September 8, 1999

On August 30, 1999, MAPSA, Statoil Energy (“Statoil”),Trigen Baltimore Steam Company (“Trigen”), the City of Baltimore (“Baltimore”) and Bethlehem Steel (“Bethlehem”) filed Initial Briefs in opposition to various components of the proposed settlement filed by Baltimore Gas & Electric Company (“BGE”) in this matter. Initial Briefs in support of the proposed settlement were filed by BGE, PSC Staff (“Staff”), the Office of People’s Counsel (“OPC”), the Maryland Energy Administration/Department of Natural Resources Power Plant Research Program (“MEA/DNR”), Johns Hopkins Health System Corporation (“Johns Hopkins”), and the Maryland Retailers Association and Building Owners and Managers Association of Baltimore, Inc. (“MRA/BOMA”). MAPSA responds herein to some of the issues raised by the parties who submitted briefs in support of the proposed settlement.

ISSUES PRESENTED

i. the proposed settlement’s recovery of $528 million in generation related stranded costs is unreasonable.
ii. the shopping credits proposed by mapsa are reasonable and will lead to the development of a competitive market while offering savings to customers of all classes.
iii. the proposed settlement will not advance the act’s goal of meeting state and federal environmental compliance requirements and will have a detrimental impact on the environment.
iv. the proposed settlement contains provisions that are illegal and which preclude implementation of the electric customer choice and competition act of 1999.


ARGUMENT
i. the proposed settlement’s recovery of $528 million in generation related stranded costs is unreasonable.
The proponents of the proposed settlement repeatedly state that the recovery of $528,000,000.00 in generation related stranded costs is “reasonable” or “within the range of reasonableness”. BGE Brief at 27 citing Brune Cross, Tr. p. 142, lines 20-22; Staff Brief at 14; OPC Brief at 35 MEA/DNR Brief at 8. This is quite simply a misstatement of the truth.

OPC is perhaps the most blatant perpetrator of this deception. As Mr. Younger set forth in his Supplemental Direct Testimony:

Q. Have you reviewed any other experts’ estimates of the value of BGE’s assets?

A. Yes. I have reviewed the analysis of the value of BGE’s assets presented in the direct testimony of Paul Chernick from Resource Insight, Inc. on behalf of the Office of People’s Counsel. Mr. Chernick estimated the value of BGE’s assets based upon a discounted cash flow similar to the company’s own estimation methodology and by applying the prices paid for comparable plants to the BGE generating assets
Mr. Chernick’s assets valuation based upon the discounted cash flow methodology resulted in a value of $2,597 million for the coal, non-peaking oil/gas and peaking units. Mr. Chernick further estimated the value of Safe Harbor at $382 million. This yields a total valuation of $2,979 million for the non-nuclear assets.
Mr. Chernick’s assets valuation based upon applying the prices paid for comparable plants to the generating assets resulted in a value of $2,403 million for the fossil assets and $274 million for Safe Harbor. This yields a total valuation of $2,677 million for the non-nuclear assets.
Q. How do Mr. Chernick’s fossil plant results compare to your valuation based upon the GPU non-nuclear generation sale?
A. Mr. Chernick’s results show that the estimation that I have provided for the fossil units is in all likelihood conservative. Mr. Chernick’s fossil plant valuation based on the discounted cash flow is almost $400 million higher than my valuation. Mr. Chernick’s fossil plant valuation based upon comparable plants is almost $200 million higher than my valuation based upon the GPU sale.
MAPSA Exh. 5, pp. 7-8. (emphasis added)

Apparently, OPC has chosen to distance itself from its own expert’s asset valuations. One might infer that the proposed settlement’s rate cuts, which are structured in such a way that BGE will retain most if not all of its residential customers for BGE generation service, and obtaining a price protection period that exceeds that permitted by the Act have caused OPC to back-peddle on its asset valuations. Clearly, if the Commission were to accept OPC’s valuation of generation assets, there would be an even greater benefit to customers of all classes than under MAPSA’s valuation. All customers, particularly residential customers, would have a much greater opportunity to obtain competitively priced supply offerings that would provide the opportunity for even greater cost savings.

