# Presentation: 307261

## The Freeze is Over: Rate Caps and Rate Implications How the Maryland Market Is Working 

***National Low Income Energy Conference ***
***June 14, 2005***
***Sheldon Switzer***
***Director – Electric Pricing and Tariffs***

**Notes:**
When I was in ISTP I found that learning about different parts of the Company was interesting & helpful.  So I will start by talking about my area’s functional organization as well as how we fit from a process orientation.
Then I will talk extensively about a topic that is a key focus of our department electric deregulation.  This will show you how many of us are spending quite a bit of our time, many other areas of the company are involved and I want you to have this information so that you can answer neighbors’ and friends questions.  

## Cartoon From The Carroll County TimesFebruary 1, 2001

## Slide 3

## “I usually take a two hour nap from 1 to 4.”

## Slide 5

## “When you come to a fork in the road, take it”

***“******When you come to a fork in the road, take it”***

- Regulation or Competition
- Competitive market for generation supply
- Other “political” objectives
**Competitive Metering**
**Universal Service **
**Conservation**
**Price Protection**
- Did we take the right fork in the road?

## “You’ve got to be very careful if you don’t know where you are going because you might not get there”

***“******You’ve got to be very careful if you don’t know where you are going because you might not get there”***

- The Electric Customer Choice and Competition Act of 1999
- Orderly transition to competitive supply market
- Maintain electric system reliability
- Compliance with environmental regulations
- Fair to customers and investors
- Provide economic benefits to all customer classes

## Provide economic benefits to all customer classes

- Customer group driving Deregulation – Large, Industrial Customers
- What about?
- Residential Customers
- Low-Income Customers

## Universal Service Fund

- The Commission shall establish a Universal Service Program to assist electric customers with annual incomes at or below 150% of the Federal Poverty Level.
- The components of the Universal Service Program:
- Bill assistance, at a minimum of 50% of the determined need
- Low-income weatherization
- A ‘one-time’ retirement of arrearages

## Universal Service Fund

- The total amount of funds to be collected for the Universal Service Program (first 3 years.)
- 	$24.4 Million shall be collected from the Industrial and Commercial Classes
-   $9.6 Million shall be collected from the Residential Class.
- In any year when there are unexpended funds, those funds shall be returned to the customer classes proportionate to how the Customer Classes paid into the fund.
- The Commission shall recommend a total amount of funds to be used thereafter.
- All Customers will contribute to the funding of the Universal Service Program through a charge collected by each Electric Company.

## Universal Service Fund

- The Commission shall determine a fair and equitable allocation for collecting the charges among all Customer Classes.
- An Electric Company shall recover Universal Service Program costs.
- The Commission may not assess the Universal Service Surcharge on a per kilowatt-hour basis.

## Universal Service Fund

- The Department of Human Resources, with oversight by the Commission, shall disburse the funds.
- The Department of Human Resources shall be responsible for administering the Universal Service Program.
- The Commission shall have oversight responsibility for the Universal Service Program.

## Slide 13

## Source: Electric Power Supply Association; Assessing the “Good Old Days” of Cost-Plus Regulation; July 23,2001

## Maryland Electric Choice History and Update

**Notes:**
Before I start doing all the talking let me ask:  When I say deregulation or Choice what do you think of?

## Electric Choice History

- Maryland’s Electric Utility Industry was deregulated through a combination of events:
- Electric Customer Choice and Competition Act of 1999
- Maryland Public Service Commission Orders
- Individual utility restructuring cases and settlements
- Roundtable meetings consisting of utility, regulatory, industry and customer representatives outlining detailed implementation rules

**Notes:**
 Electric was deregulated through a combination of legisation, regulatory decisions and settlements.
Law signed by then-Governor Glendening in 4/99.
BGE settlement reached June 29, 1999
BGE’s Settlement approved by PSC on 11/10/99
Roundatables setting the implementaion rules and processes.  (Supplier Authorization, Customer Education and Competitive Billing, Customer Protection, Universal Service and DSM)

## “It was impossible to get a conversation going, everybody was talking too much.”

***“******It was impossible to get a conversation going, everybody was talking too much.”***

- The Settlement Processes
- Roundtables -- competitive billing, universal service, customer education, demand-side management, supplier tariffs, technical implementation
- The “big issues” -- Case Nos. 8794/8804
**Stranded Cost Quantification**
**Price protection**
**Unbundled rates**

