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Maryland PSC Weighs Future of Columbia Gas Choice Program

October 27, 2011

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Copyright 2010-11 Energy Choice Matters

The Maryland PSC yesterday took under advisement the future of the Columbia Gas choice program, declining to issue from the bench an order on Columbia's recommendation to cease the program and suppliers' proposal to continue the program.

As only reported by Matters (3/30), Columbia has sought to end the choice program due to implementation costs from compliance with COMAR 20.59, which requires certain market enhancements such as POR.

However, ending choice would not eliminate any sunk costs of COMAR 20.59 compliance, and would only eliminate ongoing choice administrative costs of $11,000 to $22,000 per month. These administrative costs have been collected in base rates since the 1990s, and are unrelated to COMAR 20.59 implementation, so the true impetus for ending choice would be to avoid these administrative costs, and not the already sunk COMAR compliance costs which Columbia is entitled to recover regardless of the choice program continuation.

IGS Energy, MXenergy, Maryland Gas and Electric (U.S. Gas & Electric), and Washington Gas Energy Services have proposed contributing a total $160,000 to shoulder a portion of COMAR 20.59 compliance costs, in exchange for continuation of the choice program.

Although Commissioners expressed skepticism with both ending and continuing choice, most of the Commissioners' concern appeared to be with the sunk COMAR 20.59 compliance costs ($255,000 to date), and additional COMAR 20.59 compliance costs to make choice viable, and not the ongoing administrative costs which are essentially the only avoidable costs from eliminating choice, aside from an incremental $50,000 for POR as proposed by suppliers.

Specifically, POR implementation would cost another $50,000 on top of sunk costs. Complying with additional requirements of COMAR 20.59 (class specific POR discount rates, 12-day enrollment, etc) would be an incremental $112,000 in compliance costs, but suppliers support a waiver of these additional requirements, so the only incremental costs under COMAR 20.59 that suppliers are seeking is $50,000 to implement POR.

PSC Chairman Douglas Nazarian pressed suppliers to justify continuation of the choice program, especially given low participation rates at Columbia and the fact that, according to Columbia, choice customers have paid about $260,000 in additional gas supply costs in 2011 versus what they would have paid under Purchased Gas Adjustment rates.

Suppliers offered little justification other than providing customers with benefits from the inherent ability to choose, but also noted that the Maryland retail market is not mature, and products offering savings or value-added services are available in markets such as New York.

Nazarian noted, however, that even at Baltimore Gas & Electric, where POR has been in place for some time, the offers he sees, although admittedly for a fixed term, are significantly (50%) above the PGA rate.

"This is a time where it's not working at all, and you're asking us to do something more," Nazarian said of the situation at Columbia.

Nazarian said to the suppliers, "If you were putting enough money on the table to make it all go away, we would have a nice tight little agreement, and we would have been done with this."

Nazarian was not explicit as to what level would equal "enough money," (whether only $255,000 plus $50,000 for POR would be sufficient or whether suppliers must assume the separate ongoing administrative costs as well), but in later discussions, in which Nazarian spoke hypothetically about a path to continue choice, the ongoing administrative costs were not included in his calculations of what needed to be covered.

This suggests (although not definitively) that the Commission's decision could be made much simpler if additional suppliers were willing to step up and commit to fund the remaining $145,000 in implementation costs not covered by the four suppliers' commitment of $160,000.

Indeed, Nazarian said that if the Commission decides to not cease choice at Columbia, the question then presented to the Commission is determine how to recover the "all-in" cost of choice of approximately $300,000, from which Nazarian apparently excludes ongoing administrative costs (and included only the sunk costs plus POR). Given that suppliers have already offered to contribute $160,000, the costs for which the PSC has to really determine recovery are approximately $140,000, Nazarian noted.

Nazarian conceded that if all such costs were included in the POR discount rate, as has been the precedent at other utilities (except for certain costs at BGE), then the discount rate would be prohibitively high, and choice would not be viable.

However, Nazarian suggested that the PSC could instead adopt a discount rate that is similar to the level approved at other utilities, such as the 3.5% rate Washington Gas Light, which would be set at a level not so high as to prevent customers from electing POR, but would allow some of the $140,000 to be recovered solely from customers participating in choice rather than from all distribution customers. The Commission would then have to agree to place any remaining costs of the $140,000 not recovered through the discount rate into distribution rates.

At no time in this potential resolution postulated by Nazarian did Nazarian suggest that the ongoing administrative costs of choice ($11,000 to $22,000 per month) should be included in the discount rate or paid by the suppliers.

This is key because, as noted above, the ongoing administrative costs of choice (aside from $50,000 for POR) are the only costs which can be avoided from ceasing the choice program, and it would appear that Nazarian is not concerned with the ongoing inclusion of these costs in distribution rates. Accordingly, there would seem to be little reason to cease the choice program, if the Commission is not concerned with the inclusion of ongoing administrative costs of choice in distribution rates.

That's because, excluding the ongoing administrative costs of choice, the alternatives presented to the Commission are:

- Ceasing the choice program with distribution customers required to pay $255,000 in sunk COMAR 20.59 costs

- Continuing the choice program, plus completing POR implementation, at a total cost of $305,000, but with customers only required to bear $145,000 of such costs due to the contribution of $160,000 from suppliers (with the allocation of these remaining costs between choice customers and distribution customers open for adjudication).

Clearly, regardless of the additional benefit of retaining choice, customers pay less in implementation costs under the supplier proposal, even if all such costs were allocated to distribution customers.

In short, it seems the decision to continue choice truly hinges on the ongoing administrative costs, but these were the costs which drew least concern from Commissioners during yesterday's discussion.

Also notable from the administrative meeting is that Staff, in large part, supports the suppliers' proposal and contribution of $160,000 to continue choice, including the suppliers' proposed condition that Columbia offer, at cost, customer lists.

Additionally, the suppliers, which sought, as a condition of their contribution, customer lists as well as a dialogue on capacity allocation, said that they were willing to remove those conditions and still contribute the $160,000, if the PSC feels appropriate.

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