It is certainly OPC’s prerogative to share or not the evidence of valuation that it spent its taxpayer money on. However, it cannot, having chosen to deny the existence of such evidence, assert that $528,000,000.00 is within the “range of reasonableness”. OPC has decided that it is better not to have competition in the residential market for six years and to let its constituents pay $193,000,000.00 to BGE, than to allow its constituents to avail themselves of the savings and other benefits of the competitive market.

Other proponents make the same mistake, implying that their estimates and MAPSA’s are the entire “range” under which reasonableness can be measured. MAPSA has carefully calculated its generation assets values to ensure that they are conservative. MAPSA has done a careful analysis of the GPU sale and described in detail why it is comparable to BGE, but conservative in its production of a comparable value. MAPSA 5, p. 6. MAPSA has even used BGE’s own values for assets that defied a comparables analysis. MAPSA 5., p. 4; MAPSA Exh. 6, p. 7; MAPSA Exh. 7.

Another mistake the proponents have made is placing all of their stranded cost “eggs” in MEA/DNR witness Kahal’s “basket”. While Mr. Kahal lead the parties and Commission on a rather lengthy journey of his criticisms of Mr. Younger’s stranded cost and tax analysis, Mr. Kahal would not, as Mr. Younger readily did, admit to his lack of expertise in tax matters. Kahal Cross, Tr. p. 783, line 13 through p. 784, line 8. Neither Mr. Kahal nor Mr. Younger are “tax experts”. They are not certified public accountants or regulatory accountants. Both do have significant experience in analyzing utility costs and measuring asset values. The one person who testified whose financial experience should count for something is Mr. Brune. He is BGE’s Chief Financial Officer, ostensibly because he has some financial experience and ability and, at the very least, has a staff of accountants and “tax experts” at his disposal.

Thus, Mr. Younger’s analysis of stranded costs, based on Mr. Brune’s methodology and set forth in MAPSA Exh. 7, should be given the greatest weight of the stranded cost valuations that are before the Commission. The only differences in MAPSA Exh. 7 and Mr. Brune’s analysis (BGE Exh. 2, p. 14) are the valuations given to Calvert Cliffs Nuclear Power Plant (“Calvert Cliffs”) and to Safe Harbor. BGE has understated the value of these assets, which leads to a higher level of stranded costs. Contrary to Mr. Kahal’s non-expert conclusion, Mr. Younger’s valuation, founded on the expertise of BGE’s Vice President and Chief Financial Officer Mr. Brune and his expert accounting staff, is the correct one. If in fact Mr. Younger made any mistake, it was his use of BGE’s discounted cash flow (“DCF”) values for Calvert Cliffs and Safe Harbor without adding back taxes that the company had removed in its analysis. Thus, Mr. Younger’s estimate used DCF valuations for these assets that were too low and which should have resulted in a higher market valuation if their pre-tax basis had been used.

In fact, it is MEA/DNR in its brief that has made the tax quantification errors. MEA/DNR Initial Brief, pp. 10-12. MEA/DNR, presumably Mr. Kahal, confuse issues by viewing one part of the hypothetical sale of assets as pre-tax and another as post-tax. Consistency requires that both be viewed in the same manner when they are transferred because a loss on one part of the assets would offset a gain on another part of the assets. Therefore, it is not reasonable to take the hypothetical gain on the non-nuclear assets and then remove the income tax without considering that it would be offset by the hypothetical loss on the nuclear transfer. BGE’s after tax calculation for Calvert Cliffs does not consider that if the assets are much less valuable than the book cost then BGE would be taking a loss. For consistency’s sake, both need to be viewed using pre-tax estimates and then, ultimately, estimate the after-tax stranded costs that can be charged to ratepayers.¹

MEA/DNR tries to explain away this treatment in its brief at 12. MEA/DNR set forth three alleged errors. MEA/DNR first alleges that MAPSA’s $438 million valuation for Calvert Cliffs does not properly treat ADITs. MEA/DNR Brief at 12. This is incorrect. The appropriate analysis must use all pre-tax or all post-tax, not some mixture as MEA/DNR/Kahal propose. MEA/DNR Brief at 10-12. Mixing pre- and post-tax valuations precludes the ability to apply a hypothetical loss on one portion of the assets to a hypothetical profit on another. Although the $438 million value of Calvert Cliffs is an after-tax value, the effect of removing the estimated income taxes from the analysis is to create a pre-tax value that is higher than the $438 million value that MAPSA accepted for its analysis.

