Pepco Holdings (NYSE:POM) invested nearly $1.2bn in transmission and distribution infrastructure in 2012, including in projects focused on enhancing reliability and installing advanced technology throughout its service territory, Pepco President, Chairman and CEO Joseph Rigby said on March 1.
“These investments are significantly improving our operating performance and restoration efforts as demonstrated during two severe weather events in 2012,” he said during the company’s 4Q12 earnings call.
The investments were aimed at enhancing the distribution and transmission systems, he said, noting that the efforts to improve system reliability are yielding meaningful results.
The overall reliability performance for each of the company’s utilities, Potomac Electric Power Company (Pepco), Atlantic City Electric and Delmarva Power and Light, improved by 21% to 33% in 2012, compared to 2011. Rigby also said that on average, customers experienced significantly fewer and shorter outages.
In 2012, Pepco continued to make progress in smart grid development by implementing advanced metering infrastructure (AMI) and distribution automation. In November 2012, the company installed its one millionth smart meter, he said, adding that meter installation and activation is essentially complete for electric customers in Delaware and is nearing completion for Pepco’s customers in the District of Columbia.
For Pepco’s customers in Maryland, meter installation and activation is underway and for Delmarva Power’s Maryland customers, state regulators have authorized the implementation of AMI and meter installation is expected to begin shortly.
Rigby also said that as approved by the respective state regulators, regulatory assets have been created to ensure recovery of and a return on AMI-related costs between rate cases.
In connection with AMI, Pepco Holdings is implementing the critical peak rebate form of dynamic pricing, which enables customers to experience additional benefits from the smart grid.
Under the critical peak rebate structure, Rigby added, customers are rewarded for lowering their energy use during critical peak periods when energy demand and the cost of supplying electricity are higher. In Delmarva Power’s Delaware and Pepco’s Maryland jurisdictions, about 12,000 customers participated in the phase-in stage of the program in 2012, garnering positive feedback.
“This critical peak rebate structure and similar implementation phase-in has been approved in concept for Delmarva Power in Maryland pending AMI deployment,” Rigby said. “Through the expansion of the smart grid and implementation of dynamic pricing, we will enable customers to better manage their energy use, and lower their energy bills while we gain added tools to improve system reliability.”
Because the rate case outcomes received in 2012 fell short of what is needed to earn the company’s authorized rates of return, it is filing base rate cases in each of the jurisdictions it serves, including Delmarva Power’s natural gas rate case in Delaware, Rigby said.
Given Pepco’s planned $5.9bn investment in its electric system over the next five years, it is important to ensure timely and reasonable cost recovery through constructive regulatory outcomes.
“We plan to file Pepco’s case in the District of Columbia shortly and Delmarva Power’s electric cases in Delaware and Maryland by the end of this month,” he said. “In total, the three pending rate cases request an annual rate increase of $143m, based on requested returns on equity at 10.25%. All three cases include requests for 12 months of forward-looking reliability planned additions in the test period.”
In Pepco’s case in Maryland, in addition to the requested base rate increase, Pepco has requested approval of a three-year grid resiliency charge to provide for the timely recovery of proposed accelerated reliability spending to address the recommendations in the Maryland governor’s grid resiliency task grid report.
“The proposed incremental spending that would be recovered by the charge is $175m of capital expenditures for the selective undergrounding and upgrading of feeders, and $17m of maintenance spending for accelerated tree trimming,” Rigby said. “We plan to incorporate a request for a similar charge in Delmarva Power’s case in Maryland. In the District of Columbia, the mayor’s task force continues to focus on the issue of undergrounding power lines to improve electric system reliability. A written report is expected to be delivered to the mayor later this month.”
Rigby said reducing regulatory lag is a significant focus, with the preference continuing to be to achieve that by adopting mechanisms that mitigate the need for frequent rate case filings that Pepco views as costly and inefficient.
“During 2012, we made progress in working with regulators and public officials to identify long-term reliability improvements and the corresponding timely recovery of adequate returns on investments and we look forward to continue progress this year,” he said.
Rigby also noted that state commissions and public advocates for the company’s jurisdictions recently filed a joint complaint with FERC challenging the base return on equity (ROE) of Pepco’s utilities and the application of the formula rate process.
The complainants claim to support an ROE with a zone of reasonableness between 6.78% and 10.33%, and arrived at a base ROE of 8.7%, Rigby said, adding that the currently authorized ROE for Pepco’s utilities is 11.3%, which includes a base ROE of 10.8%, plus a 50-basis-point adder for being a member of an RTO.
“We believe the complaint is unsupported and intend to vigorously defend our current ROE and the formula rate process,” Rigby said.
Among other things, he said FERC issued an order on Feb. 28 in the Mid-Atlantic Power Pathway (MAPP) abandonment proceeding.
“The order concludes that the MAPP project was canceled for reasons beyond the company’s control, but set the prudence of the abandonment cost and the amortization period for hearing,” Rigby said. “They denied the inclusion of the incentive adders and applied a 10.8% return on equity to the abandonment cost. They also denied 50% recovery of costs incurred prior to Nov. 1, 2008, which is approximately $2m. We are evaluating the decision, including our legal alternatives.”
Pepco senior vice president and CFO Frederick Boyle said during the call that power delivery diluted earnings were $1.02 per share compared to 93 cents per share in 2011, noting that higher distribution and transmission revenue increased earnings by 12 cents per share and 7 cents per share, respectively.
A higher revenue was due to higher rates driven by increased investment in the utility infrastructure. This increase in earnings was partially offset by higher operation and maintenance (O&M) expense, primarily due to higher employee-related and customer support costs.
“On our previous earnings call, we provided a forecast of total 2012 power delivery O&M expense of $890m to $900m,” Boyle said. “Actual O&M for power delivery in 2012 was $901m. The effect of the major storms had minimal impact on total O&M due to offsetting factors. … O&M incudes $4m and $6m of restoration costs that were not deferred for the derecho and Hurricane Sandy, respectively. Substantially offsetting these costs was $9m of lower expense due to the establishment of a regulatory asset for recovery of restoration costs incurred for the January 2011 winter storm that had previously been expensed in 2011.”
Pepco reported on March 1 net income from continuing operations (GAAP) of $43m for the three months ending Dec. 31, 2012, compared to $23m for the same period in 2011.
The company reported net income of $285m in 2012, compared to $260m in 2011.
Pepco also reported adjusted net income from continuing operations (non-GAAP) of $44m for the three months ending Dec. 31, 2012, compared to $34m for the same period in 2011.
The company reported adjusted net income of $277m in 2012, compared to $283m in 2011.