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Retail Suppliers Propose Setting Bypassable BGE SOS Admin. Adjustment At 1.1¢/kWh for Residential Customers, Allege BGE Underallocating Costs to SOS
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In testimony concerning electric and natural gas rate cases at Baltimore Gas & Electric, a group of retail suppliers alleged that BGE's proposal to set the bypassable electric SOS Administrative Adjustment underallocates costs to SOS, and recommended setting the SOS Administrative Adjustment at about 1.1¢/kWh, or 1¢ higher than BGE's proposal
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The SOS Administrative Charge is included in BGE’s bypassable 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
As previously 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."
As exclusively first reported by EnergyChoiceMatters.com, BGE has proposed to set the bypassable SOS Administrative Adjustment at 1.00 mill per kWh, for all of BGE’s SOS customer classes, after BGE provided a cost of service study finding that the costs included under the SOS Administrative Adjustment at 0.99 mills per kWh
Currently, the SOS Administrative Adjustment component is 0¢/kWh, as set in a prior Commission order
Testimony was filed by the Energy Supplier Coalition (Coalition), comprised of NRG Energy, Inc., Direct Energy
Services, LLC, Vistra Energy Corp. and Interstate Gas Supply, Inc. d/b/a IGS
Energy.
As further described below, the Coalition said that BGE underallocated costs to SOS. The Coalition said that BGE proposes to allocate just over $9.5 million of
costs to the SOS Administrative Adjustment for the residential class, whereas a witness for the Coalition recommends that $114 million be allocated to the residential class SOS Administrative Adjustment. Overall, BGE allocated $12.3 million to the SOS Administrative Adjustment, while a witness for the Coalition recommends that $173 million be allocated overall to the SOS Administrative Adjustment
The Coalition recommended setting the SOS Administrative Adjustment as follows:
The Coalition said an alternative approach that levelizes the Administrative Adjustment across all rate classifications results in the Administrative Adjustment being 13.89 mills per kWh for all customer classes.
A witness for the Coalition said, "The Administrative Charge should be broken out to account for BGE’s direct and
indirect costs. The Administrative Charge currently captures some of BGE’s
direct costs but it significantly understates the indirect costs. Therefore, it does
not, but should, reflect all the costs that BGE incurs in providing standard offer
services. The majority of those costs have always been embedded in distribution
rates. The Administrative Charge and Administrative Adjustment mechanisms
are the proper channels to ensure that BGE’s rates reflect the true cost to serve its
customers objective and that it is made whole financially."
A witness for the Coalition alleged, "Proposing an Administrative Adjustment of 1.00 Mill per kWh, which is
equal to only one-tenth of one cent per kWh, BGE has omitted major cost
categories and significantly understated other cost allocations. For example, BGE
has not allocated administrative and general expenses to SOS, including costs of
information technology ('IT') and human resources ('HR') and other costs that
the Commission has previously ordered it to include in SOS. Further, BGE has
failed to fully allocate costs from the accounting, regulatory and legal functions
required to support SOS."
A witness for the Coalition alleged, "BGE has not fully allocated its costs to provide standard offer service to
the Administrative Adjustment component of the Administrative Charge
and is using revenues collected through distribution rates to subsidize
standard offer service."
A witness for the Coalition alleged, "Notably, BGE did not include many of the cost items detailed in Order No.
87891, such as staffing for human resources, marketing and advertisement,
product and price formation, electronic data information, or PJM membership
fees. Its allocation for regulatory and legal services was unrealistically low.
Similarly, its call center allocations were also unjustifiably low."
A witness for the Coalition alleged, "By way of simple example, BGE’s allocation to the Administrative
Adjustment included only costs for the billing system, credit and collections, the
call center, regulatory, accounting and legal expenses. It is simply not feasible to
run and manage a nearly $1 billion business with only those resources. BGE did
not include any IT expenses, any expenses for computer equipment,
communications, rent or insurance or any expenses for executive time. For
accounting, it included only the equivalent of approximately 11% of one full-time
accounting employee (one-ninth of one FTE) when approximately 46%, or close
to $1 billion, of BGE’s revenues are derived from SOS and must be 'accounted'
for."
