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SURFA – 43 rd Financial Forum The Post-Recession Environment: A Regulatory Perspective April 14-15, 2011

SURFA – 43 rd Financial Forum The Post-Recession Environment: A Regulatory Perspective April 14-15, 2011. Paula M. Carmody People’s Counsel Maryland Office of People’s Counsel. Maryland Office of People’s Counsel “the voice of Maryland residential utility customers”.

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SURFA – 43 rd Financial Forum The Post-Recession Environment: A Regulatory Perspective April 14-15, 2011

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  1. SURFA – 43rd Financial ForumThe Post-Recession Environment: A Regulatory PerspectiveApril 14-15, 2011 Paula M. Carmody People’s Counsel Maryland Office of People’s Counsel

  2. Maryland Office of People’s Counsel“the voice of Maryland residential utility customers” • Independent state agency • People’s Counsel appointed by the Maryland Attorney General – 5 year term • Regulated utilities • Electricity • Gas • Telecommunications • Private water services • 19 person agency: • Professionals: 10 attorneys • Consultants: expert testimony and technical assistance

  3. State Public Service Commissions:Traditional ratemaking • Utility Rate Regulation Principles • Customers should receive safe and reliable service at “just and reasonable rates” • Utility should have opportunity to recover prudently incurred costs and authorized rate of return • FPC v. Hope Natural Gas Co., 320 U.S. 605 (1944) • MD PUA, §§ 4-101 and 4--201 • Cost-based ratemaking • State Commission approves utility rates in a formal proceeding • The utility seeks a rate change (typically an increase) • Other stakeholders seeks a rate change (typically a decrease) • Base rates are based on a test year • The test year is basically a “snapshot” for a fixed period (MD – Actuals) • Operating income • Operating expenses • Customer classes and numbers • Rates remain fixed between rate cases • Individual Elements may change – expenses, revenues, customers • Utility still have opportunity to earn its authorized rate of return

  4. Consumer Perspective: Advantages of Traditional Ratemaking • Stakeholders can engage in scrutiny of utility rate proposals • Discovery • Expert witnesses: Testimony • Ability to challenge utility case • Revenues and expenses can be reviewed together • Avoid selective ratemaking • Provide incentive to control costs • Exceptional circumstances can still be addressed within a rate case or other proceeding

  5. Trackers and surcharges • Increased utility interest in cost-recovery mechanisms outside of base rate proceedings • Reasons given • “New circumstances require new approaches” • Better matching of revenues with costs • Avoid regulatory lag • Greater cost-recovery certainty • Lower financial risk means lower financial costs • Reduce regulatory scrutiny and rate case costs • Necessary for replacement of aging infrastructure

  6. Trackers and surcharges • Types • Purchased electricity and gas costs (FCA; PGA) • Systems benefit charges • Renewable energy surcharges • Energy efficiency, conservation and demand response • Energy assistance • Major Infrastructure projects • Uncollectible costs • Pension costs • Environmental costs • Decoupling mechanisms

  7. Trackers and surchargesMaryland experience • Purchased gas and fuel cost adjustments (PGAs and FCAs) • PUA §§ 4-401 and 402: Gas companies and small electric companies • Annual prudency reviews • Fuel cost adjustments for large electric companies • PUA § 4-403 repealed in 1999 • 1999 deregulation law required sale or transfer of all generating plants • Standard Offer Service (SOS) – Electricity supply • PUA § 7-501 et seq.: 1999 Deregulation law

  8. Trackers and surchargesMaryland experience • Energy assistance • Electric Universal Service Program (EUSP) – Funds transferred to DHR Office of Home Energy Programs • No Systems Benefit Charge (SBC) for renewable energy and energy efficiency in 1999 deregulation law • Energy efficiency and demand response surcharges • EmPower Maryland: PUA § 7-211(f) • EmPower Maryland Programs: BGE, PEPCO, Delmarva Power, Potomac Edison (formerly Allegheny Power) and SMECO • Revenue Decoupling Mechanisms • Weather Normalization Adjustments (WNAs) – Gas utilities • Bill Stabilization Adjustments (BSAs) – BGE, Pepco and Delmarva • Current Issue: Major storm outage exception

