Maryland regulators on July 12 granted an approximately $28m electric distribution rate increase to Pepco Holdings’ (NYSE:POM) Potomac Electric Power Company, and approved one of the company’s three proposed reliability projects.
In each of Pepco’s last two electric distribution rate cases, the PSC has granted less than half of the amount the company requested, the PSC said in its order, noting that it again has reduced the company’s requested rate increase by more than half, and granted only what it finds necessary to allow Pepco to continue – and even accelerate – the pace of its improvement in reliability and resiliency of its electric distribution system.
In its November 2012 application, Pepco requested an approximately $61m rate increase and an increase in the return on equity (ROE) from 9.31% to 10.25%.
The company argued that the increase was necessary because it “has made, and continues to make, prudent investments in the reliability of its electric distribution infrastructure,” according to the order.
“Based on our thorough review of Pepco’s application … we find that a revenue increase of $27.883[m] and an ROE of 9.36[%] will be sufficient to permit the company to continue to improve its reliability and resiliency at just and reasonable rates,” the PSC said. “The increase will have an average residential monthly bill impact of $2.41, and represents a 2.19[%] increase in the overall bill.”
Myra Oppel, regional communications vice president with Pepco Holdings, told TransmissionHub on July 15: “We are very disappointed in the commission’s decision on our rate adjustment request. We will need time to analyze the details before we can provide further comment, but we don’t feel this adequately supports our continued investments to improve service reliability for our customers in Maryland or our plans to respond to the governor’s recommendations to improve grid resiliency.”
The PSC noted that it fined Pepco $1m in December 2011 for its failure to adequately maintain its distribution system over the prior decade, and in the last rate case, the PSC disallowed $6.4m in “catch up” operations and maintenance expenses attributed to Pepco’s prior neglect, as well as reduced the company’s ROE from 9.83% to 9.31%.
The PSC also said that in this rate case, it again allows Pepco to recover costs related to its significant and sustained increase in spending on reliability projects, noting that it allows Pepco to include in its rate base $12.5m for completed reliability projects through the end of the test period, or Dec. 31, 2012, and $45m for projects completed in the first three months of this year.
Pepco included a $192m grid resiliency charge (GRC) proposal in addition to the request for an increase in its base distribution rates and in response to Gov. Martin O’Malley’s Grid Resiliency Task Force Report recommendations.
The proposal aimed at increasing the reliability and resiliency of Pepco’s distribution system in an accelerated time frame from 2014 through 2016. Pepco, the PSC added, proposed three reliability projects: $17m for accelerated vegetation management; $151m for selective undergrounding of six feeders; and $24m for an accelerated priority feeders project to accelerate the hardening of 24 feeders over two years, 12 feeders each in 2014 and 2015.
The PSC said it approved the accelerated priority feeders project but only on the condition that Pepco provide a detailed description of the proposed hardening work, performance objectives for each feeder project, incremental milestones and estimated costs for each project as well as estimated total costs.
The PSC said it is also requiring annual filings so that it can monitor each of the feeder projects, including a reconciliation of projected costs and recoveries.
Subject to the company’s filings, the GRC for an average residential monthly bill will be about 6 cents in the first year.
The PSC noted that it believes the record is insufficient with regard to the selective undergrounding project to justify its approval at this time.
“We have granted a limited rate increase and the partial GRC due to the financial strain of Pepco’s increased infrastructure reliability spending, and only while demanding specific and measurable improvements in Pepco’s reliability performance exceeding those set forth in our present … standards,” the PSC said, noting that it is cognizant of the effect the increases will impose on ratepayers as well as of the demands placed on Pepco for improved performance.
A commissioner concurs in part, while another dissents
Commissioner Lawrence Brenner said in a statement included in the order that he concurs with the result reached in the order on approval of the accelerated priority feeders to avoid a split PSC stalemate, which would have had the result of not approving a project that he thinks is worthwhile because of a disagreement over the cost-recovery mechanism.
The safeguards put into place are adequate, he said, later adding, “These conditions and the fact that the project at this time is limited in scope and time, with an estimated monthly residential bill impact of only 6 cents a month in 2014, growing but still relatively low to 19 cents in 2015 and 27 cents in 2016, have persuaded me to concur in the result.”
Brenner said he would have preferred setting up a mechanism similar to a deferred regulatory asset with regard to the cost recovery for the accelerated priority feeders.
That would have provided for a review, and a hearing, of the work done upon completion of each year’s accelerated feeders before allowing Pepco to recover its then-known and prudent costs. He also said he would have allowed Pepco to recover approved costs after such a decision, without the need to wait for the next base rate case.
“I recognize the need to spur, incent, cajole, lead and when necessary, as it unfortunately has been, push and pull Pepco to improve its reliability,” he said. “I believe my willingness to allow accelerated recovery for the accelerated feeders, if you will, without the need to wait for a full base rate case, would have been more than sufficient to provide prompt, reasonable recovery to Pepco, while better protecting customer ratepayers.”
Pepco’s attitude about its GRC projects shows regrettably that the utility “still doesn’t get it,” he added, noting that Pepco’s position is that unless it receives its requested GRC cost recovery treatment, it will not undertake the projects.
“My reaction to that is who is regulating whom here,” Brenner said.
Among other things, he said that if Pepco declines to perform the accelerated priority feeder project, he said he would convene a proceeding to require Pepco to show cause why the PSC should not order it done.
Commissioner Harold Williams, in a separate statement included in the order, said he dissents from the majority’s decision to allow cost recovery for the accelerated priority feeder project by means of the GRC tracker mechanism.
“While I agree with my colleagues that the accelerated priority feeder project has merit and, in theory, should result in some reliability improvement, I would provide for cost recovery for this project through a rolling two year regulatory asset,” he said.
He added, “I cannot justify the fundamental shift from long-standing [ratemaking] principles merely to enable Pepco to begin recovering the cost of this project from ratepayers even before the company begins spending it.”
Williams noted that when the PSC first considered a tracker surcharge for basic plant infrastructure, it limited the recovery mechanism to “very large, non-recurring expense items that have the potential to seriously impair a utility’s financial well-being and that do not contribute to the company’s rate base” as opposed to “classic, ongoing costs of running a utility company.”
He also said that the GRC tracker allows Pepco to collect $24m from ratepayers before the PSC finds that such expenditures were “prudently incurred.”
Williams said, “While the conditions added by the majority, such as the requirement for specific reliability target metrics and an annual true-up, provide some limited ratepayer protections, in my view those conditions simply do not substitute for our traditional ratemaking protections.”
If the improvements do not meet the reliability standards, the PSC will be faced with the prospect of having to “claw back” the money collected and return it to the respective ratepayer classes, he said.
Among other things, he said, “Today we are letting the tracker genie out of the bottle, and I fear it will continue granting the wishes of Maryland utilities for many years and we may never get it back in the bottle.”