Expecting electricity costs to soar this summer, the Public Utilities Commission last week raised Last Resort Service rates from 3.8 cents per kilowatt-hour to 4.5 cents per kilowatt hour for usage beginning June 1. The commission also set Last Resort Service rates for July and August by providing customers a credit equal to one half of the difference between Standard Offer and market rate. The credit would not exceed 3 cents.
The PUC also postponed deciding on Last Resort rates for September and beyond and will decide this month whether to raise Standard Offer Rate Service through the endo of this year for both residential and non-residential customers from the current 3.8 cents per kWh. Officials estimate so far that such increases would not exceed two or three mills (tenths of a cent) per kWh.
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The Last Resort rate increases came after two weeks of PUC testimony from Narragansett Electric Co. officials, the Division of Public Utilities and Carriers, and members of the Energy Council of Rhode Island as a solution to the disparity between what a utility can charge for Last Resort and Standard Offer rates and the current market prices of electricity.
Ron Gerwatowski, general counsel for Narragansett Electric, said the company has to pay 6.5 cents per kilowatt hour for June, while charging customers only 3.8 cents. And, he said, while still unclear, projections for July and August are more than 9 cents per kilowatt hour, although in September their contracted rates for Last Resort are back down to 4 cents per kilowatt hour and 3.6 cents in October.
But something has to be done to make things fair, said Commissioner Brenda Gaynor, since obviously rosy projections for utility deregulation have yet to come true.
“No one seems to be able to get power at a fixed rate,” Gaynor said, and although she didn’t like the idea of “subsidizing [company’s] power costs,” still “keeping people in their jobs is very critical.”
“There is no competitiveness right now because the standard offer price is below market,” said Roger Buck, executive director of the Energy Council of Rhode Island (TEC-RI), a group with 85 members including almost all of the large industrial users in the states.
Last month TEC-RI proposed to the PUC that Last Resort Service remain at 3.8 cents to help its members “get through the summer,” with the knowledge that “there’d be significant over cost,” which Narragansett Electric could recover in 2001.
The Last Resort concept was born in Rhode Island’s utility restructuring legislation enacted in 1996 that provided customers a choice of electricity suppliers, to take effect by Jan. 1, 1998.
Those who chose not to choose were placed on Standard Offer, a 12-year fixed rate where prices would ramp up to reflect market workings, and the theory was that customers would leave standard offer to get a better deal on their own. Because it was structured so once you leave you can’t come back, a system called “Last Resort” was set up to take care of these customers until they found another supplier.
“Last Resort service was intended to be at market rates,” said Robert Seega, vice president and director of public affairs at Narragansett Electric. And initially the number of those customers was so small, they kept them with standard offer, expecting to roll out extra costs in a rate recovery system spreading through all its customers.
According to Narragansett Electric officials, when last resort was first established at standard offer price there were very few customers on that service, but since December of 1999, the number of customers has grown from 719 to 1,560. Officials also said 725 commercial and industrial customers have dropped their suppliers to take Last resort service since January, increasing the load from 370,364 kilowatts in December to 27,154,126 kilowatts as of March.
Because the size of the load is growing, the size of the deferred cost recovery is growing. As of February, Narragansett Electric had under-recovered $575,039 of last resort service costs that are accumulating in the standard offer adjustment provision balance. This balance was estimated to reach nearly $1 million by April.
“Last Resort Service was not designed to be an alternative to the market. Rather it was designed to be a “last resort” for those customers who are unable to find a supplier,” Seega said.
But by this past January many Narragansett Electric customers, particularly large industrial customers, started coming back to Last Resort for a variety of reasons, including a practice called “gaming,” where a supplier can send a customer back to Last Resort, give them credit for the difference from their contract, and sell the power for a higher rate in the open market.
All 16 TEC-RI members who left standard offer in the last two years for the market are back on last resort, Buck said, including Toray Plastics Inc. of North Kingstown.
Toray Utility Manager James O’Donahue told the PUC that the company had been unable to find power through the summer at a fixed rate of 3.8 cents. He also said that even a small increase in Last Resort rates could increase his company’s electric bill by several hundred thousand dollars.
“No one could have predicted how crazy the retail and wholesale markets could have been this summer,” Gerwatowski said. “We’re just fortunate in Rhode Island that the size of the deferral is not that big.”
John K. Stutz, testifying for the Division of Public Utilities and Carriers, told the PUC that Last Resort Service usage grew from 370,000 kilowatt hours in December to 27 million in kilowatt hours in March. Stutz said that because the price of Last Resort Service hasn’t covered the cost of power, the deferral balance has grown from $141,000 in December to about $721,000 in March, and is expected to reach $953,000 by April.
Narragansett Electric Officials said if Last Resort Service stayed the same, its deferral balance would reach $6 million – compared to $40 to $60 million in Massachusetts, from a similar situation there that’s called “default offer” customers, Gerwatowski said.
Massachusetts Electric last month asked state regulators for permission to raise power-generation rates charged to more than 200,000 such customers by 54 percent in order to avoid later price spikes across the board. The Massachusetts utility has said that if the plan isn’t approved, the utility could rack up $60 million in losses that would be passed on to customers next year, possibly adding $2 or more to all of its residential customers bills. That decision was expected last week.
