BEFORE THE MARYLAND PUBLIC SERVICE COMMISSION * * * * BRIEF OF THE STAFF OF THE

Transcription

1 BEFORE THE MARYLAND PUBLIC SERVICE COMMISSION IN THE MATTER OF THE OPTIMAL STRUCTURE OF THE ELECTRIC INDUSTRY OF MARYLAND * * * * CASE NO BRIEF OF THE STAFF OF THE MARYLAND PUBLIC SERVICE COMMISSION DECEMBER 8, 2006

2 Table of Contents I. Introduction... 1 A. Background and Procedural History... 1 B. Positions of Parties AP BGE SMECO AOBA CESI PEPCO/DPL WGES CNE RESA CECG MEA/PPRP OPC Staff II. Argument A. SB1 Must be Interpreted in Light of the Overall Statutory Scheme of Electric Restructuring B. Procurement Issues Issue List Items 1, 2, 4 and The Commission Should Evaluate SOS Procurement Proposals According to the Criteria Outlined by Staff The Record Does Not Support the Procurement of Contracts of More than Three- Years Duration, the Purchase, Lease or Construction of Generation, or the Procurement of SOS Power Through the Use of Negotiated Bilateral Contracts The Commission Should Reject OPC s Proposed Procurement Planning and Managed Portfolio Approach The Commission Should Adopt Staff s Procurement Proposal C. Energy Conservation and Efficiency Issues (Issues List Items 3 and 6) - The Commission Should Direct the Demand Response and Distributed Generation Working Group to Develop Proposals for Integrating Energy Efficiency and Conservation Measures into SOS Supply Procurements and Proposals for Implementing Time-of-Use Rates as Widely as Possible in Maryland D. Municipal Opt-Out Aggregation (Issue List Item 5) E. Definition of Default Service (Issue List Item 8) III. Conclusion ii

3 Table of Authorities Federal and State Cases Baltimore Gas and Elec. Co. v. Public Service Comm n of Maryland, 305 Md Bank of America f/k/a Nationsbank v. Stine, 379 Md Gov t Employees Ins. Co. and GEICO General Ins. Co. v. Ins. Commissioner of the State of Maryland, 332 Md Mid-Atlantic Power Supply Ass n v. Public Service Comm n of Maryland, 361 Md Federal and State Administrative Cases 16 U.S.C. 2621(d)(3) Allegheny Energy Supply Company, LLC, Docket No. ER , 108 FERC 61,082 (July 29, 2004) In the Matter of the Commission s Investigation into Default Service for Type II Standard Offer Service Customers, Case No. 9056, Order No (Aug. 28, 2006) In the Matter of the Competitive Selection of Electricity Supplier/Standard Offer or Default Service for Investor-Owned Utility Small Commercial Customers; and for the Potomac Edison Company d/b/a/ Allegheny Power s, Delmarva Power and Light Company s and Potomac Electric Power Company s Residential Customers... 2 Md. Code Ann., PUC, 7-510(c)(4)(ii) Re Baltimore Gas and Elec. Co., 81 Md. P.S.C Re Competitive Selection of Electricity Supplier/Standard Offer Service, 94 Md. P.S.C , 26 Re Competitive Selection of Electricity Supplier/Standard Offer Service, 94 Md. P.S.C Re Competitive Selection of Electricity Supplier/Standard Offer Service, Phase II, 94 Md. P.S.C Re Potomac Electric Power Co., 77 Md. P.S.C State Statutes Chapter 5, 2006 Maryland Laws, 1 st Special Session Chapter 5, 2006 Maryland Laws, 1 st Special Session, Section 7(a) Md. Code Ann., PUC, 7-510(c)(8)(ii)... 25, 27 Md. Code Ann., PUC, , 27, 34 Md. Code Ann., PUC, 7-510(c)(3)(iii) Md. Code Ann., PUC, 7-510(c)(3)(iii) Md. Code Ann., PUC, 7-510(c)(3)(iii) Md. Code Ann., PUC, 7-510(c)(4) Md. Code Ann., PUC, 7-510(c)(4)(ii)2.C iii

4 BEFORE THE MARYLAND PUBLIC SERVICE COMMISSION IN THE MATTER OF THE OPTIMAL * STRUCTURE OF THE ELECTRIC * CASE NO INDUSTRY OF MARYLAND * * BRIEF OF THE STAFF OF THE MARYLAND PUBLIC SERVICE COMMISSION Pursuant to the procedural schedule, the Staff of the Maryland Public Service Commission ( Staff ) hereby respectfully submits its Brief in the above-captioned proceeding, by and through the undersigned counsel. I. INTRODUCTION A. Background and Procedural History The Commission initiated this proceeding in response to a petition filed by the Office of People s Counsel ( OPC ) on March 16, Citing the results of the procurement and the relatively small number of residential customers obtaining their electricity supply from non-utility sources, OPC claimed that deregulation has not worked and urged the Commission to conduct an investigation into the optimal structure of the electric industry in Maryland. 1 By letter order dated March 27, 2006, the Commission sought comments from interested stakeholders on OPC s request. Parties responding to OPC s request and the Commission s request for comment included the Potomac Electric Power Company ( Pepco ) and Delmarva Power and Light Company 1 Request of the Office of the People s Counsel for an Investigation into the Optimal Structure of the Electric Industry in Maryland, Docket No. 1, March 16, 2006 at 1-2.

