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PA Bulletin, Doc. No. 13-1625



Investigation Regarding Transmission Service Charge Reconciliation Methods

[43 Pa.B. 5045]
[Saturday, August 31, 2013]

Public Meeting
August 15, 2013

Commissioners Present: Robert F. Powelson, Chairperson; John F. Coleman, Vice Chairperson; Wayne E. Gardner; James H. Cawley; Pamela A. Witmer

Investigation re Transmission Service Charge (TSC); Reconciliation Methods; M-2011-2239714


By the Commission:

 On May 19, 2011, the Commission solicited comments on reconciliation methods for transmission service charges, which are pass-through costs. Interested entities could address, inter alia, methods of aligning demand costs with cost causation, the frequency and timing of reconciliations, and riders. Several entities filed comments and reply comments.


 The Pennsylvania Electricity Generation Customer Choice and Competition Act (Act) requires electric distribution companies (EDCs) to unbundle transmission rates from other charges, e.g., generation and distribution. 66 Pa.C.S. § 2804(3). The EDC remains responsible for distribution of electricity to all customers. Customers can shop for generation services and associated transmission services from electric generation suppliers (EGS), but not all customers shop. Customers that do not choose an EGS receive default service from EDCs.

 Each EDC recovers the cost of delivering power from generation sources through high voltage transmission lines to the local electric distribution system through a transmission service charge (TSC) in its tariff. PJM is the regional transmission organization (RTO) that coordinates this movement (transmission) of power on a wholesale basis in Pennsylvania, twelve other states, and the District of Columbia. PJM bills the EDCs for this transmission service. TSC is a recoverable cost subject to Section 1307(e) reconciliation.

 While related to volumetric usage and applied in conjunction with the volume of generation consumed, TSC tariff rates are not strictly volumetric. In addition, EDCs do not use a uniform method to reconcile TSC. At least one EDC has been reconciling actual revenues to historical estimates of usage to allocate actual costs among customer classes.1

 By order entered on May 19, 2011, at this docket, we solicited comments on reconciling transmission costs. We questioned whether it is appropriate to reconcile TSC revenue to estimates of demand used to set the TSC rates2 (e.g., prior year allocators) or whether the reconciliation should be based on the actual TSC revenues received and the actual costs incurred for demand. We opened this investigation to explore the implications of using historical estimates demand or prior year allocators, as opposed to actual demand, costs, and revenues, for TSC reconciliation purposes on a going-forward basis. Commenters were to address, inter alia, whether it is appropriate to allocate an EDC's actual current TSC demand based on (a) historical TSC, (b) actual annual or monthly TSC per customer class, (c) volumetric throughput, or (d) some other method in order to align demand costs with cost causation during the reconciliation period. Commenters were also to address the use of quarterly reconciliations and the timing of reconciliations. Additionally, commenters could address riders in conjunction with reconciliation.

 Comments were filed by the Office of Consumer Advocate (OCA); the Office of Small Business Advocate (OSBA); Duquesne Light Company (Duquesne); Metropolitan Edison Company, Pennsylvania Electric Company, Pennsylvania Power Company, and West Penn Power Company (collectively, FirstEnergy); PECO Energy Company (PECO); PPL Electric Utilities Corp. (PPL); and Industrial Customer Groups (ICG).3 Reply comments were filed by FirstEnergy, OSBA, and ICG.


 OCA's Witness Glenn A. Watkins described the complexity of predicting transmission demand and setting TSC rates for default service classes:

When default service providers develop their prospective estimates of class loads, MWH usages, and/or number of customers for each upcoming TSC rate year, it is impossible to forecast which specific customers will leave default service and begin shopping during the upcoming rate year, let alone when these switches will occur within the rate year.

Watkins Affid. at 2 ¶7, M-2011-2239714, attached to OCA Comments.

 OCA notes that transmission loads are decreasing for EDCs and increasing for EGSs due to shopping. OCA Comments at 2. OCA opines that EDCs should reconcile TSC revenue to actual usage rather than to estimates of that usage and that EDCs must account for shopping. OCA Witness Watkins, supporting this proposition, provided:

However, if the ratemaking methodology used to develop forward-looking TSC ''estimate'' rates as well as the methodology used to reconcile a default service provider's total annual TSC costs and revenue do not reflect class changes in monthly revenues and costs, inequitable ultimate TSC cost reimbursement across customer classes may result. That is, the allocation of a default service provider's total transmission costs across retail classes should reasonably reflect the dynamics of cost causation and retail customer migration that occurs during each rate year.

