Pepco, Delmarva Seek Maryland PSC Order on Cost Allocation for Long-Term Contracts

Pepco and Delmarva Power have sought rehearing of the Maryland's PSC order issuing an RFP for 1,500 MW of new capacity, arguing that the Commission must address several threshold issues, including cost recovery, prior to issuing an RFP.

Most notably for the retail market, the utilities asked the Commission to determine how the electric distribution companies (EDCs) are to recover their costs of owning or contracting for new generation. The Pepco Holdings utilities noted that at an October 21, 2011 pre-bid conference, PSC representatives confirmed that the issue of cost allocation for any long-term contract that an EDC is required to execute has yet to be addressed.

"Moreover, it is unclear whether the Commission intends for the costs associated with agreements resulting from the RFP to be allocated to all IOU EDC customers or only to IOU EDC SOS customers," the Pepco companies said.

"If the purpose of mandating new generation is to provide reliability benefits to the entire State, then all EDCs and all their customers (not just SOS customers of one or two IOU EDCs) should pay for contracts arising from the RFP process. Spreading the costs across a wider base of customers will lessen the financial and customer migration risk associated with the requirements of the long-term agreement," the utilities added.

While cost recovery has not yet been addressed, the RFP calls for capacity to be sold into RPM, with energy addressed on a contract for differences basis. As such, neither the asset's capacity nor physical energy would be dedicated to serving SOS (though any costs/benefits from the contract for differences could ultimately be allocated to SOS). As things stand now, however, a nonbypassable charge to address capacity and energy costs of the assets under the RFP would not negatively impact comparison of SOS prices with competitive retail rates.

The Pepco utilities continued: "Furthermore, any requirement that an IOU EDC enter into a long-term procurement agreement resulting from the RFP will transfer significant risks from generators and to the IOU EDCs and their customers."

"If the Commission is to proceed with an RFP process for new generation capacity, there must be clarity concerning the key elements of risk mitigation and cost recovery. These include (a) non-bypassable charges for all distribution customers to protect the IOU EDCs' SOS customers; (b) timely true-up mechanisms similar to fuel adjustment charges designed to recover the above market expenses related to generation obtained through the RFP; and (c) measures to mitigate the increased capital costs created by the imputed debt of long term power purchase agreements," the Pepco EDCs said.

In their rehearing request, the Pepco utilities also reiterated their arguments that utility-owned generation should be included in the RFP.