5 ( DPL ), Eastalco Aluminum Company ( Eastalco ), the Potomac Edison Company d/b/a/ Allegheny Power ( AP ), Maryland Energy Administration ( MEA ) and the Power Plant Research Program of the Maryland Department of Natural Resources ( PPRP ), Washington Gas Energy Services ( WGES ), South River Consulting, LLC ( South River ), Baltimore Gas and Electric Company ( BGE ), Southern Maryland Electric Cooperative ( SMECO ), and OPC. OPC also filed an amended request, while the Retail Energy Suppliers Association ( RESA ) filed a letter reserving its rights to comment at a later date. The Commission instituted this proceeding by letter order, on May 10, In addition to the parties named above, intervenors include: the Apartment and Office Building Association of Metropolitan Washington ( AOBA ), First Energy, Dominion Retail, Inc. ( Dominion ), the Maryland Industrial Group and United States Gypsum Co. ( MIG ), Commerce Energy, Inc. ( Commerce ), United States Department of Defense and other interested Federal Agencies ( DOD ), Sempra Energy ( Sempra ), the PJM Industrial Customer Coalition ( PICC ), Pepco Energy Services, Inc. ( PES ), the Maryland Public Interest Research Group, Public Citizen, Baltimore ACORN and Environment Maryland ( MPIRG ), ISG Sparrows Point, LLC ( ISG ), Consolidated Edison Energy, Inc. and Consolidated Edison Solutions, Inc.( ConEd ), Constellation Energy Commodities Group ( CECG ), Constellation New Energy, Inc. ( CNE ), Morgan Stanley Capital Group, Inc. ( Morgan Stanley ), Mirant Mid-Atlantic, LLC ( Mirant ), Coral Power, LLC ( Coral ), Conectiv Energy Supply, Inc. ( CESI ), 2 On the same date, the Commission docketed In the Matter of the Competitive Selection of Electricity Supplier/Standard Offer or Default Service for Investor-Owned Utility Small Commercial Customers; and for the Potomac Edison Company d/b/a/ Allegheny Power s, Delmarva Power and Light Company s and Potomac Electric Power Company s Residential Customers, Case No. 9064, initially intended as a policy 2

6 National Energy Marketers Association ( NEMA ), the Energy Power Supply Association ( EPSA ), and the Mayor and City Council of Baltimore ( Baltimore City ). OPC filed a motion seeking to begin evidentiary proceedings and consolidate this case with Case No The case was held in abeyance until after the completion of the special session of the Maryland General Assembly and the passage of Chapter 5, 2006 Maryland Laws, 1 st Special Session ( SB1 ). After the passage of SB1, both OPC and Staff filed motions to reopen this proceeding. On August 1, 2006, Staff filed a proposed issues list. After a prehearing conference held on August 2, 2006, the Commission adopted Staff s issues list on a preliminary basis, as well as a procedural schedule. 4 Based upon the requirements of various sections of SB1, the issues list included the following issues: 1. Purchase of SOS through competitive or negotiated contacts of various durations - SB1 7(b)(1); 2. Requiring or allowing IOU to purchase or lease generation - SB1 7(b)(2); 3. Procurement of energy efficiency and conservation measures at the time of the SOS bid for IOUs SB1 Section 7(b)(3); 4. Procurement of SOS through bilateral contracts between wholesale electricity suppliers and IOUs SB1 Section 7(b)(4); 5. Allowing opt-out aggregation of residential electric customer demand by local governments in the service territories of IOUs SB1 Section 7(b)(5); review regarding the provision of standard offer service for small commercial customers statewide, and residential service for Pepco, DPL, and AP customers. 3 Office of People s Counsel, Motion to Consolidate and for Evidentiary Hearings, Docket No. 23, May 24, Notice of Procedural Schedule, Preliminary Issues List and Intervention Status with Provisional Service List. Case No. 9063, Docket No. 71, Aug. 3, The procedural schedule was subsequently amended based on a motion by OPC. 3

7 6. Procurement process and criteria for evaluation of bids for energy and conservation resources SB1 Section 7(d)(2); 7. Evaluation of the benefits to small commercial customers of not offering SOS service SB1 Section 7(d)(3)(ii); 8. Definition of default service - SB1 Section 7(c)(3)(iii)2; and 9. Implications of various bid processes including declining block auction, full requirements bidding, variable pricing per formula - SB1 Section 7(c)(4). The Commission specifically permitted parties to address any other issues they considered appropriate. 5 This Brief does not address issue seven, because Staff made no recommendations on this issue. Parties filed direct testimony on October 3, OPC filed the Direct Testimonies of Barbara R. Alexander 6 and Jonathan Wallach. 7 BGE filed the Direct Testimonies of Mark D. Case 8 and Jonathan A. Lesser. 9 SMECO filed the Direct testimony of Sonja M. Cox. 10 MEA filed the joint Direct Testimony of Matthew I. Kahal and Steven Estomin. 11 CECG filed the Direct Testimony of Michael M. Schnitzer. 12 Staff filed the Direct Testimonies of John O. Sillin, 13 Phillip E. VanderHeyden, 14 and Eric Icart Notice of Procedural Schedule, Preliminary Issues List and Intervention Status with Provisional Service List. Case No. 9063, Docket No. 71, Aug. 3, OPC Exh OPC Exh BGE Exh BGE Exh SMECO Exh MEA Exh CECG Exh Staff Exh Staff Exh Staff Exh. 9. 4

