Implementation of the Alternative Energy Portfolio Standards Act of 2004; Doc. No. M-00051865 [35 Pa.B. 4280] Public Meeting held
July 14, 2005Commissioners Present: Wendell F. Holland, Chairperson; James H. Cawley, Vice-Chairperson; Bill Shane; Kim Pizzingrilli; Terrance J. Fitzpatrick
Implementation Order II By the Commission:
The Commission has been charged by the Pennsylvania General Assembly (''General Assembly'') with carrying out the provisions of the Alternative Energy Portfolio Standards Act of 2004 (the ''Act'' or ''Act 213''). 73 P. S. §§ 1648.1--1648.8. Accordingly, the Commission has opened a proceeding at this docket to implement the provisions of the Act. The Commission recently issued an order that established a timetable for compliance with the provisions of Act 213 and referred certain matters to the Alternative Energy Portfolio Standards Working Group (''AEPS WG'') for consideration. Implementation of the Alternative Energy Portfolio Standards Act of 2004, Docket No. M-00051865 (Order entered March 25, 2005) (''Implementation Order''). In this second implementation order, we address comments filed in response to the Implementation Order, solicit comments on a number of other issues, and refer one new matter to the AEPS WG for consideration.
Background and History of this Proceeding The Act was signed into law on November 30, 2004, and took effect on February 28, 2005. The Commission and the Pennsylvania Department of Environmental Protection (''DEP'') hosted a technical conference on January 19, 2005, in order to provide a forum to discuss the implementation of the Act. Interested parties were given the opportunity to file comments and reply comments on various aspects of the Act's implementation at that time. The Commission then convened the first meeting of the AEPS WG on March 3, 2005. The AEPS WG was intended to serve as a forum in which various issues relevant to the implementation of the Act could be addressed, and if possible, consensus recommendations for necessary rules and regulations could be developed.
The AEPS WG initially focused on developing standards for the participation of demand side management resources in this market. The Commission released its initial proposal for these standards at the last Public Meeting. Implementation of the Alternative Energy Portfolio Standards Act of 2004: Standards for the Participation of Demand Side Management Resources, Docket No. M-00051865 (Order entered June 24, 2005). Interested parties have sixty days in which to file comments on this proposal. The Commission will issue final standards later this year after the conclusion of this public comment period.
The AEPS WG is also working to develop net metering and interconnection rules to enable distributed generation resources to participate in this new market. The AEPS WG has solicited comments on net metering and interconnection issues and has met several times to discuss these matters. The Commission will issue proposed rulemaking orders for net metering and interconnection standards by November 30, 2005. 73 P. S. § 1648.5.
Discussion In this section, the Commission will first identify certain appropriate revisions to the Implementation Order. We will then review a series of legal and policy questions presented by Act 213 that have been identified by the Commission, DEP and the participants in this proceeding as requiring resolution. Some of these questions were previously addressed in comments filed at the time of the January 19, 2005, technical conference. The Commission recognizes that, given the relatively short notice afforded in advance of the technical conference, all interested parties may not have had the chance to participate or sufficient time to fully address various issues. Accordingly, we will use this Order to offer interested parties another opportunity to comment on certain Act 213 implementation issues. We will also refer one new matter to the AEPS WG for consideration and recommendations for rules necessary to implement the provisions of the Act.
A. Amendments to the March 23, 2005 Implementation Order
1. Act 213 Compliance Schedule
The Citizens Electric Company (''Citizens'') and the Wellsboro Electric Company (''Wellsboro'') filed comments regarding their compliance exemption period. In the Implementation Order the Commission had determined that these electric distribution companies' (''EDCs'') exemptions would expire on February 28, 2006. This date was derived from the most recent approval of provider of last resort rates (''POLR'') for these two EDCs from March 1, 2005 through February 28, 2006. Citizens Electric Company Generation Supply Service Rates Effective March 1, 2005; Wellsboro Electric Company Generation Supply Service Rates Effective March 1, 2005; Docket Nos. R-00050266, R-00050278 (Final Secretarial Letters entered March 3, 2005). Act 213 exempts EDCs from compliance for the duration of either their approved generation rate cap or a POLR plan approved prior to February 28, 2006. 73 P. S. § 1648.2.
