Paula M. Carmody People’s Counsel Maryland Office of People’s Counsel

 Independent state agency  People’s Counsel appointed by Maryland Attorney General  Represent interests of residential utility customers in Maryland ◦ Electricity ◦ Gas ◦ Telecommunications ◦ Private water ◦ Transportation  State and federal agencies and courts 2

 Maryland is a restructured state ◦ Generating facilities are owned by competitive companies ◦ Ratepayers are not responsible for construction and operating costs ◦ Environmental compliance will be borne by competitive companies ◦ BUT: We have other cap ex requirements  Transmission projects  Distribution infrastructure  Smart meters 3

 Increased capital investments → Rate Pressure → Increase rates → Adopt trackers and surcharges and/or → Manage O&M costs → Adopt risk management tools 4

 CPCN proceedings  Approval of projects based on need and estimated costs  Cost recovery  Traditional: Cost recovery when plant is “in” and operating (‘Used and useful”)  Cap Ex are recovered from ratepayers through rates  Other cost recovery adjustments 5

 Generation and Transmission Plant ◦ Need has already been established by CPCN ◦ Costs will be recovered from ratepayers absent a prudency challenge  Prudency challenges can be difficult ◦ Cost escalations or over-runs are not sufficient by themselves to avoid cost recovery ◦ Typically will need to show gross mismanagement, fraud or concealment 6

 Cost overruns and price escalation ◦ Design ◦ Management of the Project ◦ Labor ◦ Financing ◦ Problems with developers, contractors, suppliers ◦ External factors  Siting and permitting  Environmental or other compliance  Weather  Supply cost escalation 7

 Cost over-runs are a problem and a risk for ratepayers – They will pay in the end  BUT  Utilities have the primary responsibility for managing and completing these projects  Ratepayers and regulators have a right to expect this will be done in an efficient manner and at reasonable cost  The risk should not just be shifted to ratepayers 8

 BUT  It is worthwhile to consider other approaches that may deliver capital intensive projects at less risk of increased costs  One proposal: Hedging as a tool to protect against price escalation and cost overruns 9

 Hedging of project costs: Food for thought or a proven tool to address these risks? ◦ Success stories?  Does hedging protect the utility and the ratepayer equally?  What project costs are to be managed through hedging tools?  Materials price escalation  External factors  Cost overruns due to poor project management 10

 Does hedging shift responsibility from the utility to the ratepayers? ◦ Does it create any disincentives for the utility to act efficiently?  How do you establish that a hedging tool is the most efficient and cost-effective way to address cap ex risk of a particular project?  Does use of a hedging tool require regulatory pre-approval?  Recovery of hedging costs ◦ Will some argue that a return should also be paid? 11

 Paula M. Carmody, People’s Counsel  Maryland Office of People’s Counsel  6 St. Paul Street, Suite 2102  Baltimore, MD   