8 Pepco and DPL filed the Direct Testimonies of J. Mack Wathan 16 and Peter E. Schaub. 17 AOBA filed the Direct Testimony of Bruce R. Oliver. 18 CNE filed the Direct Testimony of Terry S. Harvill. 19 RESA filed the Direct Testimony of Charles S. Griffey. 20 AP filed the Direct Testimony of Robert B. Reeping. 21 WGES filed the Direct Testimony of Harry A. Warren. 22 ISG filed, but subsequently withdrew, the Direct Testimony of Ronald P. Belbot. On or before November 3, 2006, all of the same parties filed rebuttal or reply testimony from the same witnesses, with the exceptions of AP and AOBA. In addition, CESI filed the Rebuttal Testimony of Robert D. Gabbard, Jr.. 23 BGE also filed the Reply Testimony of William B. Pino. 24 Finally, during the first day of hearings, OPC filed the written Surrebuttal Testimonies of witnesses Wallach 25 and Alexander. 26 The Commission conducted hearings on November 16 and 17, B. Positions of Parties 1. AP AP takes the position that the Commission should continue to develop policies that foster a competitive and efficient wholesale market, and that the local distribution utility should continue to be a provider of last resort to residential and small commercial 16 Pepco/DPL Exh Pepco/DPL Exh AOBA Exh CNE Exh RESA Exh AP Exh WGES Exh CESI Exh BGE Exh OPC Exh OPC Exh

9 customers. 27 SB1 should be implemented in a manner that promotes the participation of both wholesale and retail suppliers in the Maryland market. 28 AP witness Reeping notes that Federal policies and actions continue to promote the development of a competitive wholesale market. 29 Witness Reeping argues that the local distribution utilities are best positioned to provide standard offer service ( SOS ) and be the providers of last resort, in light of their continued obligation to serve and their regulated status. 30 Witness Reeping discusses the various electricity procurement options permitted by SB1, and notes that no one can successfully time the energy market all of the time. 31 According to witness Reeping, the existing full requirements procurement process has generally worked well. 32 The utilities should not construct or lease new generation because this could be anticompetitive, as well as uneconomic for ratepayers. 33 Customers would need to guarantee payment for the asset, even if they shop. 34 Witness Reeping believes it may be feasible to create a bidding process for demand-side resources. 35 He has concerns about the possibility of municipal opt-out aggregation, although those concerns might be alleviated if the muncipal aggregator became the provider of last resort. 36 In general, AP supports continuing the existing full requirements procurement process, and believes that a suitable blended portfolio of mixed-length contracts can be assembled through this process. 37 Witness Reeping also suggests that default service 27 AP Exh. 1 at Id. 29 Id. at Id. at Id. at Id. at Id. at Id. 35 Id. at Id. at Id. at

10 could be considered synonymous with SOS, and that small commercial customers should continue to have access to SOS BGE BGE believes that the existing power procurement model has generally worked well. 39 In fact, the analysis of BGE witness Lesser indicates that prices are in fact lower under the current deregulated industry structure than they would be if rates had continued to be regulated under the former system. 40 BGE witness Case notes that even after the recent rate increases stemming from the procurement, BGE customers monthly bills are very similar to, and not necessarily higher than, those for other utility customers in this part of the country. 41 BGE witness Case argues that the optimal structure of the electric industry in Maryland is one based upon robust wholesale competition, retail competition for all customers, and demand-side measures promoted by the utilities. 42 According to witness Lesser, wholesale competition has increased generation plant efficiency and reduced costs. 43 Retail markets in Maryland, especially for commercial and industrial customers are robust and continue to develop. 44 BGE opposes having Maryland utilities enter into long-term power purchase agreements ( PPAs ), which would undermine development of competitive retail markets and demand-side management initiatives. 45 BGE witness Case recommends that the existing procurements should be modified to obtain laddered three-year contracts, 38 Id. at BGE Exh. 4 at 2; BGE Exh. 3 at BGE Exh. 1 at BGE Exh. 3 at BGE Exh. 3 at BGE Exh. 1 at BGE Exh. 3 at Id. at

11 procured in tranches at different times of the year, with each tranche covering a third of the SOS load. 46 A volumetric risk mechanism should be part of all mass-market SOS electricity procurements, and the Commission might consider implementing a descending clock auction, such as the one used in New Jersey. 47 The Commission should support utility-provided energy conservation and efficiency programs that are cost-effective, and BGE is actively considering additional energy conservation and efficiency initiatives. 48 BGE supports municipal opt-in aggregation, but opt-out aggregation would be harmful over the long run to customers, wholesale suppliers, and retail suppliers SMECO SMECO witness Cox notes that as a cooperative utility, the procurement provisions of SB1 do not apply to SMECO, but offers her testimony to provide the Commission with information on what SMECO believes has been a successful alternative method of procuring SOS supply. 50 Given the differences between a cooperative and an investor-owned utility, SMECO makes no recommendation that the Commission adopt SMECO s procurement approach for the investor-owned utilities. 51 Witness Cox describes SMECO s managed portfolio as containing a variety of products purchased on markets, through brokers, and via bilateral negotiations. 52 In partnership with ACES 46 Id. at Id. at Id. at Id. at SMECO Exh. 1 at 4-5. Staff concurs that the provisions of SB1 do not appear to apply to SMECO. Staff s position with respect to the merits and hazards of SMECO s procurement method is a matter of public record in the docket of Case 8985, In the Matter of the Provision of Standard Offer Service by Southern Maryland Electric Cooperative, Inc., and has not changed. Staff is not at this time recommending any changes to SMECO s procurement model. Tr. at 479. In light of the fact that SMECO has no obligations under SB1, Staff does appreciate SMECO s willingness to offer its testimony for the record and the Commission s consideration in this matter. 51 SMECO Exh. 1 at Id. at 7. 8