Under this interpretation of the Act, Citizens and Wellsboro would need to begin compliance with Act 213 on February 28, 2007. Citizens and Wellsboro note that while specific rates have been set only through February 28, 2006, they have entered into full requirements contracts with wholesale suppliers to satisfy their POLR obligations that are in effect through December 31, 2007. Petition of Citizens' Electric Company of Lewisburg, Inc., to Modify Electric Restructuring Settlement and Proposed Provider of Last Resort Supply Offering, Docket No. R-00016999 (Order entered June 13, 2002); Citizens' Electric Company Generation Supply Rate Effective March 1, 2004, Docket No. R-00049161 (Final Secretarial Letter entered March 5, 2004); Pennsylvania Public Utility Commission v. Wellsboro Electric Company, Docket No. R-00027909 (Order entered December 19, 2002); Pennsylvania Public Utility Commission v. Wellsboro Electric Company, Docket No. R-00027380 (Order entered December 19, 2002). Citizens and Wellsboro therefore ask that their compliance exemption period be extended to December 31, 2007. No other party has objected to this request in the reply comments filed with the Commission in response to the Implementation Order.
The Commission finds that the public interest is served by a broader reading of the Act than its initial interpretation on this point. We recognize that EDCs may face significant challenges in participating in this new alternative energy market. Citizens, Wellsboro and their respective customers may therefore benefit from additional time to develop strategies to meet the compliance obligations. Accordingly, we will amend the Implementation Order to find that the compliance exemption period for the Citizens and Wellsboro service territories runs through December 31, 2007. Beginning January 1, 2008, the Tier I and Tier II requirements in effect at that time will apply to all sales of electricity in these two service territories.
2. Banking of Alternative Energy Credits
The Commission received a number of comments and reply comments that addressed the banking of alternative energy credits during the cost-recovery period. Act 213 provides, relevantly:
An electric distribution company or an electric generation supplier with sales that are exempted under subsection (d) may bank credits for retail sales of electricity generated from Tier I and Tier II sources made prior to the end of the cost-recovery period and after the effective date of this act. Bankable credits shall be limited to credits associated with electricity sold from Tier I and Tier II sources during a reporting year which exceeds the volume of sales from such sources by an electric distribution company or electric generation supplier during the 12-month period immediately preceding the effective date of this act. All credits banked under this subsection shall be available for compliance with subsections (b) and (c) for no more than two reporting years following the conclusion of the cost-recovery period.
73 P. S. § 1648.3(e)(7) (Emphasis added)
The statutory reporting period is defined as the 12 month period from June 1 through May 31. 73 P. S. § 1648.2. The banking of credits is therefore complicated by the fact that the cost-recovery periods for the EDCs are set to expire on December 31 of various calendar years as identified in the Implementation Order. The Commission has interpreted the Act to find that the first reporting year in which banked credits may be used is the same reporting year in which these cost-recovery periods expire. Credits banked during the cost-recovery periods would therefore only be available for compliance purposes for a seventeen month period.
Various parties have asked the Commission to reconsider this interpretation. Specifically, they believe that the intent of the Act was to provide for a full two years in which to use any credits banked during the cost-recovery period. By providing for a full two year period the Commission will be encouraging greater development of the alternative energy market in Pennsylvania and allowing for greater flexibility in meeting the compliance obligation. This view was shared by multiple parties, including the Energy Association of Pennsylvania (''Energy Association''), DEP, and various EDCs.
Given the plain language of the Act regarding the use of ''two reporting years,'' the Commission cannot support the application of banked credits for a consecutive twenty four month period commencing with the expiration of an exemption period. Such an interpretation would result in banked credits being used in three different reporting years, which the express language of the Act prohibits. However, the Commission finds merit in a proposal suggested by the Energy Association in its comments to the Implementation Order.