  9. Trackers and surchargesMaryland experience • MD PSC has rejected other requests for surcharges or trackers • Smart meters • BGE • Uncollectible expenses • PEPCO and Delmarva Power • Pensions and OPEB costs • PEPCO and Delmarva Power • Expenses related to Purchase of Receivables (POR) – Electricity Suppliers • BGE • Delmarva Power • Potomac Edison

  10. Maryland PSC’s BGE Smart Meter decisionRatemaking: First Principles Order No. 83410 (June 21, 2010), p. 28: “We begin with first principles. For one hundred years. . .one of our primary functions has been to establish the rates that public service companies can charge their customers. We and our predecessors have done this by comprehensively reviewing the companies’ costs and revenues, defining the rate base, establishing an appropriate rate of return, and translating the resulting revenue requirement into rates. . .In the electric and gas industries, we establish the rates . . . according to traditional cost-of-service principles, and those fundamental principles have not changed.”

  11. Maryland PSC’s BGE Smart Meter decisionRatemaking Trend: Surcharges • Order No. 83410, p. 28: “This [smart meter] case comes to us in the context [of] . . . a general trend in which Maryland utilities (and undoubtedly others) seek to remove as many revenue streams of costs as possible out of distribution rates, and to recover them through surcharges.”

  12. Maryland PSC’s BGE Smart Meter DecisionAre Surcharges and Trackers Ever Acceptable? • Order 83410, p. 28 The trend towards the use of trackers and surcharges “has gained some traction from our approval in recent years of surcharges to support energy efficiency and demand response programs. [ftn] [Those] programs . . . are fundamentally different in purpose and function than [the smart meter] Proposal. Neither energy efficiency nor demand response programs build utility infrastructure. The communications systems and load-control devices . . serve only that specific program and have no other utility uses.”

  13. MD PSC DecisionsRejection of surcharges and trackers • Reasons for rejection • Delmarva Power Rate Case (Case 9192, Order 83085) • Uncollectible, pension and OPEB expenses • Guarantee dollar-for-dollar recovery of specific costs • Risk is shifted to customers • Diminish utility incentive to control costs • Exclude classic, ongoing utility expenses from the “standard, contextual ratemaking analysis” • Similar proposal rejected in Washington Gas Light Co. rate case (94 Md. PSC 329 (2003)

  14. MD PSC DecisionsRejection of surcharges and trackers • BGE Smart Meter Case (Case 9208) • Same reasoning as Delmarva case • Rejected utility arguments • Scale of investment • Possible negative reaction of rating agencies to rejection of surcharge “We are not in the business of attempting to predict rating agency reactions, nor of calibrating our decisions to what the utilities say the agencies want or expect” (MD PSC Order 83410, p. 30) • BGE’s project is “a large, but classic, investment in BGE’s infrastructure”

  15. MD General Assembly – 2011 Bills • Gas Infrastructure (Senate Bill 332/House Bill 596) • Surcharge: Fund replacement or improvement of existing gas infrastructure • Primary rationale: Improve public safety or infrastructure reliability • Proponents: Gas utilities • Opponents: Commission, OPC and AOBA (commercial customers) • Unfavorable votes in committees • Renewable Energy (Senate Bill 304/House Bill 662 and Senate Bill 648) • Surcharges: Fund certain existing solar and geothermal programs • Primary rationale: Additional incentives for renewable programs; offset anticipated loss of RGGI and ARRA funding or to provide credit incentives to retail customers purchasing electricity from renewable energy resources • Unfavorable votes in committees

  16. References • www.psc.state.md.us • Case 9208 (BGE) - Order Nos. 83410 (pp. 28-30)and 83531 • Case 9192 (Delmarva Power) – Order Nos. 83040 (p. 2) and 83085 (p. 15) • Re Washington Gas Light Co., 94 Md. PSC 329, 353 (2003) • www.mlis.state.md.us • House Bill 596 and Senate Bill 332 - Gas Infrastructure Surcharge • www.opc.state.md.us • OPC Testimony on HB 596 and SB332, http://www.opc.state.md.us/opc/Legislation/State/Testimony.aspx And thanks to Scott Hempling and Ken Costello of NRRI for their thoughtful contributions to these ongoing discussions!

  17. OPC • Paula M. Carmody, People’s Counsel • Maryland Office of People’s Counsel • 6 St. Paul Street, Suite 2102 • Baltimore, MD 21202 • 410-767-8150 • www.opc.state.md.us

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