Watkins Affid. at 2 ¶7, M-2011-2239714, attached to OCA Comments.

 OCA notes that a monthly TSC rate may be appropriate. OCA Comments at 1. OCA Witness Watkins further opined that:

In my opinion, a fair and reasonable method to assign cost responsibility across classes is to first estimate retail class contributions to monthly demands on a prospective basis. The forecast contributions to monthly demands will then serve as the basis for the upcoming year's estimate rates for each class. During the reconciliation process, actual contributions to each monthly demand that occurred during the rate year can be used. This class allocation based on actual monthly demands will then reasonably reflect changes in the total transmission costs incurred by the default service provider during the year and reasonably reflect changes in cost causation and resulting cost responsibility.
 It is my understanding that method outline above, is very similar, if not identical to, the TSC method currently utilized by PECO.

Watkins Affid. at 2-3 ¶¶8-9, M-2011-2239714, attached to OCA Comments.

 PECO submits that the most accurate way to reconcile TSC costs for a prior period is to use the actual monthly TSC because this method effectively ties the TSC surcharge closely to the actual PJM transmission service charge. PECO opines that using a historical demand allocator is likely to create significantly higher over- or under-recovery in classes that experience significant shopping after the development of the allocator. PECO does not support allocating demand on a volumetric basis. PECO does not see a need for reconciliations more frequently than annually. PECO Comments at 4.

 FirstEnergy asserts that transmission-related rates should be based on forecasted costs and reconciled to actual costs to achieve an accurate correlation between cost causation and allocation. According to FirstEnergy, to the extent not already allocated by PJM, actual costs should be allocated by customer class based on actual default service load, which would help to mitigate the risk of cross-subsidization and stranded costs and would treat customers similarly regardless of whether the customer chooses to shop with a competitive supplier. FirstEnergy Comments at 3. FirstEnergy explains the relationship between historical and actual demand as follows: The '''historic[al]' demands during [the prior year] are used to create the 'actual' [network service peak load] demands during [the following year].'' FirstEnergy Reply Comments at 3.

 West Penn, a FirstEnergy EDC, allocates TSC across distinct customer classes based on each class' load ratio share of the monthly TSC. In doing so, West Penn claims that it mitigates the risk of cross subsidization among classes and reduces the possibility of stranded costs should all the customers in an entire rate schedule chose to shop. According to FirstEnergy, this presents pricing more comparable to competitive pricing structures. FirstEnergy Comments at 6. West Penn reconciles on a yearly basis with a provision for interim revisions if the original rates would result in material over- or under- collections. FirstEnergy Comments at 6-7.4

 PPL believes that monthly adjustments of each customer class' assigned peak load responsibility to reflect the class' share of default service load in a given month will minimize over- and under-collections, avoid cost shifting, and ensure that customers bear their fair shares of TSC costs. PPL at 7. PPL believes that historical PJM peak load contribution demand data should be adjusted for the forecast amount of default service for each upcoming TSC application period and that adjustments should be monthly to prevent cost shifting and to fairly allocate costs.5 PPL Comments at 8. PPL believes, however, that it is appropriate to use historical allocators, which are estimates of future usage, to reconcile current demand. PPL Comments at 6. See also PPL comments and filings at PPL 2010 TSC Reconciliation (M-2010-2213754).

 PPL argues against volumetric allocation of demand as unfair to large customers who shift load out of peak periods through demand response. PPL Comments at 8 and 9. PPL does not favor quarterly reconciliations, especially if an EDC is allowed to use monthly allocation data. PPL Comments at 9. PPL proposes a migration rider for generation and transmission cost variances. PPL notes that the lack of a migration rider distorts an EDC's ability to ensure that refund reconciliations benefit only those customers previously burdened with an over-collection and that recoupment reconciliations burden only those customers previously benefited from an under-collection; further, it results in distorted and unstable PTC figures. PPL Comments at 9-13.

