Multi-year rate plans harm customers with or without Exelon’s proposed tweaks, OPC tells regulators
BALTIMORE – Multi-year rate plans (MRPs) have accelerated rate increases, contributing directly to the affordability crisis for the customers of Maryland’s Exelon utilities, and Exelon’s proposed tinkering with the MRP rules will not help MRPs meet the requirements of the recently enacted Next Generation Energy Act (NGEA), the Office of People’s Counsel said in comments filed at the Public Service Commission last week.
“The General Assembly’s new standards for MRPs, including the requirement that the plans demonstrate ‘customer benefits,’ reflect concerns over what five years of experience has already shown: MRPs have harmed customers and frustrated effective utility oversight,” said Maryland People’s Counsel David S. Lapp. “It’s time to acknowledge the lessons learned and return to proven ratemaking practices.”
OPC filed its comments in response to the Commission’s request for updated briefing in its MRP “lessons learned” proceeding following the enactment this spring of the NGEA’s heightened standards for MRP adoption. Under MRPs, the Commission has set customer rates based on utility budget forecasts that were generally inaccurate, leading to “reconciliation” proceedings in which the utilities sought to raise rates further—a practice the NGEA now prohibits. In contrast, long-established practices set rates based on actual, proven historic spending, not on forecasts.
Maryland’s experience with MRPs also has shown how they undermine a cornerstone of utility regulation—the review of utility spending for “prudence,” OPC’s comments said. The Commission’s prudence review protects customers by helping ensure utilities invest in appropriate projects and operate at the lowest reasonable cost for customers. By locking in large blocks of capital spending upfront in a rate case, MRPs risk stripping prudence review of its core purpose, reducing it to a limited, after-the-fact check on how the utilities executed their projects—skipping over the question of whether the utilities showed the reasonableness of the projects in the first place, OPC’s comments explained.
The Commission’s request also sought comments on a proposal by Exelon Corporation—parent company of Baltimore Gas and Electric, Delmarva Power and Pepco—to adjust Commission-approved customer MRP rates based upon whether a utility’s profit ends up being a certain amount above or below a forecasted benchmark (the Exelon “earnings risk sharing mechanism”).
Exelon’s proposed earnings risk sharing mechanism does not address the fundamental problems with MRPs, OPC said in its comments. MRPs are premised on utility projections of future costs, and the evidence shows—and utilities themselves have acknowledged—utilities’ inability to forecast costs accurately for large swaths of spending. MRPs force customers to bear the risk of those inaccurate forecasts, OPC said, and Exelon’s proposal does not change this fundamental problem. Because the proposal would continue to set rates based on the same unreliable forecasts, customers would still pay too much upfront. The proposal only offers to refund a slice of excess profits years later and does nothing to protect customers from the harm of inaccurate forecasts when rates are set.
In any case, OPC’s comments explain, Exelon’s proposed risk sharing mechanism itself is a “reconciliation” prohibited by the NGEA, a fact that a BGE executive expressly acknowledged at a Commission hearing last fall.
“Setting rates on projected spending means relying on utility speculation about the future,” Lapp said. “Exelon promotes MRPs as ‘growth drivers’ for utility earnings, but that growth comes at the expense of customers who are forced to pay higher rates to fund it. Rates should be based on actual costs—not utility wish lists of spending projects that burden regulators, stakeholders like OPC, and ultimately customers.”
If the Commission does wish to find a way to advance alternatives to standard ratemaking, OPC’s comments said, it needs to go back to the drawing board.
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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