12 Power Management, SMECO carefully assess its power needs and market conditions to determine which products to purchase. 53 SMECO seeks to provide its members with reliable power at the lowest possible price, in a manner that roughly tracks market prices, but limits customers exposure to substantial price spikes. 54 SMECO witness Cox believes the Cooperative has succeeded in reducing price volatility for its members AOBA AOBA witness Oliver believes that for the Commission to permit the utilities to 1) purchase electricity through negotiated contracts; 2) purchase, lease or construct generation; or 3) bid for the purchase of energy efficiency and conservation measures, it would require the use of an integrated resources planning model with a re-regulated electricity supply service, as well as reasonably predictable customer load. 56 Witness Oliver believes that bids for energy conservation and efficiency measures are not feasible as long as alternative suppliers are free to compete with utility SOS. 57 Neither the utilities no their customers should be at risk for the recovery of the costs of such measures. 58 Witness Oliver does not see any evidence to support a contention that small commercial customers would benefit from the elimination of their SOS. 59 He suggests that to facilitate competition for small commercial customers, and improve the transparency of competitive electricity pricing, the Commission could require retail suppliers to offer on request a price for a standardized set of terms and conditions Id. at Id. at Id. at AOBA Exh. 1 at Id. at Id. at Id. at Id. at 11. 9

13 Finally, witness Oliver suggests that default service be priced in a manner that appropriately reflects the uncertain costs of providing the service, while still having prices known at least 45 days prior to the month in which they will be effective. 61 Hourly price service should not be the only default service offered to a customer CESI CESI witness Gabbard believes that monthly SOS auctions in Maryland would likely lead to less wholesale supplier participation than the existing process. 63 If the load to be bid is for amounts of load that are too small, or for time periods that are too short, wholesale suppliers may use their limited resources to participate in more substantial procurements elsewhere. 64 In contrast, bidding on three-year contracts is attractive to wholesale suppliers because there are limited opportunities to bid on such procurements. 65 Witness Gabbard disagrees with arguments that monthly bidding would limit migration and regulatory risks for wholesale suppliers. 66 Finally, witness Gabbard argues that three-year pricing may be different from the pricing customers would see with monthly bidding, but it is no less accurate PEPCO/DPL Pepco/DPL (or Companies ) witness Schaub proposes that electricity be procured through competitive bidding for staggered three-year contracts, with one third 61 Id. at Id. at CESI Exh. 1 at Id. 65 Id. at Id. at Id. at

14 of the SOS load purchased each year. 68 The Companies experience with similar procurements in New Jersey and the District of Columbia indicates that this procurement method can effectively limit the price volatility experienced by customers. 69 Pepco/DPL do not support the use of negotiated contracts for SOS procurement, or the construction or lease of generating facilities. 70 Pepco/DPL believe the market should determine where and when new capacity resources will be developed. 71 Pepco/DPL could accept the use of contracts longer than three years in term, or through bilateral negotiaions under certain conditions. 72 Pepco/DPL see no compelling reason to change the basic Request for Proposals ( RFP ) form of electricity procurement in Maryland, in part because their experiences with other methods in other jurisdictions does not suggest that they produce any better results. 73 Pepco/DPL believe that implementation of cost-effective energy efficiency and conservation measures could help lower electricity costs for Maryland customers. 74 Such measures should be developed and implemented by the utilities, subject to Commission approval. 75 The utilities should be entitled to recover any revenues lost through such programs, either according to a calculated amount, or as the result of revenue stabilization measures. 76 Witness Wathan also states that the Companies oppose municipal opt-out aggregation because it reduces Commission control over electricity 68 Pepco/DPL Exh. 3 at Id. 70 Id. at Id. at Id. at 9-11, Id. at Pepco/DPL Exh. 1 at Id. at Id. at

15 supply and creates risks for wholesale suppliers. 77 The result is likely to be higher prices for all SOS customers WGES WGES witness Warren points out that the results of the procurement did not represent a failure of competition policy, but stemmed instead from large increases in fuel prices. 79 Warren further notes that notwithstanding the passage of SB1, the over-arching policy of the 1999 [Electric Customer Choice and Competition] Act remains the creation of robust, competitive retail electricity supply markets for all the electricity consuming businesses and residents in Maryland. 80 SOS should be procured through a transparent process that provides the SOS provider and customers with access to the wholesale electricity markets. 81 According to witness Warren, the current process should continue to be used, but contracts should be limited to no more than one year. 82 The Commission may limit price volatility through the use of rate stabilization plans and budget billing. 83 To the extent that the Commission mandates procurement of energy conservation and efficiency measures, the benefits should be available to all distribution customers, regardless of whether they are on SOS or take service from a competitive supplier. 84 Witness Warren supports municipal aggregation, but does not differentiate between opt-out and opt-in versions. 85 Finally, he believes that a default service is not 77 Id. at Id. at WGES Exh. 1 at Id. at Id. at Id. at Id. at Id. at Id. at

