Maryland Utilities Cite Risks from Obligations Under Long-Term Capacity Contracts if Agreements' Approval Litigated

The Maryland investor-owned electric distribution companies (EDCs) have informed the Maryland PSC that the existing draft contract for differences to be procured under the PSC's capacity RFP (see 9/30) poses serious risks to the EDCs and their customers if any awarded contracts become subject to litigation, which the EDCs noted is likely to occur.

In joint comments, Baltimore Gas and Electric Company, Delmarva Power & Light Company, the Potomac Electric Power Company, and The Potomac Edison Company said that of particular concern is the remaining obligation and exposure of EDCs under the contracts if the contracts are ultimately struck down by a court or other regulatory body, or if authority to collect rates from various classes of Maryland customers is reversed by a court.

"[T]here appears to be a significant risk that some set or sets of stakeholders, whether customers, retail or wholesale suppliers, competing projects, or others, will be dissatisfied with the RFP results, decision to proceed, or methods of contract implementation, and will seek to litigate elements of a Commission action," the EDCs said.

Aside from the threats of various incumbent capacity owners to seek relief from FERC, the electric distribution companies said that the RFPs could be challenged under Maryland statute as well.

"A Commission order to proceed is also likely to be challenged as inconsistent with the provisions of the Electric Customer Choice and Competition Act ('Customer Choice Act'), Md. Code Ann., Pub. Util. Act ('PUA') § 7-501 et seq.," the EDCs said.

"The Commission has invoked two provisions within PUA § 7-510 as the source of statutory authority for its action. The first is in § 7-510(c)(6), which provides '[i]n order to meet long-term, anticipated demand in the State for standard offer service and other electricity supply, the Commission may require or allow an investor-owned electric company to construct, acquire, or lease, and operate, its own generating facilities ... subject to appropriate cost recovery," the EDCs said [emphasis by EDCs].

"Nothing in the RFP, however, contemplates that the EDC will 'construct, acquire, or lease, and operate, its own generating facilities' as provided in § 7-510(c)(6)," the EDCs noted. "Indeed, the contrary is true. The RFP winners will construct and own all of the generation and operate the generation. Nothing in § 7-510(c)(6) permits the contracts contemplated here," the EDCs said.

The Commission also relies on § 7-510(c)(4)(ii)(1)(B), cited in conjunction with § 7-510(c)(4)(ii)(2)(A) for its authority. "In pertinent part, these sections allow the Commission to require an 'investor-owned electric company to procure electricity for [residential and small commercial standard offer service] customers from an electricity supplier through one or more bilateral contracts outside the competitive process,'" the EDCs said.

"On their face, these provisions only allow the utilities to procure electricity for standard offer service ('SOS') customers, i.e., those customers that have not exercised their legal right to purchase electricity supply from a competitive retail electric supplier, through bilateral contracts rather than through the competitive full requirements supply wholesale bidding process. Plainly, customers that are shopping for electricity cannot be charged for electricity procured for customers remaining on default service," the EDCs said.

The EDCs further said that the suggestion that impracticably or unsustainably high contract costs could be passed on instead through distribution rates appears to have been called into question by the Court of Special Appeals' decision in Severstal Sparrows Point, LLC v. Public Service Commission (see prior 1/25/11 story and 9/20/10 story for discussion of the case).

The EDCs also questioned whether a contract for differences which excludes alternatives other than new natural gas capacity could meet the statutory "best price" standard for SOS.

"Further, in addition to cost allocation and recovery issues, the EDCs are concerned that the Agreement as structured is not for the purchase of electricity, and so does not result in the 'procurement' of electricity pursuant to the statutory text. The Agreement is to be a 'financial arrangement ... in which the physical delivery to the [EDC] of the Capacity, Energy and Ancillary Services is not required' ... The Agreement will not yield any electricity for resale to SOS customers and will not displace any of the EDCs' need to procure under the existing SOS supply procurement process. As such, it is unclear how it can be said to 'procure electricity for [SOS] customers' pursuant to the statute," the EDCs said.

"The Commission may determine that it can resolve this latter legal issue by linking the Agreement to SOS, with the costs and potential benefits incurred under the contract passed through only to SOS customers. However, even setting aside whether this action would resolve the legal issue, the resulting financial pressures could jeopardize the viability of SOS and ultimately the financial performance and health of the EDCs. As the Commission is aware, significant numbers of customers are taking advantage of lower rates in the competitive retail market. As of January 2012, customers representing over 48% of the peak load served by Maryland EDCs buy their energy needs from competitive suppliers and more and more are doing so every day. It is not clear how many customers, if any, will remain on SOS during the up to 20 year term of the Agreement, leaving the EDCs and any remaining SOS customers fully exposed to the cost of the contracts. While the Commission has not disclosed the cost of the contracts, we believe that the total cost could be significant. To the extent the costs exceed the EDCs' costs to procure electricity through the competitive bidding process, it is likely that the contracts will trigger even more migration from SOS. That migration will, in turn, leave fewer customers to bear the costs, leading to still higher SOS prices and increased customer migration. To the extent that the EDCs do not have sufficient numbers of SOS customers to cover these costs, the contracts would imperil the EDCs financial ability to provide reliable service," the EDCs said.

"There is a similar risk that follows from the uncertainties associated with the open questions of which EDC customers will bear the costs (and receive potential benefits) of the Agreement, in what proportion those customers will bear the costs, and by what method they will be required to pay. It is important to resolve how costs and risk will be allocated among EDCs and among customers of different EDCs and different classes before undertaking contractual obligations. To the extent these issues have not been resolved prior to execution of contracts, there is risk of customer litigation and significant risk that EDCs will not have the means to meet their financial obligations under the Agreement," the EDCs said.

The EDCs said that they, "face a very real problem in executing the Agreements in the current form because they ask the EDCs to represent to the project developers that these issues do not exist."

The EDCs' preferred option would be to resolve these issues before executing contracts. However, the EDCs requested at a minimum that the Commission make the modifications listed below to the proposed Agreement prior to the selection of any prevailing bidders and the execution of contracts between EDCs and prevailing bidders:

• Incorporate terms in the Agreement clarifying that the EDC only has obligations to the project developer under the Agreement to the extent the EDC lawfully collects revenue from customers sufficient to meet those obligations. Under no circumstance will customers or the EDC be responsible for stranded costs incurred in project development should the project fail or litigation overturn a Commission decision to proceed;

• Allow the EDCs to incorporate exclusions from the representations made by the EDCs to project developers to account for the practical and legal risks associated with the Agreement or eliminate those representations from the Agreement; and

• Provide clarifying changes postponing the effectiveness of the Agreement until not only direct appeals are resolved, but rather until all legal proceedings related to the Commission decision, the Agreement, or other Commission decisions implementing the decision (including those providing for cost recovery) are fully resolved