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Microsoft word - constellation response toquestions posed by the retail market review committee - final assubmitted.docx

Response of Constellation Energy Commodities Group to
Questions posed by the Retail Market Review Committee

June 5, 2012
Executive Summary
On March 22, 2012, the Minister of Energy issued a Ministerial Order pursuant to which the Government of Alberta established a committee, referred to as the Retail Market Review Committee (“RMRC”), to review the retail electricity market in Alberta. The RMRC is required to submit its report to the Minister of Energy by June 21, 2012. Toward that end, the RMRC issued a Request for Information containing twenty two questions seeking stakeholder input whether there is a continuing need for a default rate (the “Regulated Rate Option”, or “RRO”), and if so, what the default rate design and terms and conditions should be. Constellation Energy Commodities Group (“Constellation”), as a member of the Independent Power Producers Society of Alberta (“IPPSA”), participated in the development of the comments submitted by IPPSA, and endorses them. However, as noted in several places in the IPPSA responses, IPPSA members have different views as to whether or not the RRO should be retained, and if retained, whether there should be some changes to its term and structure. Constellation appreciates this opportunity to submit these comments in order to present its views on the RRO. Constellation owns the Northern Prairie Power Project located in Grand Prairie. Constellation is also evaluating the development of a second peaker facility in Didsbury. In addition, Constellation regularly competes in the existing RRO auctions to provide energy to Alberta’s residential and small commercial customers through the RRO providers. Moreover, although Constellation is not currently an active provider of retail service in Alberta, it has in the past served a significant amount of retail load in Alberta. As a result of these current and past ventures, Constellation is very familiar with the Alberta energy markets. Moreover, Constellation, now newly merged with Exelon Corporation, serves 165 TWh of retail and wholesale load in jurisdictions throughout North America, and owns and operates over 34,000 Constellation believes Alberta’s energy market to be generally well structured and adherent to the principles of a fair, efficient, open and competitive market. As such, Constellation’s interest in the RRO review process is the same as that stated by IPPSA: “to advocate for market principles and to discourage policy that would detrimentally impact Alberta’s successful, open wholesale market. Competition has worked in Alberta’s wholesale power market to bring a host of benefits to consumers, including:  entry of new market participants, competing on price and offering new  addition of sufficient supply to meet Alberta’s profound growth in  shifting of generation investment risk to developers and away from  competitive wholesale market prices, which are presently below the replacement cost of a host of generation technologies. “ 1 In the following section, Constellation provides responses to the questions posed by the RMRC. Where Constellation’s responses to the RMRC’s questions are the same as IPPSA’s, Constellation simply refers to the IPPSA comments. Where Constellation has viewpoints and comments that are different or additive to the IPPSA comments, it presents those viewpoints and comments. A summary of Constellation’s comments and recommendations are as follows: 1. Even in the most robustly competitive retail markets, there are always some customers who will be unable to choose a competitive supplier or will simply not do so. Policymakers must determine to what extent their default service should hedge energy price risk, particularly for residential and small commercial customers. 2. Constellation recommends that the default rate for residential and small commercial customers in Alberta should incorporate a blend of shorter term and longer term pricing of between 3 months and two years, in order to provide an enhanced level of price risk 3. Default service providers should be required to source their supply through competitive bids and/or auctions to ensure the best possible pricing for RRO customers, with compliance to these bidding requirements to be ensured through the normal procedures of the Alberta Utilities Commission (“AUC”). 4. Constellation supports renaming the RRO to be ‘Default Service Pricing,’ as noted by 5. As did IPPSA in its comments, Constellation supports public education efforts to ensure that Albertans understand their wholesale and retail power markets, the drivers of power 1 See IPPSA responses, dated May 18, 2012, page 1. prices, the role of transmission in the market, and the options consumers have to manage If you have qeustions about these comments, or would like to discuss further, please call:  Andy Kiss, Senior Originator, Constellation, 410-470-3101  Mary Lynch, Vice President, Government Affairs, 916-606-0783 Constellation Response to RMRC Questions

Question 1: “Clearly state what the purpose of a default rate (currently called the
Regulated Rate Option, RRO) should be in Alberta’s retail electricity market?

In Alberta, competitive retail choice is open to all electricity users. Where there is universal choice for all classes of customers, the purpose of a default rate is to ensure service to customers who are unable to execute a contract with a competitive supplier, or do not want to exercise their retail choice. Constellation believes that, particularly among residential and small commercial customers, there will always be some customers who will be unable to choose a competitive supplier or will simply not do so. Where a robustly competitive retail choice program exists, as is the case in Alberta, default service should be simple “plain vanilla” service that provides these customers with a reasonable hedge against price risk volatility without undermining competitive retail service.
Question 2: “Within the context of a competitive electricity retail market in Alberta, is
there a continuing need to have a default rate? Please detail and substantiate why or why
not.