Second, MEA/DNR/Kahal allege that the $150 million write-off cannot be used as a reduction to stranded costs. MEA/DNR Brief at 12. This, too, is incorrect. MAPSA does not oppose this portion of the proposed settlement. If BGE is willing to reduce by $150 million the book value of its assets, then that amount must be recognized in the determination of stranded costs.

Third, MEA/DNR/Kahal allege, again, that the MAPSA valuation for Calvert Cliffs is wrong and that taxes are double-counted. MEA/DNR Brief at 13. This, too, is incorrect. Mr. Kahal’s proposal eliminates the capacity to offset a hypothetical profit with a hypothetical loss. Mr. Younger has set forth the appropriate mechanism for tax treatment by using pre-tax figures then assessing the tax impact against the entire package. MEA/DNR/Kahal are correct that the $438 million is after-tax. If Mr. Younger had been completely consistent, the Calvert Cliffs valuation would have been even higher. Thus, Mr. Younger has included a reduction in value that should not have been included in a pre-tax valuation, but which is in keeping with MAPSA’s conservative approach to these valuations.

Mr. Younger is also erroneously criticized for using DCF values in conjunction with comparables values in his estimations of the market value of BGE’s generating assets. BGE Brief at 27; MEA/DNR Brief at 10; Staff Brief at 13; OPC Brief at 37. As Mr. Younger stated during cross-examination, in response to questions by Commissioner Riley, this is entirely appropriate:

COMMISSIONER RILEY: I must say I got somewhat lost here. I think I'm still lost. To use comparable sales and then to use discounted cash flow in the middle of it is confusing. I'm not sure what to even ask you at this point.
MR. YOUNGER: As I said before, what you are attempting to do in both calculations, what is implicit in a comparable sale value, is somebody's summation into a price of what they think their revenues and what they think their costs will be discounted to present. Younger Cross, Tr. pp. 629-30, lines 18-23, 1-5.
Mr. Younger provided a more detailed analysis of establishing a DCF valuation in response to a previous question by Commissioner Brogan related to the appropriateness of the value of Calvert Cliffs used in MAPSA Exh. 7:

COMMISSIONER BROGAN: To my very elementary understanding of all of this, I'm a little troubled by mixing comparable sales in the DCF methodology, talking about MAPSA 7. Your first number is a comparable sales number and then your second and third numbers which are Safe Harbor and Calvert Cliffs are DCF numbers. Why is it okay to mix methodologies when you are trying to get some sense of what the stranded cost is?

MR. YOUNGER: My firm has helped clients bid on power plants and, in fact, the clients did end up buying some of the power plants. One of the parts of our analysis is to look at the revenue, which is what the Company did in their DCF analysis, look at what the cost of operating the units are which is the other major part of the Company's DCF analysis and come up with a revenue stream.
In comparison to the company, we tend to look much more aggressively for ways to save money, ways to trade off whether you use cleaner fuel, whether you do pollution abatement for the sake of lower pollution emission, rate costs, but the basic analysis is the same. You sit there and you do your best estimate of the revenues and then you do your best estimate of costs and you get your net revenues and based on those net revenues you calculate what you would be willing to pay for the generation.
In the absence of truly comparable units, it is a perfectly reasonable way to do the calculation. (emphasis added)
Younger Cross, Tr. p. 609-10, lines 5-15.
Mr. Younger also explained the necessity of carefully analyzing the comparability of

different assets in the formulation of a comparables analysis similar to his comparison of the BGE and GPU assets:

MR. YOUNGER: [T]he nonnuclear assets that BG&E has are of a much higher quality and more desirable than the average assets that have been sold. When you look at the assets that have been sold, there have been a large amount of capacity of oil/gas units. There have been other units that are just not that valuable that make up $399 per kW average value of what has been sold. BG&E has a lot of coal that is generally quite economic. It has a rather high capacity factor selling into PJM which is generally a fairly good place to be selling your energy into. And so when you go to the step of doing a comparable, you need to look at the asset sales that have happened so far and then try and make sure that you are lining up apples and apples rather than apples and oranges. Younger Cross, Tr. pp. 626-27, lines 11-23, 1-6.

