February 1, By Electronic Filing and Federal Express

Brian R. Greene GreeneHurlocker, PLC 1807 Libbie Avenue, Suite 102 Richmond, Virginia 23226 (804) 672-4542 (Direct) BGreene@GreeneHurlocker.com February 1, 2016 By Electronic Filing and Federal Express Mr. David J. Collins Maryland Public Service Commission William Donald Schaefer Tower 6 Saint Paul Street, 16 th Floor Baltimore, MD 21202-6806 Dear Mr. Collins: Re: Case No. 9221 Enclosed for electronic filing in the referenced proceeding please an original and 17 copies of the Retail Energy Supply Association s Reply Memorandum on Appeal. Please feel free to contact me should you have any questions. Sincerely, Enclosure c: Official Service List for Case No. 9221 Brian R. Greene www.greenehurlocker.com

Table of Contents I. Introduction... 1 II. A&G Costs should be unbundled from SOS rates. In the alternative, the Administrative Adjustment must continue.... 4 A. The evidence and law support unbundling of A&G Costs.... 4 B. Absent an unbundling of A&G Costs at this time, continuation of the Administrative Adjustment is appropriate until BGE s next base rate case.... 7 C. Either an unbundling or an Administrative Adjustment is necessary to comply with the Electric Choice Act.... 8 III. The PULJ s proposed return component of the Administrative Charge is not reasonable.... 11 IV. SB1 does not prohibit BGE from retaining its CWC until December 31, 2016.... 14 V. Conclusion... 15

BEFORE THE PUBLIC SERVICE COMMISSION OF MARYLAND In the Matter of a Request by Baltimore Gas and Electric Company for Recovery of Standard Offer Service Related Cash Working Capital Revenue Requirement * * * * Case No. 9221 * * * * * * * * RETAIL ENERGY SUPPLY ASSOCIATION S REPLY MEMORANDUM ON APPEAL On January 8, 2016, Baltimore Gas and Electric Company ( BGE ), the Office of People s Counsel ( OPC ), and the Staff of the Commission ( Staff ) submitted their respective memoranda appealing the November 20, 2015 Proposed Order of the Public Utility Law Judge ( Proposed Order ) in the above-captioned matter. The Retail Energy Supply Association ( RESA ), 1 by counsel, submits this Reply Memorandum in response to the appeals of BGE, OPC, and Staff. I. Introduction Staff nailed it: Implementation of the Proposed Order would create an electricity market where suppliers have no hope of competing and residential customers have no choice but to take SOS. 2 This quote from Staff sums up the negative effects of the Proposed Order. Its implementation would require retail suppliers to compete against an artificially low standard offer service ( SOS ) rate that does not include all of BGE s costs to provide the service. Competing against a 1 The comments expressed in this filing represent the position of the RESA as an organization but may not represent the views of any particular member of RESA. Founded in 1990, RESA is a broad and diverse group of more than twenty retail energy suppliers dedicated to promoting efficient, sustainable and customer-oriented competitive retail energy markets. RESA members operate throughout the United States delivering value-added electricity and natural gas service at retail to residential, commercial and industrial energy customers. More information on RESA can be found at www.resausa.org. 2 Staff Memorandum on Appeal at 10 (citations omitted).