## Electric Choice History 

- In the past, a customer’s entire electric service was provided by the local electric utility (Vertically integrated electric utility)
- As a result of electric deregulation, on July 1, 2000 all BGE customers were able to choose their electricity supplier

## Electric Choice History

- What was deregulated?
- In a deregulated market, generation, transmission and distribution are separated
- Now, customers can choose the company that they contract with for electricity supply (generation and transmission)

**Notes:**
Transmission = Network Integration Transmission Service charged at rates published in Open Access Transmission Tariff (OATT)

## What Is Purchased From a Supplier

- Generation (non-regulated) consists of:
- Energy
- Capacity
- Transmission (regulated)

**Notes:**
Energy cost - based on your hourly load and Locational Marginal Price (LMP)
Capacity charge - based on Peak Load Contribution (PLC)
Ancillary services
generation operating reserves
generation regulation service
voltage control and reactive power supply services
local generation scheduling & dispatch services
PJM administrative services

## What Continues To Be Regulated?

- Transmission is still regulated by the Federal Energy Regulatory Commission (FERC) and included when generation is purchased
- Role of PJM as an RTO
- Distribution services, that is, the delivery of the electricity to a customer’s facility, are still provided by the local utility - BGE

**Notes:**
 For GLs, 
7.25 cents/kWh total
generation  - 4.18 cents/kWh (58%)
transmission - .28  4.46 = PFS/Price to Compare
CTC .60 (8.2%)
distribution - 2.19  cents/kWh (30%)

## What is Competitive

## A Competitive Electric Market Takes Time to Develop

- As part of the transition, Price Freeze Service (PFS) was put in place to allow time for the market to develop
- PFS – Price protection / smooth transition  -- but limited the development of a competitive market by stabilizing prices at low levels for a fixed period
- PFS does not reflect current market prices because they were based on the last rate case held in 1993
- In BGE’s service territory, the majority of electric Choice activity has started with the larger businesses and government entities.

## Key Steps In The Developing Market:End Of BGE Price Freeze Service

- PFS ended for Schedule P accounts on 6/30/02
- 99% of Schedule P accounts enrolled with a third party
- PFS ended for remaining non-residential accounts on 6/30/04
- 114,000 accounts
- PFS ends for residential accounts on 6/30/06

**Notes:**
In July of last year, 92% of accounts & 96% of load.

## “I knew I was going to take the wrong train, so I left early”

***“******I knew I was going to take the wrong train, so I left early”***

- We have a ***transition*** to a competitive generation supply market -- limited ability for competitive market to develop in the short term

## Benefits of Deregulation

- Competitive Wholesale Generation Market
- Retail Choice
- Customers are able to select an electricity supplier that offers service which best meets their needs
- For example, customers can shop for a supplier that offers the best prices for their energy load profile and energy efficiency services including energy management

## The PJM Power Pool

- PJM Interconnection is a regional transmission organization (RTO)
- PJM ensures the reliability of the largest centrally dispatched control area in North America
- PJM, acting neutrally and independently, operates **the largest competitive wholesale electricity market in the world**. (Independent System Operator (ISO))
- PJM manages a sophisticated regional planning process for generation and transmission expansion to assure future electric reliability.
- PJM facilitates a collaborative stakeholder process. Stakeholders include participants that produce, buy, sell, move and regulate electricity.

## Gas Customer Choice

- A much simpler process!
- Commodity vs. Pipes
- Fuel Rate / Market-based Rates
- Interstate Pipelines
- Distribution inside the “city gate”
- Retail choice significant for Industrial and Commercial Customers

## Provider of Last Resort

*“**Baseball is 90% mental -- the other half is physical”*

## Provider Of Last Resort (Case 8908)

- Settlement reached November 15, 2002 which established Provider of Last Resort (POLR) for all utilities in Maryland
- POLR Phase I
- The Maryland Public Service Commission approved the settlement on April 29, 2003

## Provider of Last Resort (POLR)

- The Provider of Last Resort is the local distribution company (LDC) - e.g., BGE, PEPCO, etc.
- POLR provides new fixed price market based Standard Offer Service (SOS) for customers whose Price Freeze Service has ended and no supplier has been selected
- This is being done
- To continue the smooth transition to electric Choice
- To provide customers with protection against the volatile Default Service rate

**Notes:**
SOS includes the generation and transmission.  The same components as are included if you buy from a third party supplier
Right now, if you are not on PFS or with a supplier, you are on Default Service.  DS includes energy prices which can change hourly and a 7 mill (.07 cents) per kWh adder.  DS prices can be quite high in the summer and low at various times of the year but are very changeable.