Mr. Younger’s valuations of Safe Harbor and Calvert Cliffs are also criticized by the proponents as excessive. BGE Brief at 27. Mr. Younger stated on cross-examination that there are not comparable sales to which either Safe Harbor or Calvert Cliffs can be validly compared. Younger Cross, Tr. p. 589, lines 7-18; p. 591, lines 1-10. In both instances, Mr. Younger has used BGE’s own after-tax, DCF valuation. As explained previously herein, this results in an even lower valuation than using pre-tax valuations and subjecting those to tax impacts along with the entire asset package. Also, as Mr. Younger has explained, it is not inappropriate to combine DCF and comparables values, since the same analysis forms the basis for each method of valuation.

BGE states erroneously that a comparables valuation of Calvert Cliffs produces a value that is “considerably lower than the DCF market value.” BGE Brief at 27. Mr. Younger was quite explicit, however, in his description of why Calvert Cliffs has no comparable equivalent sale with which to compare it:

MR. GAHAGAN: That is not a comparable sales price?
MR. YOUNGER: No, it is not. I don't believe there actually is a comparable sale. There is not another unit that has sold that has both as low an operating cost and has already indicated the belief that the unit is ready to be operated for another 20 years. (emphasis added)
Younger Cross, Tr. p. 591, lines 3-10.
In response to Commissioner Brogan’s question, Mr. Younger explained the appropriateness of using the company’s DCF value for Calvert Cliffs:

COMMISSIONER BROGAN: But it seems to me that that number would affect on your Exhibit 7, MAPSA Exhibit 7, the value for the nuclear, 438, that is from Mr. Brune. The footnote says that is from Mr. Brune's testimony. So is that a DCF number, not a comparable sales number?

MR. YOUNGER: That is a DCF number and the company's calculation of their discounted cash flow. They include the costs in their valuation of doing the steam replacement and then calculate the revenues they expect to get on the assumption that the steam turbine replacement has been done. So the net present value of the discounted cash flow includes both the cost of doing the steam turbine replacement and the revenues that, in part, result from having done it. So it includes both sides of the calculation.
Younger Cross, Tr. pp. 615-16, lines 9-23, 1-4.
In response to additional questions from Commissioner Brogan, Mr. Younger explained the appropriateness of using BGE’s own DCF valuation for Safe Harbor and approximated a very rough comparables valuation:

COMMISSIONER BROGAN: And for Safe Harbor, why aren't there comparable sales?

MR. YOUNGER: There could be comparable sales. If you look at when we would do the analysis for actually buying, you would be looking intensely at the cost of the unit to operate and expected revenues in the market but if you are going to do it purely on a comparable sales basis, if you look at Exhibit MDY‑S‑1, you will see that that table lists 200 percent hydro sales.
* * *
MR. YOUNGER: It is the first exhibit of that testimony, the nonnuclear asset sales in PJM, NYPP and NEPOOL. If you go down to the next to the last column shows the percent of hydro that was sold in each of the auctions and we have Niagara Mohawk Power Corporation. Their hydro units went for $643 per kW. And you have Northeast Utilities, the CL&P and Western Massachusetts Electric Company, and their sale of 100 percent hydro went for $651 per megawatt hour.

If you apply the average of those two, I believe it is 277 or 280 megawatts for the Company's ownership of Safe Harbor, then you end up with a value of $181 million which is close to the 214. The hydro can vary in their characteristics certainly and without doing a very detailed analysis of the characteristics you can't be certain that the prices would be exactly the same. Certainly most of Niagara Mohawk's hydro units are in the western part of the state which does tend to have lower energy prices because of the other generators that are located there and because of the transmission constraint between western New York and eastern New York. So 181 million, 214 million, they are certainly close. (emphasis added)
Younger Cross, Tr. pp. 610, line 16 through p. 612, line 13.
Mr. Younger demonstrated the appropriateness of his acceptance of the BGE DCF valuation for Safe Harbor, but cautioned that there must be a detailed analysis in order to do an appropriate comparables valuation. Fortunately, Mr. Younger’s knowledge of the Niagra Mohawk units enabled him to ensure that his usage of the company’s DCF valuation was not inflated.