below-market rate would, by all accounts, discourage retail suppliers from entering the Maryland market to serve mass market (residential and small commercial) customers. It would also likely cause retail suppliers already serving Maryland mass market customers to reduce their service offerings or leave the market altogether. Customers would have fewer options from which to choose. The available offers would be less desirable to customers from a pricing perspective, causing customers to remain on or revert to SOS. That outcome directly contravenes the General Assembly s explicit goals and intentions when it adopted the Maryland Electric Customer Choice and Competition Act of 1999 ( Electric Choice Act ) to create competitive markets and provide economic benefits to all customer classes. 3 Yet, that is the realistic result, as the evidence showed, of the Proposed Order. Based on the memoranda filed by BGE, Staff and OPC, there are three potential components of the Administrative Charge in dispute. First, the PULJ rejected RESA s and Staff s proposals to unbundle BGE s administrative and general expenses ( A&G Costs ) 4 and to allocate a portion of those costs to SOS rates. Currently, BGE incurs a portion of its A&G Costs in the provision of SOS but recovers 100% of these costs through its distribution rates. The current Administrative Adjustment component of the Administrative Charge has served as a proxy for these A&G Costs since the inception of SOS. The Administrative Adjustment is revenue neutral for BGE and guards against double-recovery because the amount collected by BGE is credited back to customers. 5 The PULJ would not require an unbundling of A&G Costs 3 Md. Code, Pub. Util., 7-501 et seq. 4 These A&G Costs have been referred to in this case as allocated costs, joint and common costs, and common costs, but those terms all refer to the expenses identified by BGE in its annual FERC Form-1 filing, a copy of which was introduced in this proceeding as RESA Exh. 4. 5 See Order No. 78400 at 85, Case No. 8908, where the Commission held that: Additionally, SOS prices under the Settlement should be representative of retail suppliers costs, thereby allowing the retailers price to be competitive with the utility s SOS prices. The Commission finds that the Administrative Adjustment 2

from distribution rates, and she would eliminate the Administrative Adjustment for BGE s residential SOS rates. 6 Without an unbundling or a proxy such as the Administrative Adjustment, BGE will recover 100% of its SOS-related costs (other than SOS-related cash working capital, incremental and uncollectible costs) in regulated distribution rates, and SOS rates will be suppressed at an artificially low level because they will not include BGE s full costs of providing SOS. Distribution rates would subsidize SOS rates, and shopping customers would be forced to pay for the same types of costs twice once to their retail supplier and once to BGE for a service (SOS) they do not receive. RESA agrees with Staff and BGE that an SOS rate that does not include the utility s SOS-related costs violates the Electric Choice Act and the Maryland Court of Appeals decision in Severstal, as well as Commission policy disfavoring subsidization of rates. The second area of dispute is the return component of the Administrative Charge. RESA, BGE, and OPC agree that the PULJ erred as a matter of law by fashioning a return on SOS that is nowhere in the record in this proceeding. OPC, however, would eliminate the return on SOS, which would result in a below-market price because retail suppliers must include a profit component in the prices they charge to their customers. BGE strikes the correct balance with its proposal, and RESA continues to support it. The third area of dispute involves BGE s request to recover its cash working capital ( CWC ) as a separate component of the Administrative Charge. It is currently included as part is designed to have a neutral impact on the customer whether or not they shop for electric supply, which should stimulate Maryland s retail electric market. In the same Order, the Commission also found that: the crediting mechanism in the Administrative Adjustment is appropriate because all customers are treated equally thereby avoiding cross-subsidies. Id. at 93. Under the Proposed Order, SOS rates would not be representative of retail suppliers prices, and SOS rates would be subsidized. 6 RESA, as well as Staff, reads the Proposed Order as allowing the Administrative Adjustment/credit mechanism to continue for non-residential SOS rates, although the Proposed Order is not completely clear on that issue. RESA and Staff have appealed the Proposed Order to the extent the PULJ would eliminate the Administrative Adjustment for non-residential SOS rates. 3

of the return component, which was a product of the 2003 Settlement Agreement in Case No. 8908. The two issues regarding CWC appear to be: (1) the appropriate return on CWC, and (2) whether Senate Bill 1 ( SB1 ), passed in 2006, prohibits BGE from retaining its SOS-related CWC until December 31, 2016. Throughout this case, RESA has not taken a position on the appropriate level of CWC return, testifying only that any return on CWC should be separate from the statutory reasonable return for the provision of SOS. 7 Regarding the timing of CWC recovery, RESA does not read SB1 as prohibiting BGE from immediately retaining its CWC. II. A&G Costs should be unbundled from SOS rates. In the alternative, the Administrative Adjustment must continue. A. The evidence and law support unbundling of A&G Costs. In its Memorandum on Appeal, RESA requested that the Commission direct BGE to allocate a portion of its A&G Costs to SOS rates using the cost allocation methodology set forth by BGE and which was introduced into the record as RESA Exhibit 4. Staff recommends that the Commission direct BGE to use this methodology as the basis of the Administrative Adjustment until a more precise division can be effected in the context of a rate case. 8 RESA agrees that A&G Costs should form the basis of the Administrative Adjustment until the next base rate case. Alternatively, Staff suggests that the Administrative Adjustment continue based essentially on BGE s proposal in this case or at its current level until BGE s next base rate case. In RESA s view, BGE could recover its A&G Costs either as an Administrative Adjustment that is credited back to all distribution customers, or as a separate rate rider that is trued-up periodically similar to manner in which BGE s SOS-related uncollectible and incremental expenses will be handled as a result of this proceeding. If the latter, there would be 7 See, e.g., Remand Tr. at 56-57. 8 Staff Memorandum at 11. 4

