Setting distribution rates using utility spending forecasts drives higher customer costs than standard rate setting, OPC analysis finds
BALTIMORE – Utilities with forecasted rates see faster rate increases and growth in customer costs during periods of forecasted rates compared with growth in rates and costs over a comparable period in which rates were set using standard rate-setting practices, according to an analysis released by the Office of People’s Counsel.
For each of the utilities that have used forecasted rates, OPC’s analysis addresses the impact of forecasted rates, which have been set through multiyear rate plans (MRPs), as well as, for Pepco, the company’s pending forecasted test year proposal now before the Public Service Commission.
“The data show that using utility spending forecasts to set electric distribution rates increases those rates by about two to three times more than standard rate-setting practices over comparable time periods,” said Maryland People’s Counsel David S. Lapp. “Customers can’t afford continued accelerated increases in their rates and their bills.”
The analysis shows, for example, that over six years of setting rates using utility spending forecasts, the annual electric bill of a Baltimore Gas and Electric customer using 900 kilowatt hours per month went up $164, versus the previous six years when BGE operated under standard rate-setting practices, during which time that same customer’s bill rose just $55. For a Pepco customer, the change in annual costs using forecasted rates is $323 versus $157 under standard rate setting.
Under standard rate-setting practices, utilities recover costs from customers only if they demonstrate that their investments were reasonable and prudent and are actually providing benefits to customers. Setting rates based on forecasted spending allows utilities to instead begin collecting speculative operational expenses and capital investment costs before the utility has demonstrated that costs are prudent and reasonable. As OPC has advocated before the Public Service Commission and at the General Assembly, rate setting based on forecasts is beneficial for investors but costly for customers, as it allows for faster cost recovery than standard rate cases and shifts risks of utility overspending away from investors and onto customers.
OPC prepared its analysis following an Exelon utility’s contrary representations to the General Assembly—that setting rates based on forecasts “delivers better affordability outcomes for customers” compared to standard ratemaking mechanisms based on actual historic costs. The Exelon utilities—Pepco, BGE, and Delmarva Power & Light—are the only Maryland utilities that have received Public Service Commission (PSC) approval to set base distribution rates using spending forecasts.
As passed by the House, the Utility RELIEF Act (HB 1532) would prohibit the PSC from authorizing utility base rates using any mechanism based on a forecasted test year.
OPC’s analysis is based on the actual PSC-approved distribution rates in effect during the years in question, as well as Pepco’s currently pending rate case. The numbers are largely the same as those included in OPC’s rates reports, first published in 2024, updated to reflect recent rate increases, and Pepco’s pending request for a rate increase based on forecasted spending. The rates used in the analysis are pulled directly out of the utility tariffs and filings and have never been disputed.
“Our data and calculations are transparent and based on PSC-approved rates and charges and Pepco’s pending proposal,” Lapp said. “If Exelon has different numbers or data, it should be transparent with its data, calculations, and assumptions, as we have been.”
OPC’s analysis explains how it calculated its figures, its assumptions, the value of comparing increases in actual dollars rather than just percentages, and the importance of the baseline year. The analysis also points out that for BGE’s gas distribution rates, the use of MRPs didn’t cause rates to rise as significantly as for the Exelon utilities’ electric rates, in part because by the time of BGE’s first MRP, the utility had already been benefitting from rate increases due to the STRIDE statute that the General Assembly enacted in 2013. STRIDE allows accelerated cost recovery similar to forecasted rates, although it is limited to gas infrastructure replacement.
“It’s time to put an end to setting rates based on forecasts of utility spending,” Lapp said. “The data undeniably shows the significant costs to customers.”
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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