Another benefit that the proponents have failed to incorporate in their analysis of Mr. Younger’s stranded cost evidence is the benefit to BGE, as a result of the transfer of the assets to an affiliate, of being able to pay the accumulated deferred income taxes (ADITs) over time. This a benefit to the company since the net present value of the taxes paid over time is lower than the amount of the ADITs. This benefit should be used to further mitigate stranded costs and to further reduce $252 million arising from the Brune methodology. Mr. Younger pointed this out during cross-examination. Younger Cross, Tr. p. X. Mr. Kahal acknowledged that this deferred payment is appropriate, but has failed to account for it in his criticisms of Mr. Younger’s analysis. Kahal Cross, Tr. p. 764, line 16 through p. 765, line 6; MEA/DNR Brief at 10.

MAPSA has demonstrated not only that the stranded costs recovered pursuant to the settlement are not reasonable— they are grossly exaggerated, but that they could not have been within a “range of reasonableness” since the valuations of both OPC and BGE (its internal studies) have been concealed from the analysis.

ii. the shopping credits proposed by mapsa are reasonable and will lead to the development of a competitive market while offering savings to customers of all classes.
The adjustments to the shopping credits proposed by MAPSA witness Murray, and set forth in MAPSA Exhibits 9 and 10, attachments TLM-S-2 and TLM-R-2, are appropriate and supported by the evidence, despite the vigorous protestations of the proponents of the proposed settlement. BGE Brief at 21; Staff Brief at 16-17; OPC Brief at 22-23.

If all costs currently incurred by BGE in the provision of generation service are properly exposed to competition as Ms. Murray has urged (MAPSA Exh. 9, pp. 10-11²), and a reasonable rate reduction within the statutory guidelines is applied to BGE’s distribution rate, then customers will not pay higher rates and the shopping credit is not artificially high. BGE Brief at 15, 21. The shopping credit simply becomes an adequate reflection of generation related costs. MAPSA Exh. 9, pp. 10-16.

It is not necessary, as BGE alleges, to file a cost of service study to determine which costs can and must be subjected to competition in order that competitors will have an adequate opportunity to recover their costs in a competitive market. BGE Brief at 22. One may, as Ms. Murray has, rely on established avoided cost doctrine that has been established by the Federal Communications Commission and adopted by this Commission. MAPSA Exh. 9, pp. 18-19; MAPSA Exh. 10, pp. 20-21. Only Ms. Murray and MAPSA have presented any evidence whatsoever in support of an unbundling methodology that will expose generation costs to competition as they must be. It thus becomes necessary to point out that the settling parties not MAPSA bear the burden of proof on the issues raised in the settlement. In support of the unbundling set forth in the settlement, much as elsewhere, the settling parties have produced precisely no evidence.

BGE very nearly stumbled into evidentiary arena on this issue, but has subsequently been able to avoid it, when Mr. Switzer addressed the unbundling of billing and metering costs during cross-examination:

MR. SWITZER: From memory, [regarding the billing and metering study] 50 percent of the calls are related to distribution related issues like getting service connections or distribution outage concerns and roughly the other 50 percent of those issues are related to billing issues with some related to meter reading issues but for the most part, very little is related to generation
Switzer Cross, p. 316, lines 16-23.
It is upon the memory of Sheldon Switzer that BGE and the settling parties have chosen to form the foundation of their unbundling case and challenge to the established principals cited and employed by Ms. Murray. Not one line or page number of the Billing and Metering Study, so revered by BGE and Staff on cross-examination and in briefs, is referenced to rebut Ms. Murray³ or support Mr. Switzer’s memory. Having had the opportunity, post-hearing, to re-analyze the rather unremarkable billing and metering study referred to by Mr. Switzer, Ms. Murray has rendered the following conclusions:

1) The study contains no support for Mr. Switzer’s conclusion regarding the split of generation and distribution related calls for service; and