Specifically, the Energy Association proposes letting an EDC or electric generation supplier (''EGS'') choose which two reporting years it intends to use any credits banked during the cost-recovery period. Under this proposal, an EDC could therefore delay the use of these credits to the first full reporting year after its exemption period expires. This would provide for a full two years in which to use credits, without violating the prohibition on using credits in more than two reporting periods. No party objected to this proposal in the reply comments filed with the Commission.
We find that such an interpretation comports with the intent of the General Assembly. Therefore, we will allow EDCs and EGSs to defer the application of banked energy credits until the first two full, consecutive, reporting years after the conclusion of their respective exemption periods. For example, PECO's exemption period expires on December 31, 2010, during Year 5 of the compliance schedule. See Implementation Order. Under our initial interpretation of the Act, PECO would have had to use any banked credits during Years 5 or 6. With our revised interpretation, PECO may now elect to use any banked credits for up to two consecutive compliance years within Years 5, 6 and 7. We find that this revision serves the public interest by providing EDCs and EGSs with more incentives to take advantage of reasonable procurement opportunities that might present themselves during their respective exemption periods.
We wish to emphasize though that we will not require EDCs or EGSs to defer the application of banked credits until after the completion of a partial compliance year. For example, if PECO only banked enough credits to satisfy its compliance obligation for seventeen months or less, it could choose to apply them towards its obligations in Years 5 and 6. As our discussion indicates, we are also placing some limitations on this deferral option. First, banked credits must be used in two consecutive compliance periods. Second, application cannot be deferred beyond the first reporting year in which an EDC or EGS must meet the compliance thresholds for all twelve months. We interpret the Act as intending that banked credits be used soon after an exemption period expires. Therefore, in our example PECO may not delay the application of banked credits to Year 8 of the compliance schedule.
B. General Compliance and Cost-Recovery
1. Cost-Recovery Process for Act 213 Compliance
EDCs may fully recover the reasonable and prudently incurred costs of complying with Act 213 from ratepayers. This includes the costs for purchases of alternative energy or alternative energy credits, payments to credit program administrators, and costs levied by regional transmission organizations to ensure that alternative resources are reliable. 73 P. S. § 1648.3(a)(3). These costs are to be recovered through an automatic adjustment clause pursuant to 66 Pa.C.S. § 1307, and are to be considered a cost of generation supply under 66 Pa.C.S. § 2807. Section 2807 of the Electricity Generation Customer Choice and Competition Act (''Competition Act''), 66 Pa.C.S. §§ 2801--2812, addresses the obligations of EDCs to retail customers after the conclusion of the transition period. This role has commonly been described as the ''provider of last resort.'' Most importantly, Section 2807(e)(3) identifies a standard governing the acquisition of electric generation supply for those retail customers not receiving this service from a competitive supplier. Specifically, Section 2807(e)(3) provides that an EDC shall acquire generation supply at ''prevailing market prices to serve that customer and shall recover fully all reasonable costs'' of providing this service. 66 Pa.C.S. § 2807(e)(3).
The Commission issued a Notice of Proposed Rulemaking in late 2004 regarding the provision of generation service by EDCs after the conclusion of the transition period, which we have identified as ''default service.'' Rulemaking Re Electric Distribution Companies' Obligation to Serve Retail Customers at the Conclusion of the Transition Period Pursuant to 66 Pa.C.S. § 2807(e)(2); Docket No. L-00040169 (Order entered December 16, 2004) (''Default Service Order''). Given that Act 213 identifies its compliance costs as generation supply costs within the meaning of Section 2807, the Commission concluded that alternative energy must be procured consistent with the legal standard found at Section 2807(e)(3). However, the Commission understood that this rulemaking would need to include special provisions for alternative energy cost-recovery, consistent with the standard identified at Section 1648.3(a)(3). As Act 213 had just been signed into law on November 30, 2004, the Commission briefly noted in the Default Service Order and the proposed regulations that an EDC must comply with the cost-recovery provisions of Act 213 in procuring alternative energy for default service customers. The Commission recognized that rules for alternative energy procurement and cost-recovery would have to be more fully developed in the default service final rulemaking order.