 Duquesne maintains that, because it has not had any significant shifts in demand over the past ten years, it uses historical demand to reconcile TSC. Since there is so little variance between historical and projected demand in its service territory, Duquesne would prefer to continue to use historical demand for reconciliations. Duquesne Comments at 2 and 5. Duquesne adjusts projected expenses for known changes that it expects to see the rate year. Duquesne Comments at 3. Duquesne believes that volumetric pricing of demand would remove the incentive for large customers to shift load to non-peak times. Duquesne Comments at 5. Because Duquesne's provider of last resort (POLR) load is decreasing on a steady, consistent basis, Duquesne sees no need for quarterly reconciliations. Duquesne Comments at 6.

 OSBA asserts that because PJM uses 2009 TSC data to bill 2010 TSC costs an EDC must reconcile its 2010 TSC costs to 2009 market configurations. OSBA Comments at 3. OSBA asserts that there is no support for requiring uniformity as to methods or time periods for reconciliation. OSBA Reply Comments at 2 and 3. Changes, whether for the sake of uniformity or on a case-by-case basis could cause material differences among rate classes and have unanticipated consequences on PTC figures. If uniformity is desired, a rulemaking should be commenced. Individual changes should be based on evidentiary records. OSBA Reply Comments at 4. Settlements regarding TSC should be honored unless the settlements are unclear or subject to alternative interpretations. Such discrepancies should be cleared on a case by case basis. OSBA suggests that while quarterly reconciliations might cause more volatility in rates, they also mitigate intergenerational mismatches and might better align an EDC's PTC with competitive offers. OSBA asserts that this decision should be made in Investigation of Retail Electricity Market, I-2011-2237952. (See order entered April 29, 2011, in that proceeding.) OSBA Comments at 3 and 4.

 ICG asserts that TSC rates and reconciliations should be designed to minimize differences in TSC pricing between an EDC's and an EGS's offerings. ICG comments at 3. ICG maintains that an EDC's TSC charges should align with concurrent PJM transmission charges and supports use of monthly reconciliation for TSC based on actual usage. Yearly reconciliations do not send appropriate signals to customers. ICG Comments at 3 and 4. Customers should receive pricing information in sufficient time to make shopping decisions prior to any pricing changes. ICG Comments at 5.


 As the comments indicate, the propriety of one reconciliation method versus another in any given set of circumstances is subject to a variety of opinions and historical EDC practices. However, Section 1307(e) the Public Utility Code provides unambiguous instruction on how the Commission is to evaluate whether a reconciliation mechanism complies with its requirements.

 TSC is an adjustable rate within the meaning of Section 1307. As such, tariff provisions establishing a TSC over-and-under reconciliation mechanism must comply with the terms of that section and with the fundamental requirement that the rates be just and reasonable. 66 Pa.C.S. §§ 1301 and 1307. Because transmission is a pass-through item, an EDC's rate of return and base rates are not affected by reconciliation of TSC revenues and costs.

 Regarding reconciliations, Section 1307 (e) provides, in pertinent part, that:

 (e) Automatic adjustment reports and proceedings.

 (1) Within 30 days following the end of such 12-month period as the commission shall designate, each public utility using an automatic adjustment clause shall file with the commission a statement which shall specify for such period:

 (i) the total revenues received pursuant to the automatic adjustment clause;

 (ii) the total amount of that expense or class of expenses incurred which is the basis of the automatic adjustment clause; and

 (iii) the difference between the amounts specified by subparagraphs (i) and (ii).

 Such report shall be a matter of public record and copies thereof shall be made available to any person upon request to the commission.

*  *  *  *  *

 (3) Absent good reason being shown to the contrary, the commission shall, within 60 days following such hearing, by order direct each such public utility to, over an appropriate 12-month period, refund to its patrons an amount equal to that by which its revenues received pursuant to such automatic adjustment clause exceeded the amount of such expense or class of expenses, or recover from its patrons an amount equal to that by which such expense or class of expenses exceeded the revenues received pursuant to such automatic adjustment clause.

66 Pa.C.S. § 1307(e)(1) and (3). This statutory language is unambiguous; Section 1307(e) reconciliation mechanisms adjust for the difference between revenues received and expenses incurred within the reconciliation period. All Section 1307(e) rates and reconciliations approved by this Commission must comply with this statutory directive.

