SIDLEY AUSTIN LLP 701 FIFTH AVENUE, SUITE 4200 SEATTLE, WA AMERICA ASIA PACIFIC EUROPE

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1 SIDLEY AUSTIN LLP 701 FIFTH AVENUE, SUITE 4200 SEATTLE, WA AMERICA ASIA PACIFIC EUROPE October 1, 2018 Via etariff Filing Kimberly D. Bose Secretary Federal Energy Regulatory Commission 888 First Street, NE Washington, DC Re: Baltimore Gas and Electric Company Revisions to PJM Tariff Attachment H-2A To Provide for Rate Treatment of FAS 109 Deferred Tax Adjustments, Flow Through to Customers the Deferred Tax Benefits of the TCJA, and Clarify Use of the Currently Effective Income Tax Rate Docket No. ER Dear Secretary Bose: Pursuant to Section 205 of the Federal Power Act ( FPA ), 1 Part 35 of the Federal Energy Regulatory Commission s ( FERC or Commission ) regulations, 2 and the Commission s order in response to Docket No. ER17-528, 3 Baltimore Gas and Electric Company ( BGE ), submits 4 the attached proposed modifications to BGE s formula transmission rate, contained in PJM Interconnection LLC ( PJM ) Open Access Transmission 1 16 U.S.C. 824d (2012) C.F.R. Part 35 (2016). 3 PJM Interconnection, L.L.C., 161 FERC 61,163 (2017) ( BGE 2017Order ), affirmed and clarified, PJM Interconnection, LLC, 164 FERC 61,173 at P 38 (2018) ( BGE Rehearing Order ) ( BGE may file to recover the tax effect on an ongoing basis if properly supported ). 4 Pursuant to Order No. 714, this filing is submitted by PJM on behalf of BGE as part of an XML filing package that conforms with the Commission s regulations. PJM has agreed to make all filings on behalf of the PJM Transmission Owners in order to retain administrative control over the PJM Tariff. Thus, BGE has requested PJM submit this filing in the etariff system as part of PJM s electronic Intra PJM Tariff. Sidley Austin (DC) LLP is a Delaware limited liability partnership doing business as Sidley Austin LLP and practicing in affiliation with other Sidley Austin partnerships.

2 Kimberly D. Bose October 1, 2018 Page 2 Tariff, Attachment H-2A ( Formula Rate ) to incorporate measures (the Application ) to more accurately track expenses arising from tax liabilities, to ensure flow through of the tax benefits arising from the Tax Cuts and Jobs Act of 2017 ( TCJA ) and to clarify the timing for recovery of various accrued tax liabilities. The Application also proposes certain ministerial edits to the Formula Rate, intended to clarify that calculations involving the currently effective income tax rate and calculation of the composite income tax rate will use the tax rates then in force, rather than the tax rates in force in Because the proposed revisions will lead to a rate reduction that benefits customers, BGE requests that the Commission waive the 60 day notice period and allow the revised tariff sheets to go into effect on the date of this filing, with an Effective Date of October 1, Alternatively, BGE requests the earliest possible Effective Date. As further discussed below, this Application is submitted as a response to the Commission s orders in Docket No. ER17-528, in which the Commission rejected recovery through BGE s transmission rates of catch-up FAS 109 amounts 5 from 2005 (when the BGE Formula Rate went into effect) through the Effective Date of this Application, which were not recovered because the Formula Rates did not provide for such recovery ( Catch-Up FAS 109 Amounts ). 6 While those orders rejected catch-up recovery, they made clear that BGE could seek recovery of ongoing amounts that would not yet have been collected, even if BGE s rates had provided for FAS 109 recovery since This Application seeks recovery only of such ongoing amounts and does not seek recovery of Catch-Up FAS 109 Amounts. 8 5 Amounts recorded pursuant to Financial Accounting Standards Board Statement No. 109 ( FAS 109 ) now included in U.S. GAAP as part of Accounting Standards Codification 740 Income Taxes. 6 See BGE 2017 Order and BGE Rehearing Order. 7 BGE Rehearing Order at P 38. See also Commonwealth Edison, Co., 164 FERC 61,172 at PP (2018) ( Exelon 2018 Order ) (authorizing other Exelon companies to amend tariff to obtain recovery of ongoing amounts if properly supported). 8 BGE is not seeking recovery of any Catch-Up FAS 109 Amounts in this Application, but nothing in this Application should be construed as BGE forgoing its right to such catch-up recoveries. BGE reserves its right to seek further review of Docket No. ER

