Explaining timing risks and magnitude risks.
David A. Foti works at Accenture and is a frequent contributer to Public Utilities Fortnightly. He may be contacted at firstname.lastname@example.org. Martin F. Nellius is vice president, supply acquisition, for Entergy Solutions Supply Ltd. He has worked in the energy industry for 21 years, and is responsible for various retail operations including power procurement, portfolio management, and risk mitigation strategies for Entergy Solutions Supply.
Tariff risk is that risk which the marketer incurs downstream of the uplift. This risk can be broken into Timing Risk (I - III) and Magnitude Risk (IV-VI) as illustrated below.
Each of these items have to do with transition period timing. Period I represents the pre-transition duration. During pre-transition customers only have access to the local utility's bundled rate. Period II is the length of transition. Typically during the transition period, customers have the option to either to keep on taking the utility's bundled rate, or standard offer, or procure generation from a third-party marketer though an unbundled tariff. Period III represents the duration of the competitive transition charge (CTC). The CTC surcharge is typically charged to all customers starting at the beginning of the transition period regardless of whether they chose the standard offer or unbundled tariff. The CTC is meant to compensate the local utility for its stranded costs under as a result of deregulation.
An inaccurate guess on the timing of these events will result in a long or short generation for the retail marketer. Also, there is the potential for losses related to unrecoverable CTC charges if period III lasts longer than expected.