 In addition, Pennsylvania Commonwealth Court has opined on the indicia of reconciliations acceptable under Section 1307(e). In a discussion of what qualified for a Section 1307 adjustable rate, it recently wrote:

Indeed, the very function of the typical automatic adjustment clause is to permit rapid recovery of a specific, identifiable expense item, with a more comprehensive analysis upon reconciliation of actual costs with previously projected costs used to establish the effective rate.

Popowsky v. Pa. PUC, 13 A.3d 583, 591, (Pa. Cmwlth. 2011) quoting Masthope Rapids Property Owners Council v. Pa. PUC, 581 A.2d 994, 1000 (Pa. Cmwlth. 1990). Thus, at core, annual or quarterly Commission review of Section 1307(e) reconciliation filings should reflect ''essentially a mathematical review'' of the ''actual costs with previously projected costs used to establish the effective rate.'' We agree that this is the essence of the revenue and expense reconciliation requirements of Subsections (i)—(iii) of Section 1307(e)(1). As such, we believe that delving further into the EDC's TSC projections or forecasting mechanisms, or the various bases of approved TSC allocations, are matters better reserved for TSC-rate or base-rate proceedings where a full panoply of cost and revenue justifications come into play.

 We proceed with this standard in mind and have structured our consideration of the comments on these topics: Reconciliation of TSC Costs, Volumetric Pricing of TSC; Frequency of Reconciliations, Riders, and PTC Issues.

Reconciliation of TSC Costs

 TSCs are pass-through costs. The issue is how to reconcile transmission revenue received by an EDC with the actual costs incurred by the EDC in obtaining that transmission on behalf of its various default service customer classes, consistent with Section 1307(e).

 OSBA notes that settlements regarding TSC should be honored unless the settlements are unclear or subject to alternative interpretations and that such discrepancies should be cleared on a case by case basis.

 Our review of the comments indicates that no commenter identified any tariff, statute, regulation, market rule, PJM provision, settlement, or case law that requires an EDC to reconcile transmission revenues to projections or estimates of costs or usage rather than to actual costs. Lloyd and its progeny expected that transmission revenues and costs would be reconciled; the PPL settlement after Lloyd expected that reconciliation would be based on actual revenues and actual costs. See Lloyd, et al. v. Pa. PUC, 904 A.2d 1010, 1018-1020. (Pa. Cmwlth. 2006) (Lloyd); see also Pa. PUC v. PPL, R-00049255 (July 25, 2007), 2007 WL 2198189 (Remand Settlement). To this extent, Lloyd is consistent with the requirements of Section 1307(e). If the parties to the remand believed that Lloyd mandated reconciliation of actual transmission costs and revenues to the prior year's market configurations by class and estimates of costs and usage based on that configuration, then that method should have been spelled out in the PPL settlement reached in the remand of Lloyd or a subsequent case. Similarly, we could have evaluated the proposed settlement for consistency with Section 1307(e) and ensuing reconciliations under those terms. See Pa. PUC v. PPL, Docket No. R-00049255 (July 25, 2007).

 During the reconciliation period, customers are billed at the tariff rate applicable to their specific customer class per unit of transmission used. Reconciliation for transmission should true-up actual costs related to actual usage and actual revenues based on tariff rates, without regard to a prior estimate of expected demand. Truing-up actual costs to assigned, estimated, or projected demand, rather than to actual demand, is contrary to Section 1307(e) and does not reconcile actual revenue to actual cost based on actual demand and tariff rates. Instead, it changes the Section 1307(e) tariff rate to match estimated usage, thus introducing circularity and inefficiency into what should be a transparent tariff rate and simple mathematical reconciliation process.

 TSC charges are permitted under the Competition Act, and the procedures to reconcile the revenues collected and the costs incurred are not base rate case matters. The inquiry in reconciliation of pass-through costs such as TSC is: ''Did class TSC payments at tariff rates cover the cost of providing transmission to that class for the reconciliation period? If not, was there an over or undercollection applicable to a specific class?'' TSC is billed at tariff rates on a volumetric basis within each class, and it should be reconciled within each class and not among or across classes. The issue is not whether a class used (or caused transmission costs equal to) the estimated transmission that the EDC expected that class to use. Rather, the query is whether the EDC collected more or less from each class than its actual TSC costs for that class during the period in question. Reconciliation should not depend on whether transmission usage is in the same class-to-class ratio as the EDC may have anticipated when the EDC set class-specific transmission rates. We recognize that forecasting tools are required to set going-forward rates. However, the role of forecasting tools in reconciliation should be negligible at best.

