This project was conceived of as a way to explore the BGE bill data and the significance of a new charge reflected on the bill called a "rate stabilization deferral" which began to be applied starting in mid-2006. The deferral accounts for the customer's obligation to pay back a fund created by a bond which sold the debt to investors, which was used to absorb the impact of anomalous rising rates caused by the expiration of regulations that capped the price consumers could be charged.
At the onset of the BGE project I thought that I would be comparing three datasets, 1. the 10-year rate deferral plan #1 (which is set to expire in June 07), 2. An as-yet-to-be-determined extension of the plan [#2.] (which proposes a 2-year period of repayment), and as a control, 3. what the change to market values would have looked like without either of the two plans taking effect.
I was able to make sense of my own bill enough to construct a model year (January-December) to graph to show the pattern of use and expense in a model year. This dataset started with the 4 complete years that I had access to 2003-2006. I broke down the gas and electricity components of the bill and used the 4-year average of the rate of use (measured in therms and kWh) to model how much of the commodities are used from month to month in the typical year. It turns out that years of use vary quite dramatically depending on how warm or cold the summers and winters are. I took the [slightly variable] market rates for each month and averaged them over just 2 years of use (since they were already trending upwards, a longer period of time would have understated them).
Throughout the course of my research and design I found that many of my initial assumptions and much of the information they were based on were wrong. First of all, the scope of the rate increase is electricity-only. As I can see from the model year data, while this is a significant component of my bill, and admittedly a huge component of some customers' bills, an increase of that portion alone doesn't drive the bill up as dramatically as seemed to be suggested by the hype and media coverage (which often overlooked the limited scope of the rate increase).
A second misconception which significantly affected the design of the analysis tool had to do with the relationship between plan #1 and plan #2. As I have come to understand, while plan #1's deferral is currently set to be "phased in" over 10 years, plan #2 will "phase in" the money from phase #1 in just 2 years starting January 1 2008. My best understanding it the accounting behind these two plans is that the loan will be subject to an amortization process where the credit from the loan will slowly be replaced by a growing set of charges. Discussions with the Director Consumer Affairs for BGE, Don Dasher, have not fully clarified the nature of these two competing amortizations, which has made it difficult to figure out how to model the impact of the two plans on consumers' bills.
I have come to understand that it actually is more important to explore what a "rate deferral" fundamentally is. As it turns out, making sense out of the deferral concept itself is not easy. In this context, the details of in individual's bill makes it harder to understand what is being proposed. On top of that, there have been two separate major changes in market rates for electricity during the period of time that these plans have been debated. Furthermore, the rates for gas and electricity actually fluctuate [albeit slightly] from month to month. And still more, the deferral plan #1 started mid-month, further obfuscating how it would work (from an accounting point of view).
Unfortunately, other aspects of the accounting in the two rate stabilization plans remain obscure as well. I haven't been able to accurately determine how interest has been/is to be applied to the outstanding loan amounts on either of the plans. Quizzically, I learned that there is no penalty for a customer leaving the state and/or BGE, and in fact that the cost of that phenomena, plus defaults, minus revenue from people moving to the state, will adjust the amount of money in the fund, and will presumably result in adjustments to the charges which consumers must pay.
However, this actually introduces more complexity to the deferral plan scheme, because if the pool of debt really is a fund and in fact the amount of people in the plan affects the rate you pay, there really is no limit to how it could fluctuate. Mr. Dasher made it clear that the amount people are charged vis-a-vis each other would be "based on their [own] use", and that the amount of money recouped was zero-sum in the sense that the goal was to zero-out the [interest bearing] loan, but in fact these two ideas essentially contradict each other.
Finally, the phrase "phase-in" which is used in BGE literature and uttered with deliberate specificity through their marketing mouthpiece raises many questions about how and what is being phased in by the two plans. Fundamentally, one could quarrel with the idea that deferring payment of anything through an interest bearing loan is "phasing it in". Moreover, while plan #1. would have had the repayment phase spread over ten years, the proposed plan #2 is said to "phase in" repayment over just two years.
With this in mind, while I can imagine some appeal to repaying an unexpected expense over ten years, I can't see how the offsetting deferral period and repayment period in plan #2. could really coexist at all. The break-even with old market value would occur in less than a year. The second year would be something like 125% of the old market rate (without interest) -- hardly a benefit for a customer!
Taking this issue a step further, I haven't been able to escape the fear that the process of transitioning from deferral plan #1. to plan #2. would result in circumstances something like refinancing, in which the obligations of the first loan aren't really forgiven, but are just rolled into the new loan. This comes from something that Mr. Dasher said in one of our conversations regarding plan #2.; he said "We're done with phase 1 of the rate stabilization deferral. There's nothing we can do about that now."
Here are a few thoughts about reading the Simplified "Rate Deferral Plan". The area of the green triangle (discounted rate) and the fuschia triangle (repayment phase) are the same in the simple diagram, but are deliberately shown with a different shape. Applying interest would distort the fuschia triangle by making it's short side taller. If the interest were [hypothetically] compounding, the hypotenuse would be slightly concave and overall the rate would rise more sharply as it approached the end of the period.
Likewise, since the area of the green and fuschia triangles must remain the same in the simple model, if the repayment period were to last a long time, say 10 years, it would need to rise just a little bit over that period of time (10% of the total rise to the target per year). However, starting the repayment period a little later than is shown in the diagram (where the burgundy triangle starts in time) would itself distort the pink triangle making it rise. Likewise if the burgundy triangle were not to make it all the way up to the new market rate before it ends (in time) this would further add to the height of the fuschia triangle.
In fact, both of these distortions exist in some form in the real world The fee which began "phasing in" the deferred payments wasn't applied to people's accounts at the time the expenses started piling up. As well, the rise in market rates was said to be capped at 15% [per year?], far short of the new market rate. Thus, it would take approximately five years to get to market rate, rising at 15% per year. The term rate itself really becomes meaningless if a fee is effectively adding cost back into something you are getting a discount for, so the theory of how the plan would work really breaks down if you allow the idea of the deferral period to overlap the repayment period.
On the whole I think that the exercise has been very revealing. It is clear that the door has been wedged open for the unprecedented imposition of an interest bearing loan, for an uncertain and fluctuating and unspecified amount, from a utility upon it's customers -- for the benefit of investors. Among my concluding thoughts I have to say that the terms that are used by BGE such as "Rate Stabilization Deferral", and "Phase-in" are diabolically misleading. However, the power of these words does prove how powerful strategic communication really is. At this point, my hope is that the diagrams could be used as a point of discussion in negotiations for plan 2., and in educating consumers about what a rate stabilization deferral really is: a bad idea at best. And in the case of plan #1, possibly illegal.