16 the same as an SOS service that meets statutory requirements, but is a backstop service to be used after there is no longer a need for SOS CNE CNE witness Harvill argues that working retail energy markets are the best way to deliver benefits to electricity consumers, and that customers do best when they have access to both a market-priced SOS and all the options available from retail suppliers. 87 Successful retail electricity markets require regulatory certainty, and SOS prices that reflect the full costs of providing the service. 88 Witness Harvill does not recommend a specific term for SOS contracts, but suggests that they should reflect a balance between reflecting spot market prices, and some level of price stability. 89 In determining whether markets are competitive, the Commission should use several metrics, including: switching trends; number of retailers and market concentration; diversity of product offerings; availability of information to customers; and customer satisfaction. 90 Witness Harvill urges the Commission to continue its efforts to foster competitive markets RESA RESA witness Griffey believes that the existing SOS procurement framework will not lead to sustainable retail competition, because it provides customers with price signals that become stale over time. 92 This in turn results in retail competition that is 86 WGES Exh. 2 at CNE Exh. 1 at Id. at Id. at Id. at Id. at RESA Exh. 1 at

17 intermittent at best. 93 According to witness Griffey, SOS pricing should be market responsive, and he therefore proposes that SOS be repriced monthly based on the results of a monthly auction process. 94 RESA opposes allowing the utilities to purchase electricity through long-term contracts, whether they are negotiated or bid. 95 Witness Griffey and RESA also oppose permitting utilities to purchase or lease generation, as this recreates the risks that exited for customers and utilities prior to deregulation, as well as the possibility of stranded costs. 96 According to witness Griffey, to the extent that energy efficiency goals are not met through the retail energy market, procurement of energy conservation and efficiency measures should be done in a competitively neutral manner. 97 He does not object to optin municipal aggregation, but is concerned that opt-out aggregation would simply replace one regulated monopoly with another. 98 Witness Griffey believes default service should come into existence after a set end date for SOS, and should then be viewed as a backstop service which customers may use while they seek and choose another competitive retailer. 99 Finally, witness Griffey does not believe that altering the form of bidding would make it better suited to the development of a competitive market, if the result is a relatively long-term contract. 100 A variable price bid based on a monthly index, however, might have similar results to the monthly bidding proposed by RESA Id. at Id. at 7, Id. at 14-15, Id. at Id, at Id. at Id. at Id. at Id. 14

18 10. CECG CECG witness Schnitzer believes that a full requirements product obtained through a competitive procurement is superior to either the development of new generation with rate based cost recovery, or a managed portfolio approach. 102 Both of these approaches could undermine wholesale competition and inhibit market investment in new capacity. 103 The issue of whether there is adequate generating capacity in the region should remain under the auspices of the Regional Transmission Organization, i.e. the PJM Interconnection. 104 Witness Schnitzer states that a fixed-price full requirements procurement delivers the price stability desired by smaller customers. 105 Finally, witness Schnitzer opposes opt-out municipal aggregation. According to the witness, opt-out aggregation could noticeably increase the price of SOS for non-aggregated customers because it would increase switching risks for wholesale SOS suppliers MEA/PPRP MEA witnesses Estomin and Kahal offer a review of supply options the Commission may wish to consider, and present a report they previously prepared for their client. 107 They note that the problems facing SOS customers include the relatively high level of wholesale electric prices in PJM markets in recent years, as well as the volatility of prices in those markets. 108 They discuss the various supply options available to the Commission under SB1, and note that if a large investment is required, the utility will 102 CECG Exh. 1 at Id. 104 Id. at Id. at Id. at MEA/PPRP Exh. 1 at Id. at

19 need some assurance of cost recovery. According to witnesses Kahal and Estomin, such cost recovery would require either the elimination of retail choice, or the imposition of a stranded cost recovery mechanism which would permit cost recovery regardless of whether customers shop. 109 They also point out that even if new generating capacity is purchased, leased or constructed, rates could not be returned to pre-deregulation levels, because new generation would be priced based on current costs instead of the embedded cost of facilities constructed several decades ago, as well as on higher fuel prices and environmental compliance costs. 110 They present estimates of the cost of power from new coal-fired generation at roughly $60/MWh. 111 They also urge revisiting the use of energy efficiency and conservation programs in light of the fact that energy prices are now much higher than they were when previous energy efficiency and conservation programs were phased out OPC OPC witness Alexander believes the Commission should take prompt steps to implement the policies enunciated in SB1, including implementation of procurement options likely to provide benefits to customers. 113 Witness Alexander states that the Commission should use the aggregated power of the residential class to obtain the best possible SOS bargain on their behalf. 114 According to witness Alexander, the purpose of SOS is to assure stable, reasonable, and affordable rates for customers who are not served 109 Id. at Id. at Id. at Id. at OPC Exh10 at Id. 16

20 by a competitive supplier. 115 Long term affordability can only be assured by examining various supply options available over a longer term planning period such as years. 116 Witness Alexander believes that individual customers lack bargaining power relative to competitive electricity suppliers. 117 Since she believes that experience in other jurisdictions suggests that suppliers cannot be relied upon to meet their contractual obligations, there must always be a default supplier with an obligation to serve and to provide that service at a reasonable and stable price. 118 Witness Alexander interprets the SB1 requirement that the Commission consider market conditions at the time of procurement to mean that SOS providers should get the best deal available for their customers, given that there are a variety of market prices for a given product or service. 119 SOS prices should reflect only actual and documented prices of providing the service, which should be a blended price for all of the products includedin the supply portfolio. 120 According to witness Alexander, residential customers have a documented preference for price stability and would be willing to pay a small premium to obtain it. 121 Witness Alexander notes that no sustainable or robust retail competitive market has developed for residential customers. 122 Witness Alexander believes that SB1 makes SOS a permanent service for residential and small commercial customers, and that default service accordingly has no application for these customers. 123 Witness Alexander recommends that the Commission require the utilities to begin as 115 Id. at Id. 117 Id. 118 Id. 119 Id. at Id. 121 Id. 122 Id. 123 Id. at