 Accordingly, we find that the TSC reconciliation process should be just a comparison between actual revenues resulting from tariffed rates and actual costs incurred. This approach is consistent with both the language of Section 1307(e) and the fundamental requirement that rates be just and reasonable. The Section 1307(e) reconciliation process is not intended to smooth utility budgeting efforts or to make actual revenue streams match forecasts.

 PECO reconciles to actual monthly TSC costs in order to tie TSC surcharges to actual PJM transmission service charges. ICG supports use of monthly transmission for reconciliation and maintains that an EDC's transmission charges should align with concurrent PJM transmission charges. OCA asserts that reconciliations must recognize shopping in order to reasonably reflect the dynamics of cost-causation and retail customer migration that occur during a rate year.

 We find that the PECO,6 ICG, OCA considerations are consistent with Sections 1301 and 1307(e).

 FirstEnergy asserts that actual costs should be allocated by customer class based on actual default service load to reduce the risk of cross-subsidization and stranded costs. FirstEnergy also asserts that historical demand ''creates'' the next year's actual demand.

 We find that allocating actual costs by customer class based on actual default service load is consistent with Section 1307(e). However, other than for budgeting or forecasting purposes, we do not subscribe to the assertion that historical demand ''creates'' actual future demand. We find that historical demand is but one of the elements used to predict future demand and to set TSC rates going forward. Thereafter, those tariffed TSC rates are to be applied to the actual demand experienced in that next year, thereby creating the actual revenue against which the actual costs (i.e., PJM billings for transmission services for DSP classes) are to be reconciled pursuant to Section 1307(3).

 There is no basis in Lloyd, or in Section 1307(e), to support the argument that reconciliation of TSC requires imputing DSP class-specific demand usage percentage estimates from the prior year into the reconciliation period. While historical demand is useful to predict what future demand might be, it does not ''create'' actual demand.

 OSBA asserts that PJM uses prior year transmission data to bill current transmission costs and that this mandates reconciliation of current costs to prior year market configurations despite the potential for a mismatch between cost causers and costs.

 We disagree. We find that OSBA is misconstruing the way that PJM bills for TSC. PJM generally bills EDCs for transmission service based on actual usage on a near real time basis; PJM does not bill based on how an EDC expected its customers to use transmission.7

 Duquesne would prefer to continue to use historical demand for reconciliations since its historical demand has generally matched its projected demand and actual demand.

 We do not agree that Duquesne's past experience justifies the use of historical demand for reconciliation on a going-forward basis. While we can appreciate that Duquesne has not experienced any issues, challenges, or questions related to its practice of reconciling revenues to historical projections of usage, we are not persuaded that this method is appropriate, reasonable, consistent with the purpose of a Section 1307(e) reconciliation, or justifiable going forward based on the experiences of other EDCs that have used similar historical methods.

 If the ratios of class-usage to total-usage remain constant, regardless of changes in total usage, reconciling to a historical projection of transmission might not appear to present any issues, despite the inconsistency with Section 1307(e). For example, if an EDC projected a class would use 50% of total TSC usage and the EDC then assigns that class 50% of its actual TSC costs in the reconciliation process, there may be no significantly apparent mismatch as a result of the reconciliation if the class actually used between 48% and 52% of total TSC.

 The mismatch between costs and cost causers becomes apparent, however, if the ratios of class-usage to total-usage do not remain constant. Requiring a class that created only 25% of TSC to pay, through a reconciliation recoupment, for 50% of TSC because the EDC projected that the class would use 50% results in that class subsidizing the other classes. Conversely, if a class that actually created 75% gets a refund such that its members are only paying for 50% of total TSC because the EDC projected that the class would use only 50% of TSC, then that class is being impermissibly subsidized by the other class.

 PPL believes that it is appropriate to reconcile to historical allocators rather than reconcile based on actual demand and that monthly adjustment of assigned peak load responsibility would minimize over- and under-collections, avoid cost shifting, and ensure that each class bears its fair shares of TSC costs even if the reconciliation itself is based on historical allocators.

