A proposal by the R.I. Division of Utilities and Carriers to change the way National Grid purchases electricity could dramatically alter how large businesses pay for it.
A lawyer for the division is recommending that the R.I. Public Utilities Commission order National Grid to purchase and resell electricity to major commercial customers on the spot market. The price of electricity sold and purchased this way changes in almost real time, with customers paying different rates every day and potentially every hour. Currently, commercial customers purchasing their electricity through National Grid pay a per kilowatt-hour rate that changes usually once or twice per year.
If enacted, the change could affect hundreds, or even thousands, of customers, depending on how the customer base is divided. The commission has targeted Sept. 29 to hold a public hearing and is likely to make a decision then, said a spokesman for the division. The change could come into affect as soon as next year.
The division’s lawyer, Richard Hahn, in pre-filed testimony told commissioners that the spot market would free National Grid from long-term, fixed-rate contracts and allow the utility and its customers to take advantage of savings when commodity prices fall. His proposal would place any customer with a 200-kilowatt demand or more on the spot market system.
The system would only affect those customers that purchase their electricity from National Grid through its so-called Standard Offer Service. Commercial customers that buy their electricity from other companies would not see a change. But very few commercial customers in the state do not purchase electricity from National Grid.
Hahn’s plan has met resistance from the Energy Council of Rhode Island, a trade organization representing large electric users. It warns that Hahn’s plan could go both ways. In public comments filed on Aug. 24 and in an interview with Providence Business News, council Executive Director John Farley said such a system would place all the risk in the hands of customers. Most obviously, Hahn’s system saves money if the price of commodities that fuel electricity, such as coal and natural gas, drop to a point that is cheaper than the fixed rates in long-term contracts. But if the prices go up, the customer pays higher rates.
“How much risk do we want to expose these customers to?” Farley said.
“The short-term procurement with three-month terms and different prices each month [as National Grid has proposed] will produce SOS prices that are quite volatile and change frequently,” he said in testimony filed July 22.
Hahn said spot market prices eliminate the cost of the risk premium put on fixed-rate contracts. Suppliers often price long-term rates slightly above anticipated market rates to protect themselves from sudden price increases.
Under Hahn’s system businesses would receive their electricity prices the day before they go into effect by checking a Web site. Business owners would then need to make decisions based on that price.
Farley said there is some rationale to predicting prices, but “there are a lot of customers that just don’t have that capability.”
In testimony before the commission on Aug. 25, National Grid Manager of Energy Supply Alan Smithling acknowledged that a spot market system requires a lot of technology and coordination. (For all practical purposes customers would still receive a monthly bill, but would see different rates for different times.) But Smithling said National Grid is not opposed to exploring the idea in lieu of the system it initially proposed.
National Grid’s proposal would group together large customers and procure three-month contracts to serve them. That would provide a hedge against sudden price changes, while not locking the company into long-term contracts like it operates under now. The short-term contracts could contain different prices for different months, but business owners would know the cost of their electricity for the next three months ahead of time and could plan accordingly.
It’s an approach National Grid already uses in Massachusetts and one that the energy council favors. Farley said the council is not outright opposed to spot market pricing, but wants to see National Grid introduce the change gradually. And, speaking for himself and not the council, Farley said creating two options for customers – spot market or short-term contracts – might be an idea worth exploring.
National Grid, through Niagara Mohawk, already uses a spot market pricing system for large customers in New York. Smithling said the company transitioned customers to that system gradually. •