A witness for the Coalition alleged, "In allocating costs to standard offer service, BGE has departed from the
National Association of Regulatory Utility Commissioners’ principles of
cost allocation, its own Cost Allocation Manual and sound utility
ratemaking practices."
A witness for the Coalition said, the
list of incremental costs which should be allocated
to SOS should include:
A witness for the Coalition alleged, "BGE’s price for SOS, which is currently 6.558 cents per kWh for the residential
customer class, is understated by approximately 18 percent. That kind of price
differential is fundamentally misleading to consumers evaluating offers from
suppliers, and it deprives them of the information that is needed to compare prices
and services on a fair and accurate basis. This is significant given the
Competition Act’s directive for the Commission to ensure that customers receive
'adequate and accurate' information enabling them to 'make informed choices
regarding the purchase of any electric services.' As consumers shop for
generation supply, they are constantly reminded of the price. When the SOS rate
is understated by 18 percent, consumers cannot meaningfully compare it to offers
in the market. In short, BGE’s SOS customers are not being provided adequate
information that is needed to enable them to make informed choices regarding the
purchase of electricity."
A witness for the Coalition said that its concerns are also applicable to BGE's natural gas default service
"The NARUC cost allocation principles are also applicable to
gas businesses. BGE utilizes an Administrative Charge tool in the delivery of
SOSS, but it does not include an 'Adjustment' mechanism that refunds costs back
to distribution ratepayers. The Commission should mandate that BGE implement
a system that collects both direct and an allocation of all indirect costs incurred in
the delivery of SOSS and refund those indirect costs back to its gas distribution
ratepayers," a witness for the Coalition said
Staff of the PSC also filed testimony
A witness for Staff of the PSC proposed revisions to BGE's proposed SOS Administrative Adjustment that would result in slightly higher residential SOS Administrative Adjustment and lower SOS Administrative Adjustment for non-residential classes, versus the proposal from BGE
A witness for Staff of the PSC testified that, "I find the calculations and methods BGE uses to separate costs between electric distribution and SOS functions to be reasonable at this time."
"I have not yet conducted a full review of all costs BGE separates between the electric distribution and SOS functions," Staff's witness said
Staff did express concerns about how BGE has allocated SOS Administrative Adjustment costs between SOS classes
"I am concerned that the method BGE uses to allocate SOS Administrative Adjustment costs between SOS classes does not follow cost causation for some cost categories. For example, BGE’s method to allocate credit and collections costs based on 2018 SOS sales by class allocates $46,605 in credit and collections costs to the Hourly Priced Service ('HPS') class, but the HPS class had no uncollected costs in 2018. Regarding the allocation of call center and billing costs, the NARUC cost allocation manual suggests allocation of costs based on the number of customers or number of meters. In the ECOSS BGE allocates Account 903, customer records and collections expenses, based on the number of customers," Staff's witness said
Staff's witness proposed changes as follows: "I propose to allocate credit and collections costs based on 2018 uncollected costs and billing and call center costs based on 2018 SOS customers by class. My proposed Administrative Adjustment costs by class are provided in Table 8 and proposed Administrative Adjustment rate is provided in Table 9. I recommend that the Commission adopt my adjustments to BGE’s method to allocate SOS Administrative Adjustment costs between SOS rates classes and my SOS Administrative Adjustment rates."
As a result, Staff recommended the following amounts for the SOS Administrative Adjustment rate by SOS class
More specifically, Staff proposed the following individual components, by class, for the total SOS Administrative Adjustment rates listed above
Staff's witness noted that BGE proposed to credit distribution customers eligible for SOS for all costs recovered through the SOS Administrative Adjustment, through nonbypassable Rider 10 in BGE’s electric retail tariff. Rider 10 states that all revenues collected in the SOS Administrative Adjustment component of the SOS Administrative Charge in Rider 1 shall be fully credited to all distribution customers eligible for SOS.
