Bill In Pennsylvania Would End Default Service

November 25, 2013

A Pennsylvania senator recently introduced legislation that would eliminate utility-provided default service in the Commonwealth, a measure that could potentially cut consumer costs and significantly relieve the state’s budget problems.

The bill, by Sen. Bob Mensch, would end default service on June 1, 2015. Default service customers would then be auctioned off to retail generation providers, who in turn would pay the state $100 per customer acquired. The measure could generate up to $360 million, which would cover about a third of Pennsylvania’s budget shortfall and spare Gov. Tom Corbett from having to tax operations in the Marcellus Shale.

As part of the plan, customers would receive a 12-month fixed rate and could switch suppliers without cancellation fees, while suppliers would have to give new customers a $50 credit. Suppliers would also be mandated to pay the state $2 per acquired customers to fund a public awareness campaign explaining the new system.

Under Pennsylvania’s deregulated electricity market, utilities must provide default service to customers who do not shop for and select their own providers. The cost of the service provides a pricing baseline that enables consumers to compare offerings from competitive retailers.

According to one estimate in one territory, the difference between PECO’s default rate and the lowest 12-month fixed-rate product was $164.5 million last year, or roughly $162 per household, the Philadelphia Inquirer reported. Statewide, the paper added, customers could have saved $357 million in 2012.

“If we can encourage people to get away from default service to a more competitively priced product, it helps a lot of people,” the Inquirer quoted Mensch, whose bill has the backing of both Corbett and the Pennsylvania Public Utility Commission.

The three-stage process that would transition customers out of default service would kick off Jan. 1, 2015, and end May 31. During this first period, electric distribution companies (EDCs) would provide three notices to existing default service customers of the June 1 auctions. If, after receiving these notices, customers have not selected a retail provider, they would be assigned to EDC-provided default service until May 31.

In the second stage, which begins June 1, EDC-provided default service would end and be replaced by two separate programs:

• Customer Auction. This onetime auction would assign all existing EDC default service customers to retail suppliers. As referenced earlier, the suppliers would agree to provide a 12-month, fixed-price “transition” service and pay the state a total of $152 for every customer acquired.

  The auction would use tranche sizes of 5 percent of the total default service received by residential customers per EDC; for non-residential customers, the tranches would be sized to evenly account for load. The PUC would select no fewer than four retail electric generation supply winners per EDC class based on the lowest price bid, and no supplier could serve more than 25 percent of the tranches in an EDC rate class.

• Next Generation Default Service. As of June 1, EDCs would be removed as default service providers, and a standardized, 60-day service would be offered by retail suppliers to customers whose existing providers cannot deliver service and to those who have not selected a provider. The PUC would establish a pricing formula that reflected market prices, direct plus indirect costs, cost of capital and risk management.

  Upon enrollment, a retail supplier providing the service would have to notify customers that they will receive Next Generation Default Service for the shorter of 60 days or two billing cycles; the price of Next Generation Default Service; shopping options; and that they can switch at any time without penalty.

The final stage begins June 1, 2016, and marks the end of the 12-month “transition” service. All customers either shop or receive the 60-day default service; new and moving customers who do not select a supplier would be assigned the 60-day Next Generation Default Service, which would be provided by the retailer. Initiating or changing electric generation or distribution service would be the responsibility of retail suppliers – not EDCs – though the EDCs would remain responsible for meter reading, settlement reporting, and disconnected and reinstatement of service as directed by electric generation suppliers.

Mensch’s bill is cosponsored by eight Senate colleagues, seven fellow Republicans and a Democrat. Debate is expected to continue over the next six months, and the legislation’s prospects are uncertain. But Mensch remains strongly committed to its passage.

“It makes the marketplace more efficient,” he told the Allentown Morning Call. “Therefore, we will all benefit from lower costs of electricity.”