Multi-year rate plans: A failed solution in search of a problem, People’s Counsel tells Public Service Commission
BALTIMORE – Standard utility ratemaking has worked well for Marylanders through decades of significant change while multiyear rate plans—the subject of a Public Service Commission pilot program since 2021—have added complexity, created new burdens, and increased rates with no added benefits, the Office of People’s Counsel told the Public Service Commission at a hearing this week. Any benefits from multiyear rate plans, known as “MRPs,” can be achieved without the complexities and customer harms experienced with MRPs, OPC told the Commission.
“Unlike standard ratemaking that has withstood the test of time, MRPs provide no incentive for the utility to contain costs,” People’s Counsel David Lapp said today, summarizing his comments. “MRPs instead incentivize utilities to propose wish lists of projects and then undermine the Commission’s review of whether utility project spending is prudent, which is how regulators protect customers from excessive costs and poor utility performance.”
“Ratemaking” is how the Commission determines what rates and charges regulated utilities are allowed to charge their customers. Utility rates are usually based largely on the cost of utility infrastructure, or “plant,” that a utility has actually built. Utilities are allowed to charge customers for investments in their systems if their decisions and expenditures were reasonable and prudent and the infrastructure provides real value to customers. In MRP ratemaking, by contrast, rates are set based on a utility’s “forecast” of the projects it will complete and other spending it anticipates over the next three years. Rates are then reconciled based on the utility’s actual spending.
Standard ratemaking practices have enabled the utilities to maintain a reliable system through periods of massive growth in electricity demand—as high as 9 percent annually, well above the less than 1 percent annual growth in electric demand experienced today and the approximately 1.5 percent of annual growth that a PSC study found would occur under a “high electrification” pathway to meet State climate goals, OPC pointed out.
The arguments for MRPs—advanced only by the Maryland utilities owned by Illinois-based Exelon Corporation—are long on rhetoric and short on facts, OPC argued. The need for utilities to raise funds for infrastructure improvements has worked well with standard—or “traditional”—ratemaking, Lapp told the Commission at the hearing. Standard ratemaking is a time-tested tool that has worked well as technology and policies have changed significantly over the last century. Some “traditions” are worth keeping, Lapp said.
OPC made its comments at a two-day “lessons-learned” hearing at the Commission, following the submission of its written initial and reply comments. The hearing exposed the inherent complexities of MRP ratemaking, complexities which, OPC argued, disadvantage the Commission, its staff, OPC, and other parties. MRPs also undermine the ratepaying public’s ability to understand how their rates are being set and how they are increasing. “This complexity works to the advantage of the utilities and to the detriment of the public,” Lapp told the Commission.
The customers of each of the Exelon utilities—Baltimore Gas and Electric, Pepco, and Delmarva Power—have experienced significant base rate increases over the course of the MRPs. This past summer, OPC released a report showing how rates have changed over time, with large rate increases for customers of the Exelon utilities.
Under MRPs, BGE’s electric and gas base distribution rates have increased by 26 percent and 43 percent, respectively. Compared to 2020, the average BGE customer annually is paying $145 more for electric service and $256 more for gas service for these base rate increases only, according to OPC's report.
But the base rate increases under the MRPs tell only part of the story. The base rates are set according to a Commission-approved utility budget forecast and are subject to a Commission-overseen “reconciliation” process in which the utility recovers—through a “rider” on customer bills—costs for additional spending on top of the base rates that the Commission initially approved. In fact, BGE spent significantly more than the Commission’s approved projected rates for both its electric and gas service:
- For BGE electric service, in 2020, the Commission approved base rate increases over three years of about $139.9 million. But BGE has asked for $131.3 million more than the amount the Commission authorized for recovery over the same three-year period. Current rates, which include reconciliation revenues for years one and two (2021 and 2022) of the three-year MRP, include $52.4 million of the additional $131.3 million. OPC is challenging BGE’s proposed electric reconciliation for the third year of the MRP (2023) in litigation currently before the Commission. If approved, BGE’s proposed $78.9 million reconciliation for 2023 would be recovered from customers over 22 months, at an average additional monthly cost to residential customers of almost $2 above the already approved base rate increase of $9.41 compared to 2020 rates.
- For BGE gas service, in 2020, the Commission approved a rate increase of $73.8 million over three years. Yet BGE has asked to recover $95.1 million in reconciliation charges on top of the Commission’s authorized base rate recovery. Of that $95.1 million, $73.3 million is for rate year 3 (2023) alone, an amount that OPC also is challenging in the ongoing Commission proceeding. If approved, BGE’s proposed $73.3 million reconciliation for rate year 2023 would be recovered from customers over 22 months, increasing monthly winter heating bills for the average residential customer by nearly $10 above the approved base rate increase of $42 compared to 2020 rates.
These rate hikes are paying for BGE’s massive capital spending over the course of the MRP. That capital spending—for infrastructure ranging from gas pipes and electric wires to computers and trucks—adds to the utility’s “rate base.” Rate base determines the level of Exelon’s profits. Including paying for the utility’s taxes, customers pay a 9-10 percent return on the amounts in rate base. Customers generally pay for new capital spending in rate base over decades, as the assets are depreciated, through higher rates.
When the Commission approved BGE’s first MRP, the Commission stated that BGE would be “in compliance as long as it does not exceed the reduced capital budget revenue requirement.” Despite this admonition, BGE exceeded its first MRP capital budgets for gas and electric by over $600 million.
“MRPs are contributing to huge burdens for customers,” Lapp said. “It’s time to return to ratemaking that motivates the utilities to control their costs.”
The Maryland Office of People’s Counsel is an independent state agency that represents Maryland’s residential consumers of electric, natural gas, telecommunications, private water and certain transportation matters before the Public Service Commission, federal regulatory agencies and the courts.
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