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Maryland Rejects Settlement To Set SOS Adders, Directs Analysis of SOS Costs in Distribution Rates

March 3, 2015

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Copyright 2010-15 EnergyChoiceMatters.com
Reporting by Karen Abbott • kabbott@energychoicematters.com

The Maryland PSC rejected a contested settlement to set the Standard Offer Service bypassable administrative charges at Pepco and Delmarva, sending the case back for further development, including an analysis of SOS costs included in distribution rates.

As previously reported, the settlement would have set the Pepco and Delmarva SOS admin charges based on a utility return component, an incremental cost component, an uncollectibles component, and an administrative adjustment component. Cash Working Capital costs were to be added to SOS rates, but under a separate process and not part of the administrative charge.

"Although the 2014 Settlement may reach a just and reasonable result, we cannot reach such a conclusion on this record. The return and Administrative Adjustment components represent negotiated figures and lack the financial analysis we believe is required a decade later. Further, we find that the Companies have not, so far, adequately supported their proposal to use their overall rate of return to recover their CWC [cash working capital] requirement. Consequently, we remand these issues to the PULJ for further investigation," the PSC said.

Most notably, the PSC said that the Administrative Adjustment should be studied in more detail. Currently, the Administrative Adjustment is a bypassable charge on all SOS customers (excluding hourly priced service) that is refunded to all distribution customers. This essentially serves as a proxy for certain costs that have not been unbundled and which are not reflected in SOS rates, and which are still recovered in distribution rates (e.g. overhead, etc.)

The PSC directed Pepco and Delmarva to file an analysis that provides a basis for any SOS costs that may be included in present distribution rates. "A fully distributed Cost of Service Study ('COSS') is not required, but a study that can provide a reasonable basis for assigning SOS costs currently in distribution rates, if any, to SOS is expected," the PSC said.

"Parties may also wish to address the legal basis, if any, for the assignment of costs to SOS," the PSC said.

Noting that the non-unanimous settlement would introduce an Administrative Adjustment for hourly priced SOS, the PSC said that, "we expect the parties to address why, after a decade, HPS should include an Administrative Adjustment."

Regarding the return component of the admin charge, the PSC directed the utilities to enumerate, and quantify to the extent possible, the specific SOS procurement and cost recovery risks they have encountered over the last decade. "To be clear, we do not reach any conclusions at this time concerning the degree of risk, if any, the Companies face in providing SOS. In fact, it is for this reason that we require the Companies to conduct a more thorough analysis," the PSC said.

Citing statute, the PSC said that, "it is clear that utilities are allowed a 'reasonable return" in addition to the recovery of SOS 'costs.'"

The PSC also agreed with settling parties that CWC represents a cost that is to be recovered for the lag in customer receipts for providing SOS. To the extent a "return" is not included in the CWC revenue requirement then it must be included elsewhere, the PSC said.

"We conclude that stating a CWC cost requirement and a utility return (profit) separately is beneficial because it promotes transparency. Consequently, we approve the inclusion of a return component in the Administrative Charge along with a separately stated CWC cost requirement for SOS to be recovered outside of the Administrative Charge. However, in no way should this determination be regarded as an endorsement of the CWC revenue requirement or of the rate of return embodied in the 2014 Settlement," the PSC said.

As for the CWC revenue requirement, the PSC said that the utilities' opposition to using short-term debt as proposed by the People's Counsel lacks the appropriate financial analysis and support. "CWC cost recovery should reflect the lowest cost possible consistent with sound utility management practices. Short-term debt rates are very low and according to OPC the Companies’ short-term borrowing exceeds $2 billion, whereas only $70 million is required to satisfy their SOS-related CWC obligations. We expect the Companies to examine whether they can increase the use of STD [short-term debt] to finance SOS CWC requirements. In sum, the burden is on the Companies to demonstrate that they are utilizing practices to minimize SOS costs in a responsible manner," the PSC said.

The PSC found the settlement's approach to uncollectible and incremental costs included in the SOS admin charge reasonable.

Cases 9226 and 9232

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