State regulators should deny Pepco’s proposed $30.6 million additional rate hike, OPC filing says
BALTIMORE – Pepco’s request to increase rates by $30.6 million to cover 2023 spending in excess of what the Public Service Commission already approved should be denied, the Office of People’s Counsel told the Commission in a brief filed yesterday. The company failed to support many of its cost increases, and it should have managed its spending to adhere to the 2023 budget the Commission approved in 2021, OPC said.
“Pepco customers have seen their rates increase over the last 10 years at a faster pace than any of the State’s other major electric utilities,” Maryland People’s Counsel David S. Lapp said. “Pepco’s request for this additional rate increase illustrates why. Customers should not bear the consequences of Pepco’s overspending.”
Pepco’s rate hike request is part of the multi-year rate plan the Commission approved in 2021. At that time, Pepco had requested rate increases over three years of $104 million. The Commission denied the $104 million request but approved a three-year increase of $52.2 million. Pepco’s current request for an additional $30.6 million in overspending is part of its “reconciliation” request for 2023 and would be additional to the already increased rates.
More than half of Pepco’s request—about $15 million—is due to Pepco exceeding its budget for operations and maintenance work. The utility provided “thin support” for exceeding the O&M budget authorized by the Commission, and most of the increases are due to costs completely within the utility’s control, OPC’s filing said. OPC asks the Commission to reject $14 million of that spending.
Pepco gave little explanation for why O&M costs significantly exceeded the budget the Commission approved in 2021. For example, Pepco spent an additional $6.1 million for equipment maintenance but provided no information explaining what drove the increase. Pepco also exceeded its budget for “job skills training” by $1.8 million, stating only that the increased costs were because of “[a]dditional requirements.” In addition, Pepco acknowledged that it doesn’t identify what costs fall into an account it labeled only as “other”—for which costs increased by about $2.2 million. These explanatory failures mean the utility did not meet its burden of showing the costs were reasonable, OPC’s filing argued.
Pepco is also seeking significant increases related to spending on capital projects. If approved, these project costs go into rates for extended periods, during which customers pay the utility a return that includes profits. OPC’s brief explains that Pepco’s request for approval of several projects should be denied. According to OPC’s brief:
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Tree wire installations ($9.8 million). Tree wire is an expensive solution for mitigating vegetation-related service interruptions, costing 42 percent more per mile than standard wire. Despite the significantly higher cost, Pepco failed to show that its tree wire installation in 2023 was for lines with vegetation or animal-related outages; in fact, Pepco installed substantial tree wire on circuits with higher reliability scores than Pepco’s system-wide average.
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Transformer replacements ($3.6 million) and circuit breaker upgrades ($2.7 million). Pepco prematurely replaced substation transformers, failing to demonstrate that the replacements were warranted based on objective assessments of asset condition and failure risk, or economics. For circuit breaker upgrades, Pepco relied mostly on generalized narratives and internal processes without any data-driven justifications or cost-benefit analyses.
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Livingston Road Battery Energy Storage System. Pepco formally cancelled this storage project in 2024, but nevertheless sought recovery for $2.0 million for “abandoned costs.” When Pepco started to incur costs for the project, there were multiple indications that the project was no longer required. Pepco also did not adequately manage the performance of its contractor before finally cancelling the project.
More generally, Pepco’s internal processes for approving capital projects are flawed because they don’t adequately consider cost impacts on customers or consider cost-effectiveness or potential lower cost alternatives, OPC’s filing said.
“A competitive business, in exercising its business judgment, must evaluate lower cost alternatives and how a project affects its customers,” Lapp said. “If it doesn’t, then it is not exercising reasonable business judgment and it will lose customers. The Commission should hold utilities to the same standard.”
The Maryland Office of People’s Counsel is an independent state agency that represents Maryland’s residential consumers of electric, natural gas, telecommunications, private water and certain transportation matters before the Public Service Commission, federal regulatory agencies and the courts.
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