PSC Approves a Portion of Pepco’s Rate Increase Request

The Maryland Public Service Commission has rejected $50 million of the $68 million rate increase requested by Potomac Electric Power Company (Pepco).

In the Order, the Commission disallowed $7.9 million in expenses caused by Pepco’s past failures to maintain a reliable electric system ($6.4 million in tree trimming expenses and $1.5 million in expenses Pepco incurred to defend itself against the Commission’s reliability investigation). The Commission also denied aspects of Pepco’s request that would have created new pre-payment surcharges, increased returns to shareholders and allowed the recovery of other projected expenses. Ultimately, the Commission did approve an $18.1 million rate increase, which is required to meet the legal and statutory mandates set by law to provide safe and reliable service. The Commission reduced the allowed return to Pepco’s shareholders to 9.31%, a reduction from its previously allowed return of 9.83% and an even further reduction of their requested return of 10.75%.

Pepco filed its request for a rate increase on December 16, 2011. The full record in the case included testimony from 31 witnesses and 11 days of evidentiary hearings, along with two public evening hearings and extensive post-hearing briefs. The record officially closed on June 25, and as stated in the Order, “Although the outages resulting from the June 29 “derecho” storm and Pepco’s response to them are not, and cannot be, part of the record or our decision-making process in this case, we recognize that the statutory deadline for this decision comes at an unfortunate time.”

Overall, the Commission found that Pepco’s application lacked the evidence required to substantiate its request. In denying three-fourths of Pepco’s rate request, the Commission considered instead its longer history of substandard performance, and, balancing that with the Company’s responsibility to invest in improving its infrastructure, made a number of key decisions: Following through on its decision in its investigation of Pepco’s reliability problems, Case No. 9240, the Commission disallowed $6.4 million in operation and maintenance expenses that Pepco incurred to “catch up” for past failures to maintain its electric system. The Commission also disallowed Pepco’s request to recover $1.5 million for the costs of its outside counsel and experts in that case.

Pepco had not justified its request for an increased return to shareholders.

The Commission denied Pepco’s requests for a new infrastructure pre-payment surcharge (the reliability investment recovery mechanism or “RIM”), finding that it would place new burdens on ratepayers and force them to assume financial risks that should be borne by Pepco.

Numerous requests by Pepco to recover expenses outside of the test year, either incurred or projected, were denied.

Throughout the Order, the Commission noted its overall dissatisfaction with Pepco’s performance, and characterized its request to increase returns to shareholders “before Pepco corrects its sub-par performance” as “backwards.”

The Commission’s approved $18.1 million rate increase translates into a $2.02 typical residential monthly bill impact (a 1.69% increase). The increase covers completed reliability-oriented capital projects; verified expenses related to providing reliable electric service; and costs to comply with the Deanna Camille Green Rule—a new statewide set of regulations adopted by the Commission in 2011 relating to contact voltage detection and prevention. The Commission noted that it does not allow any rate increase lightly, but that this outcome was required by the Maryland Public Utilities Article, the portion of the Annotated Code of Maryland that governs public utility companies. Moreover, the Commission expressed its expectation that Pepco will make the necessary expenditures to address new reliability standards adopted in May 2012.

The complete 162-page Order No. 85028 can be found on the Commission’s website at www.psc.state.md.us.

View the Public Service Commission’s statement.

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