2) Ms. Murray’s unbundling adjustments are not impacted by the contents of the study.
Furthermore, BGE has misconstrued Ms. Murray’s proposed adjustment to the shopping credit. In its Initial Brief at p. 24, BGE cites authoritatively to Mr. Switzer’s memory and then concludes that Ms. Murray’s telephone industry analogy is inapposite. Ms. Murray has not opined that 50% of all calls are generation related. She has opined that approximately 50% of customer service costs are related to a combination of competitive billing and generation. MAPSA Exh. 10, p. 21. Moreover, the appropriate determination of what is or is not a generation related cost is not Mr. Switzer’s absurd notion that someone might inquire as to whether or not a particular generating plant is in operation. BGE Brief at 24 citing Switzer Cross, Tr. p. 316. Instead, the appropriate generation related customer service functions will relate to the very things cited by Mr. Switzer, i.e., establishing service, changing the customer’s name on the bill. BGE Brief at 24; MAPSA Exh. 9, p. 12. Even assuming arguendo that Mr. Switzer’s memory were correct, his own testimony would not support the de minimis competitive billing credit that BGE has proposed in the settlement for suppliers who perform consolidated billing for distribution and generation services.⁴

Similarly, BGE criticizes MAPSA’s proposed allocation of 100% of the proposed residential rate reduction to the distribution component. BGE Brief at 23, 25. One must recall that BGE witness Brune has testified that BGE can survive the financial outcome of the proposed settlement:

MR. BRUNE: Let me say if I look at the rates that are in the settlement, taking into account the rate reduction for the residential customers, it is a challenge. Let me put it that way.

Brune Cross, Tr. pp. 285, line 21 through p. 286, line 2.
If one assumes arguendo that the settlement is approved, and few or no residential customers switch to competitive suppliers, then the impact on BGE’s bottom line is the same regardless of the allocation of the rate reduction, i.e., BGE’s revenues are reduced $53.8 million per year. Given Mr. Brune’s testimony that BGE can withstand that reduction to its revenues and maintain reliability, BGE’s, and other proponents’ criticisms of MAPSA’s proposed allocation to the distribution rate are groundless.

iii. the proposed settlement will not advance the act’s goal of meeting state and federal environmental compliance requirements and will have a detrimental impact on the environment.
Virtually every proponent of the proposed settlement states that it complies with the Act’s mandate that restructuring “ensure compliance with federal and state environmental

standards.” Act § 7-504(5). See, BGE Brief at 31-32; Staff Brief at 21; OPC Brief at 31-32; MEA/DNR Brief at 19-20⁵. However, as MAPSA witness Murray demonstrated in her unrebutted Supplemental Direct Testimony, the precise impact of the proposed settlement will be to hinder the development of a market for “green power” products.

Ms. Murray’s criticism of this aspect of the proposal arises from her concern that the “limited scope for price competition under the proposed settlement would make it more difficult for value -added competitors as well.” MAPSA Exh. 9, p. 16. Because of the manner in which BGE has unbundled rates and buried customer service costs in the distribution rate, “BGE, . . . would be able to recover a part of its retailing and overhead costs from the very customers that it loses to new entrants, as well as from the retail customers that it retains.” Id. Murray continued:

Because the proposed settlement would needlessly and arbitrarily hinder competition from providers of “green” power, it does not affirmatively support the environmental objectives of the Act, even though it complies with the literal letter of the law to ‘ensure compliance with federal and state environmental standards.’ Id.

Therefore, by approving the settlement, which will stifle competitive opportunities, the Commission will, in effect, be stifling a mechanism for improving Maryland’s environment. Surely, this was not the intended result of the Act.

iv. the proposed settlement contains provisions that are illegal and which preclude implementation of the electric customer choice and competition act of 1999.
In its Initial Brief, MAPSA has set forth several areas of the settlement that either directly contravene the Act, or render mandatory findings pursuant to the Act impossible. MAPSA Brief at 35-43. The provisions of the proposed settlement that directly contravene the Act are set forth in Appendix A, attached hereto.

The proposed settlement also precludes any meaningful findings, at least those that might be supported by substantial evidence in the record, by the Commission on a number of issues.

Although the Act places some constraints upon the Commission’s review and approval powers of a transfer of generation assets such as that contemplated by the proposed settlement, § 7-508(C)(2) does require that the Commission determine:

(I) That the appropriate accounting has been followed;

(II) That the transfer does not or would not result in an

undue adverse effect on the proper functioning of a competitive electricity supply market; and

(III) The appropriate transfer price and rate making

treatment.
Because the transfer price of BGE’s assets as set forth in the settlement is purely fabrication arrived at through bargaining among the parties, and no evidence of any quantifiable calculations or assignments of value has been adduced by the settling parties, the Commission is precluded from discharging its obligations under § 7-508(C)(2).

