Maryland Bombshell: Proposed Order Would Eliminate SOS Admin. Charge

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February 7, 2011  

A proposed order from a Maryland hearing examiner would completely eliminate the administrative charge which comprises part of the bypassable SOS rates at Pepco and Delmarva, finding that the charge is no longer justifiable given the maturity of the retail market (Cases 9226 & 9232).

Currently, the admin charge is 4 mills/kWh at each utility.  Pepco and Delmarva were actually seeking an increase in the charges to reflect higher cash working capital costs.

As currently structured, the SOS administrative charge includes a return component, an incremental cost component, an administrative adjustment, and an uncollectible component.  Funds collected from the administrative adjustment on a bypassable basis are also credited to all distribution customers through an administrative credit on a nonbypassable basis.

As only noted in Matters (8/10), Staff said that such costs do not reflect all costs relating to the provision of SOS, and suggested a new bypassable "allocated cost component" to recover costs such as customer accounts expenses, billing expenses, credit and collection expenses, customer service expenses, and customer information expenses related to generation service.  Such costs are currently recovered in nonbypassable distribution rates.

"I find that since all customers must use distribution services, there is no overcharge of non-SOS customers by having some costs embedded in distribution rates," the hearing examiner said.  "I further find that continuing the Administrative Charge causes the rate paid for SOS to be artificially too high.  Since the market is fully mature and functional, there is no need to have any adjustments to try to keep SOS rates too high and no need in a competitive market to try to benefit suppliers.  Since all customers pay the same distribution rates, suppliers who can operate efficiently will still be able to be profitable.  It is the utilities who must accept customers that suppliers reject as not worthy or as too high a business risk to take on as a customer."

"It is time to see if the end game objectives of the move toward competition will present themselves or whether the experiment is a failure," the hearing examiner concluded.

The relief proposed by the hearing examiner is beyond even what the People's Counsel proposed, which had recommended in testimony continuing the incremental cost component and uncollectible cost component (though at lower levels) along with a cash working capital cost component.

"It is interesting to note that the Commission's own website lists at least 70 suppliers in each Company's service territory.  There appears to be enough of a choice of supplier to support [the Office of People's Counsel] assertion that the market is mature and in no need of artificial subsidization to promote a higher percentage of customers migrating to competitive suppliers.  I therefore find that the compromised structures [for the admin. charge] put in place in the [restructuring] Settlement Agreement have outlived their usefulness and need.  Any customer who wants to shop can, and the fact that that percentage is lower than some stakeholders would prefer does not mean that the market is not mature and as competitive as the law can dictate," the hearing examiner said.

The 70 "suppliers" cited by the hearing examiner include non-load serving brokers, and the actual number of suppliers in the mass market is about a dozen.

The hearing examiner did propose that all cash working capital costs are to be recovered in SOS rates and shall earn a rate of return as set in each utility's last rate case at the authorized rate of return, subject to an annual true-up proceeding.

All Standard Offer Service costs and revenues would also be examined as part of each utility's next rate case.

The hearing examiner concluded that, "the history of SOS has shown that it carries very little risk," and said that an additional return above the return on cash working capital costs (set at the authorized rate of return for distributions service) is not warranted.

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