 We disagree. We conclude that reconciling actual revenues to ''assigned'' load or estimated percentages of load, rather than to actual costs based on actual usage, is contrary to Section 1307(e) and to Section 1301. Section 1307(e) requires that revenues be compared to costs, and that the difference be refunded to customers if revenues exceeded costs or recovered from customers if the costs exceeded revenues. EDCs must realize that the 1307(e) reconciliation process is not a budgeting tool used to true-up revenue to cash flow projections. The 1307(e) reconciliation process is a statutory method by which adjustable rates remain just and reasonable. This is the case no matter how frequently adjusted the forecasts may be. The reconciliation must compare actual revenues collected pursuant to tariff rates to actual costs based on actual usage. Accordingly, going forward, actual class revenues shall be reconciled to the actual class costs and not to estimated class usage, consistent with Section 1307(e).

 OSBA further asserts that there is no support for requiring uniformity as to methods of reconciliation and that the only way to achieve uniformity in reconciliation is through a rulemaking.

 We disagree. There is no need for the rulemaking that OSBA suggests. First, Section 1307(e)(4) provides the Commission with wide discretion regarding its supervision and administration of Section 1307(e) reconciliation periods and methods such that the Commission may amend a Section 1307(e) reconciliation ''at any time.'' Subsection 1307(e)(4) provides that:

 (4) For the purpose of this subsection, where a 12-month report period and 12-month refund or recovery period shall have been previously established or designated, nothing in this section shall impair the continued use of such previously established or designated periods nor shall anything in this section prevent the commission from amending at any time any method used by any utility in automatically adjusting its rates, so as to provide the commission more adequate supervision of the administration by a utility of such method and to decrease the likelihood of collection by a utility, in subsequent periods, of amounts greater or less than that to which it is entitled, or, in the event that such deficiency or surplus in collected amounts is found, more prompt readjustment thereof.

66 Pa.C.S. § 1307(e)(4). We specify herein that, going forward, TSC revenues be reconciled to the actual cost of actual demand consistent with Section 1307(e). This is the uniform result required by Section 1307(e). Pursuant to our discretion under Section 1307(e)(4), we recognize, however, that the EDCs may propose alternate ways of accomplishing this true-up. To the extent that we are clarifying our discretion under 1307(e)(4) in this circumstance, a rulemaking is not required.

 Second, questions specifically related to whether an EDC's methodology is consistent with Section 1307(e) will be addressed in conjunction with that EDC's reconciliation submission, including but not limited to the accuracy of the method employed.

 Third, some of the disparity in reconciliation processes stems from the fact that some EDC tariffs and some settlement documents related to TSC merely provide that ''transmission costs will be reconciled.'' They provide no specificity as to the formulae or methodology for reconciliation. Accordingly, we will require that any future settlements and any future tariffs for TSC must provide specificity as to how reconciliations will be calculated.

Volumetric Pricing

 In the May 19, 2011 order, the Commission also asked the parties to address ''volumetric pricing'' of transmission costs. Duquesne asserts that volumetric pricing of demand would remove the incentive for large customers to shift load to non-peak times. PECO does not favor allocating demand on a volumetric basis. PPL argues that volumetric allocation of demand is unfair to large customers who shift load out of peak periods through demand response.

 We did not anticipate any dispute or significant differences to surface regarding pricing or the way the EDCs estimate and set reconcilable TSC rates. We find OCA Witness Watkins presented a credible and supportable summary description of the complexity of the calculation of reconcilable TSC rates based on his underlying analysis. EDCs estimate their costs of transmission based on estimates of what the costs of transmission service rendered by PJM will be for the next year for each class of default service customers. EDCs then establish a reconcilable tariff rate for each customer class for transmission service based on those cost estimates. PJM does not mandate how the EDCs charge their various customers for transmission service, only that it be paid by the EDCs for the transmission services billed by PJM to the EDCs.

 Upon consideration of this issue, we find no suggestion that the method of setting tariffed transmission rates is defective. Further, we find no support or articulation of need for volumetric pricing for large C&I customers and do not see a need to pursue this option further at this time in this proceeding. We anticipate that the requirement to reconcile actual revenue to actual costs could alleviate some of the concerns that prompted us to request comments relative to volumetric pricing for transmission provided to large C&I DSP customers. Absent more input on this topic, we do not have a record before us upon which either to predicate a mandatory change or to prohibit a voluntary change to volumetric allocation of transmission costs. If an interested party wishes to revisit this matter, it may petition the Commission to open such an inquiry. Therefore, we shall not require the EDCs to change the way they set their tariff rates for transmission or to change their transmission pricing methods at this time.

