Pepco Holdings (NYSE:POM) is challenging in court Maryland state regulators’ July 12 decision to grant Potomac Electric Power Company (Pepco) an electric distribution rate increase of approximately $28m, which is less than half of what the company had requested, Pepco Chairman, President and CEO Joseph Rigby said on Aug. 7.
“On July 26, we filed an appeal of the commission’s order with the Circuit Court for the city of Baltimore and we expect to file Pepco’s next rate case in Maryland by the end of the year,” Rigby said during the company’s 2Q13 earnings webcast. “Our priority remains system reliability and improvement of the customer experience, but we expect timely cost recovery and the opportunity to earn reasonable regulatory returns. We are continuing to evaluate Pepco’s spend in Maryland and will determine any changes by year-end.”
As reported, 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 state Public Service Commission (PSC) authorized the approximately $28m increase based on a 9.36% ROE, Rigby said.
“We view the commission’s decision to maintain the punitive return on equity authorized in our last rate case in mid-2012 to be unwarranted,” he said, adding that Pepco is exceeding all reliability standards in the state and has experienced a decrease in the duration and frequency of outages over the past couple of years.
The annual pre-tax earnings impact of the decision, including the changes in depreciation and amortization expense, as well as other miscellaneous items, is about $27m, he said.
The new rates were effective on July 12.
“We also find disappointing the failure to adopt mechanisms supported by the Maryland governor’s grid resiliency task force report issued last fall,” he said. “Out of $192m of proposed accelerated reliability improvements, only $24m of priority feeder work was approved under a host of conditions.”
Costs associated with the feeder project will be recovered through a grid resiliency charge implemented as a rider that is separate from base rates and includes a return on investment.
As reported, as a means to strengthen the state’s electric distribution system, a Maryland task force recommended that state regulators implement a performance-based ratemaking structure, with a focus on increased reliability as a priority, to align the motivation of the investor-owned utility and its customers.
Gov. Martin O’Malley in October 2012 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, according to a statement from the governor.
The report stems from an executive order that O’Malley issued in July to look into how to strengthen the electric distribution system.
On July 17, Rigby said, Pepco’s Delmarva Power, PSC staff and the state Office of People’s Counsel entered into a settlement agreement, providing for a $15m annual increase in the company’s electric distribution base rates and a 9.81% ROE.
The agreement allows for recovery of storm restoration costs included as a result of recent major storm events. Rigby also said that the annual pre-tax earnings impact under the proposed settlement, including the changes in amortization expense resulting from storm cost recovery is about $14m.
The settlement also provides for a grid resiliency charge under certain conditions, for recovery of costs totaling about $4m associated with Delmarva Power’s proposed plan to accelerate investments related to priority feeders, he said.
The settlement does not provide for approval of the proposed acceleration of the tree-trimming cycle, he said, adding that under the agreement, the rates would become effective on Sept. 15 or as soon as practicable thereafter once the PSC issues an order approving the agreement.
“We view this outcome as more constructive and we do not anticipate any changes to Delmarva Power’s planned capital expenditures in Maryland,” Rigby said.
Rigby said that in Delaware, hearings in Pepco’s Delmarva Power’s natural gas distribution base rate case are scheduled to begin on Aug. 27 and on Nov. 13 in the company’s electric distribution base rate case. A decision is expected in 4Q13 for the gas case and in 1Q14 for the electric distribution case.
According to the Delaware PSC’s website, on March 22, Delmarva Power filed an application seeking approval of a proposed increase in electric base rates of about $42m, or 7.38% in total revenues.
In June, the New Jersey Board of Public Utilities (BPU) approved a settlement agreement in Pepco’s Atlantic City Electric’s distribution base rate case, providing for an annual increase in electric distribution base rates in the net amount of about $26m, based on a 9.75% ROE, Rigby said.
The revenue increase includes full recovery of incremental storm restoration costs, he said, later adding that the new rates were effective on July 1.
“[W]e intend to reduce distribution and other related capital expenditures in New Jersey by a total of $150m through 2015 in order to more closely align our spending with revenue,” he said.
Rigby also noted that the consolidated tax adjustment policy in the state “is greatly hindering our ability to achieve reasonable regulatory outcomes for Atlantic City Electric.”
There is a generic proceeding underway in New Jersey to address that policy. “While the proceeding is not moving as quickly as we would like, we are pleased that the [BPU] has initiated a review of the policy and we are actively participating in the process,” he added.
Rigby said that while Pepco is disappointed with the outcome in Pepco’s Maryland rate case as well as the continued application of the consolidated tax adjustment in New Jersey, it is important to note that the company has made significant progress in its system reliability enhancement plan that began in 2010.
“We are acutely aware of the under-earning of our utilities and we will make modifications to our investment plan to help close the gap between our allowed and earned ROEs,” he said. “However, what we will not do is jeopardize reversing the positive trend in reliability improvement.”
Pepco Holdings on Aug. 7 reported net income (loss) from continuing operations (GAAP) of $38m for the three months ended June 30, compared with $53m over the same period in 2012.
The company also reported adjusted net income from continuing operations (Non-GAAP) of $53m for the three months ended June 30, compared with $46m over the same period last year.
The increase in adjusted net income from continuing operations (Non-GAAP) in 2Q13, as compared to 2Q12, was driven by higher electric distribution revenue – primarily due to higher rates from increased infrastructure investment – and lower operation and maintenance expense, Pepco said. Partially offsetting those positive factors were lower default electricity supply margins – mainly due to a favorable adjustment in 2012 – and lower unbilled revenue associated with Atlantic City Electric basic generation service.
Pepco also said that the primary driver of the increase in adjusted net income from continuing operations (Non-GAAP) for the six months ended June 30, as compared to the 2012 period, was higher electric distribution revenue, largely due to higher rates driven by increased infrastructure investment and higher weather-related sales in its service territories that do not have revenue decoupled from sales. Higher net interest expense, lower transmission revenue primarily due to a less favorable formula rate true-up, and lower default electricity supply margins partially offset the increase for the period, the company added.