no need for the Administrative Adjustment. However, if there is no unbundling, Staff is correct that, until the next base rate case, the Commission should not eliminate a mechanism [the Administrative Adjustment] that most parties view as serving necessary functions, and risk damaging the competitive retail electricity market it has worked so hard to establish. 9 RESA explained in is Memorandum on Appeal that retail suppliers incur the same types of costs when providing retail service as BGE incurs when providing SOS. The difference is that suppliers must recover all of their costs, plus a return, through the prices they charge their customers. BGE, however, recovers a significant portion of its SOS-related costs through its regulated distribution rates. The result is an SOS rate that is subsidized by distribution rates and does not properly reflect the true cost of SOS. Further, SOS rates would not be a market price consistent with the Electric Choice Act. BGE agrees that unbundling A&G Costs or, alternatively, a proxy such as the Administrative Adjustment, is necessary to satisfy the Electric Choice Act, and that an artificially low SOS price will undermine retailers ability to compete. 10 Staff has consistently stated that suppliers incur these same types of costs, and that, [t]he simple fact is that some costs must be allocated between utility functions because it is nearly impossible to determine exactly which function causes the cost. 11 9 Staff Memorandum at 12. Although not discussed at the hearing, damage to the competitive electricity market could also negatively affect the competitive natural gas market. Many suppliers sell dual fuel products and either enter a market to take advantage of that opportunity and to take advantage of efficiencies in marketing, etc., or are able to offer lower prices because they are signing up dual fuel customers. If suppliers are not able to compete with artificially low, subsidized SOS rates, then they will not offer natural gas products at all because they will not invest in Maryland, or their natural gas offers will be higher than they otherwise would be. 10 BGE Memorandum at 14; Remand Tr. at 232-33. 11 Staff Memorandum at 11. 5

In this regard, RESA agrees with BGE that the PULJ erred in holding that the record did not show that suppliers include specific overhead expenses in their prices. 12 In fact, the record was undisputed that suppliers incur costs that are substantially greater than the A&G Costs. 13 As for the costs themselves, BGE presented the public financials of three retail suppliers showing that suppliers incur administrative expenses, selling and marketing expenses, and operating expenses. 14 BGE also pointed to retail suppliers customer acquisition costs, call center costs, hedging and managing market positions, PJM membership fees, human resources, and policy and legal services; this is but a partial list of all of the costs included in BGE s FERC Form-1 which includes costs that, according to BGE, are the same types of costs that supplier incur on a daily basis. 15 Further, RESA referred specifically to costs such as legal, billing, supply procurement, notice requirement, acquisition, call center, office space, EDI interface, IT support, and regulatory compliance costs, which all combine to equal a total cost that exceeds BGE s costs of providing SOS. 16 Staff has also consistently stated throughout the long history of this case that retail suppliers incur the same types of costs as those included in BGE s FERC Form-1. 17 Thus, the undisputed testimony, coming from all directions, showed that suppliers incur the same types of costs when providing retail service as BGE does when providing SOS, and that these costs exceed the costs included in the FERC Form-1. It was also undisputed that the only way 12 Proposed Order at 35-36; BGE Memorandum at 7. 13 See, e.g., RESA Exh. 2 at 10-11; Remand Tr. at 50-51. 14 BGE Exh. 15 at Strunk Exh. 4. BGE witness Mr. Stunk testified that he and his staff performed the research that led to the documents included in Strunk Exhibit 4. In all likelihood, BGE will recover the cost of the personnel involved in the research, as well as the cost of all BGE personnel in the hearing in this case, through its regulated distribution rates. Suppliers involved in this case, or in any case at the Commission, are not so lucky, and must recover their expenses through the prices they charge their customers. 15 BGE Memorandum at 14; see also Remand Tr. 226, 229-30, 285, 297, 493-95; Staff Exh. 9 at 30. 16 RESA Exh. 2 at 11; Remand Tr. 51, 61-62. 17 Staff Exh. 4 at 11-12. 6

