* * * * APPLICATION FOR ADJUSTMENTS TO ELECTRIC AND GAS BASE RATES. BALTIMORE GAS AND ELECTRIC COMPANY (BGE or Company), a public service

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1 IN THE MATTER OF THE APPLICATION OF BALTIMORE GAS AND ELECTRIC COMPANY FOR ADJUSTMENTS TO ITS ELECTRIC AND GAS BASE RATES BEFORE THE PUBLIC SERVICE COMMISSION OF MARYLAND CASE NO. APPLICATION FOR ADJUSTMENTS TO ELECTRIC AND GAS BASE RATES BALTIMORE GAS AND ELECTRIC COMPANY (BGE or Company), a public service company under the Public Utilities Article of the Annotated Code of Maryland, files herewith the attached adjustments to its electric and gas base rates designated Supplement 507 to P.S.C. Md. E-6 (Electric) and Supplement 373 to P.S.C. Md. G-9 (Gas), respectively, to become effective August 27, In support of its Application, BGE states: ONE: BGE is a public service company subject to Public Service Commission of Maryland (Commission) regulation. It provides electric and gas service to a population of about 2.8 million in Baltimore City and in all or part of ten counties in Central Maryland. Electric service is provided to over 1.2 million customers across an electric service territory of 2,300 square miles. Gas service is provided to over 650,000 customers across a gas service territory of 800 square miles. TWO: Under the provisions of of the Public Utilities Article of the Annotated Code of Maryland, BGE has the affirmative duty of furnishing utilities, services, and facilities which are safe, adequate, just, reasonable, economical and efficient.

2 THREE: Under the provisions of of the Public Utilities Article of the Annotated Code of Maryland, BGE is entitled to an operating income yielding, after a deduction for necessary and proper expenses, a reasonable return upon the fair value of its property, which must be adequate to assure confidence in the financial soundness of the utility, to maintain and support its credit, and to enable it to raise the capital necessary for the proper discharge of its duties as a public service company. FOUR: BGE s last electric and gas base rate case was completed in BGE s present electric and gas base rates, filed pursuant to Order No in Case No. 9230, are insufficient to produce a reasonable rate of return on its property devoted to electric and gas distribution services. 1 When adjusted for known and measurable factors, the rate of return for BGE s combined electric and gas distribution operations for the test period in this proceeding (the 12 months ending September 30, 2012) is expected to be 4.87%. In fact, at no time since Order No has BGE come close to earning its authorized 9.78% return on equity. FIVE: The requested increases are needed for the Company to continue to provide safe and reliable service and mitigate the rate of under earning. Furthermore, BGE plans to invest more than $3 billion in capital in our electric and gas infrastructure over the next five years. This investment and the associated increase in revenues will allow BGE to continue to make necessary replacements and upgrades to the distribution systems. BGE, like many other utilities and governmental entities with long-lived assets, has made significant investments in its infrastructure, including maintaining and upgrading equipment that has been in place for decades, but significant work remains ahead. The requested increases are also necessary to 1 Re Baltimore Gas and Electric Company, 101 Md. PSC 493 (2010). 2

3 address increasing operating costs, including those incurred to comply with new regulations at both the state and federal level. SIX: BGE s present electric and gas base rates are neither just nor reasonable and do not yield a reasonable return on the fair value of BGE s property devoted to electric delivery or gas service. In the testimony and exhibits supporting this application, BGE provides evidentiary support for an increase in its electric distribution revenue requirement of $150.8 million and an increase in its gas distribution revenue requirement of $53.4 million. The increases demonstrated are based on a test year for the 12 months ended September 30, 2012, and an 8.02% overall rate of return on investment. SEVEN: On average, the requested distribution rate relief results in a 4.4% increase in total electric bills and a 6.6% increase in total gas bills. But the impact will vary somewhat from rate schedule to rate schedule and from customer to customer. The typical residential electric bill is expected to increase by $7.22 per month and the typical residential gas bill by $4.62 per month. 2 EIGHT: While commodity costs have continued to decline since BGE s last base rate proceeding, BGE has implemented numerous initiatives and programs to empower customers with the tools to better manage and reduce their energy consumption, thus helping to offset the rate increases requested in this Application. Customers can also offset the proposed increases by taking advantage of shopping opportunities for both the electric and the gas commodity. 2 The typical residential customer bill impact was calculated using the median monthly electric usage of 800 kwh and the median monthly gas usage of 52 therms both based on the 12 months ending June 30,