Staff' witness said that, rather than reimburse distribution customers for SOS Administrative Adjustment costs allocated to SOS but simultaneously recovered from distribution rates, BGE should remove costs allocated to the SOS Administrative Adjustment from distribution rates. "This is consistent with Order No. 87881 in Case No. 9221, which required BGE to provide a cost of service study in its next rate case to determine which costs should be allocated to distribution rates, and which costs should allocated to SOS rates through the SOS Administrative Adjustment. I recommend that the Commission require BGE to file an adjustment to distribution rates at the conclusion of this case after SOS Administrative Adjustment rates are set, to remove all costs allocated to the SOS function from distribution rates and collect these costs through the SOS Administrative Adjustment," Staff's witness said
The Office of People’s Counsel opposed BGE's proposed level for the SOS Administrative Charge, stating that BGE has not shown that BGE's costs are comparable to any actually incurred by retail suppliers, and noting the different between SOS and competitive service
A witness for OPC testified that BGE's proposed 1 mill per kWh SOS Administrative Adjustment, "will result in a 51% increase in the current administrative charge applied to
customers on SOS. Given that more than 70% of residential customers take SOS
service, the increase will impact a substantial number of customers within the
residential class."
"Moreover, the Company has made no effort to determine whether the
administrative adjustment amount is comparable to the administrative costs incurred
by competitive suppliers. BGE has made no effort to research -- even on a preliminary basis—how much administrative costs are incurred by competitive suppliers.
Furthermore, BGE has not attempted to compare its administrative charge to any
similar charges assigned to comparable standard offer service rates in other states.
Although the administrative adjustment is justified by proponents as a way to recognize
the types of costs incurred by competitive suppliers, the Company has not provided a
market benchmark to evaluate the reasonableness of the costs 'allocated' to SOS
customers," OPC's witness said
OPC's witness testified, "As I understand it, the purpose of the administrative adjustment is to 'level the playing
field' in the competitive electric market. However, the Commission won’t know if
the allocated amount reasonably achieves that objective without knowing the
administrative costs expended by competitive suppliers. In addition, the possibility
that the fee is set too high could be equally as damaging as the condition that the
Commission is trying to remedy. If the competitive suppliers view the SOS rate as a price umbrella, adding an excessive fee to the SOS rate could result in non-competitive
behavior to the detriment of consumers."
Asked whether SOS is strictly comparable to service from competitive retail suppliers, OPC's witness said, "To a significant extent, no. Unlike the competitive supplier, the SOS provider must
be prepared to serve the entire market if necessary. SOS stands in reserve for the
competitive market in the event that competitive retailers lose their customers due to
high rates or if the competitor ceases operations. For residential and small commercial
customers, the SOS is required to select two year power contracts in PSC regulated
bidding processes. Although this provides the benefit of more stable SOS prices, the
fact that the requirement applies only to SOS means that competitors can undercut the
SOS rate with shorter term power prices when market conditions are favorable. In
addition, SOS must be available to all customers, even those who have been dropped
or denied by competitive retailers due to credit/payment issues. SOS has an obligation
to serve all customers, but competitive suppliers do not. The assumption that SOS
enjoys a market advantage over competitive suppliers ignores the regulatory obligation
imposed on the SOS provider which can be viewed as a handicap in the market. In that
sense, the SOS product is not strictly comparable to the competitive supplier’s products. Consequently, it is unreasonable to artificially increase the SOS price based
on the faulty premise that SOS should incur the same costs as competitors."
OPC's witness said that the BGE billing and collection system is properly considered a regulated distribution cost. "BGE directly bills all distribution charges to all customers. BGE would require
the investment in the billing system regardless of the existence of SOS. From that
perspective, SOS is not the cause of the investment," OPC's witness said
OPC's witness further said, "I am skeptical of including the amortized and unamortized cost of the billing system.
These are sunk costs which do not represent prospective costs in the market. In
addition, the billing software for the electric utility likely is more complex than the
billing requirements of competitors. Yet these expenditures are almost one third of the
total administrative adjustment. The time expended by regulatory, accounting, and
legal personnel may involve regulatory filings specific to operating the SOS, and,
therefore, may not be representative of market costs. But these expenditures may be
valid costs directly associated with SOS. However, these expenditures are less than
1% of the administrative adjustment."