Frequency of Reconciliation

 Section 1307(e) establishes a mandatory annual reconciliation and a 12-month ceiling on reconciliation periods (i.e., maximum), but utilities cannot unilaterally change a reconciliation period set by Commission order. Thus, presently an EDC may reconcile transmission costs and revenues on a yearly or more frequent basis, as approved by the Commission. The May 19, 2011 order asked the parties to address the frequency of reconciliations.

 PECO believes that annual reconciliations are sufficient. The FirstEnergy EDCs reconcile on a yearly basis with a provision for interim revisions of the rates if the original rates would result in material over- or under- collections. PPL prefers annual reconciliations, especially if an EDC is allowed to use monthly allocation data. Duquesne asserts that annual reconciliations are sufficient in light of the steady and consistent decrease of its default service load. ICG favors monthly reconciliation for transmission on the premise that yearly reconciliations do not send appropriate signals to customers.

 OSBA asserts that there is no need to require all EDCs to use the same time frame for reconciliations and that if uniformity is desired, a rulemaking should be commenced. Individual changes should be based on evidentiary records. OSBA does suggest quarterly reconciliations might mitigate intergenerational mismatches and might better align an EDC's PTC with competitive offers even if the more frequent reconciliation could cause more volatility in rates.

 Upon consideration of the comments, the issue with frequency of reconciliation is that some customers who paid the revenues and caused the costs being reconciled will have moved out of the EDC's DSP customer classes and others may have moved into the classes prior to the reconciliation. The longer the interval between reconciliations, the more likely the customer configuration within a class will change. We do not, however, see an across-the-board problem with yearly reconciliations. At least some of the EDCs appear to have sufficient mechanisms in place to address anomalies as they arise between annual reconciliations. Further, we find no support for mandated uniform timing or procedures for quarterly or monthly reconciliations for transmission costs and, thus, do not see a need to pursue such a mandate further at this time.

 We anticipate that the process of reconciling actual revenue to actual costs could alleviate some of the concerns that prompted us to ask for comments on the frequency of transmission reconciliations in this proceeding. While we chose not to specify a frequency of reconciliation, we instruct the industry that the longer the reconciliation interval, the more likely that there may be mismatches between costs and cost causers because of a reconciliation. We shall review the potential for such mismatches in the context of reconciliation proceedings.8 If the EDCs are unable to minimize the mismatches resulting from fluctuations in class sizes, we will revisit this frequency issue.

 While we have directed the EDCs to track transmission costs and revenues monthly, we recognize that some EDCs may choose to adjust their TSC rates only on a yearly basis. The more frequently an EDC recomputes its TSC rates, the more likely any fluctuation in TSC costs will be aligned with TSC revenues and the more likely customers in the DSP classes will be those customers who incurred the demand and contributed the revenue. An EDC that chooses to adjust TSC rates on an annual basis may see more of a leveling out of reconciliation differences over time, but it runs a greater likelihood of change in the constituency of its DSP customer classes over the extended time period.

 Accordingly, we shall not require the EDCs to change the frequency or timing of TSC reconciliations at this time.

Migration Riders

 In the May 19, 2011 order, the Commission asked the parties to address the use of migration riders. PPL advocates in favor of a migration rider that would follow customers who leave the DSP for an EGS. PPL was the only company to advocate for a migration rider. A migration rider, in general, causes some concern about the effect on competition. The Commission strives to ensure that the PTC properly reflects current market conditions. A migration rider has the potential to artificially inflate or depress price signals. Accordingly, evidence of the need for a migration rider should be clear. We anticipate that, by moving to a reconciliation of actual costs with actual revenues, the need or desire for a migration rider will diminish. Therefore, we decline the use of a migration rider at this time. If experience demonstrates that the reconciliation of actual experience does not address the migration issue, we can revisit this issue.

PTC Issues

 Several parties raised PTC issues. PTC issues are beyond the scope of this proceeding, and Commission action at this docket on such issues is not necessary to resolve the reconciliation issue.


