Following passage of Utility RELIEF Act, Pepco withdraws pending forecasted test year proposal
BALTIMORE – Pepco notified the Public Service Commission (PSC) last week that it was withdrawing its proposal to base its recent request for a rate increase on forecasted costs. That means its requested rate increase will depend on proven, actual costs—a move that reduces Pepco’s proposed rate increase by $8.6 million.
As Pepco’s letter to the PSC explains, the company’s decision responds to the General Assembly’s recent passage of the Utility RELIEF Act, which Governor Wes Moore is expected to sign into law. That legislation would temporarily prohibit the PSC from approving a requested rate increase that is based on a forecasted test year until at least April 1, 2027, while the PSC conducts a proceeding to determine whether this alternative form of ratemaking is “in the best interests of and protects ratepayers.”
“The Utility RELIEF Act’s temporary pause resulted in Pepco withdrawing its current request, marking a win for Pepco’s customers,” said Maryland People’s Counsel David S. Lapp. “Although a permanent ban would have been better, the one-year moratorium is an important step forward for customers.”
The legislature’s one-year moratorium could save customers as much as $8.6 million, or $4.5 million for residential customers, according to figures Pepco filed with its rate case. Although these savings won’t lower current customer bills, they will help limit any future increase customers might otherwise have seen. OPC is opposing Pepco’s rate increase.
The Utility RELIEF Act—and Pepco’s decision to withdraw its proposal—follow OPC’s motion to dismiss the proposal and expert witness testimony on the risks of and problems with using utility forecasts to determine rates. The arguments in this case, in turn, follow OPC’s advocacy in other proceedings before the PSC and before the General Assembly to end the use of alternative forms of ratemaking based on forecasted costs.
Under standard rate-setting practices, utilities recover costs from customers only if they demonstrate that their investments were reasonable and prudent and are actually providing benefits to customers. Among other issues, setting rates based on forecasted spending allows utilities to instead begin collecting speculative operational expenses and capital investment costs before the utility has demonstrated that costs are prudent and reasonable. The forecast method is beneficial for investors but costly for customers, as it allows for faster cost recovery than standard rate cases and shifts risks of utility overspending away from investors and onto customers.
As a recent OPC analysis shows, using utility spending forecasts to set electric distribution rates increases those rates by about two to three times more than standard rate-setting practices over comparable time periods.
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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