The Freeze is Over: Rate Caps and Rate Implications How the Maryland Market Is Working

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The Freeze is Over Rate Caps and Rate
Implications How the Maryland Market Is Working
National Low Income Energy Conference June 14,
2005 Sheldon Switzer Director Electric Pricing
and Tariffs
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Cartoon From The Carroll County TimesFebruary 1,
2001
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I usually take a two hour nap from 1 to 4.

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When you come to a fork in the road, take it

• Regulation or Competition
• Competitive market for generation supply
• Other political objectives
• Competitive Metering
• Universal Service
• Conservation
• Price Protection
• Did we take the right fork in the road?

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Youve got to be very careful if you dont know
where you are going because you might not get
there

• The Electric Customer Choice and Competition Act
  of 1999
• Orderly transition to competitive supply market
• Maintain electric system reliability
• Compliance with environmental regulations
• Fair to customers and investors
• Provide economic benefits to all customer classes

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Provide economic benefits to all customer classes

• Customer group driving Deregulation Large,
  Industrial Customers
• What about?
• Residential Customers
• Low-Income Customers

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Universal Service Fund

• The Commission shall establish a Universal
  Service Program to assist electric customers with
  annual incomes at or below 150 of the Federal
  Poverty Level.
• The components of the Universal Service Program
• Bill assistance, at a minimum of 50 of the
  determined need
• Low-income weatherization
• A one-time retirement of arrearages

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Universal Service Fund

• The total amount of funds to be collected for the
  Universal Service Program (first 3 years.)
• 24.4 Million shall be collected from the
  Industrial and Commercial Classes
• 9.6 Million shall be collected from the
  Residential Class.
• In any year when there are unexpended funds,
  those funds shall be returned to the customer
  classes proportionate to how the Customer Classes
  paid into the fund.
• The Commission shall recommend a total amount of
  funds to be used thereafter.
• All Customers will contribute to the funding of
  the Universal Service Program through a charge
  collected by each Electric Company.

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Universal Service Fund

• The Commission shall determine a fair and
  equitable allocation for collecting the charges
  among all Customer Classes.
• An Electric Company shall recover Universal
  Service Program costs.
• The Commission may not assess the Universal
  Service Surcharge on a per kilowatt-hour basis.

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Universal Service Fund

• The Department of Human Resources, with oversight
  by the Commission, shall disburse the funds.
• The Department of Human Resources shall be
  responsible for administering the Universal
  Service Program.
• The Commission shall have oversight
  responsibility for the Universal Service Program.

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Source Electric Power Supply Association
Assessing the Good Old Days of Cost-Plus
Regulation July 23,2001
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Maryland Electric Choice History and Update
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Electric Choice History

• Marylands Electric Utility Industry was
  deregulated through a combination of events
• Electric Customer Choice and Competition Act of
  1999
• Maryland Public Service Commission Orders
• Individual utility restructuring cases and
  settlements
• Roundtable meetings consisting of utility,
  regulatory, industry and customer representatives
  outlining detailed implementation rules

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It was impossible to get a conversation going,
everybody was talking too much.

• The Settlement Processes
• Roundtables -- competitive billing, universal
  service, customer education, demand-side
  management, supplier tariffs, technical
  implementation
• The big issues -- Case Nos. 8794/8804
• Stranded Cost Quantification
• Price protection
• Unbundled rates

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Electric Choice History

• In the past, a customers entire electric service
  was provided by the local electric utility
  (Vertically integrated electric utility)
• As a result of electric deregulation, on July 1,
  2000 all BGE customers were able to choose their
  electricity supplier

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Electric Choice History

• What was deregulated?
• In a deregulated market, generation, transmission
  and distribution are separated
• Now, customers can choose the company that they
  contract with for electricity supply (generation
  and transmission)

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What Is Purchased From a Supplier

• Generation (non-regulated) consists of
• Energy
• Capacity
• Transmission (regulated)

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What Continues To Be Regulated?

• Transmission is still regulated by the Federal
  Energy Regulatory Commission (FERC) and included
  when generation is purchased
• Role of PJM as an RTO
• Distribution services, that is, the delivery of
  the electricity to a customers facility, are
  still provided by the local utility - BGE

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What is Competitive
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A Competitive Electric Market Takes Time to
Develop

• As part of the transition, Price Freeze Service
  (PFS) was put in place to allow time for the
  market to develop
• PFS Price protection / smooth transition --
  but limited the development of a competitive
  market by stabilizing prices at low levels for a
  fixed period
• PFS does not reflect current market prices
  because they were based on the last rate case
  held in 1993
• In BGEs service territory, the majority of
  electric Choice activity has started with the
  larger businesses and government entities.

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Key Steps In The Developing MarketEnd Of BGE
Price Freeze Service

• PFS ended for Schedule P accounts on 6/30/02
• 99 of Schedule P accounts enrolled with a third
  party
• PFS ended for remaining non-residential accounts
  on 6/30/04
• 114,000 accounts
• PFS ends for residential accounts on 6/30/06

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I knew I was going to take the wrong train, so I
left early

• We have a transition to a competitive generation
  supply market -- limited ability for competitive
  market to develop in the short term

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Benefits of Deregulation

• Competitive Wholesale Generation Market
• Retail Choice
• Customers are able to select an electricity
  supplier that offers service which best meets
  their needs
• For example, customers can shop for a supplier
  that offers the best prices for their energy load
  profile and energy efficiency services including
  energy management

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The PJM Power Pool

• PJM Interconnection is a regional transmission
  organization (RTO)
• PJM ensures the reliability of the largest
  centrally dispatched control area in North
  America
• PJM, acting neutrally and independently, operates
  the largest competitive wholesale electricity
  market in the world. (Independent System Operator
  (ISO))
• PJM manages a sophisticated regional planning
  process for generation and transmission expansion
  to assure future electric reliability.
• PJM facilitates a collaborative stakeholder
  process. Stakeholders include participants that
  produce, buy, sell, move and regulate
  electricity.