## Key Term: Capacity PLC

- Peak Load Contribution (PLC) is a measure of the peak amount of electricity a customer uses
- Along with other aspects of the service, PLC is used by suppliers to determine their prices
- The PLC is set annually unlike billing demand
- Capacity PLC is:
- Share of PJM’s peak in the summer period (6/1 - 9/30)
- Based on the 5 peak hours occurring on 5 different days
- Used to determine the POLR service for which non-residential customers are eligible

**Notes:**
To understand the different POLR services, this is a term you need to understand
The Peak Load Contribution is a customer's share of the total capacity on the system. The capacity and transmission PLCs are used to calculate customer capacity obligation, and are calculated annually. The PLC is used to calculate BGE's Default Service charges, and it is used by suppliers to calculate capacity and transmission charges.
Capacity PLC is the share of PJM’s peak  (PJM = the interconnection grid), [weather normalized] in the summer period of June 1 - Sept. 30
Are established based on the 5 peak hours occurring on 5 different days
[2002 PJM Capacity peaks were
7/3 hr-ending 5 PM 	  -- 8/13 5 PM
7/29 5 PM 	  -- 8/14 4 PM
8/2   4 PM
[Network PLC = share of BGE’s actual peak for full year 11/1 - 10/31]
Pennsylvania-New Jersey-Maryland Interconnection is a regional transmission organization (RTO) that ensures the reliability of the largest electric grid in North America by coordinating the movement of electricity in all or parts of Delaware, Maryland, New Jersey, Ohio, Pennsylvania, Virginia, West Virginia and the District of Columbia. 
A mill equals .1 ¢, e.g., 1 mill = .1 ¢, 6 mills = .6¢.

## Summary of POLR Market Based Rate Plans

## Summary of POLR Market-Based Rate Plans For Accounts of 600+ kW PLC

## PFS Doesn’t Reflect Current Market Prices

**Notes:**
This shows that electricity costs have declined in real dollars and our message points when to customers touch on this
Still, you see that in real dollars, prices have dropped in total from 5.46 cents/kWh in 1992 to 3.5 cents/kwh in 2003.

## Since 1999 Cost of Fuels Rose While BGE Residential Electric Prices Declined

**Notes:**
This chart illustrates that energy costs have gone up.  Here I focus on the costs from the producers (electric generators) perspective).
This is a chart I used in my customer presentations.

Back-up notes:
This chart shows electric costs primarily from the perspective of an electric generator so that you can see that while energy production costs have increased, BGE residential rates decreased.
Residual fuel is for oil-fired generators
Natural gas is the cost to utilities
US Electric is an average of prices from the Producers Price Index of residential (up 8.6%), commercial (up 9.2%), industrial (up 13.4%,) with the aggregate increase of 9.8%.
Coal represents the NYMEX spot price for coal
Electric rate component of national CPI has gone up 10% since ‘99

## POLR Phase II

- Separate settlement reach by most of the same parties and filed with PSC on 6/30/03
- PSC hearings to be held at end of August
- Addresses details on wholesale supply bidding process including
- Model Request for Proposal
- Credit requirements and application
- Contracts
- Schedule
- Reporting requirements

## Slide 39

## Residential Customers

- Pepco
- July 1, 2004 – May 31, 2005
- Total annual bill - 16%
- Total annual supply bill – 26%
- July 1, 2005 – June 30, 2005
- Total annual bill – 4.5%
- Total annual supply bill – 6.6%

## Small Commercial Customers

- Pepco
- July 1, 2004 – May 31, 2005
- Total annual bill - 16%
- Total annual supply bill – 31%
- July 1, 2005 – June 30, 2005
- Total annual bill – 4.5%
- Total annual supply bill – 7.1%

## Small Commercial Customers

- BGE
- July 1, 2004 – May 31, 2005
- Total annual bill - 17%
- Total annual supply bill – 27%
- July 1, 2005 – June 30, 2005
- Total annual bill – 4.1%
- Total annual supply bill – 6.5%

## Why the large increases in retail generation supply prices under market-based SOS rates?

- Some would say --
- Electric Industry Restructuring is a Failure
- If it wasn’t broke, we shouldn’t have changed it
- Bring Back the Good Old Days
- Are they correct?????
- Last price change in 1993 for BGE
- Fuel price increases which are largely exogenous to the structure of the electric utility industry