21 soon as possible a procurement planning process that would consider all of the procurement options permitted under SB1, over a year planning period. 124 Witness Wallach describes the existing SOS procurement process, and notes that Pepco s rates appear to have increased more slowly over the last three years than would have been the case had Pepco used only one year contracts. 125 However, the existing approach has exposed customers to unreasonable price increases. 126 Witness Wallach attributes these increases to developments in PJM s spot markets, including increasing commodity prices, reliance on natural gas as the marginal fuel, increased congestion costs, and the implementation of scarcity-pricing rules. 127 These developments have increased the risks for wholesale suppliers providing full requirements service. 128 According to witness Wallach, broadening the SOS supply portfolio to include at least some longer term products would move SOS prices from volatile marginal prices towards more stable cost-based prices. 129 An SOS portfolio strategy should not be limited to just one type and duration of supply product Staff Staff witness Sillin notes that the SOS power procurements that have occurred in Maryland have been competitive and in compliance with the process required by the Commission s orders in Case No He notes that energy is by far the largest 124 Id. at OPC Exh. 14 at Id. at Id. at Id. at Id. at Id. at Staff Exh. 5 at 7. Case 8908 is Re Competitive Selection of Electricity Supplier/Standard Offer Service, 94 Md. P.S.C. 113 (2003); Re Competitive Selection of Electricity Supplier/Standard Offer Service, 94 Md. P.S.C. 200 (2003); Re Competitive Selection of Electricity Supplier/Standard Offer Service, Phase II, 94 Md. P.S.C. 286 (2003). 18

22 component of wholesale power costs, and that fuel prices therefore have a significant impact on the price of wholesale power. 132 Witness Sillin describes a number of alternative options for SOS power procurement, including declining clock auctions, double auctions, direct contracting, and procuring generation facilities. 133 He also describes the specific SOS procurement methods, results and overall restructuring status in neighboring jurisdictions. 134 Next, witness Sillin describes developments that could tend to change the procurement results in Maryland, either increasing or decreasing prices. 135 In his Rebuttal Testimony, witness Sillin identifies six criteria which the Commission should use in evaluating procurement proposals: 1) reliability of service should be maintained; 2) the procurement process should be transparent; 3) the procurement method should result in prices that mirror or closely approximate electricity market conditions; 4) the SOS procurement method should not be administratively burdensome or costly; 5) price shock should be avoided if at all possible; and 6) the power procurement method selected should be competitively neutral. 136 Analyzing the parties proposals using these criteria, he concludes that the Staff proposal made by witness VanderHeyden best meets the stated criteria. 137 Witness Sillin also offers Staff s vision of a default service, which is a service that could be made available in lieu of SOS, after the retail market is judged fully competitive. 138 Such a service should be consistent 132 Staff Exh. 5 at Id. at Id. at Id. at Staff Exh. 6 at Id. at Id. at

23 with the default service already offered to large customers, ideally based on the hourly PJM LMPs (locational marginal prices). 139 Staff witness VanderHeyden offers Staff s specific proposals. He recommends that the Commission move towards more ubiquitous time-of-use pricing as a means of implementing the SB1 mandate regarding energy efficiency and conservation programs. 140 Witness VanderHeyden recommends against allowing the rejection of bids that have been duly submitted within the requirements of a procurement process approved by the Commission. 141 He suggests that the Commission continue to procure electricity through a full requirements bid process unless and until another method has been found to be superior. 142 Witness VanderHeyden suggests that the Commission mitigate price volatility and avoid price shock by creating a bid structure in which wholesale suppliers bid to supply power under one year contracts, bid at four separate occasions during the course of a year, with each bid covering 25% of the SOS load. 143 He also proposes that the Commission direct interested stakeholders to develop an electricity road map by which Maryland would transition from the existing SOS model to a fully competitive retail electricity market, in which all customers would receive service from a competitive supplier, or via a basic default service. 144 Staff witness Icart addresses the issues of energy conservation and efficiency measures, and the use of long term contracts to procure electricity. Witness Icart concludes that there may be benefits to be gained from the solicitation of energy 139 Id. at Staff Exh. 7 at Id. at Id. at Id. at Id. at

24 efficiency and conservation measures. 145 Witness Icart reviews five tests that have been used to determine if demand-side programs are cost effective, and notes that the Commission has previously used the Total Resource Cost test for this purpose. 146 He also reviews past y efficiency and demand response programs in Maryland, as well as programs developed in other jurisdictions. 147 Witness Icart urges the Commission to ensure that any demand side initiatives will have results that are measurable and verifiable. 148 Finally, with respect to long term contracts, witness Icart takes note of the history of long-term PURPA power purchase agreements in Maryland, and notes that to date, they have been extremely costly to Maryland ratepayers. 149 II. ARGUMENT A. SB1 Must be Interpreted in Light of the Overall Statutory Scheme of Electric Restructuring This case is largely concerned with the interpretation and implementation of the provisions of SB1. In particular, SB1 contains many relevant provisions, which can be read to give the Commission legislative guidance on how SOS should be provided in the future. Those provisions were used to develop the issues list in this case and guide the testimony of Staff witnesses. Put simply, the Maryland General Assembly has given the Commission a number of new options it may employ in designing SOS for residential and small commercial customers, and instructed the Commission to carefully consider whether and how to use 145 Staff Exh. 9 at Id. at Id. at 4-8, Staff Exh. 10 at Id. at 9-12; Exh. EI-2. 21

