Pepco and fellow subsidiary Delmarva Power and Light likely would have their credit ratings lowered this year if the electric utilities are not granted rate increases that would allow them to recover what they have spent to improve reliability, a company executive told Maryland regulators on Monday.
“If we don't we could get a downgrade,” Anthony J. Kamerick, executive vice president and CFO of parent Pepco Holdings, told the Public Service Commission. It was the first day of more than a week of scheduled hearings at the commission's offices in Baltimore on Pepco's and Delmarva's requests for rate hikes.
Pepco — whose service territory includes much of Montgomery and Prince George's counties, as well as Washington, D.C. — has a BBB+ rating, as does Delmarva, which serves Delaware and most of Maryland's Eastern Shore, Kamerick said.
Pepco Holdings has a BBB rating, and Kamerick said company executives “have had some pretty tough conversations” with ratings agencies.
Pepco is seeking a 4 percent rate increase, which it said will raise the average residential customer's monthly bill by $5.56.
Delmarva is seeking a 5.6 percent increase, which the company said will raise the average residential customer's monthly bill by $7.29.
“We believe now we are spending far beyond what is in our current rates,” Kamerick said. “Really, we are on a path that‘s unsustainable in the long run.”
Pepco's customer base has grown at an annual rate of 1 percent or less, not enough to meet the rate of return the PSC has authorized, Kamerick said. Also, operating and maintenance expenses have not fallen, although productivity improvements have offset some increases.
Pepco was authorized to get a 9.83 percent return on equity in Maryland after the last rate increase the PSC approved, but realized just 3.09 percent and minus 0.36 percent, when adjusted, in 2011, according to documents Pepco filed with the new rate request.
Under questioning, Kamerick acknowledged Pepco realized a larger return than authorized about four years ago, but he said it has not met its authorized rate for several years.
As reasons for its financial struggle, Kamerick pointed to “a perfect storm” of the slowdown in the economy, plus its investments in infrastructure and tree trimming.
Its stock now is earning about a 5.8 percent dividend yield, Kamerick said.
In 2010, after the PSC opened an investigation into Pepco's reliability, which was found to be among the worst in the state and nation, Pepco accelerated its tree-trimming program.
Critics have argued Pepco should not be allowed to get repaid for tree trimming and improvements it did to catch up on what it already should have done.
Kamerick disagreed, saying he “wouldn't refer to it as catching up” but that he can understand that people would see it that way.
Late last year the PSC found the utility had been “imprudent” in not trimming enough to keep trees and limbs from falling onto power lines and interrupting service during storms.
The PSC fined Pepco $1 million.