The Default Service Order was published in the Pennsylvania Bulletin on February 28, 2005. The public comment period concluded on June 27, 2005. The Independent Regulatory Review Commission (''IRRC'') will provide its comments to the Commission by July 27, 2005. After receiving IRRC's comments, the Commission's next step will be to prepare the final default service rulemaking order.
We note that the Commission convened a POLR Roundtable in early 2004 to provide a forum for interested stakeholders to offer input on the development of default service rules. The Commission found this process to be very helpful in its development of proposed default service regulations. The Commission wishes to extend to interested stakeholders the same opportunity for participation in the development of alternative energy procurement and cost-recovery rules in the context of default service. Therefore, we will refer these issues to the AEPS WG for study. After the AEPS WG completes its review of these issues, the Commission will issue a final default service rulemaking order. The Commission will announce at a later date a schedule for the AEPS WG's consideration of these matters.
2. Alternative Energy Credits Program
Act 213 authorizes the Commission to establish an alternative energy credits trading program and retain a program administrator:
The commission shall establish an alternative energy credits program as needed to implement this act. This provision of services pursuant to this section shall be exempt from the competitive procurement procedures of 62 Pa.C.S. (relating to procurement).
73 P. S. § 1648.3(e)(1)
The commission shall approve an independent entity to serve as the alternative energy credits program administrator. The administrator shall have those powers and duties assigned by commission regulations.
73 P. S. § 1648.3(e)(2). These powers include the administration of an alternative energy credits certification, tracking and reporting program that includes a process for qualifying alternative energy systems and determining the manner of credit creation, accounting, and transfer. 73 P. S. § 1648.3(e)(2)(i). The Act identifies the alternative energy credit as the unit of measure to be used by this program in tracking compliance, and states that the credit may be separable from the energy commodity:
An electric distribution company of electric generation supplier shall comply with the applicable requirements of this section by purchasing sufficient alternative energy credits and submitting documentation of compliance to the program administrator.
73 P. S. § 1648.3(e)(4)(i)
For purposes of this subsection, one alternative energy credit shall represent one megawatt hour of qualified alternative electric generation, whether self-generated, purchased along with the electric commodity or separately through a tradable instrument and otherwise meeting the requirements of a commission regulations and the program administrator.
73 P. S. § 1648.3(e)(4)(ii)
Section 1648.3(e) also includes provisions addressing the banking of alternative energy credits, both during and after the compliance exemption period, the development and use of a credits registry, and a mechanism for recovering the costs of the alternative energy credits program. The Commission recognizes that the development of rules to implement the above cited provisions represents one of the more technically complex aspects of the implementation of Act 213. As we alluded to in the Implementation Order, we believe all these issues warrant close examination by Commission staff and interested stakeholders. The Commission will announce its intentions to the AEPS WG and other interested parties in the near future on the process for developing and implementing these rules.
3. Force Majeure
Act 213 provides that the Commission, upon its own initiative or upon the request of an EDC or EGS, can find that force majeure exists that would allow modification of the compliance obligation within a particular reporting year. This will occur if alternative energy resources are not ''reasonably available in the marketplace in sufficient quantities'' for EDCs and EGSs to meet their obligations. 73 P. S. § 1648.2. Such determinations shall be made by the Commission within sixty days of a request by an EDC or EGS. Obstacles to compliance over longer terms may warrant a recommendation to the General Assembly that the obligation be eliminated. In comments previously filed at this docket, several parties offered suggestions on the process to be used and the standards to be applied in a force majeure proceeding. The Commission continues to closely study this issue, and will provide guidance to stakeholders and other interested parties in the near future on its plans for developing and implementing rules for a force majeure mechanism.
4. Alternative Compliance Payments
Section 1648.3(f)(2) of the Act provides that EDCs and EGSs who fail to meet the Tier I and Tier II obligations for a given reporting year shall be assessed an ''alternative compliance payment.'' Payments are generally set at $45 times the number of additional credits needed for compliance. 73 P. S. § 1648.3(f)(3). The solar photovoltaic compliance payment is set at 200% of the average market price of these credits sold during the reporting year in the applicable regional transmission organization service territory. 73 P. S. § 1648.3(f)(4). These payments are to be paid into a special fund of the Pennsylvania Sustainable Energy Board and made available to the regional sustainable energy funds for projects that would increase the quantity of electricity generated from alternative energy sources. 73 P. S. § 1648.3(g).