25 these options to provide customers with electricity at the best possible price. 150 This price may be viewed as one that allow[s] electric companies to develop a portfolio of electricity supply that provides electricity at the lowest cost with the least volatility. 151 In its consideration of these issues, the Commission should bear in mind that the legislature was very careful to refrain from making any of the optional forms of procurement mandatory. In each and every case where the General Assembly gave the Commission an option, such as the use of blended contract term supply portfolios or the purchase or construction of generation, the language is very clear that the Commission may require or allow something. In no case does the statute say the Commission shall require the utilities to purchase their electricity in the specified manner. The only notable exception is the requirement that the utilities shall select wholesale electricity suppliers via a competitive process, 152 and even this is subsequently modified by the Commission s ability to permit the utilities to negotiate contracts outside the competitive process. 153 Significantly, The General Assembly did not repeal the portions of the PUC article that enunciate the goals of the Electric Customer Choice and Competition Act of 1999 ( Restructuring Act ). Thus the Commission remains bound to: (1) establish customer choice of electricity supply and electricity supply services; (2) create competitive retail electricity supply and electricity supply services markets; (3) deregulate the generation, supply, and pricing of electricity; (4) provide economic benefits for all customer classes; and (5) ensure compliance with federal and State environmental standards Id. at subsection (a). 151 Id. 152 Md. Code Ann., PUC, 7-510(c)(4)(i). 153 Md. Code Ann., PUC, 7-510(c)(4)(ii)1.B. 154 Md. Code Ann., PUC,

26 OPC witness Alexander, appears to believe that SB1 entirely supersedes these provisions. 155 Witness Alexander criticizes Staff for advocating an SOS procurement strategy that continues the transition to a competitive market. 156 In fact, Staff does disagree with the idea that the Commission could or should implement SB1 without regard to the potential effects of the various options on the development of a competitive retail electricity supply market. A fundamental rule of Maryland statutory interpretation is that when new legislation is inserted into an existing statutory scheme, to the greatest extent possible, that legislation must be interpreted in the context of, and in harmony with, the overall statutory scheme. 157 That is precisely what has occurred in this instance, with the SB1 provisions inserted into the existing statutory framework of the Restructuring Act. The General Assembly could have chosen to repeal the Commission s statutory obligation to create a competitive retail electricity supply market, but even though it repealed other provisions of the Restructuring Act, it left the competition mandate intact. Staff accordingly reads the overall revised law to mean that the Commission has been given optional tools to use if the public interest requires them, but barring dire necessity, it should not implement them in a way that impedes the development of a competitive market. Witness Alexander forthrightly states her belief that the only way for residential customers to obtain benefits from restructuring is through an SOS program structured to 155 See OPC Exh. 11 at Id. 157 See e.g. Bank of America f/k/a Nationsbank v. Stine, 379 Md. 76, 85-6 (2001) ; Mid-Atlantic Power Supply Ass n v. Public Service Comm n of Maryland, 361 Md. 196, 204 (2000) ; Gov t Employees Ins. Co. and GEICO General Ins. Co. v. Ins. Commissioner of the State of Maryland, 332 Md. 124, (1993); Baltimore Gas and Elec. Co. v. Public Service Comm n of Maryland, 305 Md. 145, 157 (1986). 23

27 obtain them. 158 If Staff shared this assumption, Staff would probably agree that it is necessary to consider implementing now the SB1 options that could create a long-term SOS designed to keep prices as low as possible over the long-term. However, Staff believes that over the long-term, a genuinely competitive retail market is the best way to assure that all electricity customers reap benefits from restructuring. 159 The transition to a competitive retail market is continuing apace, and should be allowed to continue. 160 Witness Alexander notes that the General Assembly repealed the provision of the Restructuring Act that said the utility obligation to provide SOS would end unless the Commission makes annual findings that the retail market is not competitive. From this repeal, she concludes that SOS is now intended to be a permanent service offering. 161 Staff agrees that SOS is now intended to continue indefinitely, but this is not the same as permanently. In fact, while repealing the old provision, the General Assembly inserted one requiring the Commission to report on the status of SOS and the transition to competition at the end of 2008 and every five years thereafter. 162 This makes it clear that the Commission is to continue the transition to a competitive retail market, while perhaps recognizing that the pace of transition may be considerably slower than was originally anticipated when the Restructuring Act was originally passed. The Commission s challenge is to continue the ongoing modification of SOS in a way that meets both the price goals of SB1 and the requirement of a continued transition to a competitive retail electricity supply market. 158 OPC Exh. 10 at Staff Exh. 8 at WGES Exh. 1 at OPC Exh. 10. at Md. Code Ann., PUC, 7-510(c)(3)(iii). 24

