept instead, under which suppliers would directly serve customers rather than go through Pepco. 

In finding that Pepco should remain as the administrator of the SOS plan, the commission pointed out that transitioning to a retail SOS regime as proposed by some parties would place the District in regulatory territory that no other jurisdiction has entered. The commission said that the retail model had been tendered with very few details of how it would actually work, with absolutely no quantification of whether it would, or even could, lead to lower prices for residential and small commercial ratepayers, who make up the bulk of SOS customers. 

The commission added that the wholesale SOS strategy had worked well over the 12 years that it has been in place and that Pepco had been very successful at managing associated supply portfolios. The commission stated that the current SOS plan had produced prices that were stable and reasonable, and it related that it had no reason to believe that Pepco's ongoing administration of the program would not continue to yield reasonable rates, its ownership by Exelon notwithstanding. 

Answering claims that Pepco's affiliation with Exelon gave rise to obvious conflicts of interest, in that Pepco was likely to purchase wholesale supply from some of Exelon's generating subsidiaries, the commission pointed out that a number of other states facing a similar situation, including Delaware, Maryland, New Jersey, and Pennsylvania, have encountered not a single instance where a utility overseeing an SOS program gave an unfair advantage to an affiliate in weighing wholesale supply bids. The commission conceded that while the potential for bias might exist because of the Pepco/Exelon nexus, there simply was no evidence that Pepco would, in fact, treat any Exelon affiliate in a preferential manner. 

The commission expressed confidence in Pepco's ability to maintain the requisite distance from affiliates in evaluating any bids submitted by Exelon subsidiaries. It described suggestions that a third-party administrator be appointed in place of Pepco as "a solution to a problem that does not exist." 

A second question raised in the review was whether the supply contracts executed by Pepco for its residential and small commercial SOS customers should be shortened from three-year terms to two-year terms. But, as with the SOS administrator issue, the commission opted to maintain the status quo. The commission stated that proponents of shorterduration contracts had failed to show that such would be a significant improvement over three-year contracts as far as tracking current market prices. 

The commission remarked that forecasting energy prices is clearly an inexact science, irrespective of what time frame is used. To that end, the commission proclaimed it a "fallacy" that the "short-term market price is the market price" (emphasis added by the commission). And, the commission said, in its experience, shorter-term supply arrangements are more likely to lead to pricing volatility than longer-term ones. 

The commission stated that rate stability and the avoidance of rate shock are critical factors in designing SOS programs. The commission pointed out that when downward or upward pricing trends are seen, they are caused by shifts in the market, not by the length of a contract term. Unable to cite any empirical evidence that a two-year contract term would assure substantial price benefits for consumers, the commission held that the current three-year contract term for residential and small commercial SOS customers should be retained. 

Toward the end of its order, the commission returned to the issue of affiliate relations. It confirmed its belief that Exelon's acquisition of Pepco's parent company should not disqualify Pepco from remaining as the administrator of the SOS plan. At the same time, though, the commission said it was cognizant of the very real concerns some parties had voiced about the impact of that corporate relationship on the SOS bidding process. 

To alleviate those reservations, the commission instructed Pepco to prepare a set of standards it will employ so as to avert any conflicts of interest that may arise when an Exelon affiliate bids into a Pepco-administered SOS auction. The commission commented that once its sees the utility's proposed guidelines, it will determine whether any further safeguards are necessary. 

In the meantime, however, the commission rejected outright a recommendation from a competitive supplier that Exelon's generating units be prohibited from participating in any of Pepco's SOS supply solicitations. The commission deemed that an extreme measure that would inhibit competition in the District and lead to unnecessarily high prices for consumers. Re Development and Designation of Standard Offer Service in the District of Columbia, Formal Case No. 1017, Order No. 18829, July 7, 2017 (D.C.P.S.C.).