Similarly, §7-513(E)(1) mandates that the Commission consider, in its determination of stranded costs, if any, “appropriate evidence of value” and

1. Book value and fair market value;
2. Auctions and sales of comparable assets;
3. Appraisals;
4. The revenue the company would receive under rate-of-return regulation;
5. The revenue the company would receive in a restructured electricity supply market; and
6. Computer simulations provided to the Commission.
No evidence has been presented by the settling parties, therefore, the Commission is once again precluded from discharging its obligation to consider the aforementioned factors in making a determination of stranded costs, and cannot make the determination sought in the proposed settlement. The Commission can rely on the only evidence presented, by MAPSA, and find that the settlement’s called for level of stranded costs is grossly exaggerated and award stranded costs of not greater than $252 million.

The Act also requires the Commission to make certain determinations related to the allocation of stranded costs in the event the Commission finds that there is evidence upon which to award stranded costs. In its determination of the allocation of stranded costs, if any, the Commission is mandated by § 7-513(E)(2) to consider the following factors:

(I) The prudence and verifiability of the original investment;

(II) Whether the investment continues to be used and useful;
(III) Whether the loss is one of which investors can be said to have reasonably borne the risk; and
(IV) Whether investors have already been compensated for the risk.

* Neither BGE nor any settling party have introduced any evidence pertaining to any particular generation asset that would enable the Commission to render a finding regarding the “prudence and verifiability of the original investment.” § 7-513(E)(2)(I).

* Neither BGE nor any settling party have introduced any evidence that would enable the Commission to determine whether or not any of BGE’s generation assets continues to be “used and useful.” § 7-513(E)(2)(II).
* Neither BGE nor any settling party have introduced any evidence that would enable the Commission to determine whether investors have incurred any loss or whether such investors have “reasonably borne the risk.” § 7-513(E)(2)(III).
* Neither BGE nor any settling party have introduced any evidence that would demonstrate “[w]hether investors have already been compensated for the risk.” § 7-513(E)(2)(IV).

Given the settlement’s multiple inconsistencies with the Act, it is difficult to comprehend how OPC can state that “[t]he Agreement does not alter any of the provisions of the Act.” OPC Brief at 45. OPC’s reading of the Act is similarly confusing when it cites the need for a transition period, but then fails to cite to § 7-505(D)(4)(i)(2) which states that the mandated rate reductions shall endure for only four years.

However, OPC correctly states that “MAPSA supported the passage of the Act in order to restructure the retail electricity market in Maryland.” OPC Brief at 45. Had BGE chosen to pursue a settlement that truly reflected the intent and content of the Act, MAPSA would support it. For many reasons, the proposed settlement does not reflect the intent of the General Assembly and cannot be approved by the Commission.

CONCLUSION

In its initial brief, OPC correctly states that the Commission cannot guarantee that there will be offers to customers from alternative suppliers. OPC Brief at 21. What the Commission can virtually guarantee is the converse of that statement: that there will be no offers from competitive suppliers. The Commission can do this by ensuring that BGE retains substantial amounts of its generation related costs in its distribution rate rather than exposing them to competition; by ensuring that improperly allocated rate reductions eliminate the opportunity for consumers to obtain savings from competitive suppliers; and by ensuring that BGE and Constellation Energy reap an enormous windfall by permitting both a transfer of BGE’s valuable generation assets to affiliated companies and forcing ratepayers to line BGE’s pockets with $528 million. To ensure that competition does not develop, the Commission need only approve the settlement. In so doing, the Commission will have completely turned its back on the implementation of the goals of the Electric Customer Choice and Competition Act of 1999. The Commission will similarly be ignoring the criteria for retail electric competition that it established in Order No. 74561:

We have developed the following criteria to guide our decision whether to adopt competition: (1) that competitive provision of the service is in the overall interest of Maryland ratepayers; (2) that competitive provision of the service will have a positive impact upon service provision and physical system providing the service; and (3) that competition will positively impact upon the affordability of service for Maryland residents and upon low-income customers. We intend to require that these criteria, plus applicable policies of the General Assembly, be satisfied in the implementation of electric retail competition in Maryland.
Order No. 74561, pp. 11-12.
At the hearings, Chairman Ivey seemed particularly concerned, understandably, about reach the “right” shopping credit number. Ms. Murray was somewhat reluctant to state that any particular number is the “right” number for a shopping credit. Murray Cross, Tr. pp. 556-7. The “right” number is not a number that can be identified in the abstract as the one that will make customers switch to competitive suppliers. The “right” number is the one that results from an analysis such as the one the MAPSA has performed in detail by properly unbundling, properly allocating rate reductions and properly determining stranded costs. No such analysis was introduced in evidence by the settling parties as part of the hearings. It is this Commission’s duty to review the evidence and analysis that are before it and establish the “right” number.

