Last week, FirstEnergy Solutions announced a new, coming charge on its customers’ bills: the Regional Transmission Organization (RTO) Expense Surcharge.
Due to extremely cold weather, PJM Interconnection (PJM) had to buy additional reserve generation in January. PJM passed the costs associated with these purchases along to generation suppliers, including FirstEnergy.
FirstEnergy characterized these costs as a “pass-through event” pursuant to customers’ agreements. The utility will charge customers for these costs via a separate line item on their bills called the RTO Expense Surcharge. Although FirstEnergy is unsure of the exact amount, it expects the RTO Expense Surcharge to be “approximately 1%-3% of (a customer’s) annual electric generation expenditure.”
Regardless of the validity of FirstEnergy’s assertion, this announcement underscores the importance of understanding the terms of your generation agreement. Before you ink that next contract, watch out for the following pitfalls:
Broad or vague change of law provision
A change of law provision protects the supplier from a change in law or a change in interpretation of law. If a supplier incurs new or additional costs as a result of such a change, the supplier may pass through those costs to you. Such a provision may also protect the supplier from a change in costs from the RTO or utility.
I have never encountered a generation contract that does not include some variation of a change of law provision. Even if you contract for a fixed, all-inclusive generation product, it is reasonable for the agreement to include a change of law provision. A supplier cannot predict regulatory action, so a change in law provision insulates the supplier from its impact.
However, be cautious of broad or vague change of law provisions. For example, a supplier should not be entitled to recoup costs due to adverse market conditions or economic hardship.
Restrictive change in usage limitation
The change in usage section of your agreement will detail the notification requirements if you anticipate your load will increase or decrease. This section will also specify when you will be subject to damages for a change in usage.
The agreement should specify the “swing” or “bandwidth.” These terms refer to the amount your usage may increase or decrease without penalty. A supplier will often charge a premium for large or unlimited bandwidth. Therefore, it is important to examine your historical and anticipated usage to determine your optimum bandwidth and minimize your cost.
Unfriendly evergreen or renewal provision
An evergreen provision allows the agreement to continue beyond the initial term, or remain “ever green,” under certain circumstances. The evergreen provision will usually state the new terms that are in effect during the holdover period.
An evergreen provision could be advantageous because it could prevent you from defaulting to the Standard Service Office (SSO) if you do not timely enter into a new agreement. The SSO is the rate charged by the utility for generation to customers that do not contract with an alternative supplier. The SSO rate is typically higher than what a shopping customer would pay.
If you want your agreement to include an evergreen provision, check to ensure it specifies the following: (1) the price during the holdover term, including the supplier’s margin and (2) how the agreement can be terminated.
Similarly, a renewal provision automatically renews the agreement if certain conditions are met. Though there are instances when they can be advantageous to the customer, renewal clauses tend to favor the supplier. For example, one supplier’s renewal clause allows the supplier to send a written notice to you with new terms — which could be anything, including an unreasonably high price or long term. If you do not expressly reject the offer, you will be deemed to have accepted it.
PLC change provision
A Peak Load Contribution (PLC) change provision allows a supplier to increase your contract price if your PLC increases. Your PLC is your billed electric consumption during the five, one-hour intervals of the year when demand on the electric grid is at its highest.
Even if you contract for fixed capacity costs, a PLC change provision allows the supplier to charge you if your PLC increases. You will not get a credit if your PLC decreases. Essentially, this provision strips away a core advantage of going with an all-inclusive, fixed product.
New generation suppliers are constantly entering the Ohio market. These new suppliers may offer competitive pricing, but they may also be unsophisticated and unversed in Ohio’s unique energy climate.
If you are considering entering an agreement with a supplier that is untested in Ohio, review the agreement with the utmost care. I have seen two agreements that did not require the supplier to deliver, or be responsible for the delivery of, electricity. I have also seen suppliers include law applicable to other states and other signs of sloppy drafting.
There are many pitfalls you can avoid prior to signing a generation agreement that can save money and aggravation. It never ceases to amaze me how many large energy users enter into generation agreements with little to no appreciation of the contract terms.
If FirstEnergy’s RTO Expense Surcharge can teach us anything, it is the importance of understanding the nuances of your agreement.
Author’s note: This blog is for informational purposes only and does not constitute legal advice or legal opinion. You should not act or rely on any information contained in this blog without first seeking the advice of an attorney.