suppliers can recover their costs is through the prices they charge to their customers, which is not true for SOS because SOS relies on subsidies from regulated distribution rates. 18 Because these costs are so significant, it is important that the Commission unbundle A&G Costs. The overall objective of unbundling A&G Costs would be parity between SOS and retail suppliers parity in the sense of comparable functions, not absolute price. 19 While the unbundling does not account for the additional return that retail suppliers must earn on their products, and also does not address the other favorable regulatory treatment afforded SOS over competitive service, it at least partially levels the playing field. 20 B. Absent an unbundling of A&G Costs at this time, continuation of the Administrative Adjustment is appropriate until BGE s next base rate case. BGE, Staff and RESA agree that the record supports continuation of the Administrative Adjustment. RESA favors this approach in the event the Commission is not inclined to either unbundle A&G Costs and eliminate the Administrative Adjustment, or set the amount of the Administrative Adjustment at the level of the allocated A&G Costs. If that is the Commission s decision, then RESA recommends that the Administrative Adjustment continue through the next base rate case. 21 Even OPC recommended that the Commission look at the unbundling issue in BGE s next rate case. 22 Virtually the same evidence that supports an unbundling also supports continuation of the Administrative Adjustment. As RESA pointed out in its Memorandum, the evidence actually showed that the current and proposed Administrative Adjustment is too low. BGE testified that 18 See, e.g., Remand Tr. 61-62; RESA Exh. 2. 19 BGE Exh. 9 at 17. The fact that the inclusion of A&G Costs would likely increase the amount of the Administrative Charge is the result of allocating SOS costs to the cost-causing SOS customers. Remand Tr. at 44. 20 RESA Exh. 2 at 11; Remand Tr. at 43. 21 Staff reaches the same conclusion. Staff Memorandum at 11-12. 22 Although OPC would limit the review in the next base rate case to incremental SOS costs only (Remand Tr. at 455-59), in RESA s view there is no reason to limit any review, and BGE should be required to submit a fully allocated cost of service study in its rate case application. 7

its own proposed Administrative Charge, with an Administrative Adjustment and no allocation of A&G Costs, does not capture all of the costs necessary to support the SOS obligation and arguably gives the SOS price an unfair advantage against retail suppliers pricing structure, causing a price subsidy to the SOS business from the other utility businesses. 23 RESA testified that, as stated above, retail suppliers costs to provide retail service are substantially greater than the level of A&G Costs. These facts were undisputed. There was no evidence none that the Administrative Adjustment was too high. As a result, there is no need to quantify the Administrative Adjustment to the exact mill, as the PULJ seems to desire. The Commission can adopt BGE s proposed Administrative Adjustment (until an unbundling can occur, if the Commission is not inclined to unbundle A&G Costs at this time) based on the reasonable certainty that it is a proxy for actual costs, albeit one that allows the current subsidization of SOS rates to continue on an interim basis until the amount of the Administrative Adjustment reflects an allocation of A&G Costs. C. Either an unbundling or an Administrative Adjustment is necessary to comply with the Electric Choice Act. RESA agrees with BGE and Staff that the Electric Choice Act requires either an unbundling or the Administrative Adjustment. In arriving at that conclusion, RESA disagrees with the PULJ and Staff on the threshold issue of whether the Commission has discretion over how to interpret the statutory reference to market price in 7-510(c)(3)(ii)(2). Staff ultimately reaches the correct conclusion that an unbundling or an Administrative Adjustment is required to comply with the Act but 7-510(c)(3)(ii)(2) is clear that BGE must provide SOS at a market price that permits recovery of the verifiable, prudently incurred costs to procure or produce the electricity plus a reasonable return. 23 BGE Exh. 9 at 18-19 (emphasis added). 8

