Download August 22, 2003 Felecia L.Greer, Executive Secretary Public Service

August 22, 2003
Felecia L.Greer, Executive Secretary
Public Service Commission
6 St. Paul Street, 16th Floor
Baltimore, Maryland 21202
Re: Case No. 8908, Phase II
Dear Ms. Greer:
Pursuant to the Commission’s August 15, 2003 letter in the above referenced
proceeding, attached please find the Office of People’s Counsel’s response to the
questions directed to “OPC” or “All”. Copies have been sent to all parties of record.
Should you have any questions or concerns, please feel free to contact me.
Sincerely,
Sandra M. Guthorn
Acting People’s Counsel
SMG/ds
Attachments
cc:
All parties of record
Office of People’s Counsel Responses to Commission Discovery
In Case No. 8908, PhaseII
DR-MPSC-04 Please explain the objectives of the Price Anomaly Process. Specifically,
are the thresholds to be established intended (1) to be a finely tuned
target designed to serve as a price ceiling or (2) a gross target designed
to prevent award of unreasonable bids.
As discussed on page 14 of the Phase II Direct Testimony of Jonathan Wallach, the
pricing anomaly procedures are designed to detect and address systemic problems with
the bid process that give rise to aggregate results that are above-market and thus
unreasonable. The thresholds do not serve as a price ceiling, since, for example, the PAT
for one-year offers will not be compared to the average of first-year prices of all 1-, 2-,
and 3-year bids. (The residential retail price for power supply will be derived as the
average of first-year prices for all awarded 1-, 2-, and 3-year offers.)
Instead, specific and distinct PATs for 1-, 2-, and 3-year portfolios will be compared to
separate averages of 1-, 2-, and 3-year offers, respectively. In this way, the pricing
anomaly procedure will ensure that offers for a particular contract term reasonably reflect
the prevailing market price for that particular contract term.
The thresholds are intended to prevent award of unreasonable offers, but only to the
extent that such offers on average exceed the thresholds. The average of offers could
exceed thresholds either because the majority of offers are above-market or because a
few offers are sufficiently above-market to drive the average above the thresholds.
However, as discussed on page 13 of Mr. Wallach’s direct testimony, the thresholds are
not intended generally to serve as a cap on individual offer prices.
DR-MPSC-05 Why is the Price Anomaly Process limited to residential SOS? What
steps if any are contemplated in the event of unreasonably high winning
bids in the non-residential classes? What are the chances that such
unreasonably high bids may indeed result?
Since residential SOS is a regulated service, and since the Commission has found that the
residential market is not competitive, it is OPC’s position that the pricing anomaly
procedures are necessary to ensure that SOS prices are reasonable.
The OPC takes no position on the likelihood of unreasonable non-residential offers or as
to the appropriate regulatory response, if any, to unreasonable non-residential offers.
DR-MPSC-06 With reference to Appendix 6 of the RFP for full-requirements
wholesale electric power supply, for each utility, provide specific
sources for the first seven cost items. Provide a table, for years 1, 2, and
3, identifying these amounts as of 8/18/03.
The sources for the first seven cost items will be either commercially available forward
price quotes, historic data posted on the PJM web site, or, in the case of the Loss Adder,
utility-specific estimates. The values for each cost item will be derived by either PSC
Staff or the individual utilities, in consultation with OPC.
DR-MPSC-07 Describe the process for determining the “Transaction Cost and Risk
Adder.”
As indicated in Appendix 6 of the RFP, the Transaction Cost and Risk Adder will be
determined by the PSC Staff prior to the receipt of offers in the first tranche and will
remain fixed throughout all tranches.
DR-MPSC-08 When will the calculation of the PATs be performed relative to the bid
date?
As discussed on page 13 of Mr. Wallach’s direct testimony, the PATs will be calculated
immediately prior to when offers are received in each tranche. PATs will be recalculated
prior to each tranche so that they reflect prevailing market conditions for each tranche.
DR-MPSC-09 The price anomaly process compares the PAT to blended (or average)
prices, as opposed to actual specific bid prices. Please explain the
rationale for using blended prices instead of specific bid prices or both?
See the response to DR-MPSC-04, above, and pages 13-14 of Mr. Wallach’s direct
testimony.
The pricing anomaly process compares PATs against the average of offer prices, since
the intent is to promote retail prices for residential SOS – said prices calculated as the
average of awarded offer prices – that are reasonably reflective of competitive market
prices.
DR-MPSC-10 In your analysis of the Price Anomaly concept, what potential
unintended consequences were identified?
Assessment of the pricing-anomaly concept during the Phase I process included
consideration of the risk that such a procedure for residential SOS would make nonresidential SOS load more attractive to suppliers. However, this was considered to be an
unlikely consequence, since non-residential pricing would be restrained by an active
competitive retail market. Residential pricing, in contrast, would not be restrained in the
same fashion, since, as the Commission found, the residential market is not yet
competitive. In the absence of a competitive market, the pricing anomaly procedures
serve to restrain above-market pricing for residential SOS.
DR-MPSC-15 Phase I defines a number of supplier attributes to be included in the bid
plans and, presumably, in the evaluation process. Supplier experience is
one of the stated attributes, but does not appear to be a part of the Phase
II plans. Please clarify the role of supplier experience in the qualification
and evaluation process.
Pursuant to Section 3.4 of the Model RFP, applicants must document that they are
members in good standing in PJM, qualified as market buyers and sellers in PJM, and are
authorized by FERC to make sales of energy, capacity, and ancillary services at marketbased rates. It is OPC’s position that such qualifications are reasonably indicative of
supplier experience, and are a reasonable minimum threshold for supplier experience for
determining eligibility to participate in the bidding process.
DR-MPSC-16 Phase I defines a number of supplier attributes to be included in the bid
plans and, presumably, in the evaluation process. Supply diversity is one
of the stated attributes, but does not appear to be a part of the Phase II
plans. Please clarify the role of supplier experience in the qualification
and evaluation process.
Supply diversity is not an attribute of an individual bidder to be used to qualify and
evaluate a bidder’s offer. Instead, it is one of the goals of the Phase II process, in the
sense that the solicitation procedures adopted as part of the Phase II process were
designed to promote a diversity of supply offers.
See pages 8-9 of Mr. Wallach’s direct testimony for a discussion of the attributes of the
solicitation process that promote supply diversity, and the benefits to residential
customers of supply diversity.
DR-MPSC-17 Phase I defines a number of supplier attributes to be included in the bid
plans and, presumably, in the evaluation process. Credit and financial
capability are such stated attributes. There does not appear to be any
criteria however that would specifically qualify or disqualify a potential
bidder. Please explain what you mean by supply diversity and clarify if
and how the financial information required of bidders will be used to
qualify them.
According to Section 3.5 of the Model RFP, applicants will be required to complete the
Credit Application, attached to the Model RFP as Appendix 3, in order to be eligible to
submit price offers; eligibility will not be determined on the basis of the information
provided in the Credit Application. This information will then be used to determine the
unsecured credit limit for any bidder that is awarded load.