The best effort at establishing the “right” number is contained in MAPSA Exhibits 9 and 10, attachments TLM-S-2 and TLM-R-2. Ms. Murray has quite adequately substantiated each and every adjustment MAPSA has proposed to obtain the optimum shopping credits set forth in those two attachments. MAPSA has not raised rates or artificially increased any component of BGE’s rates. MAPSA has properly identified costs that should be exposed to competition, properly allocated rate reductions and properly evaluated stranded costs. Only through this analysis, based on the evidence before it, can the Commission determine the “right” number. While the “right” number may not drive customers into the open arms of competitors, MAPSA has demonstrated that the wrong number will most certainly ensure that customers remain on BGE’s generation service and that competition does not develop.

Many of the proponents cite to the non-severability provision of the proposed settlement as if it contains some mystical power that will compel the Commission to accept the proposed settlement in total or face the threat of litigation. See, settlement ¶ 53. Paragraph 53 also contains the following sentence:

“If the settlement is rendered null and void by operation of this Paragraph, the Settling Parties agree to immediately enter into good faith negotiations to reach a new settlement.” (emphasis added).

The threat of litigation is somewhat hollow given the parties agreement to immediately try to reach a new settlement. Thus, the Commission should perceive itself, as other parties would have it perceived, as a hostage of the proposed settlement as filed. In that light, MAPSA requests that the Commission make the modifications to the proposal that it has proposed. In so doing, the Commission will produce a settlement document that:

1) is in the public interest;

2) advances the purposes enumerated in § 7-504 of the Electric Customer Choice and Competition Act; and
3) is reasonably designed to ensure the creation of a competitive electricity supply and electricity supply services markets.

WHEREFORE, the Mid-Atlantic Power Supply Association requests that this
Commission make the following findings:
a. That MAPSA’s modifications to the proposed settlement are supported by substantial evidence in the record;
b. That the proposed settlement be modified in accordance with the MAPSA modifications;

c. That, alternatively, the Commission find that the proposed settlement is not supported by substantial evidence in the record and is therefore rejected in total; and
d. Afford such other and further relief as the Commission deems just and appropriate under the circumstances set forth herein.
Respectfully submitted,
ALEXANDER & CLEAVER, P.A.

By:

GARY R. ALEXANDER

THOMAS W. KINNANE

CHANTEL R. ORNSTEIN

54 State Circle

Annapolis, MD 21401

410-974-9000

Attorneys for the Mid-Atlantic

Power Supply Association

CERTIFICATE OF SERVICE
I HEREBY CERTIFY that copies of the foregoing Reply Brief of the Mid-Atlantic Power Supply Association were delivered via e-mail and first class mail, postage prepaid, to all parties on the service list of this matter this 8th day of September, 1999.

THOMAS W. KINNANE

1It is not necessary to address MEA/DNR’s discussion of taxes on the gains from a sale since neither BGE nor MAPSA are proposing a sale, just a transfer.

2“True competition cannot exist where one competitor (the incumbent) is virtually guaranteed the opportunity to recover all of its costs from charges that customers cannot avoid while other competitors must recover all of their costs in markets that are subject to competition. That is the effect of the proposed settlement.”

3Ms. Murray advises counsel that her review of the study does not reveal any breakdown of generation v. distribution related calls for service such as that referred to by Mr. Switzer.

4Competitive Billing credits range from $0.47 to $0.62 depending on the customers schedule. Settlement Appendix A, part 1.

5MEA/DNR do cite to ¶ 41 of the proposed settlement which provides a framework for a public benefits charge that might be used, should it ever be activated, for the development of energy efficiency and renewable energy programs. Activation of this provision will result in increased rates for residential customers. Kahal Cross, Tr. p. 777, lines 8-17.

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