3 Kimberly D. Bose October 1, 2018 Page 3 I. EXECUTIVE SUMMARY This Application will provide transmission customers a mechanism for rate relief from the recent TCJA, which reduced the effective federal corporate income tax rate, and will formulaically flow through other similar changes in deferred tax amounts. Once the filing is accepted, the next annual Formula Rate update of BGE, as well as future updates, will provide millions of dollars in rate relief to customers and will provide an automatic approach to ensure that deferred tax adjustments recorded under FAS 109 will be included in rates in a timely fashion. We estimate that the annual net impact of the proposed modifications will be a reduction of approximately $ 4.56 million per year or a 1.98 % reduction in transmission rates. BGE currently tracks adjustments to deferred taxes (tracked pursuant to FAS 109) in accordance with Commission precedent and policy. But the BGE Formula Rate has no mechanism to flow those FAS 109 amounts (whether positive or negative) through its transmission rates. As described below, the FAS 109 amounts reflect mismatches between BGE s liability for taxes, its accounting for that liability, and recovery of that liability in transmission rates. Allowing BGE s Formula Rate to now include a mechanism to pass FAS 109 amounts through to customers as proposed in this Application will ensure, among other things, that customers receive the benefits of the TCJA tax relief, and will ensure over time that customers pay in rates what was paid by BGE. While the changes proposed in this Application provide important clarity about timing, they do not alter the overall amount of taxes flowing through rates. The TCJA creates a deferred tax difference that leads to a rate decrease because BGE will pay future taxes at a new, lower federal corporate tax rate and must adjust its books to reflect that change. Under the current BGE Formula Rate, FAS 109 adjustments including those arising from statutory tax rate changes do not get reflected in rates but are instead tracked for later rate treatment. 9 When approved, the amendments proposed here will ensure that those important 9 Unlike the deferred tax impact, the effect on current tax expense of the federal corporate tax cut in the TCJA is automatically reflected in the BGE Formula Rate, which computes tax expense using the currently effective income tax rates. BGE Formula Rate, PJM Attachment H-2A, Note I. The TCJA was thus reflected in BGE s 2018 formula rate update in the current tax calculations, and will be reflected in future rate updates in calculation of tax expense. While the formula s intent to use the currently effective income tax rate is clear, the filed formula has filled in several cells with the tax rates effective in See e.g. BGE Formula Rate, Line 127 and 130. Questions about which tax rate would be used by BGE led to the Commission s show cause order issued in Docket No. EL AEP Appalachian Trans. Co., et al., 162 FERC 61,225 (2018) ( Order to Show Cause ). This Application deletes those references to the 2005 tax rates and resulting tax computations that relied on the 2005 rate to eliminate any question or concern that the currently effective tax rates will be used for current tax calculations.

4 Kimberly D. Bose October 1, 2018 Page 4 benefits, and other adjustments to deferred taxes, are automatically flowed through to ratepayers. 10 Unlike the Application in Docket No. ER the proposal here is not seeking recovery of Catch-Up FAS 109 Amounts. Because this Application does not seek such catch-up recovery, it is entirely consistent with the Commission s orders in Docket ER and in other recent proceedings, and thus should be accepted promptly and summarily. 11 II. SINGLE ISSUE RATE TREATMENT The Commission has held that it is appropriate to address formula rate filings that concern the timing of deferred tax recovery but do not otherwise modify the formula rate on a single-issue basis. For example, the Commission held in a recent proceeding concerning formula rate modifications to the MISO Tariff to address ADIT recovery and timing that arguments concerning other aspects of the formula rate were beyond the scope of the issues raised in this proceeding and dismissed protests raising such unrelated issues Consumers across the country have been asking for such flow through of the TCJA benefits. See e.g. February 9, 2018 Letter of Citizens Utility Board to the Commission (Accession No ). In response, the Commission initiated a Notice of Inquiry to consider how best to accomplish such flow through. Inquiry Regarding the Effect of the TCJA on Commission Jurisdictional Rates, 162 FERC 61,223 (2018) ( ADIT NOI ). Exelon s utility affiliates are committed to flowing all FAS 109 amounts, including this large tax benefit, back to customers in a just and reasonable fashion. In addition to this filing, BGE s affiliates Commonwealth Edison Co., Atlantic City Electric Co., Delmarva Power & Light Co., and Potomac Electric Power Co. are simultaneously making FPA Section 205 rate filings at the Commission to amend their formula rates to include FAS 109 amounts that will allow the TCJA tax cuts to flow through rates as well as providing the other benefits of this filing. BGE s affiliate PECO Energy Co. included FAS 109 passthrough that will flow through these impacts in its formula rate in Docket No. ER (accepted and now effective, and now in hearing proceedings at the Commission). 11 As required by the Commission s determination in Docket No. ER that BGE may seek recovery of only excess or deficient ADIT to be calculated as of the effective date in the new filing, the BGE rates pursuant to this Application will not flow through the impacts of the TCJA on deferred taxes that could have been collected from January 1, 2018 through the Effective Date of this Application. See BGE Rehearing Order, at P Midcontinent Indep. Sys. Operator, Inc.,153 FERC 61,371 at P 41 (2015).

5 Kimberly D. Bose October 1, 2018 Page 5 Because the application here seeks adjustments relating to the timing of deferred tax recovery but does not impact any other aspects of BGE s rates, it is appropriate that the Application here similarly be addressed on a single-issue basis. 13 III. SUMMARY AND TIMING OF PROPOSED MODIFICATIONS The following adjustments are reflected in this Application: 1. Excess/Deficient Deferrals Arising from Tax Rate Changes Adjustment. Due to changes in state or federal tax rates, occurring from time to time, such as the TCJA, BGE s accumulated deferred income tax balances do not match the actual tax liabilities of BGE. Rather than continuing to allow such tax mismatches to accumulate over time in BGE s deferred tax balances, BGE proposes to correct the mismatch through automatic adjustments to be incorporated into the formula rate, using the average rate assumption method ( ARAM ) when ARAM is required under the normalization provisions of the Internal Revenue Code, and using an amortization over a 10 year period for non-property items. The automatic adjustments would reflect past tax rate changes that are not yet fully accounted for, and would also provide an automatic mechanism to capture the impact of any future tax rate changes that may be enacted at the state or federal level. 14 Consistent with the orders in Docket No. ER17-528, BGE is not seeking in this Application any Catch-Up FAS 109 Amounts associated with Tax Rate Changes. 2. AFUDC Equity Adjustment. Federal income tax rules do not permit deduction on the income tax return of the AFUDC equity that is capitalized to plant and included in depreciation expense for financial reporting purposes. Thus, over time, the financial statement reporting of depreciation expense, which includes a component for book basis of AFUDC equity, will be different from the related amount deducted on the income tax return that does not include AFUDC equity. Consistent with the Commission s precedent approving similar formula rate adjustments, BGE proposes to modify its formula rates, to recover the tax component associated 13 The Application also includes ministerial corrections to clarify that the formula relies on the currently effective tax rate rather than tax rates in force in This modification is purely ministerial, to clarify the tax calculations, with no actual change to the rate. It likewise merits single issue rate treatment. 14 See, e.g., Wisconsin Power and Light, Docket No. ER18-216, (February 13, 2018 Letter Order) (approving formula rate change of WPL to provide for recovery of excess and deficient ADIT) ( WPL ); Virginia Electric and Power Co., Docket No. ER ( VEPCO ) (August 2, 2016 Letter Order) (approving formula rate change of VEPCO to provide for recovery of excess and deficient ADIT); Midcontinent Indep. System Operator, 153 FERC 61,374 (2015) ( ITC ) (approving formula rate changes of various ITC affiliates to include a mechanism for the return or collection of excess and deficient ADIT).

