BGE Says Costs Of Administering SOS That Aren't Currently Bypassable Are About 1 Mill Per kWh

In Rate Case, BGE Seeks To Set Bypassable SOS Administrative Adjustment Component To 1 Mill Per kWh

May 28, 2019

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Reporting by Paul Ring • ring@energychoicematters.com

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In a newly filed electric rate case, Baltimore Gas & Electric filed a cost analysis for the SOS Administrative Adjustment component of the bypassable SOS Administrative Charge, and proposed to set the SOS Administrative Adjustment at 1 mill per kWh

The SOS Administrative Charge is included in BGE’s total electric SOS price and recovers SOS-related administrative costs that are incurred by BGE to meet its load serving obligation, in addition to the actual commodity charges, transmission charges, and taxes. The SOS Admin. Charge includes five components: an incremental charge, uncollectibles, a cash working capital requirement, a return component, and the Administrative Adjustment

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As described by a witness for BGE, "[t]he Administrative Adjustment component of the SOS Administrative Charge represents a proxy for certain costs incurred by third-party electric suppliers to provide electric supply to their customers but are not otherwise included in SOS rates. The Administrative Adjustment is necessary as certain costs in addition to the Company’s SOS incremental costs currently included in the other four cost components of the SOS Administrative Charge mentioned above, are either currently included in utility distribution rates or, in the instance of costs such as customer acquisition, are not incurred by utilities at all. The purpose of the Administrative Adjustment is to better align BGE’s total SOS price with the electric supply market price, thus 'leveling the playing field' between the Company and alternative suppliers."

Currently, the SOS Administrative Adjustment component is 0¢/kWh, as set in a prior Commission order

BGE's witness noted that, "[i]n Case No. 9221, the Commission issued Order No. 87891 on November 17, 2016, setting forth the method for deriving four of the five components of the SOS Administrative Charge. In its order, the Commission set the fifth component, the Administrative Adjustment, to 0 mills/kWh and stated that it 'should be taken up in connection with BGE’s next general rate case, in which a cost of service study should be presented to reflect more precisely which costs should be properly allocated in distribution rates and which costs should be properly allocated to SOS prices."

BGE's witness stated that, to comply with the PSC's directive, the company undertook a cost analysis and identified the following costs to include in the SOS Administrative Adjustment:

• Billing (including the billing system)

• Credit & collections

• Customer call center

• Regulatory, accounting, and legal

"As BGE does not have insight into third-party electric suppliers’ costs structures, the Company prepared a cost of service study of its own costs that could reasonably be allocated to SOS. In doing so, the Company first recognized that all incremental costs incurred to provide SOS are currently functionalized to the SOS Administrative Charge. The Company then identified those types of costs and cost centers that support SOS. After identifying these non-incremental costs and cost centers, the Company determined a reasonable approach for functionalizing a portion of the non-incremental costs to SOS and then allocating those costs by SOS customer class," a witness for BGE said

"The Company identified the following types of non-incremental costs and cost centers as supporting SOS: billing (including the billing system), credit & collections, customer call center, regulatory, accounting, and legal. Consistent with SOS incremental costs, the total costs associated with these activities are tracked in unique projects in the Company’s general ledger, which allows the total costs to be analyzed and functionalized to SOS," a witness for BGE said

With regard to the billing system, a witness for BGE said, "The billing system is an asset with two types of costs recovered through distribution base rates: amortization of the billing system and the unamortized costs in rate base. Both costs are already functionalized between gas and electric distribution, so this study took the extra step to functionalize a portion of the electric distribution costs included in the Company’s ECOSS [Electric Distribution Cost of Service Study] to SOS. To accomplish this, BGE first calculated the percentage of 2018 calendar year electric commodity revenues to total electric revenues. This electric commodity revenue percentage was then applied to the billing system costs included in the Company’s ECOSS to arrive at the amount to functionalize to SOS."

