Retail Suppliers Ask Maryland to Recover POLR Charge in Shopping Customers' Distribution Rates, Instead of From Suppliers Directly

The Retail Energy Supply Association has asked the Maryland PSC to modify the cost recovery mechanism for Baltimore Gas and Electric's natural gas Provider of Last Resort (POLR) Capacity cost rate, under BGE's Rider 7 - Gas Choice and Reliability Charges, such that the POLR charge is recovered through the distribution rates of shopping customers, rather than a charge imposed on retail suppliers.

The PSC is to consider BGE's updated Rider 7 at today's administrative meeting. The POLR capacity costs reflect BGE's costs to stand ready to serve firm distribution service customers that take service from third-party suppliers in the event their customers (shopping customers) return to BGE's sales service.

BGE has filed to update the POLR capacity cost rate from ($0.0035) per therm to $0.0226 per therm. The large increase is driven by the acquisition of additional pipeline capacity, lowered mitigation for released capacity, and the need to true-up last year's rate which was significantly impacted by the mild 2011/2012 winter.

The POLR capacity charge assessed to retail suppliers has fluctuated greatly between 2009 and 2013 -- as low as ($0.0102) per therm to the proposed $0.0226 per therm.

Given the volatility in the rate, RESA has requested that POLR Capacity cost charge instead be assessed to shopping customers via distribution rates.

RESA noted that under a 2004 settlement establishing the POLR Capacity cost charge, the charge was recovered from shopping customers via their distribution rates for the first year of the charge. "The rationale behind this recovery method was that the POLR capacity costs were attributable to shopping customers, but since suppliers had not priced in the POLR capacity charge into their [existing] contracts, they would not have the opportunity [to] recover the POLR capacity costs from their customers."

After the first year, the POLR Capacity cost charge has been assessed to retail suppliers.

However, RESA said that eight years since the adoption of the 2004 settlement, "it is clear that BGE has had difficulty estimating the POLR capacity charge with any certainty," for reasons largely outside of BGE's control.

"This is seen by the large fluctuations (both positive and negative) in the amount of the POLR capacity charge, culminating in this year's proposed $0.26 [per dekatherm] increase over last year's charge," RESA said.

"In order to develop and provide the most cost-effective products to customers, suppliers, like any business, need some degree of certainty surrounding various cost components," RESA said in explaining the challenge presented by recovering the fluctuating charge from retail suppliers.

"If suppliers cannot effectively predict the charge, they are forced to build in a larger risk premium into their contract price with customers. In fact, the only predictable outcome of the current POLR capacity charge recovery mechanism is that it will, invariably, result in higher price offerings to customers. Moreover, subjecting customers to larger risk premiums undermines their ability to take maximum advantage of historically low natural gas prices," RESA said.

"[G]iven the difficulty in deriving and the resulting volatility of the POLR capacity charge, the better mechanism is for BGE to recover the charge through shopping customers' distribution rates," RESA said.

"While it may require some minimal programming changes for BGE to revert back to this model, any incremental costs (if there are any at all) would be greatly outweighed by the increase in shopping customers' supply rates and the market inefficiencies that will result from suppliers continuing to bear the POLR capacity charge," RESA said.