6 Kimberly D. Bose October 1, 2018 Page 6 with the non-deductibility of AFUDC Equity amounts that are reflected in depreciation in each rate year. 15 Consistent with the orders in Docket ER17-528, BGE does not seek recovery here of tax amounts associated with AFUDC Equity that is not reflected in depreciation that rate year. 3. Flow Through Accounting Adjustment. Consistent with Commission requirements, BGE s Formula Rate employs the tax normalization methodology which does not immediately flow through tax savings, and instead normalizes tax liability assessed in rates over time. However, in prior decades, BGE employed flow through ratemaking for certain assets, immediately flowing through certain tax savings. The Commission has recognized that while both the flow through and normalization methodology recover the proper amount of taxes from ratepayers over time, the switch from one methodology to another creates timing differences that lead to a difference between a utility s deferred tax account balance and its future tax liability. While the normalization switch for BGE occurred years ago, shortfalls remain to be passed through in BGE s accounting resulting from the pre-2005 use of the flow through method. BGE proposes modifications to its Formula Rate to to amortize the tax balances associated with flow through ratemaking over the average remaining life of its assets. 16 In Docket No. ER17-528, the Commission rejected recovery of amounts that could have been sought in rates from 2005 until the present, and rejected recoveries associated with assets that are retired or fully depreciated. This Application is consistent with those rulings, and is limited to only those small remaining amounts that could not have been amortized prior to the Effective Date of this filing and relate to assets that are in service and still being depreciated, and thus meets the ER standards. 4. Ministerial Changes to References to Current Tax Rate. The BGE Formula Rate refers to and uses the currently effective income tax rates in several locations. In a few of those locations, the settlement spreadsheet on file has cells associated with the currently effective income tax rate and tax rate calculations which contain the tax rate that was in effect in 2005 or 15 See, e.g., Indianapolis Power and Light, 162 FERC 61,134 (2018) ( IPL ) (approving formula rate adjustment for AFUDC equity); Wisconsin Power and Light, Docket No. ER18-216, (February 13, 2018 Letter Order) ( WPL ) (approving formula rate adjustment for AFUDC equity); VEPCO (approving formula rate adjustment for AFUDC equity); ITC (approving formula rate adjustment for AFUDC equity). 16 See, e.g., Duquesne Light Co., Docket No. ER (April 26, 2013 Letter Order) ( Duquesne ) (accepting deferred tax adjustment charge arising from deferred tax previously accounted for using flow-through methodology using South Georgia method that amortizes over average remaining life of asset)s; PPL Electric Utilities Corp., Docket No. ER (Letter Order issued May 23, 2012) (accepting deferred tax adjustment charge arising from deferred tax previously accounted for using flow-through methodology using South Georgia method that amortizes over average remaining life of assets).

7 Kimberly D. Bose October 1, 2018 Page 7 calculations derived from the 2005 tax rate. This is purely for illustrative purposes, but has created questions about whether the tax calculations will actually use the currently effective income tax rates or 2005 tax rates. To eliminate such questions, the proposed revisions delete the references to the 2005 tax rates and calculations based on the 2005 tax rate from the formula. 5. Timing of Rate Impacts. While we propose that the changes to the formula will go into effect on October 1, 2018, or such other date as approved by the Commission, the actual rate levels charged to customers will not change until June 1, The BGE Formula Rate protocols provides for changes to rates to be addressed in the annual update reconciliation mechanism, in lieu of mid-year rate adjustments, in order to avoid administrative inconvenience for PJM, to provide a measure of rate certainty to customers and suppliers, and to avoid the complexities of accounting and true-ups for mid-year formula changes. 17 Interest accrual at the FERC rate on the true-up calculation will ensure that customers are held harmless from the fact that the rate levels will not be adjusted until June 1, Assuming the Application is accepted, BGE will include in its 2018 FERC Form 1 the amortizations that will permit it to reflect the adjustment in the true-up to 2018 rates, and in the initial rate calculation of 2019 rates, each of which will be submitted by May 15, 2019 and go into effect on June 1, Later year FERC Form 1 s will include amortizations that permit the rate calculation to be performed in following years. IV. DESCRIPTION OF APPLICANT BGE is an energy delivery company in Central Maryland, where it delivers energy to more than 1.25 million electric customers and 650,000 gas customers. BGE is regulated by the Commission and the Maryland Public Service Commission ( MPSC ). As one of the original eight transmission owners within PJM, BGE has a significant involvement with bulk electric power transmission over broad regions. BGE maintains 22,500 miles of distribution lines and almost 1,300 circuit miles of transmission lines in a 2,300-square-mile service territory. BGE provides unbundled, open access delivery service, and is a default load-serving provider for customers that do not opt for alternative energy providers under BGE s retail customer choice 17 BGE Protocols, PJM Tariff Attachment H-2B, Section 5(a) (providing that adjustments will be dealt with at time of next annual rate update). 18 BGE Formula Rate, PJM Tariff, Attachment H-2A, Attachment 6, line 9 of Reconciliation Details, provides for interest pursuant to 18 C.F.R a for true-up amounts. 19 Because the FAS 109 amounts will only flow through the rate for the portion of 2018 after the Effective Date, BGE commits that its 2019 rate update will include workpapers that detail adjustments so that the 2018 true-up reflects only the post-effective Date amortizations.