With regard to billing and credit & collections costs, BGE's witness said, "BGE identified the billing and credit & collections projects that support SOS through the billing or collecting of SOS charges. Similar to the billing system costs discussed above, these project expenses are functionalized in BGE’s general ledger between the gas and electric distribution lines of business. To functionalize to electric SOS, BGE applied the same electric commodity revenue percentage discussed above to the electric 8 distribution expense recorded for the billing and credit & collections cost centers."

With regard to call center costs, BGE's witness said, "Similar to billing and credit & collections cost centers, customer call center costs are separately tracked by project and functionalized between gas and electric distribution in the Company’s general ledger. However, since many of the activities of the call center are unrelated to billing or credit & collections and therefore unrelated to SOS (e.g. emergency response) but are not tracked in separate projects, the Company utilized another step in the functionalization process. Specifically, the Company used data from its interactive voice response (IVR) system to first determine the percentage of incoming calls from customers that related to billing or credit & collections. The Company applied this percentage to the customer call center’s electric distribution expenses first, and then applied the percentage of commodity revenue compared to total revenue described previously to further functionalize to SOS."

With regard to regulatory, accounting, and legal costs, BGE's witness said, "BGE identified three more areas of the business that support SOS in a non-incremental fashion: regulatory, accounting, and legal. To determine a reasonable functionalization factor to use for these cost centers, individuals from these areas were asked to identify their SOS-related tasks/deliverables and the estimated time they spent on each activity. Based on this information, the functionalization factor for each area was derived by multiplying the percentage of time spent per employee during the year on SOS-related activities by the respective cost center expenses recorded in the general ledger."

Upon identifying the SOS costs, the Company allocated all SOS-functionalized costs between SOS customer classes on a sales volume basis, "as these costs cannot be direct-assigned to individual customer classes in a similar fashion to incremental costs," a witness for BGE said

Using actual costs incurred in 2018, the total cost related to SOS for inclusion in the SOS Administrative Adjustment component is about $12 million, allocated to various SOS classes as described above.

On a mills per kWh basis, dividing each class's allocated revenue by volume, each SOS class's Administrative Adjustment cost equates to 0.99 mills per kWh

Based on this result, a witness for BGE recommends setting the SOS Administrative Adjustment component for each SOS class (residential, Type I, Type II, Hourly) at 1.00 mill per kWh

"I recommend the Commission approve a 1.00 mill per kWh Administrative Adjustment for all of BGE’s SOS customer classes for three primary reasons. First and foremost, the adjustment amount is consistent with the results included in my testimony (0.99 mills per kWh). Second, by rounding the amount to 1.00 mills per kWh, I am acknowledging that the cost of service study the Company performed is not surgically precise but can be used by the Commission to set the Administrative Adjustment at a reasonable level for years to come, pending the need for another study. Third, the rounded amount represents an 11% increase since the Administrative Adjustment was first set at 0.90 mills per kWh in accordance with the Case No. 8908 Settlement Agreement executed in 2002," a witness for BGE said

"As mentioned previously, the Administrative Adjustment is intended to represent a proxy for the costs incurred by third-party electric suppliers to provide electric supply to their customers, in addition to the actual incremental costs incurred by BGE and currently included in the SOS Administrative Charge. While suppliers’ costs cannot possibly be known due to their competitively sensitive nature, the allocated costs approach taken by BGE provides a rational foundation for setting a just and reasonable Administrative Adjustment for the indefinite future," a witness for BGE said

As noted previously, the SOS Administrative Adjustment is an existing mechanism, but the charge is currently set at $0.

BGE's witness recommended continuation of the existing SOS Administrative Adjustment mechanism, by which the Administrative Adjustment is charged to SOS customers, and revenues from the charge are credited back to all distribution customers (as opposed to removing the allocated SOS costs from distribution rates)

"Consistent with the Settlement Agreement in Case No. 8908 and BGE’s existing Retail Electric Service Tariff, the Company will include any Commission-approved Administrative Adjustment rate in the SOS Administrative Charge while simultaneously crediting the amount in full to all distribution customers," BGE's witness said

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