28 B. Procurement Issues Issue List Items 1, 2, 4 and 9 1. The Commission Should Evaluate SOS Procurement Proposals According to the Criteria Outlined by Staff Staff witness Sillin offered six criteria by which the Commission can reasonably evaluate the various SOS procurement proposals. They are as follows: 1. The proposal should not degrade reliability of service. 2. The procurement process should be transparent. 3. In order to obtain the best possible price the procurement method should result in prices that mirror or closely approximate electricity market conditions. 4. Because the administrative costs must be passed on to ratepayers, the SOS procurement method should not be administratively burdensome or costly Price shock should be avoided if at all possible. In SB1, the General Assembly specifically set 20% as a level of annual price increase that requires greater Commission scrutiny The power procurement method selected should be competitively neutral. SB1 specifically references reliability. 165 It simply means that delivery of electric service should be assured with rare service interruptions, which should not be the result of the supply procurement processes or asset ownership arrangements. Transparency is important because the process for selecting wholesale electric providers, and the manner by which that service will be delivered, should be fair to all parties and readily 163 Md. Code Ann., PUC, 7-510(c)(3)(ii) Md. Code Ann., PUC, 7-510(c)(8)(ii). 165 Chapter 5, 2006 Maryland Laws, 1 st Special Session, Section 7(a) (uncodified) 25

29 understood by all who participate in the process. 166 Also, the process and results should be as public as possible and easily monitored. 167 The third criterion is that the procurement results should mirror competitive electricity market conditions. This ensures that customers are paying a fair price for electricity and that they receive accurate price signals that will help them determine how much electricity to use. This is an application of the basic economic laws of supply and demand. 168 Administrative costs are referenced both in the Restructuring Act and the restructuring settlements. 169 They are a pass through to ratepayers and if reasonable electricity prices are a goal, administrative costs and burdens should be kept as minimal as possible. 170 The fifth criterion is the avoidance of price shock. As witness Sillin notes the passage of SB1 was largely a reaction to the painful price shock experienced after the SOS procurement of this past year, and SB1 contains an explicit limit of 20% on year to year price rises. 171 The 20% threshold is the point at which the Commission must institute a proceeding to consider a rate mitigation plan. 172 There is no doubt that customers and most other stakeholder groups dislike sudden drastic increases in electricity prices. The Commission should avoid choosing an SOS option where such events are likely. The last criterion is competitive neutrality. As discussed above, the Restructuring Act continues to require the Commission to foster a competitive retail 166 Status Report by the Public Service Commission of Maryland on Electricity Procurement and Restructuring in Maryland, February 23, 2005, page Staff Exh. 6 at Id. 169 Md. Code Ann., PUC, 7-510(c)(3)(ii)2; 94 Md. P.S.C. 113 at Staff Exh. 6 at Id. at Md. Code Ann., PUC, 7-510(c)(8)(ii). 26

30 electricity market. 173 An SOS that is at least competitively neutral would be the minimum the Commission could accept to meet this requirement. 174 Staff s criteria are based on the statutory requirements of the Restructuring Act and SB1. They are supported by common sense and the experience with SOS to date in Maryland and elsewhere. No other party has even attempted to offer the Commission clear evaluation standards. For all the reasons stated by Staff witness Sillin, the Commission should use these criteria in evaluating the SOS proposals before it. 2. The Record Does Not Support the Procurement of Contracts of More than Three-Years Duration, the Purchase, Lease or Construction of Generation, or the Procurement of SOS Power Through the Use of Negotiated Bilateral Contracts There is no evidence in the existing record to support the inclusion of long-term contracts of greater than three-years duration in an SOS portfolio. OPC witness Wallach postulates that it might be advisable as a means of creating more long-term stability in SOS prices, but offers no specific proposal for doing so. 175 Instead, he apparently relies on witness Alexander s proposal that the utilities be directed to analyze the various SB1 options as part of a long-term portfolio planning process. 176 Witness Alexander herself has performed no analysis of their merits. 177 MEA/PPRP witnesses Kahal and Estomin likewise offer some testimony on the issue, and note that some of the options could require elimination of retail customer choice for some group of customers, but they do not make any recommendations for the Commission to adopt at this time. 178 They add 173 Md. Code Ann., PUC, Staff Exh. 6 at OPC Exh. 14 at OPC Exh. 10 at Tr. at MEA/PPRP Exh. 1, passim. MEA/PPRP address the issue more in terms of purchasing generating capacity. 27

31 that long-term contracts have the potential to become stranded costs and, in any case, are likely to include provisions requiring the pass through of certain costs (notably fuel costs). 179 Pepco/DPL witness Schaub indicates that those Companies would be willing to consider procuring contracts of up to five years in duration, provided they are not required to do so. 180 Staff witness Icart presents the cautionary tale of the Warrior Run, Panda Brandywine and Ohio Edison power purchase contracts. Warrior Run and Panda Brandywine are long-term capacity contracts that Maryland utilities entered into under the Federal PURPA mandate. Warrior run has cost AP ratepayers $291,790, in surcharges since the plant went into operation in Although Staff does not know the total above-market costs of power that Pepco s ratepayers have paid over the years for the Panda Brandywine and Ohio Edison contracts, these power sources were included in the sale of Pepco s generation assets in At that time, the purchaser placed a negative value (meaning the contracts reduced the value of the sale proceeds) of approximately $550 million on the two contracts. It is unlikely that new longer term power purchase agreements would be priced at the avoided costs mandated by PURPA. 182 Nonetheless, these contracts illustrate the difficulty of making accurate guesses about the long-term cost of power, and the tremendous potential costs of making inaccurate guesses Id. at Pepco/DPL Exh. 3 at Staff Exh. 10 at Exh. EI Id. at 11. It should be noted that avoided cost as used to price PURPA contracts meant the costs the utilities avoided for construction of their own generation. Tr. at There is no way to be certain that purchasing long term power nowadays would be much cheaper, since such contracts would still be serving as substitutes for the construction of generation. 183 Id. See also Tr. at 377-9; Staff Exh. 2; Staff Exh