Pepco CEO: Company to spend $1.3bn on transmission over next five years

Over the next five years, Pepco Holdings (NYSE:POM) expects to invest $5.9bn in the power delivery business, company Chairman, President and CEO Joseph Rigby said on Nov. 6.

Those investments are aimed at improving reliability, enhancing customer service, meeting load growth and implementing the smart grid, he said during the company’s 3Q12 earnings conference call.

Of the $5.9bn total, Pepco expects to spend $1.3bn on transmission infrastructure, he said, adding, “Our transmission assets are subject to the jurisdiction of [FERC] and the transmission rates are set under a formula rate process.”

Sandy’s impact

Rigby also noted Hurricane Sandy, which landed near Atlantic City, N.J., on Oct. 29 as a post-tropical cyclone, saying that the storm caused severe flooding and tree-related damage to the electric system.

“Approximately 20% of our electric customers were without power at the height of the storm,” he said. “The majority of the outages and damage occurred in the Atlantic City Electric service territory where we had peak customer outages of approximately 211,000. Delmarva Power and [Potomac Electric Power] experienced peak customer outages of approximately 88,000 and 41,000, respectively.”

The company had more than 5,800 personnel dedicated to the restoration effort, including more than 2,500 mutual assistance line workers, tree workers and damage assessors.

Rigby also said 90% of Pepco’s and Delmarva Power’s customers had their power restored on Oct. 30 and 31, respectively. Given the level of damage in New Jersey, restoration took longer with 90% of Atlantic City Electric’s mainland customers restored by Nov. 2 and the remaining customers whose homes could accept power restored on Nov. 3.

“We currently estimate the incremental cost of system restoration will range between $45m and $65m with the majority of the cost being incurred in New Jersey,” Rigby said. “A portion of the cost will be capitalized. The balance will be expensed or deferred depending on the regulatory jurisdiction.”

Whether expensed or deferred, recovery of the incremental system restoration cost will be pursued during the next cycle of the distribution base rate cases, he said. The large portion of the cost relates to services provided by third parties and given that restoration was recently completed, Pepco has not yet received invoices for many of those services, which is why the costs are only estimates.

Regulatory activities

Rigby also discussed Pepco’s regulatory activities, including a settlement agreement in Atlantic City Electric’s distribution base rate case approved on Oct. 23 by the New Jersey Board of Public Utilities (BPU).

The settlement provides for an increase in base revenues of $44m and an authorized return on equity of 9.75%, he said, noting that the increase in base revenue is reduced by a credit to customers of $16m through an excess depreciation rider, as previously directed by the BPU, resulting in a net increase in revenue of $28m.

In the third quarter of 2013, the credit of excess depreciation will have expired and the full amount of the revenue increase will be in effect, resulting in an incremental $16m in cash. He also said that the new rates became effective on Nov. 1, and the company is evaluating the timing of the next base rate case in New Jersey.

In the District of Columbia, the Public Service Commission (PSC) approved on Sept. 26 a $24m annual increase in electric distribution base rates based on a 9.5% return on equity.

“Because the portion of the rate increase relates to the recovery of advanced metering infrastructure costs that were previously deferred as a regulatory asset, the commission also approved an increase in amortization expense for the AMI regulatory asset of $3.3m per year for 15 years,” Rigby said.

The new distribution and amortization rates were effective on Oct. 18.

“We’re disappointed that the commission rejected our proposals aimed at timely cost recovery and it will necessitate the more frequent filing of rate cases,” he said. “We plan to file Pepco’s next base rate case in the District of Columbia in the first quarter of next year.”

On Aug. 17, Delmarva Power and Light entered into a proposed settlement agreement with the parties to its electric distribution base rate case in Delaware, including the state Public Service Commission (PSC) staff and the public advocate. The settlement, Rigby added, provides, among other things, for a $22m annual increase in Delmarva Power’s electric distribution base rates and a return on equity of 9.75%.

As allowed by state law, Delmarva Power implemented interim rate increases of $2.5m on Jan. 31 and $22.3m on July 3, he said, noting that the excess amount collected will be returned to customers.

The hearing examiner issued a report on Oct. 23 recommending approval of the settlement agreement, which is subject to final approval by the PSC; a decision is expected late this month.

Under the settlement agreement, the parties agreed to discuss alternative ratemaking methods, including multi-year rate plans.

“Our objective in this process is to gain the consensus of the parties regarding the adoption of a multi-year rate plan and to file a proposal with the commission that is supported by all parties,” Rigby said. “We plan to file Delmarva Power’s next electric distribution base rate case in Delaware in the first quarter of next year.”

In Maryland, Pepco plans to file its next base rate case later this month and Delmarva Power plans to file its next base rate case in the first quarter of 2013.

Rigby also noted that Maryland Gov. Martin O’Malley issued an executive order in July to look into how to strengthen the electric distribution system.

O’Malley on Oct. 3 released the task force’s report, which contains 11 recommendations, including a four-step implementation plan that would accelerate investment designed to strengthen the electric distribution grid.

“We believe the task force understood the complex nature of the issues involved in making the electric grid more reliable, including the importance of timely cost recovery,” Rigby said, adding that Pepco intends to reflect certain recommendations in the upcoming electric distribution base rate cases to be filed in Maryland.

In the District of Columbia, a mayor’s task force continues to focus on the issue of undergrounding power lines to improve electric system reliability. A written report is due to the mayor by Jan. 31, 2013, Rigby added.

Pepco reported on Nov. 6 net income from continuing operations (GAAP) of $112m for 3Q12, compared to $80m for the same period in 2011. The company also reported adjusted net income from continuing operations (non-GAAP) of $108m in 3Q12 compared to $83m in the same period in 2011.

The company also said the increase in non-GAAP in 3Q12, as compared to the 2011 quarter, was largely due to higher electric transmission and distribution revenue, lower expenses and the early termination of one of the seven cross-border lease investments.

About Corina Rivera-Linares 3058 Articles
Corina Rivera-Linares, chief editor for TransmissionHub, has covered the U.S. power industry for the past 15 years. Before joining TransmissionHub, Corina covered renewable energy and environmental issues, as well as transmission, generation, regulation, legislation and ISO/RTO matters at SNL Financial. She has also covered such topics as health, politics, and education for weekly newspapers and national magazines. She can be reached at clinares@endeavorb2b.com.