8 Kimberly D. Bose October 1, 2018 Page 8 program. BGE is an indirect subsidiary of Exelon, a publicly held corporation incorporated in Pennsylvania, with its principal headquarters located in Chicago, Illinois. V. PERSONS TO BE INCLUDED ON OFFICIAL SERVICE LIST Stan Berman Sidley Austin LLP 701 Fifth Avenue, Suite 4200 Seattle, WA (206) sberman@sidley.com Eric Todderud Sidley Austin LLP 701 Fifth Avenue, Suite 4200 Seattle, WA (206) etodderud@sidley.com Gary Guy Baltimore Gas and Electric Company Suite 1301, 110 West Fayette Street Baltimore, MD (410) gary.e.guy@bge.com Christopher A. Wilson Director, Federal Regulatory Affairs Exelon Corporation 101 Constitution Ave. Suite 400 E Washington, DC (202) FERCeFilings@exeloncorp.com VI. BACKGROUND AND HISTORY OF INCOME TAX RATEMAKING The Commission has established accounting procedures for public utilities to record and recover deferred taxes over multi-year periods, including the establishment of regulatory assets and liabilities to record excess or deficient collections, with the excesses and deficiencies experienced in prior years to be dealt with in later years in later rate cases. BGE has conformed to and relied on those procedures. A. Commission Orders on Normalization Public Systems I, a 1979 case from the United States Court of Appeals for the District of Columbia Circuit ( D.C. Circuit ), describes the issue of interperiod tax accounting, and recounts the history of the issue. 20 The court explained rulings tracing back to the 1950s, leading to FPC Order No. 530, which generally required that public utilities employ the normalization 20 Public Systems v. FERC, 606 F.2d 973 (D.C. Cir. 1979) ( Public Systems I ).

9 Kimberly D. Bose October 1, 2018 Page 9 method of accounting to address interperiod deferred tax issues. 21 In Public Systems I, the court found that the agency (by then, the FPC had become FERC) had not adequately explained its policies, and remanded to FERC for further proceedings. On remand, the Commission initiated the rulemaking that led to Order No In Order No. 144, the Commission re-affirmed and explained its choice to require public utilities to adopt normalization ratemaking. The rule text adopted by the Commission provided that the eventual rate case would address, using methods such as the South Georgia method, the circumstance where: as a result of changes in tax rates, the accumulated provision for deferred taxes becomes deficient in or in excess of amounts necessary to meet future tax liabilities as determined by application of the current tax rate to all timing difference transactions originating in the test period and prior to the test period. 23 After the issuance of Order No. 144 and rehearings, the issue went back to the D.C. Circuit, where challengers again contested the Commission s tax normalization policies, as well as the portions of the rule permitting make-up recovery of prior year excesses and deficiencies. 24 The D.C. Circuit upheld FERC s policies and rejected the contention that this was improperly retroactive, explaining: the provision does not adjust for shortfalls in prior rates. It only adjusts future rates so that tax costs will not fall disproportionately on one ratepayer generation. Ratepayers are not charged for a greater tax allowance under the provision than they otherwise would be; they merely incur the cost over a different time period Id. at ; Accounting For Premium, Discount and Expense of Issue, Gains and Losses on Refunding and Reacquisition of Longterm Debt, and Interperiod Allocation of Income Taxes, 53 FPC 2123 (1975) ( FPC Order No. 530 ). 22 Public Systems I, 606 F.2d at ; Tax Normalization for Certain Items Reflecting Timing Differences in the Recognition of Expenses or Revenues for Ratemaking and Income Tax Purposes, Order No. 144, FERC Stats. & Regs. 30,254, at 31,519 (1981), order on reh g, Order No. 144-A, FERC Stats. & Regs. 30,340 (1982). 23 Order No. 144 slip op. at ; regulatory text for 18 CFR 2.201(c)(ii) (as then codified). 24 Public Systems v. FERC, 709 F.2d 73, 85 (D.C. Cir. 1983) ( Public Systems II ). 25 Id.; see also Town of Norwood v. FERC, 53 F.3d 377, 381 (D.C. Cir. 1995) (noting that the court has upheld the Order No. 144 make-up provision against charges of retroactive ratemaking on the grounds that past costs collected during the transition were costs that the

