The Office of the People’s Counsel (OPC) for the District of Columbia on Dec. 4 urged District regulators to reject Potomac Electric Power Company’s (Pepco) request for an approximate $44.8m increase in its base distribution rates, but the company maintains the increase is just and reasonable (Formal Case No. 1103).
According to its Dec. 3 initial brief filed with the Public Service Commission (PSC) of the District of Columbia, Pepco also requests a return on equity (ROE) of 10.25%, as well as an overall return on rate base of 8.07%.
Pepco said its existing rates yield an ROE of 6.34%, which is “far short” of the company’s current 10.25% to 10.75% estimated cost of equity capital.
In its Dec. 4 brief, the OPC said that Pepco has failed to meet its burden of proof that its request, if granted, would result in “just and reasonable rates.”
This is the fourth case in Pepco’s “serial case filing strategy,” the OPC said, noting that during a span of six years, the company has requested a total of $144.3m in rate increases and has been granted $72.1m by the PSC.
“Not only is Pepco’s request unwarranted, but the company’s request also ignores PSC directives, flaunts long standing commission and regulatory policies, and repackages proposals recently rejected by the commission,” the OPC charged, adding, “This strategy is designed to enrich shareholders and places an unfair and unnecessary financial burden on DC ratepayers.”
The record does not support Pepco’s inflated cost of capital and ROE, the OPC said, adding that Pepco’s request for a 10.25% ROE is out of line with comparable markets and prevailing interest rates.
Also, the company’s reliability construction plan falls short of the standard set by the PSC and therefore, fails to establish that it is cost-effective or that it will achieve the PSC’s objective to measurably improve reliability.
The rate base is not just and reasonable because it does not properly reflect accumulated depreciation of historical plant, the OPC said, adding that Pepco failed to adjust the accumulated depreciation in rate base to reflect the approximately $73.5m of depreciation expense that Pepco will incur, and collect from its ratepayers, on that same historical plant during the new rate effective period.
The OPC also noted that Pepco’s proposed cash working capital allowance is not reasonable, noting that the allowance of about $12.5m should be reduced to about $12.3m.
Furthermore, the OPC said Pepco’s proposed test year additions are not just and reasonable, noting that the company has proposed three adjustments to its historical test year to recover the full value of plant additions that were made after the test year, including one that seeks to adjust rate base by including about $1.4m in electric plant in service, which Pepco contends is “the full value of two 69 kV capacitor banks at the company’s Benning Road site.”
OPC said that adjustment satisfies some, but not all, of the requisite elements of the PSC’s standard governing post-test year additions to plant and should therefore be rejected.
Among other things, the OPC said it recommended that the PSC decrease Pepco’s revenue requirement by about $13.4m, and that it establish Pepco’s overall rate of return at 7.04%, including a return on common equity of 8.8%.
Others that have recently filed briefs with the PSC on the matter include the Washington, D.C. Chapter of the Sierra Club and the District of Columbia Government (DCG) by Office of the Attorney General.
In its Dec. 3 brief, for instance, DCG said that since 2008, Pepco has received three rate increases for its electricity distribution service and as a result, is now authorized to collect $72m more per year in revenue than it was authorized to collect in the beginning of 2008.
Moreover, Pepco has represented that it intends to seek another rate increase in 2014, DCG said, adding, “The cumulative effect of such pancaked rate increases on the various rate classes has been and, if not stopped, will continue to be unreasonable.”
In its brief, Pepco said it filed on March 8 its application for authority to increase its rates for electric distribution service to a level that will allow it to recover a portion of the significant investments it has made to the District of Columbia’s electric distribution system over the last 18 months.
The PSC’s reliability requirements mandate continuous, yearly improvements through 2020, Pepco said, adding that it has met those standards and is committed to continuing to meet or exceed those requirements even as they become more rigorous.
Therefore, Pepco’s substantial, but prudent, investments in reliability must continue into the future, the company said.
In order to sustain an appropriate level of prudent and efficient investment in the electric distribution system, Pepco seeks to have the opportunity to earn its authorized rate of return (ROR) on investment and to recover the cost of investments that are currently in service and benefiting customers.
Pepco noted that it has not earned its allowed ROR in more than a decade. “This problem is now even more acute due to the substantial increase in investments the company has made in recent years, and which will be required for some years to come, with only minimal growth in overall customer count and loads,” Pepco said.
Noting that it has made significant investments in the District, the company said it plans to make distribution of about $1.22bn in the District during 2013 through 2017. That investment is required to address infrastructure replacement and to improve the resiliency of its system, Pepco said.
Pepco’s rate base is generated from information from its 12-month historical test year, and adjusted in order to be reflective of conditions that are expected to prevail during the rate effective period.
The company said it proposed a just and reasonable test year consisting of the 12 months ending Dec. 31, 2012, noting that the test year was chosen as it is a recent test period that is representative of a level of return that Pepco’s current rates are producing on its distribution cost of service.
Pepco also noted that it presented several adjustments to its average test year data that were accepted or not contested by the parties to the proceeding. The one involving the 69-kV capacitor banks at the Benning Road site, cited by the OPC in its brief, is just and reasonable, Pepco said, because those banks have been placed into service within 12 months of the end of the test period and will be used, helpful and serving customers during the rate effective period.
Among other things, the company also noted that it recommends a cash working capital allowance of about $12.5m in rate base for the proceeding.
Noting the OPC’s recommendation to reduce the allowance, Pepco said there is no precedent in the District for incorporating adjusted operating expenses into a cash working capital determination before the PSC’s decision in a proceeding.
Pepco is a subsidiary of Pepco Holdings (NYSE:POM).