## What changed?

- Industry Structure
- Wholesale Competitive Markets
- Open Access Transmission
**Utility Mindset**
- No longer a Next Base Rate Case Focus
- Profitability no longer dependent on “prudent” management and a good regulatory environment
- Change in the conduct of business
- Not just generation
- Not just transmission
- BUT distribution as well
- Benchmarking / Cost cutting /Efficiency improvements

## Econometric Model

- ($/CPI) / kWht = α0 +Σ β1i NERCi + β2CPI (fuel)t + β3 Dummy93t + Σ β4i NERCi * Dummy93t + εt
- Ln(($/CPI)/kWht)=α0+Σ β1i NERCi 	+β2Ln(CPI(fuel))t+β3Dummy93t 	+Σβ4iNERCi*Dummy93t+εt
- 	Real cost of electricity (per kWh) as a function of the NERC region, an inflation index for fuel costs, a dummy variable that is one for the years 1993 through 2002, zero otherwise, and an interaction term between the NERC region and the dummy variable.

## Slide 46

## Results

|  |  |  | $/kWh  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- |
| R2 | CPIFuel | Dummy93 | Pre 1993 | Post 1993 | Post-Pre | %Change |
| Total |  |  |  |  |  |  |
| 0.623 | 0.0078 | -0.0138 | 0.0534 | 0.0401 | -0.0132 | -25% |
|   | (9.2) | (-8.2) | (182.9) | (82.9) | (-21.5) |   |
| Residential |  |  |  |  |  |  |
| 0.601 | 0.0038 | -0.0141 | 0.0627 | 0.0503 | -0.0124 | -20% |
|   | (4.2) | (-7.7) | (198.6) | (95.9) | (-18.7) |   |
| Commercial |  |  |  |  |  |  |
| 0.649 | 0.0025 | -0.0158 | 0.0588 | 0.0439 | -0.0149 | -25% |
|   | (2.83) | (-9.1) | (195.5) | (88.0) | (-23.5) |   |
| Industrial |  |  |  |  |  |  |
| 0.570 | 0.0124 | -0.0143 | 0.0407 | 0.0273 | -0.0134 | -33% |
|   | (15.6) | (-9.1) | (148.1) | (59.9) | (-23.1) |   |

## Conclusion

- Benefits of competition are substantial
- “Threat of competition” as a precursor to actual industry transformation had an impact
- Competitive Wholesale generation
- More efficient utilities and improved business practices for distribution
- Residential customers gain, but less than others
- Fundamental gain – derives from the need to operate and plan generation supply efficiently to maximize profits

## Conclusion

- Retail choice
- Large customers have unique load profiles and ability to respond to price signals and participate in load response programs
- Smaller customers – benefits are less clear plus need to have a POLR service for those who choose not to shop
- Avoid imposing complicated market rules, policies that restrict the availability of optional value-added utility services, and policies that would impose uneconomic costs (e.g. interval meters for small customers)
- Consider Incentive Ratemaking

## Where Can I Get More Information?

- Maryland Public Service Commission:_  www.psc.state.md.us/psc_
- BGE website:  _www.bge.com_

## Questions?

**Notes:**
Gas prices:
The major portion of your gas bill is for the commodity.  BGE buys gas commodity in the competitive market and basically passes through the  cost to you.  We try and buy when prices are lower.
Gas prices had been lower for a number of years.  Now demand has been picking up.  New wells need to be dug and this is starting but there is a lag in the increase of supply.  
Experts like American Gas Asn are saying that gas prices will continue to be high and we are seeing that this summer.
Summer is when prices normally are lower but as we replenish our supply to provide you service next year, the prices are higher than in summers past.
Roll back Choice?
BGE believes there is still the need to give Choice a chance.  I noted we are in transition and have not seen the full benefits of Choice.  It takes markets time to get up and running - it has been years since telecommunications was deregulated and we are now seeing the increase in options and lower long distance prices.  Choice is working in the NE and in Europe.  PA has estimated that consumers have saved millions.  You are even seeing savings here in Maryland even if you are still with the utility.  Generators saw deregulation coming and have increased their operational efficiency.  BGE electric base rates are at the same level as in 1993.

## “It ain’t over till it’s over” -- Yogi

- NY Yankees 1946 - 1963
- 3 time American league MVP
- 14 Pennants
- 10 World Series Championships
- 15 successive All-Star Games
- Elected to Baseball Hall of Fame -1972

## Slide 53