10 Kimberly D. Bose October 1, 2018 Page 10 The ultimate goal of the Commission policy is an accurate rate that ensures that customers pay, and utilities receive, the accurate measure of tax expense, as measured over both current and prior test periods. B. FAS 109 FAS 109, issued February 1992 by the Financial Accounting Standards Board, updated the accounting and reporting standards for the interperiod tax issues such as those addressed in Order No FAS 109 specifically addresses the amounts at issue in this proceeding. It requires that companies recognize a deferred tax liability for: It further requires: tax benefits that are flowed through to customers when temporary differences originate ( Flowthrough Items ); and the equity component of the allowance for funds used during construction ( AFUDC Equity ). adjustment of a deferred tax liability or asset for an enacted change in tax laws or rates ( Excess/Deficient Deferred Taxes ). 26 On April 23, 1993, the Commission provided guidance on FAS That guidance letter, generally consistent with the prior Commission policy under Order No. 144, authorizes and directs compliance with FAS 109 by public utilities, requiring that excess or deficient deferred tax liability associated with all three categories Flowthrough Items, AFUDC Equity, and Excess/Deficient Deferred Taxes will be accounted for as provided in FAS 109, by recording utility had always planned to charge to future ratepayers ) (emphasis in original). 26 FAS 109. This standard also states that regulated enterprises, such as BGE, that meet the criteria for application of FAS 71, Accounting for the Effects of Certain Types of Regulation, are not exempt from FAS 109. Id. at FAS 71 is the accounting standard that provides for regulatory asset treatment of the future increases (or decreases) in taxes payable if it is probable that the taxes will be recovered from (or refunded to) customers in future rates. Id. 27 Accounting for Income Taxes, Docket No. AI93-5, April 23, 1993 Letter ( 1993 FAS 109 Guidance Letter ).

11 Kimberly D. Bose October 1, 2018 Page 11 the associated amounts as an asset or liability in separate accounts where later recovery from or payment to customers could ultimately be sought. 28 Consistent with this guidance, BGE and other public utilities have been tracking and recording amounts under FAS 109 since the early 1990s. Rather than automatically flowing through rates, the FAS 109 excesses and deficiencies are retained in the accounting records of the utility, for later recovery, once a specific application is made to the Commission for such recovery. C. Formula Rates Treatment of FAS 109 Amounts Filings by ITC and Virginia Electric Power Company ( VEPCO ) make clear that FAS 109 amounts may be recovered formulaically. For example, in 2015, ITC filed an application in Docket No. ER to amend its transmission formula rate, including new formula provisions for recovery of continued FAS 109 accruals. 29 The Commission approved the proposed recovery. 30 In July 2016, VEPCO, in Docket No. ER , proposed formulaic recovery of FAS 109 amounts, using essentially the same mechanism and theory as ITC. 31 The Commission approved the proposed recovery. 32 The Commission continues to approve formulaic recovery mechanisms for FAS 109 amounts, as can be seen in its February 2018 approval of a proposal by Wisconsin Power and Light that mirrored the earlier ITC filing. 33 In response to a similar filing by Ameren, protestors raised concerns that the AFUDC Equity amount is different from other FAS 109 amounts because it arises from a permanent tax timing difference rather than the temporary timing differences addressed in other FAS 109 amounts. As explained in the Ameren order, the 28 Id.; BGE 2017 Order at P Midcontinent Indep. System Operator, Docket No. ER (ITC October 30, 2015 Application). 30 ITC, 153 FERC 61, Virginia Electric and Power Co., Docket No. ER (VEPCO July 1, 2016 Application). 32 VEPCO, August 2, 2016 Letter Order. 33 WPL, February 13, 2018 Letter Order.

12 Kimberly D. Bose October 1, 2018 Page 12 deferred tax effect arising from AFUDC equity is indeed a permanent tax difference but the Commission has held that it should be treated as a temporary timing difference and thus treated like other amounts addressed in the Commission s normalization policies. 34 D. BGE Income Tax Accounting and Rate History BGE adopted FAS 109 accounting in 1992, shortly after that standard was issued. Since its adoption of FAS 109, BGE has been properly recording deferred tax amounts subject to FAS 109 in all three categories for later rate recovery from customers, or later payment to customers, once appropriate Commission authorization for such recovery was obtained. 35 At least initially, there was no Commission rate proceeding where recovery of such amounts would have come up. BGE never had wholesale requirements customers, and it does not appear that BGE had any fully developed bundled or transmission level wholesale rates prior to the open access era in In 1996, BGE submitted an open access tariff to the Commission in Docket No. ER96-894, and then submitted another open access tariff in Docket No. OA The two cases were ultimately resolved together in a black box stated rate settlement that that did not expressly address FAS Midcontinent Independent System Operator, 163 FERC 61,163, at P 59 (2018) (Ameren). 35 Consistent with the 1993 FAS 109 Guidance Letter, the deferred tax liability for BGE has been recorded to FERC Account 282, and the regulatory asset amounts are recorded to FERC Account These amounts are reflected in each annual Form 1 of BGE (the amounts reported in Form 1 are for all of BGE, rather than just the transmission-related component at issue in this filing). 36 Until June 1, 2000, most BGE customers were served under Maryland bundled retail rates. We have not found any Maryland rate orders expressly addressing FAS 109 recovery by BGE. 37 Baltimore Gas and Electric Co., Docket No. ER (Application of January 22, 1996); Baltimore Gas and Electric Co., Docket No. OA (Application of July 9, 1996). 38 Baltimore Gas and Electric Co., Docket No. ER (Letter Order of November 13, 1997).