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Gas Customer Choice

• A much simpler process!
• Commodity vs. Pipes
• Fuel Rate / Market-based Rates
• Interstate Pipelines
• Distribution inside the city gate
• Retail choice significant for Industrial and
  Commercial Customers

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Provider of Last Resort

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• Baseball is 90 mental -- the other half is
  physical

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Provider Of Last Resort (Case 8908)

• Settlement reached November 15, 2002 which
  established Provider of Last Resort (POLR) for
  all utilities in Maryland
• POLR Phase I
• The Maryland Public Service Commission approved
  the settlement on April 29, 2003

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Provider of Last Resort (POLR)

• The Provider of Last Resort is the local
  distribution company (LDC) - e.g., BGE, PEPCO,
  etc.
• POLR provides new fixed price market based
  Standard Offer Service (SOS) for customers whose
  Price Freeze Service has ended and no supplier
  has been selected
• This is being done
• To continue the smooth transition to electric
  Choice
• To provide customers with protection against the
  volatile Default Service rate

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Key Term Capacity PLC

• Peak Load Contribution (PLC) is a measure of the
  peak amount of electricity a customer uses
• Along with other aspects of the service, PLC is
  used by suppliers to determine their prices
• The PLC is set annually unlike billing demand
• Capacity PLC is
• Share of PJMs peak in the summer period (6/1 -
  9/30)
• Based on the 5 peak hours occurring on 5
  different days
• Used to determine the POLR service for which
  non-residential customers are eligible

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Summary of POLR Market Based Rate Plans

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Summary of POLR Market-Based Rate Plans For
Accounts of 600 kW PLC

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PFS Doesnt Reflect Current Market Prices

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Since 1999 Cost of Fuels Rose While BGE
Residential Electric Prices Declined

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POLR Phase II

• Separate settlement reach by most of the same
  parties and filed with PSC on 6/30/03
• PSC hearings to be held at end of August
• Addresses details on wholesale supply bidding
  process including
• Model Request for Proposal
• Credit requirements and application
• Contracts
• Schedule
• Reporting requirements

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Residential Customers

• Pepco
• July 1, 2004 May 31, 2005
• Total annual bill - 16
• Total annual supply bill 26
• July 1, 2005 June 30, 2005
• Total annual bill 4.5
• Total annual supply bill 6.6

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Small Commercial Customers

• Pepco
• July 1, 2004 May 31, 2005
• Total annual bill - 16
• Total annual supply bill 31
• July 1, 2005 June 30, 2005
• Total annual bill 4.5
• Total annual supply bill 7.1

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Small Commercial Customers

• BGE
• July 1, 2004 May 31, 2005
• Total annual bill - 17
• Total annual supply bill 27
• July 1, 2005 June 30, 2005
• Total annual bill 4.1
• Total annual supply bill 6.5

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Why the large increases in retail generation
supply prices under market-based SOS rates?

• Some would say --
• Electric Industry Restructuring is a Failure
• If it wasnt broke, we shouldnt have changed it
• Bring Back the Good Old Days
• Are they correct?????
• Last price change in 1993 for BGE
• Fuel price increases which are largely exogenous
  to the structure of the electric utility industry

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What changed?

• Industry Structure
• Wholesale Competitive Markets
• Open Access Transmission
• Utility Mindset
• No longer a Next Base Rate Case Focus
• Profitability no longer dependent on prudent
  management and a good regulatory environment
• Change in the conduct of business
• Not just generation
• Not just transmission
• BUT distribution as well
• Benchmarking / Cost cutting /Efficiency
  improvements

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Econometric Model

• (/CPI) / kWht a0 S ß1i NERCi ß2CPI (fuel)t
  ß3 Dummy93t S ß4i NERCi Dummy93t et
• Ln((/CPI)/kWht)a0S ß1i NERCi
  ß2Ln(CPI(fuel))tß3Dummy93t Sß4iNERCiDummy93t
  et
• Real cost of electricity (per kWh) as a function
  of the NERC region, an inflation index for fuel
  costs, a dummy variable that is one for the years
  1993 through 2002, zero otherwise, and an
  interaction term between the NERC region and the
  dummy variable.

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Results
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Conclusion

• Benefits of competition are substantial
• Threat of competition as a precursor to actual
  industry transformation had an impact
• Competitive Wholesale generation
• More efficient utilities and improved business
  practices for distribution
• Residential customers gain, but less than others
• Fundamental gain derives from the need to
  operate and plan generation supply efficiently to
  maximize profits

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Conclusion

• Retail choice
• Large customers have unique load profiles and
  ability to respond to price signals and
  participate in load response programs
• Smaller customers benefits are less clear plus
  need to have a POLR service for those who choose
  not to shop
• Avoid imposing complicated market rules, policies
  that restrict the availability of optional
  value-added utility services, and policies that
  would impose uneconomic costs (e.g. interval
  meters for small customers)
• Consider Incentive Ratemaking

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Where Can I Get More Information?

• Maryland Public Service Commission
  www.psc.state.md.us/psc
• BGE website www.bge.com

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Questions?

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It aint over till its over -- Yogi

• NY Yankees 1946 - 1963
• 3 time American league MVP
• 14 Pennants
• 10 World Series Championships
• 15 successive All-Star Games
• Elected to Baseball Hall of Fame -1972

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