In Alberta, despite a robustly competitive retail choice program that has been in existence for several years, retail choice among residential and small commercial load is currently at 29% and 48%, respectively.2 This rate of switching is not a commentary on the effectiveness of retail choice; rather it is simply a reflection of customer preferences and willingness to exercise their competitive choices. Constellation believes that these customers should, of course, be allowed to move to competitive service when they so choose, but in the meantime, their default service should be structured to provide them with a reasonable hedge against price volatility. Moreover, procurement by default 2 Calculated from Government of Alberta Electricity Statistics Information System service providers should be structured to create as much competition as possible, through the use of well designed auctions and bidding mechanisms that are open to all qualified suppliers. Such wholesale competition will not only ensure that customers on default service are getting the best possible pricing, it will also bring liquidity and additional pricing transparency to the wholesale markets that will in turn support retail competition.
Question 3: If it were determined that a default rate was no longer required for some or all
eligible customers (13c)

a) What provisions would be needed to ensure that services from a ‘provider of last
resort’ would be available to retail consumers?
b) What would the benefits, weaknesses and risks of phasing out the existing RRO?
c) What would be the appropriate timing for phasing out the existing RRO?

As noted above, Constellation believes that there will always be some customers who will not be able to or who will simply not choose to get service from a competitive retail supplier, such that some sort of default service or provider of last resort service will always be necessary. In short, even if Alberta policymakers determine that all customers should be forced to the competitive market by eliminating the RRO altogether, the issue of default service will still need to be addressed. Constellation would note, however, as did IPPSA in its comments, the provider of last resort service is not to be confused with social services needed for vulnerable members of society for whom separate social Question 4) How should the default rate be designed? What design principles should be
used?

The default rate should be structured as a single, plain vanilla service that is available to all residential and small commercial customers who have not selected a competitive retail provider. Constellation supports a default service pricing for residential and commercial customers that is a blend of shorter term and longer term pricing of between 3 months and two years. In designing this default service, Constellation acknowledges that such service must be based on market conditions and must not be create artificially low prices, which would undermine retail choice. As such, Constellation endorses the principles outlined by IPPSA in its responses, which were as follows:  “It should be designed in a way that does not undermine incentives for customers to shop. Specifically, the default product should not be subsidized. It should not have legitimate costs removed.  It should not be designed with the goal of providing ‘low’ prices to consumers. In open markets, price is determined by what the market can bear. This is true of essential energy products in Alberta, such as natural gas, diesel and gasoline. It is also true of all other goods and services such as food, shelter, clothing, downtown parking, dental care, cable television, etc. The government does not create parallel products to compete with what the market provides. Instead, the government provides financial support to those who are legitimately in need in order for them to manage their cost of living.  The default product should not be designed to provide low price volatility, as this is what existing term contracts provide. Furthermore, electricity is a fundamentally volatile commodity, as it cannot be stored and as demand is inelastic for a significant portion of time within Alberta’s current price-capped market.  It should be designed in a way that ensures the procurement of the RRO is fair, efficient and open, and that no one potential supplier has an inherent competitive advantage.  IPPSA would be opposed to any role for the Balancing Pool as an RRO aggregator or the use of the Balancing Pool’s as-yet-unsold Power Purchase Arrangement (PPA) to provide power at cost for the RRO market. Instead, the Balancing Pool should focus on divesting its unsold PPA.3 In addition to the IPPSA principles outlined above, Constellation would add the  For residential and small commercial customers, default service pricing should be a blend of shorter term and and longer term pricing with hedges of 3 months to two years incorporated into the default pricing. The reasons for this recommendation are explained in more detail in response to Question 5: “Which customer groups (for example, residential, farm, irrigation, small
commercial, large industrial) need access to a default rate.

Constellation believes a default service is required for all customers who do not want to choose or, for whatever reason, cannot choose, an alternative supplier. For purposes of 3 See IPPSA responses, dated May 18, 2012, page 3. the responses to the RMRC’s questions, Constellation supports the existing RRO threshold of 250,000 kWhs per year as the cutoff point for default service eligibility.
Question 6: “What should the default rate be called? What name would most clearly
communicate to customers the purpose and intent of the default rate?”

Constellation agrees with IPPSA’s recommendation to rename the ‘RRO’ to ‘Default
Question 7: “What mechanism should be used to determine the default rate?”

Constellation believes that a default service pricing mechanism should, to the maximum extent possible, rely on competitive auctions and bidding open to all qualified suppliers who bid to provide the default service price hedges to default providers. Self supply by default providers should be permitted only when the default provider has participated in Question 8: “What is the best delivery mechanism for a default rate? Who should provide
it? Please provide specific comments on billing, procurement and any other
relevant aspects of delivering the default rate?