13 Kimberly D. Bose October 1, 2018 Page 13 In 1997, BGE submitted rates as part of the initial tariff of PJM, and those rates were set for hearing in FERC Docket ER Like the earlier open access filings, those rates were settled in a stated rate black box settlement that did not expressly address FAS In 2005, BGE submitted its Formula Rate, in Docket No. ER The rate was made effective June 1, Challenges to the rate were settled in a settlement accepted on April 19, The Formula Rate, as settled, segregated FAS 109 amounts from current rate recovery. 44 BGE s rates prior to the Formula Rate do not specify FAS 109 recovery, but BGE accounting assumes recovery of an appropriate amortized portion of transmission-related FAS 109 amounts in rates (either its bundled retail rates or its FERC established stated rates) until the Formula Rate went into effect in Consistent with the rulings in Docket No. ER17-528, BGE will likewise assume for this Application that the FAS 109 amounts continued to be amortized away after the Formula Rate went into effect in 2005, even though the Formula Rate did not provide for passthrough of FAS 109 amounts. The attached exhibits document by year, the derivation of the transmission related portion of excess deferred taxes, AFUDC equity, and Other Flow Through items, each type of flow 39 Pennsylvania-New Jersey-Maryland Interconnection, 81 FERC 61,257 (1997). 40 Baltimore Gas and Electric Co., Docket No. ER (Letter Order of September 18, 1998). 41 Baltimore Gas and Electric Co., and Pepco Holdings Inc. Docket No. ER (Application of January 31, 2005) (Docket No. ER was jointly submitted by BGE and the PHI companies because the Commission had encouraged joint filings by the PJM utilities. BGE and the PHI companies were unaffiliated at the time, and did not become affiliates until the 2016 closing of the Exelon/PHI merger.). 42 Allegheny Power System Operating Companies, 111 FERC 61,308 (2005) BGE Settlement Order, 115 FERC 61, BGE Offer of Settlement, Docket No. ER The rate formula Attachment H-2 expressly excludes FASB 109 amounts and 109 amounts in numerous locations. Consistent with the formula rate requirements, in each Annual Update BGE identifies on its Attachment 1- ADIT Worksheet, the excluded FAS 109 amounts that are recorded in FERC Account 282.

14 Kimberly D. Bose October 1, 2018 Page 14 through amount that BGE proposes to pass back to customers. Whether or not such pass-back actually occurred, the calculations reflect the recovery (or assumed recovery) in wholesale and retail rates until To assist the reader, the exhibits are in an excel file that is a working model with all links and calculations intact, structured as follows: - Summary of the total transmission-related FAS 109 regulatory asset as of December 31, 2017, reflecting amortizations each year consistent with the rulings in Docket No. ER (Exhibit C-1). - Spreadsheet showing the TCJA impacts to the FAS 109 transmission regulatory asset components. (Exhibit C-2). - Spreadsheet summarizing the tax originations and reversals by year (Exhibit C-3). - Spreadsheet showing the tax calculations on annual AFUDC-Equity originations (Exhibit C-4). - PowerTax report showing deferred tax summary by component as of 12/31/04 (Exhibit C-5). - Pro forma calculation of the revenue impact to the 2018 Annual Update, using the proposed modifications to the Formula Rate (Exhibit D-1). - TCJA excess deferred tax summary including 12/31/17 balances, amortization periods and annual amortizations, by category (Exhibit D-2). - Example Tariff Calculations showing the pro forma amounts that would be reflected in Formula Rate Attachment 5, if the proposed modifications were part of the 2018 Annual Update (Exhibit D-3). 45 Amortizations for 2018 have not yet been computed, but will be done in the same fashion as shown for prior years. Assuming this Application is granted, BGE s Form 1 for 2018 will reflect balances based on a continued amortization throughout the Formula Rate period since Because the modifications proposed here will not go into effect prior to the Effective Date, the 2018 Rate Update will include workpapers detailing inclusion in the 2018 rate true-up only of FAS 109 amounts from after the Effective Date.

15 Kimberly D. Bose October 1, 2018 Page 15 - Computation of Amortization of AFUDC Equity/Excess Deferred/Other Flow Through Items used to support example tariff calculations (Exhibit D-3a). - Various supporting tax documents, including additional amortization calculations and original PowerTax reports for every year from 2004 to 2017 (Tax Support). - Spreadsheet listing pre-1976 transmission assets that are still in service and not fully depreciated (Exhibit E). VII. EXPLANATION OF PROPOSED TARIFF REVISIONS BGE has appropriately followed Staff accounting guidance and Commission precedent in accounting for FAS 109 amounts. These deferred tax amounts, relating to Excess/Deficient Deferred Taxes, AFUDC Equity, and Flowthrough Items were properly reflected in BGE accounts, subject to later recovery in rates when expressly authorized by the Commission. As discussed above, and as required by the Commission s orders in Docket No. ER17-528, BGE assumes for this Application that FAS 109 amounts amortized away prior to the Effective Date of this Application. This Application, unlike the Application in Docket No. ER17-528, does not seek to recover Catch-Up FAS 109 amounts relating to the period from 2005 to the present. A. Proposed Revisions to Attachment H-2A of the PJM Tariff to Permit Return or Recovery of Accumulated Deferred Income Taxes Resulting From Tax Rate Changes. BGE proposes to modify its formula transmission rate to ensure that transmission rates automatically adjust to reflect fluctuating tax liabilities arising from federal or state income tax rate changes. This change to the Formula Rate serves to implement a mechanism through which BGE can recover deficient deferred taxes tracked and recorded by BGE. The Formula Rate change also provides a mechanism through which BGE will automatically return excess deferred income taxes should they occur in the future. While there have been several tax rate changes over the years, the TCJA will lead to a large excess in deferred taxes that will substantially exceed the other amounts recorded at BGE, meaning the overall impact of this Application will be a large rate reduction for customers. The tax rate change in the TCJA and prior tax rate changes have led to a re-measurement of BGE s ADIT balances, leading to a reduction in the deferred taxes, which will be flowed through to customers over time. However, there is no mechanism available in the current Formula Rate to return to customers any excess deferred taxes that result from a re-measurement of the ADIT balances. Likewise, there is no mechanism available in the current formula rate to recover deficient deferred income taxes that result from the re-measurement of the ADIT balances. In order to flow through excess ADIT, or collect deficient ADIT, a formula rate must include a mechanism to accomplish that task. These two parallel mechanisms are very similar

