New Treatment of RMR Costs Under Maryland SOS Contracts Proposed; Alternative SOS Procurement Again Presented for Potomac Edison

A report on the Maryland SOS Procurement Improvement Process for 2012 has raised an issue regarding how PJM Reliability Must Run (RMR) charges are handled for SOS customers, and has again presented an alternative procurement schedule for residential and Type I SOS at Potomac Edison.

According to the Procurement Improvement Process report, at least one wholesale supplier advocated making RMR charges the responsibility of the buyers (the utilities), rather than the SOS suppliers, given an expectation that such charges may increase substantially in coming years.

Essentially, the possibility of increased RMR charges creates additional risks for the wholesale suppliers, which could be alleviated by making the utilities and ratepayers directly responsible for the charges, the report notes.

While there was some agreement that this might make potential bidders more willing to bid, parties also recognized that it could substantially increase ratepayers' exposure to the same risks. Instead of having bidders price this risk into their bids at possibly discounted levels, RMR charges would essentially become pass-throughs, the report notes.

Notably, the removal of RMR charges from the SOS product (provided that they are not placed in distribution rates with retail suppliers relieved of their RMR obligations) would mean that the SOS product is no longer a full requirements product, and could skew the retail market.

Ultimately, it was agreed that while the Commission might want to consider whether the reallocation of RMR risk is desirable and appropriate, such a change would not be within the intentionally limited scope of the annual Procurement Improvement Process. Accordingly, if the Commission is interested in resolving this issue, it should consider establishing a separate proceeding to do so, the report says.

The Procurement Improvement Process report also once again presents two potential schedules for the procurement of residential and Type I SOS at Potomac Edison, including the current mechanism and an alternative which transitions Potomac Edison to the format used by BGE, Pepco, and Delmarva.

For BGE, Pepco, and Delmarva residential SOS and Type I SOS, bidding will take place in October of 2012 for June 1, 2013 power flow and in April of 2013 for October 1, 2013 power flow.

For Potomac Edison's residential SOS, if the current schedule is maintained, bidding will take place in October 2012, January 2013, and April 2013 for June 1, 2013-May 31, 2014 and June 1, 2013-May 31, 2015 power flow. Potomac Edison's June 2013 Residential bidding will be for a June 1, 2014-May 31, 2015 and June 1, 2014-May 31, 2016 power flow. As indicated, each Potomac Edison residential procurement includes one 12-month and one 24-month contract, and all delivery start dates are all on June 1 (with no October 1 start dates).

PSC Staff requested that Potomac Edison develop a transition plan to conform to the residential and Type I schedule used at the other utilities, so that this alternative may be presented to the Commission. The proposed alternative transition schedule includes a combination of 4, 12 and 24-month residential SOS procurements so that by June 2015, Potomac Edison's procurement structure is identical to that of BGE, Pepco, and Delmarva – all contracts are for two years, and all residential procurements occur in April and October.

Potomac Edison has used its unique schedule for the last several procurement cycles in order to try to capture cost savings for customers by facilitating winning bidders' ability to select their own Auction Revenue Right (ARR) paths and convert them into Financial Transmission Rights (FTRs). According to the report, Potomac Edison continues to have serious concerns about transitioning to the schedule used by the other utilities, since an October 1 start date for SOS contracts would eliminate 50% of the contracts in the first year having the benefit of the winning suppliers' ability to select their own ARR paths. Additionally, an October 1 start date would not allow SOS suppliers to convert whatever ARR paths that have been selected into FTRs.

The report recognizes that ARR revenues can be significant for the Potomac Edison Zone, but Staff notes, however, that these revenues have decreased substantially since the potential transition was last discussed in 2010. Potomac Edison believes that although this revenue potential has declined, it is still likely to be in the millions of dollars. According to the report, wholesale suppliers who took part in the discussion were either indifferent or somewhat supportive of Potomac Edison's position that they should continue to control the ARR path selection and FTR conversions if they win.

The advantage of transitioning Potomac Edison to the SOS schedule used by the other utilities is that all four utility procurements will be identical in structure. Staff believes that this may help make Potomac Edison's procurements more competitive, and that the correspondence with other utilities may attract some bidders that have so far declined to participate in Potomac Edison's procurements.