OPC's witness also testified that, "According to the Company, the likely effect of the SOS adjustment, in combination
with the revenue credit, is to increase electric bills of customers who take SOS service
and decrease electric bills of customers who contract with competitive suppliers. This
pattern will create intra-class cross-subsidies; essentially customers who remain on
SOS will be forced to subsidize customers who contract with competitive suppliers.
While this may encourage some SOS customers to shop for a competitive supplier, it
is possible (perhaps likely) that many of the customers will remain on SOS. The
customer segments that are less inclined to shop for electricity may include less
sophisticated customers and elderly low income ratepayers -- the types of customers
who often require regulatory protection. These customers would disproportionately
fall within the subset of residential customers who sustain a net bill increase from the
administrative adjustment. Given the Company’s proposal for periodic changes to the
adjustment, the intra-class impact may become more noticeable as the fee grows in the
future. For this reason, the Commission should be conservative in approving
expenditures for the adjustment."
OPC's witness further said, "The Company’s proposed allocation of call center costs to the SOS rate is
illustrative. Approximately $15 million of call center expense is assigned to electric distribution. 38.5% of the calls made to the call center involve billing inquiries or
collections. The Company assumes that 45.6% of these billing and collection calls are
assignable to SOS based on the commodity revenues as a percent of total revenues.
Multiplying the total call center expense by 38.5% and 45.6% results in an allocation
of $2.6 million to SOS. The remaining 54.4% of billing and collection calls are not
assigned to competitive suppliers, but instead remains in distribution expense, which
means that it is paid by both SOS and competitive supplier customers. The Company
admits that customers of competitive suppliers call the BGE call center. But the
Company does not track the data necessary to quantify the amount. To the extent
that these calls fall within the billing category (which is assigned to the SOS
administrative charge), SOS customers are subsidizing the call center use by customers
of competitive suppliers."
Case No. 9610
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PSC Staff Witness: BGE's Calculations To Separate Costs Between Distribution, SOS "Reasonable At This Time", Would Adjust Allocation Among Classes
OPC Opposes Proposed Bypassable SOS Administrative Charge
September 11, 2019
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Copyright 2010-19 EnergyChoiceMatters.com
Reporting by Paul Ring • ring@energychoicematters.com
Coalition Recommended SOS Administrative
Adjustment Rates By SOS class
per kWh
mills cents
Residential 11.82 1.18¢
Type I 21.06 2.11¢
Type II 21.06 2.11¢
Hourly 21.06 2.11¢
• Call Center
• Regulatory
• Legal
• Customer Accounts Expenses
• Customer Service & Info Expenses
• Administrative & General Expenses
• Depreciation and Amortization
• Allowed Return on Working Capital
Staff Recommended SOS Administrative
Adjustment Rates By SOS class
(mills per kWh)
Residential 1.11
Type I 0.95
Type II 0.40
Hourly 0.28
Residential
Staff Recommended SOS Administrative
Adjustment Rates By SOS class
(mills per kWh)
Billing System Amortization Expense 0.16
Billing System Unamortized Costs 0.12
Credit & Collections 0.41
Billing 0.17
Call Center 0.25
Regulatory 0.01
Accounting 0.00
Legal 0.00
Total 1.11 [sic]
Type I
Staff Recommended SOS Administrative
Adjustment Rates By SOS class
(mills per kWh)
Billing System Amortization Expense 0.16
Billing System Unamortized Costs 0.12
Credit & Collections 0.32
Billing 0.14
Call Center 0.21
Regulatory 0.01
Accounting 0.00
Legal 0.00
Total 0.95 [sic]
Type II
Staff Recommended SOS Administrative
Adjustment Rates By SOS class
(mills per kWh)
Billing System Amortization Expense 0.16
Billing System Unamortized Costs 0.12
Credit & Collections 0.09
Billing 0.01
Call Center 0.01
Regulatory 0.01
Accounting 0.00
Legal 0.00
Total 0.40
Hourly
Staff Recommended SOS Administrative
Adjustment Rates By SOS class
(mills per kWh)
Billing System Amortization Expense 0.16
Billing System Unamortized Costs 0.12
Credit & Collections --
Billing 0.00
Call Center 0.00
Regulatory 0.01
Accounting 0.00
Legal 0.00
Total 0.28 [sic]
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