16 Kimberly D. Bose October 1, 2018 Page 16 and are included in formula rates for other transmission owners, 46 and are consistent with longestablished precedent for the flow through of ADIT excesses and collection of ADIT deficiencies. 47 To accomplish this result, BGE proposes to add an Other Income Tax Adjustment section to its Formula Rate, with a new line 135a titled FAS 109 Amortized Tax Expense that will be added to the Income Tax Component computed on line 136 of the Formula Rate. The FAS 109 Amortized Tax Expense will include the three adjustments reflected in this Section 205 filing, with the detail of the calculation provided for in a new section of Attachment 5 (Cost Support) with accompanying instructions that describe and control the calculation. BGE will allocate the cumulative adjustment recognized in its financial records for the re-measurement of its state and federal deferred taxes due to tax rate changes to the transmission function and amortize the amount over the remaining life of the transmission-related assets consistent with the ARAM methodology, which will be used when ARAM is required under the normalization provisions of the Internal Revenue Code. For non-property items, which are not governed by the ARAM methodology, BGE proposes to use a ten year amortization, based on analysis of average period of time to eliminate the book to tax basis difference for that group of non-property items. Consistent with the holding in the BGE Rehearing Order 48, the calculation will reflect the assumption that these amounts have been amortized in rates until the Effective Date of this Application, and thus will reflect only the portion of these amounts that remain calculated as of the effective date in the new filing. In applying the ARAM methodology, BGE will amortize the excess/deficient deferral balances over the remaining useful life of the assets impacted by the tax rate change(s), using the depreciation rates included in Attachment 9 (Depreciation Rates) for the underlying plant assets. 49 As stated in the instructions to the newly proposed section of Attachment 5 (Cost Support), the resulting amortized tax expense will be taken directly from BGE s tax accounting 46 VEPCO, (August 2, 2016 Letter Order) (approving formula rate change of VEPCO to provide for recovery of excess and deficient ADIT); ITC, 153 FERC 61,374 (2016) (approving formula rate changes of various ITC affiliates to include a mechanism for the return or collection of excess and deficient ADIT). 47 See, e.g., Michigan Gas Storage Co., 83 FERC 63,001 (1998), aff d in relevant part, 87 FERC 61,038 (1999). 48 BGE Rehearing Order at P Or for a ten year period for non-plant items.

17 Kimberly D. Bose October 1, 2018 Page 17 records (which are currently maintained using the widely used PowerTax tax depreciation and deferred tax software), which relies on amounts recorded by BGE pursuant to the Commission s Uniform System of Accounts. Like other such elements of the Formula Rate, the amounts are derived from the Form 1 and the calculations will be subject to review as part of the Annual Update procedures spelled out in BGE s Formula Rate Protocols in PJM Tariff Attachment H- 2B. B. Proposed Modifications to Attachment H-2A of the PJM Tariff Permitting Flow-Through of Deferred Tax Liabilities for AFUDC Equity. Federal income tax rules do not permit the deduction on the income tax return of the AFUDC equity that is capitalized to plant and included in depreciation expense for financial reporting purposes. Thus, over time, the financial statement reporting of depreciation expense, which includes a component for book basis of AFUDC equity, will be different from the related amount deducted on the income tax return that does not include AFUDC equity. Consistent with the tax recovery mechanisms that the Commission has allowed in recent transmission rate filings, 50 BGE proposes to modify its Formula Rate to adjust for the non-deductibility of AFUDC Equity. This treatment will provide ongoing recovery in current rates of the permanent tax differences that would otherwise accrue as a deferred tax liability. Consistent with the holding in the BGE Rehearing Order, 51 the calculation will reflect only the taxes associated with AFUDC Equity that is depreciated in a given year. Unlike the Application in Docket No. ER17-528, this Application does not seek recovery of tax amounts associated with depreciation from prior years. In order to recover the tax amount on an ongoing basis, as discussed above, BGE proposes to add an Other Income Tax Adjustment section to its Formula Rate, with a new line 135a titled FAS 109 Amortized Tax Expense that will be added to the Income Tax Component computed on line 136 of the Formula Rate. The FAS 109 Amortized Tax Expense will include the amortization of AFUDC Equity amounts recorded under FAS 109, with the detail of the calculation provided for in a new section of Attachment 5 (Cost Support) with accompanying instructions that describe and control the calculation. As described in the instructions to the newly proposed section of Attachment 5 (Cost Support), BGE will multiply the amount of AFUDC embedded in the actual gross transmission plant depreciation expense by the depreciation rates included in Attachment 9 (Depreciation 50 See e.g., VEPCO (approving formula rate adjustment for AFUDC equity); ITC (approving formula rate adjustment for AFUDC equity); Ameren. 51 BGE Rehearing Order at P 25.