Section 1648.3(f) is silent on whether the costs of alternative compliance payments may be recovered from ratepayers. Various parties have argued for and against the recovery of these payments in comments previously filed at this docket. Those opposed argue that the recovery of these costs would discourage the acquisition of alternative energy resources, particularly when the cost of these resources approached the $45 per credit price. In such a situation it would be easier for an EDC to make an alternative compliance payment and recover the associated costs through an automatic adjustment clause. The policy objectives of the Act that have been identified by interested stakeholders, including economic development and emissions reductions, would clearly be frustrated by such conduct.
Those in favor of allowing some degree of recovery point to the financial exposure of EDCs from very high alternative energy costs. If alternative energy credits were not available in sufficient quantities to meet the compliance obligation, EDCs could suffer significant financial harm from having to make these payments. This harm could have some impact on the reliable provision of utility service to retail customers. The OCA noted in its comments the potentially negative impact on ratepayers from high prices for credits. For example, the public interest might be better served by allowing an EDC to make an alternative compliance payment of $45 per credit, which could be recovered, rather than requiring ratepayers to cover the costs of alternative energy credits acquired on the market at $60 per credit.
The Act identifies the categories of costs recoverable from ratepayers in Section 1648.3(a)(3). During the compliance exemption period, an EDC may recover all costs for:
(i) the purchase of electricity generated from alternative energy sources, including the costs of the regional transmission organization, in excess of the regional transmission organization real-time locational marginal pricing, or its successor, at the delivery point of the alternative energy source for the electrical production of the alternative energy sources; and
(ii) payments for alternative energy credits,
in both cases that are voluntarily acquired by an electric distribution company during the cost recovery period on behalf of its customers shall be deferred as a regulatory asset by the electric distribution company and fully recovered, with a return on the unamortized balance, pursuant to an automatic energy adjustment clause under 66 Pa.C.S. § 1307 (relating to sliding scale of rates; adjustments) as a cost of generation supply under 66 Pa.C.S. § 2807 (relating to duties of electric distribution companies), in the first year after the expiration of its cost recovery period.
After the exemption period ends, the following standard applies:
After the cost recovery period, any direct or indirect costs for the purchase by electric distribution of resources to comply with this section, including, but not limited to, the purchase of electricity generated from alternative energy sources, payments for alternative energy credits, cost of credits banked, payments to any third party administrators for performance under this act and costs levied by a regional transmission organization to ensure that alternative energy sources are reliable, shall be recovered on a full and current basis pursuant to an automatic energy adjustment clause under 66 Pa.C.S. § 1307 as a cost of generation supply under 66 Pa.C.S. § 2807.
73 P. S. § 1648.3(a)(3). Alternative compliance payments are not included in the list of cost categories in Section 1648.3(a)(3). They are not the purchase of alternative energy, the purchase of alternative energy credits, costs of credits banked, payments to a credit program administrator for performance, or a cost levied by a regional transmission organization. The alternative compliance payment appears to be intended to serve as a penalty provision that will encourage compliance with the Act.
The Commission is sensitive to the concerns raised by those who have advocated for the recovery of alternative compliance payments from ratepayers. The Commission finds that these concerns are best addressed through the force majeure mechanism. As suggested earlier in this Order, the Commission will continue to study the application of the force majeure provision. We tentatively find that the force majeure mechanism will serve to provide adequate financial protection to EDCs and that alternative compliance payments are therefore not recoverable from ratepayers.
C. Miscellaneous Issues for Public Comment
1. Voluntary Alternative Energy Purchases
A number of participants in this implementation proceeding have expressed concern regarding the impact of Act 213 on the voluntary alternative energy market. Since the passage of the Competition Act, some retail customers have chosen to purchase electricity generated from renewable sources. The price of this energy typically included a certain premium reflecting the incremental cost of the renewable attributes of this energy. A prime example of this is the ''PECO Wind'' option offered by the PECO Energy Company to those retail customers not already taking generation service from a competitive supplier.