 Our reviews of a reconciliation must look to the logic underlying the reconciliation to ensure that tariff rates have been applied justly, legally, and reasonably, consistent with Sections 1301 and 1307(e). We conclude that Section 1307(e) requires EDCs to reconcile actual TSC revenues with actual transmission costs incurred, and not with historical estimates of transmission, for the reconciliation period.9

 Going forward, for reconciliation purposes, and to the extent that they are not already doing so, EDCs must reconcile actual revenues based on tariff rates to the actual demand and actual costs incurred for the period being reconciled. EDCs must use actual transmission costs per customer class for reconciliation and must present the Section 1307(e) data on a monthly basis, regardless of the period chosen for reconciliation. EDCs may use either annual or quarterly rates changes.

 This order neither mandates nor prohibits volumetric allocation of transmission costs during the period to be reconciled. We will consider any requests to use a volumetric throughput method for pricing or reconciliation on a case-by-case basis.

 We do not have a record before us upon which to address generically the use of migration riders in conjunction with reconciliations.

 Further, we shall require settlements and tariffs to address with specificity the process of reconciliation. It will no longer suffice to merely provide that ''revenues will be reconciled.''

 The contact persons for this proceeding are Louise Fink Smith,, and Shaun Sparks,, in the Commission's Law Bureau, Lori Burger,, in the Commission's Bureau of Audits, and Anthony Rametta,, in the Commission's Bureau of Technical Services; Therefore,

It Is Ordered That:

 1. For reconciliation periods beginning on and after July 1, 2013, electric distribution companies (EDCs) shall reconcile class-specific actual transmission service charge (TSC) revenues to actual transmission usage and transmission costs incurred for that period, consistent with this Order and 66 Pa.C.S. §§ 1301 and 1307(e).

 2. Any settlements or tariffs which provide for reconciliations must provide specificity as to how reconciliations will be calculated.

 3. Notice of this this order be published in the Pennsylvania Bulletin and posted on the Commission's website and that the order be served on all electric distribution companies in the Commonwealth, the Bureau of Investigation and Enforcement, the Office of Consumer Advocate, the Office of Small Business Advocate, and the Energy Association of Pennsylvania, as well as all parties participating in this proceeding.


[Pa.B. Doc. No. 13-1625. Filed for public inspection August 30, 2013, 9:00 a.m.]


1  See PPL Proposed TSC Reconciliation for 12-Months Ending Nov. 30, 2010, M-2010-2213754, (PPL 2010 TSC Reconciliation) and PPL Transmission Service Charge, M-2011-2239805 (2008 FERC Rates Refund), order entered August 15, 2013. PPL reconciled TSC revenue to historical estimates of demand (or historical allocators), which did not anticipate disproportionate migration from its large C&I default service customer classes. As we said in our recent order in those consolidated proceedings, TSC reconciliation is not retroactive ratemaking. Further, it does not affect base rates.

2  Some EDCs use TSCd and also have a rate element ''TSCe'' that includes TSCd reconciliation and regulatory lag factors.

3  ICG comprises Industrial Energy Consumers of PA, Duquesne Industrial Intervenors, Met-Ed Industrial Users Group, Penelec Industrial Customer Alliance, Penn Power Users Group, Philadelphia Area Industrial Energy Users Group, PP&L Industrial Customer Alliance, and WPP Industrial Intervenors.

4  FirstEnergy suggests that transmission costs which are not market-based but rather consistent with utility-based charges be removed from the price to compare (PTC) via a rulemaking or provisions in an EDC's default service plan. FirstEnergy Comments at 8 and Reply Comments at 3.

5  It does not appear that this was PPL's practice as of 2010. See PPL 2010 TSC Reconciliation.

6  We are not persuaded, however, that limiting reconciliation to once a year, as PECO suggests, is necessary to implement use of actual demand allocators for reconciliations.

7  A possible exception being, for example, take-or-pay pricing.

8  See Section 1307(e) Reconciliation Statement Pilot Program, Docket No. M-2013-2345492 (May 9, 2013), 43 Pa.B. 2971, which streamlines the reconciliation process.

9  We recently permitted an EDC to leave in place a TSC reconciliation based on historical estimates of transmission usage. That proceeding speaks for itself, and the use of historical allocators therein is limited to the particulars of that proceeding. Issues identified in that reconciliation (including initial and correcting recoupments and refunds) prompted this generic inquiry. See PPL 2010 TSC Reconciliation (M-2010-2213754).

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