18 Kimberly D. Bose October 1, 2018 Page 18 Rates) for the underlying plant assets. Furthermore, as stated in the instructions to the newly proposed section of Attachment 5 (Cost Support), the resulting amortized tax expense will tie directly to BGE s tax accounting records maintained using the PowerTax tax depreciation and deferred tax software, which relies on amounts recorded by BGE pursuant to the Commission s Uniform System of Accounts. Like other such elements of the Formula Rate, the amounts are derived from the Form 1 and the calculations will be subject to review as part of the Annual Update procedures spelled out in BGE s Formula Rate Protocols in PJM Tariff Attachment H- 2B. C. Proposed Modifications to Attachment H-2A of the PJM Tariff Permitting Recovery of Deferred Tax Liabilities Related to Flow-Through Accounting. BGE s Formula Rate follows the rules and policies of the Commission, including rules and policies that require full tax normalization. 52 While BGE now collects its transmission rate through the Formula Rate, in past years BGE recovered substantially all of its transmission revenue requirement through bundled retail rates, regulated by the Maryland Public Service Commission. In past years, the Maryland Public Service Commission required that Maryland state income tax and certain federal income tax savings resulting from temporary differences between the amount of taxes computed for ratemaking purposes and taxes on the amount of actual current federal income tax liability would flow-through rates on a current basis, but that ratepayers would be responsible for paying higher taxes when the temporary timing differences reversed. The Maryland Commission changed this policy and switched to normalization accounting, but only beginning with 1976 property additions. 53 Because the switch to normalization accounting only applied to a portion of the company s property, the income tax and thus rate reducing benefits of the company s property vintage prior to the switchover date continued to be flowed through to current ratepayers. The cumulative timing differences related to the book versus federal tax life on that property is reflected in BGE s accounts maintained consistent with FAS See Tax Normalization for Certain Items Reflecting Timing Differences in the Recognition of Expenses or Revenues for Ratemaking and Income Tax Purposes, Order No. 144, 46 Fed. Reg. 26,613 (May 14, 1981), FERC Stats. & Regs. 30,254, at 31,560-61, order denying reh g, Order No. 144-A, 47 Fed. Reg (Feb. 26, 1982), FERC Stats. & Regs. 30,340 (1982); see also 18 C.F.R (c). 53 Baltimore Gas and Electric Co., Md. P.S.C. Case No. 6985, Order No , 17 PUR 4th 44, 1976 WL (1976).

19 Kimberly D. Bose October 1, 2018 Page 19 Since Order No. 144, 54 where the Commission required use of tax normalization, the Commission has recognized both that the switch from the flow through method to full normalization creates timing differences that may result in deferred tax reserves which are deficient from that required to provide for the associated future tax liabilities as they arise and that it is appropriate for companies to make some provision in their deferred taxes for the tax effects of timing difference transactions that had previously been flowed through. 55 That is, in the transition from the flow-through method to normalization, utilities were entitled to recover an additional income tax allowance to make up for the prior use of flow-through. 56 While Order No. 144 did not specify a methodology to make such a provision in a utility s deferred taxes, the Commission has since relied heavily on the South Georgia Method, and has accepted filings that employ the South Georgia Method to recover an adjustment to recover these amounts. 57 This filing seeks to recover the difference between BGE s deferred tax account and its future tax liability associated with Flow-Through Accounting, and thus clarify when these tax amounts will be recovered, and thus ultimately resolve these accruals of tax liability. BGE proposes to recover its future unfunded tax liability over the remaining average depreciable life of its transmission assets. In the BGE Rehearing Order, the Commission disallowed any recovery of Catch-Up FAS 109 Amounts that could have been amortized prior to this filing, and made clear that it would violate the matching principle to include amounts associated with assets that are either fully depreciated or retired. 58 The Commission questioned whether any costs would remain if limited in that fashion. 59 Exclusion of Catch-Up FAS 109 Amounts reduces the Flowthrough balance substantially, but still leaves a small Flowthrough balance relating to assets that are neither retired nor fully depreciated. A schedule listing transmission assets that pre-date 1976 and that 54 Order No. 144, 15 FERC 61,133 (1981), FERC Stats. and Regs. 30,254 (1981). 55 Order No. 144 at 31, New England Power Company, 61 FERC 61,331 at 62,215 & n. 54 (1992) (citing Order No. 144 at 31,559-60). 57 See, e.g., Duquesne, Docket No. ER (April 26, 2013 Letter Order); PPL, Docket No. ER (Letter Order issued May 23, 2012). 58 See BGE Rehearing Order at P See BGE Rehearing Order at n 104.

20 Kimberly D. Bose October 1, 2018 Page 20 are still in service and not fully depreciated is attached as Exhibit E, demonstrating that the remaining unamortized deferred tax amounts are associated with real assets that remain in service. 60 This Application provides a mechanism to address that relatively small remaining balance in rates. To implement this recovery, as discussed above, BGE proposes to add an Other Income Tax Adjustment section to its Formula Rate, with a new line 135a titled FAS 109 Amortized Tax Expense that will be added to the Income Tax Component computed on line 136 of the Formula Rate. The FAS 109 Amortized Tax Expense will include the amortization of Flow-Through amounts recorded under FAS 109, with the detail of the calculation provided for in a new section of Attachment 5 (Cost Support) with accompanying instructions that describe and control the calculation. 61 BGE will allocate the flow-through tax amounts to the transmission function and amortize the amount over the average remaining life of its transmission-related assets as discussed above. VIII. DETAILED DESCRIPTION OF PROPOSED TARIFF REVISIONS The proposed revisions to the Formula Rate are provided in the attached clean and redline tariff pages. The specific changes to Appendix A are summarized as follows. Items (a) through (e) and (g) are changes also included in Attachment 4. (a) The heading of section encompassing Line 135a through Line 135c is inserted as Other Income Tax Adjustment to reflect the revised scope of this portion of the Formula Rate. 60 A similar schedule of assets was attached to BGE s rehearing request in Docket No. ER The schedule in Exhibit E is updated to the present, and includes information on the book cost and remaining book value of each asset. As can be seen, Exhibit E only includes assets that are not yet fully depreciated. 61 As shown in the attached Exhibit D-3A, the remaining average depreciable life of BGE s transmission assets is 31 years. The BGE Rehearing Order could be read to require use of the remaining life of the specific assets at issue which is 15 years as can be seen in Exhibit E. Use of the 31 year period is consistent with remaining average depreciable life of all of BGE s transmission assets as determined under Generally Accepted Accounting Principles (ASC ) and will lead to a reduced rate that benefits customers. If the Commission determines that 15 years rather than 31 years must be used, BGE commits it will revise its formula to use 15 years in compliance.