While the SOS rate must be set at a level that permits BGE to recover its verifiable and prudent costs to procure electricity plus a return, the statute leaves no question that the final rate must be a market price. That would include BGE s costs to provide SOS, such as A&G Costs. An SOS rate that does not include the entire world of non-procurement costs, while all other market participants must incur these costs and recover them from their customers, is a belowmarket rate. 24 Thus, the Commission does not have discretion as to whether to include BGE s costs relating to providing SOS; rather, the only way to adhere to the Act is to include them. On this issue, RESA also agrees with BGE that the PULJ s reading of the market price provision is a narrow definition that is inconsistent with: (1) any reasonable interpretation of the cost of any good or service; and (2) the manner in which the Commission has viewed this cost from the beginning of retail choice, which has included an Administrative Adjustment mechanism approved by the Commission in 2003. 25 Effectively the PULJ would have the SOS price include only wholesale electric costs, and all other costs to provide SOS be recovered through distribution rates. However, SOS is a retail electric product that incurs costs above and beyond wholesale electric costs; thus it cannot be said that the SOS rate is a market price for retail electric service (or even a reasonable proxy) if additional costs required to provide retail electric service (e.g. call center, overhead, CWC, etc.) are not included in the SOS rate. RESA agrees with BGE and Staff that an SOS rate that does not include A&G costs or a proxy violates other provisions of the Electric Choice Act and also the Severstal decision. First, Maryland cannot attain the explicit goals of the Act as set forth in 7-504 including creating competitive retail electricity supply markets and bringing economic benefits to all customer 24 Tr. 190-91; RESA Exh. 1 at 13:5-7; Remand Tr. 72, 232-33, 297; BGE Memorandum at 13-14; Staff Memorandum at 9-10. 25 BGE Memorandum at 14. 9

classes if the SOS rate is not a market price. 26 As Staff stated, suppliers will leave and customers will find themselves stuck on SOS for lack of competitive offers. That is not competition and does not benefit customers. Second, such a result would not be fair to retail suppliers or customers, in violation of PUA 7-505(a)(1). Third, the Severstal decision and Commission policy disfavor subsidization of rates, as RESA, BGE, and Staff explained in their Memoranda. 27 Fourth, the Commission would not have approved the Administrative Adjustment in Order 78400 in 2003 if it was inconsistent with the Act. 28 Finally, in addition to Maryland statutes, the Severstal decision, and Commission decisions regarding the SOS Administrative Charge, Commission precedent regarding BGE s recovery of costs associated with its retail sale of gas supports the position that an unbundling is appropriate. In Order No. 80265, entered in Case No. 8950, the Commission approved a settlement among the parties, including OPC, that (a) established a Gas Administrative Charge for recovery of certain costs associated with the sale of the gas commodity, to be paid only by those customers who purchase the gas commodity from BGE and (b) removed the recovery of those costs from gas base rates, which are paid for by all customers, including those who purchase the gas commodity from retail suppliers. The Commission noted in the Order that the gas commodity-related portion of credit and collections cost, commodity billing, uncollectibles, and the Commission assessment would be recovered through a newly created Gas Administrative Charge in BGE s Rider 12 to be paid by gas commodity customers. The portion of the four cost items related to the gas commodity would then be excluded from BGE s gas base rates via an adjustment to the revenue target levels under Rider 8. This is similar to the Administrative 26 BGE Memorandum at 13-14; Staff Memorandum at 12. 27 RESA Memorandum at 4; BGE Memorandum at 1-2, 7-8; Staff Memorandum at 10-11; see also RESA Exh. 1 at 16; RESA Exh. 2 at 8; Staff Exh. 4 at 5-6; Remand Tr. at 208-09. 28 BGE Memorandum at 14-15. 10