4 NINE: This Application is supported by the prepared direct testimony and exhibits of Kenneth W. DeFontes, Jr., President and Chief Executive Officer of BGE; Stephen J. Woerner, Senior Vice President and Chief Operating Officer for BGE; Carim V. Khouzami, Chief Financial Officer and Treasurer for BGE; David M. Vahos, Controller for BGE; Dr. Samuel C. Hadaway, Principal in FINANCO, Inc., Financial Analysis Consultants; Jonathan Weinstein, a Managing Partner in Pay Governance LLC, an independent compensation advisory firm; George R. Pleat, a Manager in BGE s Pricing and Tariffs unit; and Michael J. Cloyd, Director of BGE s Pricing and Tariffs unit; which have been simultaneously filed herewith. TEN: This Application is also supported by a volume of data required by the Commission s April 18, 1983 Secretarial Letter Order, which provides that the filing requirement is a possible means to expedite Commission proceedings by providing as much relevant data as possible at the beginning of the proceeding thereby obviating or diminishing the need for subsequent time consuming and costly data requests. See binder labeled Supplemental Information. ELEVEN: Pursuant to the provisions of of the Public Utilities Article of the Annotated Code of Maryland, BGE submits with its Application, the independent audit opinion prepared by PricewaterHouse Coopers LLP (PwC) which was prepared by PwC following an examination of BGE s Cost Allocation and Transfer Pricing Manual (CAM). The public version of the opinion, which was originally filed with the Commission on May 1, 2012, is provided herein as Attachment 1. [Signature Page Follows] 4

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9 Report of Management on Cost Allocation Manual Compliance For the Manual Filed on April 29, 2011 and the Cost Allocation Schedules Filed on April 30, 2012 Which Reflect Actual Calendar Year 2011 Transactions Management of Baltimore Gas and Electric Company ( BGE or the Company ) is responsible for allocating or assigning costs to its affiliates and for accepting the costs allocated or assigned from its affiliates in compliance with the Company s Cost Allocation Manual ( CAM ) filed with the Maryland Public Service Commission on April 29, 2011 pursuant to the Code of Maryland Regulations Section , Affiliate Regulations. Management has performed an evaluation of the Company s affiliate transactions for the twelve months ended December 31, 2011 and has prepared the accompanying reports entitled Schedule of 2011 Costs from Affiliates to BGE and Schedule of 2011 Costs from BGE to Affiliates. Based upon this evaluation, management asserts the following: 1) The Company has complied with the policies and procedures of the CAM. 2) Costs were allocated to the Company s affiliates in accordance with the CAM, as summarized in the accompanying report entitled Schedule of 2011 Costs from BGE to Affiliates. 3) Costs and transactions were charged to the Company in accordance with the CAM, as summarized in the accompanying report entitled Schedule of 2011 Costs from Affiliates to BGE. As part of our evaluation, no adjustments were identified that should be made to the CAM to be consistent with current requirements. In addition, no adjustments were identified that should be made to the allocation or charging of costs either to the Company or to an affiliate of the Company.

10 CONFIDENTIAL Schedule of 2011 Cost Allocations to Affiliates PAGE REMOVED FROM PUBLIC VERSION

11 CONFIDENTIAL 2011 Costs Charged to BGE from Affiliates PAGE REMOVED FROM PUBLIC VERSION