Constellation’s recommendation for default service pricing that blends shorter term and longer term pricing does not contemplate that any changes to the current delivery system, through the current RRO providers, are necessary. Question 9: Please provide your views on alternatives to the current default rate design.
a) Include your assessment of the benefits, weaknesses and risks of each alternative
b) If changes to the default rate were recommended, what time line would be

appropriate for implementing changes to the current RRO?
As noted above, Constellation supports default service pricing that is a blend of shorter term and longer term pricing with hedges of 3 months to two years incorporated into the Benefits: This blended price approach will provide better hedge to customers who do not
or cannot choose an alternative supplier. By smoothing out large market price excursions, the potential for customer complaints is expected to be reduced. It would also provide retailers with a better sense of a ‘price to beat’ for term contracts and it may improve forward market liquidity. Finally, the existing approaches used for the RRO should be readily adaptable for a blended product Weaknesses: A blended RRO provides a longer term hedge for customers, and therefore
may reduce their incentive to shop for similar products from competitive retailers. However, Constellation expects that this impact on the competitive retail market will not be significant and that any minor impact that it would have is outweighed by the benefits described above. Another potential weakness is that the blended approach, while providing some additional price hedging, will not eliminate all market volatility and so the risk of political backlash when prices are high still remains. Risks: The blended product recommended herein may still not satisfy consumer
expectations, should those expectations seek low price and low volatility energy.
Question 10: For each alternative default rate design described in your answer to question
9, please address the following questions:

a) How would this alternative accommodate significant swings in consumption
volumes?
b) How would the regulate rate providers’ current billing systems be affected?
c) How would the credit requirements for the current regulated rate providers be

affected? What would be the impact?
d) How would the alternative design for a default rate affect the competitive retail
market in terms of the following:
The sustainability of the competitive retail market?
The appropriateness of having a default rate compete with the
competitive retail market?

The impact on energy efficiency and conservation incentives for
customers?

Accommodating Swings In Consumption: RRO providers would be responsible for
load shape and forecast risk, as is currently the case. Impact to current provider’s billing system: The blended approach recommended
herein does not contemplate any change in the RRO providers’ billing systems. Impact to credit requirements of RRO provider: Because the blended approach
includes some longer term contracting, there would likely be some slight increase in Impact to sustainability of competitive market: While a blended RRO provides a
longer term hedge for customers, and therefore may reduce their incentive to shop for similar products from competitive retailers, Constellation does not believe that this would have a significant impact on the sustainability of competitive markets. Specifically, the term structure recommended by Constellation is still relatively short term, leaving the competitive market alone to provide longer term hedges to customers who want that, and to provide additional customized services that they may need. Appropriateness of having a default product compete with the competitive market:
Constellation does not believe it is inappropriate to offer a plain vanilla default service product to residential and small commercial customers that contains a pricing component The impact on energy efficiency and conservation: Constellation does not believe that
providing residential and small commercial customers a default service that contains an element of longer term pricing will materially impact their interest in efficiency and conservation. Specifically, the default service will continue to provide a price signal in advance, allowing consumers to respond by dialing back their consumption. Question 11: Which costs, in addition to the pure energy cost, should be included in the
default rate?

Constellation agrees with the response provided by IPPSA to this question: “The default rate should include all costs which are related to procuring and delivering the product. The default rate should not be subsidized or it would compete unfairly against products provided by the competitive market. IPPSA understands that all of the costs going into the current RRO have been reviewed, debated and resolved before the AUC. In deference to process, we believe it is before the AUC where changes to costs should be debated.”4
Question 12: What alternatives are available for energy procurement, and which one is
best (for example, long-term forward contracts, short-term forward contracts, flow-
through of pool price.)

See responses to the questions above, especially questions 4, 7, 9 and 10 above for the default service pricing and procurement model recommended by Constellation.
Questions 13 through 21: Constellation concurs with the responses provided by IPPSA to
4 See IPPSA responses, dated May 18, 2012, pages 7-8.
Question 22: What is the state of competitiveness within the Alberta retail electricity
market? Please include comments about the following:

a) Competitiveness among current retailers: While not currently active participant in
the retail electricity market in Alberta, Constellation understands the market to be reasonably competitive, with suppliers offering a variety of contract terms and b) Barriers to new entrants: Constellation defers to currently active retail suppliers to
answer questions about whether there are specific barriers to entry that should be c) Growth of existing market participants: Constellation has not researched data on
the extent to which the amount of residential and commercial load served by competitive retail suppliers has changed over time. Constellation is aware that that recent data suggests that approximately 29% of residential and 48% of small commercial load has switched.5 While this switching rate certainly supports a contention that the market is reasonably competitive, and that switching opportunities do exist for these customers. Constellation nevertheless believes that customers in these classes who do not choose an alternative supplier should be afforded somewhat longer term default service pricing to provide enhanced price hedging for them. Moreover, Constellation does not believe that providing this type of improved price hedging for the default service would materially impact the competitiveness of the 5 Calculated from Government of Alberta Electricity Statistics Information System

Source: http://www.rmrc.ca/xData/rmrc/Constellation%20Response%20to%20Questions%20posed%20by%20the%20Retail%20Market%20Review%20Committee%20-%20final%20ssubmitted.pdf

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