Adjustment s credit mechanism and RESA s and Staff s proposal to separate a portion of A&G Costs from electric distribution rates. In approving the BGE settlement, the Commission explained that base rates would be reduced and that the rates paid by customers who purchase the gas commodity from BGE would increase by a like amount. The Commission held that the Settlement eliminates a subsidy which would otherwise be provided to BGE s commodity sales by customers purchasing gas from competing providers. 29 The Commission also held that it was in the public interest for BGE to recover costs related to the sale of gas from sales service customers only, and distribution costs should be recovered from all delivery service customers: Costs which are related to the sale of gas (as opposed to gas distribution), must be extracted from BGE s distribution rates because all customers, including those who purchase their gas from other suppliers, pay the distribution rates. The costs extracted from distribution rates should be recovered solely from those customers who purchase their gas from BGE. That is, the gas-related costs should be removed from distribution charges and should be paid for solely by sales service customers. Removal of these costs from distribution rates will enhance the prospects for economically efficient gas sales competition by removing the subsidy currently provided to BGE s sales service. Thus, the Commission has supported changes in the natural gas context similar those advocated by RESA in this proceeding. III. The PULJ s proposed return component of the Administrative Charge is not reasonable. RESA agrees with BGE that the PULJ s proposed return on SOS is nowhere in the record, and that the Commission is limited to the record evidence when deciding cases. 30 As BGE pointed out, PUA 3-111(d)(2) states that, [f]actual information or evidence not made 29 Order No. 80265 at 2. 30 RESA Memorandum at 14-15; BGE Memorandum at 5-6. 11

part of the record may not be considered in the determination of a case. 31 No party proposed or even discussed the PULJ s return methodology; it simply did not exist until the Proposed Order was issued. In fact, as evidenced by BGE s argument in its Memorandum, the only way to counter the PULJ s return methodology is to introduce even more facts that are not in the evidentiary record. 32 BGE s Memorandum shows that the PULJ s proposal would have benefitted from pre-filed evidence, discovery, and cross-examination, yet that did not happen and therefore the parties are stripped of the opportunity to properly address the proposal. Simply put, the PULJ s return methodology is arbitrary and capricious and will not survive appellate scrutiny under 3-111(d)(2) and applicable Maryland case law. 33 Having disregarded the PULJ s decision regarding the return on SOS, RESA supports BGE s proposed returns for all SOS customer classes. 34 First, as stated above, BGE's proposed SOS returns are reasonable because they strike the proper balance between allowing for a return under 7-510(c)(3)(ii)(2) and not incenting BGE to keep SOS customers. 35 As RESA explained in its Memorandum, retail suppliers must earn returns to maintain their respective businesses. An SOS return that is too low will result in an SOS rate that lacks a pricing component that serves as an important piece of a market price. Second, OPC s endorsement of the PULJ s decision that the SOS return must be based on BGE s capital investment is misplaced. OPC argues that SOS rates must satisfy the just and reasonable standard under Title 4 of the PUA and cites specifically to 4-101 and 4-102. 36 31 BGE Memorandum at 5-6. 32 BGE Memorandum at 9-10. 33 See, e.g., Bereano v. State Ethics Comm n, 403 Md. 716, 740, 944 A.2d 538 (2008) (quoting Fairchild Hiller Corp. v. Supervisor of Assessments for Wash. County, 267 Md. 519, 524, 298 A.2d 148, 150 (1973)) (holding that agencies are limited to the record evidence when deciding cases); see also BGE Memorandum at 6. 34 The PULJ would apply her made-up return methodology to all SOS classes, not just residential. Proposed Order at 39-40. 35 RESA Exh. 2 at 15. 36 OPC Memorandum at 5. 12

