Maryland regulators grant lower-than-requested rate increase to Pepco

The new rates were to go into effect on Oct. 20

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The Maryland Public Service Commission denied a portion of Potomac Electric Power Co.’s request to increase the company’s electric distribution rates by $68.6 million, instead granting a revenue requirement of $33.9 million.

The average residential monthly bill is expected to increase by $4.01 per month – as noted in the PSC’s order – or about 3 percent, the PSC said, adding that the fixed monthly charge portion of residential customers bills would increase 20 cents from the current $7.60 to $7.80.

The new rates were to go into effect on Oct. 20, the PSC said.

The largest portion of the increase results from Pepco’s spending on reliability improvements, the PSC said, adding that over the past four years, Pepco has invested $908.6m in its distribution system to improve system performance and reliability.

The PSC noted that it denied Pepco’s request for a return on equity (ROE) of 10.10 percent, instead lowering the company’s ROE from 9.55 percent to 9.5 percent.

Additionally, the PSC said that it denied a portion of Pepco’s request to recover costs for an employee incentive program that rewarded staff for achieving service reliability goals, noting that the company did not meet the service reliability benchmark related to outage frequency that it committed to in the 2015 merger of its parent company, PHI Holdings with Exelon. As a result, the PSC said that it reduced Pepco’s revenue request by $1.1 million.

The PSC further noted that it denied an $18m request related to a proposed change in the method of income tax accounting and allocation for system assets installed before 1981.

In addition, the PSC said that it adjusted the manner in which ratepayers will benefit from synergies resulting from the merger, noting that while that will result in a one-time rate increase in this case, it should result in significant savings to ratepayers over the next several years.

The PSC also noted that it approved a modified version of Pepco’s streetlight tariff, which will change the current scaled, fixed charge rate structure for LED streetlights to a lower, flat rate structure that, according to the company, will encourage future conversions to the more energy efficient LED streetlights.

In a statement provided to TransmissionHub on Oct. 23, Pepco said, “We received the commission’s order, have begun the review and are moving forward.”

As noted in the order, Pepco in March filed with the PSC its request to increase its rates for electricity in the amount of about $68.6 million. Pepco last received a rate increase from the PSC in November 2016 of $52.5 million, primarily related to its capital investment over a six-year period in advanced metering infrastructure (AMI) and continued reliability investments, the PSC said.

Pepco asserted in its application that at its current authorized rates, its adjusted ROE for the test year is 5.44 percent. The PSC added that Pepco noted that its revenue growth has been outpaced by growth in operating costs and rate base, a problem that the company expects to grow as it continues to invest to enhance the reliability of the distribution system. Pepco also stated that if granted in full, the impact of the requested rate increase on the typical residential standard offer service customer using 872 kWh per month would be $7.37 per month, or an increase of 5.52 percent.

The PSC added that Pepco in June filed supplemental direct testimony and schedules, which updated the four months of projections with actual data. The PSC said that Pepco’s use of actual data caused the company’s proposed increase in electric distribution base rates to rise slightly, with the impact to the typical residential customer increasing to $7.50 per month, or an increase of 5.61 percent.

Among other things, the PSC noted that since the creation of the Service Quality and Reliability Standards in 2012, Pepco has experienced a 22 percent improvement in the frequency of outages and a 35 percent improvement in the duration of outages through the end of 2016.

“While continual improvement in Pepco’s performance and reliability metrics is required in order for the company to achieve first quartile performance, the commission recognizes this improvement comes with a cost to customers,” the PSC said. “We are required to balance the company’s recovery of its expenses and capital investments with the requirement that its rates are ‘just and reasonable.’ To this end, we will continue to hold Pepco accountable for meeting its reliability commitments while providing service that is affordable to its customers.”

Of the ROE, the PSC said that based on the record in the case, it finds that a reduced ROE of 9.50 percent provides for a fair and appropriate return, and will allow the company to obtain any necessary capital investment at reasonable interest rates.

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