According to Talen Energy Supply, LLC’s (Talen) Chapter 11 bankruptcy filing (Case No. 22-90054), Talen intends to discontinue Retail Purchase Agreements (Agreement) for select commercial and industrial counterparties and begin the process of transitioning those counterparties to the default “Provider of Last Resort (POLR)” service of the corresponding electric utility.
Affected commercial and industrial businesses can remain on POLR service or implement new electricity supply agreements with replacement electric generation suppliers (EGS). For most affected companies, and given current market dynamics, the electricity supply price written in their Talen Agreement will be significantly lower than either alternative.
Who Does the Talen Bankruptcy Impact?
Many of the businesses impacted by the Talen bankruptcy are in Ohio and Pennsylvania. In Ohio, affected utility service areas include Ohio Edison, The Cleveland Electric Illuminating Company, and Toledo Edison. In Pennsylvania, affected customers might have utility service with Duquesne Light Company, PENELEC, METED, PPL, PECO, Penn Power, UGI, or West Penn Power. Some refer to electric utilities as EDC(s), which is short for Electric Distribution Company. These utilities are included in the PJM network.
What is POLR Service?
Provider of Last Resort, or POLR, is utility-based default service for businesses that have not elected to purchase electricity from licensed Electric Generation Suppliers (EGS). In other words, the EDC is the electricity supplier, as well as the electricity distributor. The EDC’s rules and regulations, called tariffs, detail POLR rates. Some refer to POLR service as “tariff” service.
POLR rates vary by EDC and by utility-designated rate class. EDCs typically define rate classes by annual electricity usage (measured in kilowatt-hours, or kWh) or demand ranges (measured in kilowatt, or kW). EDCs typically reflect a customer rate designation on their invoices. A state utility regulatory body approves POLR rates. In Ohio, the regulatory authority is the Public Service Commission of Ohio (PUCO) and the Pennsylvania Public Utilities Commission (PA PUC) in Pennsylvania.
POLR service prices can be fixed or variable. The foundation of variable-price POLR is hourly wholesale pricing. PJM is a regional transmission organization, or RTO, that administers the reliable flow of electrons from power generators to consumers. PJM’s wholesale hourly pricing concept, known as Locational Marginal Pricing, or LMP, is the basis of variable POLR pricing. The EDCs mentioned above are part of the PJM network.
The PUCO put out a new release about the Talen bankruptcy that describes the choices, including POLR service, that affected customers in Ohio have.
For most customers affected by the Talen bankruptcy, POLR pricing will represent meaningful increases compared to the prices reflected in their Agreements with Talen.
Businesses That Opt Out of POLR Service Can Do New Deals with Electric Generation Suppliers
Businesses can forego POLR service and secure new electricity supply contracts with licensed EGSs. Opting out of POLR will be the optimal decision for some businesses but not for others. But, given the timing of Talen’s bankruptcy filing, businesses that shop for replacement electricity supply deals may feel stress.
Businesses will likely be facing sticker shock, as electricity prices are significantly higher than they were two or three years ago, when many of the existing Agreements with Talen may have been finalized.
Businesses that forego POLR service face several decisions regarding electricity procurement that are challenging in their own right.
Challenge 1: How to Buy Electricity from an EGS – Variable, Fixed, or Other?
First, impacted businesses will have to decide how to buy electricity. EGSs offer various pricing options, including variable (based on LMP), fixed, variable and fixed combined, and other hybrids. Each alternative has different features and corresponding pros and cons. Additionally, some EGSs or electricity brokers will hard-sell buying strategies that align to their objectives of winning deals. These buying approaches may not line up with the goals of the businesses to whom they are selling. Businesses will be burdened with sorting through myths and realities to implement the right plan in a high risk environment.
Challenge 2: Selecting the Right EGS
Second, businesses will need to figure out from which EGS to buy. Comparing EGSs on an “apples to apples” basis can be challenging. EGS offers have distinct pros and cons, even within a similar pricing structure. To say it differently, a supply proposal from an EGS with the lowest price isn’t necessarily the best deal. It could be the worst, all things considered.
Challenge 3: Timing the Buy with an EGS
The third issue is timing a purchase. For some businesses, POLR pricing will be the best short-term option. But, the challenge will be when to transition from POLR and take service from an EGS. For others that POLR pricing is not suitable, a pertinent consideration will be the length of the contract term. In other words, businesses will have to determine if it makes sense to secure shorter-term or longer-term deals, as each has potential benefits and pitfalls. Moreover, given the recent volatility in electricity prices, the decision when to buy electricity (especially for fixed-price buyers) can be especially challenging.
Challenge 4: Sorting Through the Noise
Also, it may be a challenge for businesses to sort through the noise associated with the Talen bankruptcy.
Energy Brokers Will Pounce on the Talen Bankruptcy
Energy brokers will likely deluge these customers with solicitations suggesting that they can help them get the best electricity deals for free. Despite inferences to the otherwise, the services of electricity brokers are not free. Although electricity brokers may imply otherwise, EGSs do not pay “commissions” that come out of their pockets to brokers. For the most part, electricity supply brokers are transactional middlemen. Their fee model is “buy low, sell high.” Their fees are markups to the actual (and lower) prices of EGSs; consequently, businesses that engage electricity brokers incur the broker fee costs, as the brokers embedded their fees into their electricity prices. The Talen bankruptcy filing explains how brokers are compensated, with markups as high as $10/megawatt-hour, or 25%. Ouch!
Because brokers need transactions to generate fees, their electricity procurement advice could be suspect. Many will push longer-term deals to secure a long-term income stream. Other brokers will likely steer businesses away from the POLR option, as they cannot generate income when businesses select POLR pricing.
Businesses that use electricity brokers, or are thinking about engaging one, should strongly consider these warnings about Pennsylvania electricity brokers or red flags about Ohio electricity brokers.
Businesses also should know that buying advice from EGSs can be compromised. As mentioned previously, the offers from EGSs vary – and have EGS specific pros and cons. EGSs have been known to push businesses to buy electricity in a way that best lines up with the EGS’s best competitive position while failing to provide consultation as to why another EGS’s offer could be better. The cost consequences of misinformed decisions about electricity procurement can be significant.
Wrapping Up the Talen Bankruptcy
Businesses that have their Retail Purchase Agreements discontinued, a result of the Talen bankruptcy, will be faced with challenges. These challenges include:
- Price sticker shock
- Deciding between POLR service or a replacement electricity supply deal with an EGS
- Determining how to buy electricity from and EGS in the future (fixed or variable or hybrid)
- Choosing an EGS
- Timing a purchase with an EGS
- Establishing a contract length with EGSs
- Sorting through the noise of brokers and EGSs
Foster LLC Can Help Businesses Sort Through the Talen Bankruptcy
Foster LLC provides electricity procurement services for commercial and industrial businesses in Ohio and Pennsylvania, and has been doing so since 2004. If you want to discuss your situation, or get help sorting through the Talen bankruptcy, please call (412) 308-6482 or submit an inquiry through the Contact Page.