However, the Court of Special Appeal s decision in Severstal stands for the proposition that, as a result of the Electric Choice Act, SOS pricing falls under Title 7 and that Title 4 does not apply: the definition of a just and reasonable rate in Section 4-101 of the [PUA] cannot apply in the context of SOS because its relevance lies outside the realm of traditional rate-of-return ratemaking... It follows that the scope of the PSC s authority to regulate SOS is confined to the standards set forth in Section 7-501(c): 1) that the price is a market price that permits recovery of the verifiable, prudently incurred costs to procure or produce the electricity plus a reasonable return. 37 Third, RESA agrees with BGE s statement regarding the proper interpretation of the requirement in 705 that the intent of restructuring was, in part, to provide economic benefit for all customer classes. 38 The PULJ denied BGE s proposed SOS returns based in part on her interpretation that customers will not receive economic benefits if BGE earns a return above the capital investment of procuring SOS load. That is a stretch; the obvious interpretation of 7-504 is that competitive markets benefit customers by affording them access to lower retail prices and more innovative products and services. RESA presented evidence which was not disputed about the various types of products and services that result from a competitive market and the benefits those enhanced product offerings bring to customers. 39 The reality is that allowing an SOS return that is too low will suppress SOS rates, which will violate the market price requirement and lead to decreased competition. That outcome does not benefit customers. Finally, BGE s evidence shows the reasonableness of its proposed sales-based SOS returns. BGE presented the public financials of three retail suppliers. Their annual pre-tax operating margins for the past five years fell anywhere from 0.66% to 18.44%, for a five-year 37 Severstal Sparrows Point, LLC v. Pub. Serv. Comm n of Md., 194 Md. App. 601, 620, 625-26 (2010). OPC s reliance on the U.S. Supreme Court s holding in Bluefield Water Works and Improvement Co. v. Pub. Serv. Comm n, 262 US 679 (1923) is misplaced. That case was decided long before customers were allowed to choose their electricity supplier and the adoption of Title 7 of the PUA. It simply has no bearing on this case. 38 BGE Memorandum at 8. 39 RESA Exh. 2 at 3. 13

average of 5.3% which includes the cost of each company s working capital. 40 The accuracy of this evidence was not disputed. BGE s proposed 2% and 2.75% SOS returns for residential and non-residential, respectively, when combined with CWC, produce total returns of 3.2% and 3.65%. This outcome falls within the comparable retail supplier margin range and is therefore a reasonable return because it seeks to emulate the market. 41 IV. SB1 does not prohibit BGE from retaining its CWC until December 31, 2016. OPC s strained reading of SB1 that SB1 prohibits BGE from retaining its CWC until December 31, 2016 should be rejected. The 2003 Settlement Agreement expired by its terms in 2010. The PULJ correctly ruled that CWC is a cost of SOS operations and not a return, and that the General Assembly in adopting SB1 did not extend the Settlement Agreement beyond 2010, nor did the General Assembly prohibit the Commission from approving new or revised cost components of the Administrative Charge upon its expiration in 2010. 42 OPC seeks to have it both ways. On one hand, OPC argues that the 2003 Settlement Agreement expired in 2010 and should not be a basis for continuing the SOS return and other components of the Administrative Charge such as the Administrative Adjustment. On the other hand, OPC seeks to extend the one component of the 2003 Settlement that included a cost CWC within the return. OPC cites to cases dealing with statutory interpretation as if the term return component of the Administrative Charge in SB1 is ambiguous, which it is not. Moreover, OPC presumes that the General Assembly modeled SB1 after the 2003 Settlement. There are no facts or legislative history in the record to support that presumption. Even still, it can be presumed that the General Assembly was aware that the Settlement would expire in 2010, 40 BGE Memorandum at 11; BGE Exh. 15 at 18-19 and Strunk Exh. 4. 41 Moreover, no party disputed the reasonableness of BGE s proposed returns for the non-residential SOS classes. Thus, it is arbitrary and capricious for the PULJ to find BGE s non-residential SOS returns unreasonable when there was no evidence in the record to support that finding. 42 Proposed Order at 21-22. 14

and at that time the Commission would reassess the structure of the Administrative Charge but would be required to approve a reasonable return for BGE that BGE would not retain until December 31, 2016. OPC s argument should be rejected. V. Conclusion RESA urges the Commission to reject the Proposed Order s rulings regarding the A&G Costs (or, alternatively, a reasonable proxy) and a reasonable return, and to reconfigure the Administrative Charges as described above and in RESA s Memorandum. Respectfully submitted, RETAIL ENERGY SUPPLY ASSOCIATION By Counsel Brian R. Greene GREENEHURLOCKER, PLC 1807 Libbie Avenue, Suite 102 Richmond, Virginia 23226 Tel: 804.672.4542 (direct) Fax: 804.672.4540 BGreene@GreeneHurlocker.com CERTIFICATE OF SERVICE I certify that a copy of the foregoing Reply Memorandum on Appeal was e-mail and mailed on February 1, 2016, to each person listed on the official service list for Case No. 9221. Brian R. Greene 15