Participants in this market fear that the implementation of Act 213 may create disincentives that lead to the elimination of these voluntary renewable purchases by retail customers. They assert that if these voluntary purchases are counted towards an EDC's compliance threshold, and the Act 213 cost-recovery provisions are then applied, that retail customers will cease to make these purchases. Essentially, these retail customers would be paying twice for these alternative energy attributes. Once through the premium on this energy, and a second time when the costs associated with this energy are recovered from them and other ratepayers through the automatic adjustment clause.
This issue has been addressed already in several other jurisdictions. For example, the Maryland Public Service Commission's proposed renewable portfolio standard regulations would exclude from an EDC's compliance calculation sales of energy to retail customers that are marketed as having renewable characteristics. The State of Rhode Island recently adopted a ''Renewable Energy Standard'' that excludes voluntary purchases from the compliance calculation of affected entities. Community Energy, Inc. proposed the following language to resolve this issue in comments previously filed at this docket:
Any and all Alternative Energy Credits sold at retail or used to track or supply a voluntary purchase of electricity by a retail customer outside of the require-ments of the AEPS shall not be sold, retired, claimed or represented as compliance under the AEPS. Alter-native Energy Credits used to support a sale of electricity with a claim of alternative energy generation shall be tracked and counted separately from Alternative Energy Credits used to support compliance under the AEPS.
The Commission finds that the preservation of the market for voluntary renewable energy purchases serves the public interest by effectuating the provisions of both Act 213 and the Competition Act as it relates to customer choice. Accordingly, we welcome comments on the approaches taken by Maryland and Rhode Island, the comments of Community Energy, and any other suggestions for resolving this question.
Those filing comments should be cognizant of the different treatment afforded to EDCs and EGSs under the Act. Specifically, EGSs are not afforded cost-recovery for Act 213 compliance through a regulatory process. This fact would appear to dictate that at least some portion of the voluntary alternative energy purchases made by retail customers from an EGS should be counted towards that EGS's compliance obligation.
2. Solar thermal energy
''Solar thermal energy'' is included among the ''alternative energy sources'' identified in the Act. 73 P. S. § 1648.2. However, the Act does not assign solar thermal energy to either the Tier I or Tier II alternative energy source definition. We intend to remove any uncertainty on this point by expressly finding that solar thermal energy belongs to the Tier I category. We note that ''solar photovoltaic energy'' has been assigned to Tier I, and that solar thermal energy, a similar resource, is therefore most appropriately assigned to Tier I as well.
D. Future Organization of this Implementation Proceeding
As is readily apparent, this is a large and complex implementation proceeding. The Commission has already issued several Orders and requested a number of comments at this public docket. The Commission will be issuing additional orders, and requesting additional comments in the future. Accordingly, we find that the assignment of certain subjects to specific subdockets would help in the organization and efficient administration of this implementation proceeding. The Commission will inform the participants in this implementation proceeding when these subdockets have been created and are ready for use; Therefore,
It Is Ordered That:
1. Interested persons may submit an original and 15 copies of written comments on the issues discussed in this Order to the Office of the Secretary, Pennsylvania Public Utility Commission, P. O. Box 3265, Harrisburg, PA 17105-3265, within 60 days from the date this Order is published in the Pennsylvania Bulletin. A copy of all filed comments should also be sent through electronic mail to Carrie Beale and Shane Rooney at cbeale@state.pa.us and srooney@state.pa.us.
2. This Order be published in the Pennsylvania Bulletin and served on the Office of Consumer Advocate, Office of Small Business Advocate, Office of Trial Staff, the Pennsylvania Department of Environmental Protection, all jurisdictional electric distribution companies, and all licensed electric generation suppliers.
JAMES J. MCNULTY,
Secretary[Pa.B. Doc. No. 05-1467. Filed for public inspection July 29, 2005, 9:00 a.m.]
