How Do Utility Customer Choice Programs Work Physically?

In the evolving landscape of electricity supply, utility customer choice programs have emerged as a means for consumers to shop for their electricity suppliers. One key component of these programs is the Purchase of Receivables (POR) Program, which has recently been approved in Delaware. This article aims to explain the intricate mechanics of such programs, their benefits, and the considerations involved.

Understanding Purchase of Receivables (POR) Programs

A Purchase of Receivables Program (POR) operates on a simple yet nuanced principle. A regulated utility company, such as Delmarva Power and Light Co., purchases outstanding receivables from unregulated third-party suppliers. These receivables represent the amounts owed by customers who have chosen alternative electricity supplies. However, this transaction comes at a discount rate, reflecting the likelihood of non-payment from these customers.

The Mechanics of POR Programs

The process of a POR Program is carefully structured to balance the interests of all parties involved. Here’s how it works:

1. Discount Rate Calculation: The regulated utility purchases the receivables at a discount rate, which is determined based on the third-party supplier’s uncollectible rate. This rate is crucial as it reflects the risk of non-payment inherent in the customer choice program. In the Delaware case, the Delaware Public Service Commission (DPSC) determined that the discount rate for the first year should be based on the participating suppliers' uncollectibles for the preceding 12 months.

2. Exclusions from Billed Amounts: The amounts billed by the third-party suppliers to Delmarva will exclude certain charges, such as exit fees, early termination fees, or charges for products other than the commodity (electricity) itself. This structure is designed to ensure that the core supply is accurately reflected in the transaction.

3. Annual Reset: The discount rate is not a fixed figure. It is re-set annually by the DPSC, based on the program’s performance in the previous year. This dynamic adjustment helps to provide a more accurate and fair assessment of the program’s impact over time.

Arguments and Approaches

Utility companies like Delmarva argue that during the initial phase, the discount rate should be set to zero to accurately gauge participation among third-party suppliers and customers. However, the DPSC rejected this finding. They reasoned that setting the rate to zero would place the entire burden of non-payment on Delmarva for the first year, which is not fair to ratepayers.

Instead, the DPSC proposed that the discount rate for the first year should be based on the uncollectible rate of the participating suppliers for the previous 12 months. This approach ensures that the burden of non-payment is placed on the third-party suppliers rather than Delmarva’s ratepayers, providing a more balanced and fair outcome.

Second Year Re-Setting

For the second year, the discount rate will be re-set based on the experience gained from the first year. This allows for a more refined and accurate assessment of the program’s performance, ensuring that the discount rate reflects the real-world dynamics of the customer choice market.

By allowing the rate to be adjusted annually, the DPSC aims to create a robust and fair market that benefits all participants. This approach acknowledges the risks involved and provides a framework for continuous improvement and adaptation.

Benefits and Considerations

The implementation of a POR Program offers several benefits, including:

1. Encouraging Competition: By allowing customers to choose their suppliers, POR Programs foster competition among third-party suppliers, potentially leading to better pricing and services.

2. Managing Risks: The discount rate mechanism helps to manage the risks associated with non-payment, providing a financial buffer for the regulated utility.

3. Fairness to Ratepayers: By placing the burden of non-payment on third-party suppliers, rather than ratepayers, POR Programs ensure that ratepayers are not unfairly burdened by the risks of customer choice.

Conclusion

The Purchase of Receivables Program is a complex yet essential component of utility customer choice programs. Through careful design and dynamic adjustment, these programs seek to balance the interests of all stakeholders, fostering a fair and sustainable market for electricity supply.

As these programs continue to evolve, they will play a crucial role in shaping the future of energy provision, ensuring that customers have more choices and that utilities remain financially stable and fair.