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Pepco Holdings' CEO Discusses Q2 2012 Results - Earnings Call Transcript

On July 20, we received decisions in both the Pepco and Delmarva Power distribution base rate cases in Maryland, which we found to be disappointing. A summary of the decisions can be found on Slides 4 and 5.

For Pepco, the Commission approved an $18 million annual increase in electric distribution base rates based on a 9.31% return on equity, but directed Pepco to reduce the amount of the rate increase by the annual cost of certain energy advisory programs and seek recovery of these costs through the EmPower Maryland Program. This reduction is currently estimated at $1.5 million.

Lower depreciation rates were approved resulting in an annual reduction of depreciation expense of approximately $27 million. The Commission also authorized recovery of $9 million of storm costs that were charged to operation and maintenance expense in 2011. The reversal of this expense and the establishment of the regulatory asset will occur in the third quarter.

For Delmarva Power, the Commission approved an $11 million annual increase in electric distribution base rates based on a 9.81% return on equity and authorized lower depreciation rates resulting in an annual reduction of depreciation expense of approximately $4 million. In both cases, the new distribution rates and depreciation rates were effective July 20.

The Commission rejected our proposals aimed at timely cost recovery in both cases and authorized a return on equity for Pepco that is among the lowest in the country. We view the Commission’s unwillingness to adopt mechanisms that would enable timely cost recovery to be disappointing and that it will necessitate the filing of frequent rate cases. While our deep and experienced regulatory staff is prepared to pursue this path, we view the frequent rate cases as inefficient and costly to the customer.

In response to these orders, we have extended our current hiring freeze indefinitely and we are in the process of rigorously reviewing our overall operating expenses. We are currently evaluating the orders to determine what actions, if any, to pursue. Also in Maryland, on July 25, the governor issued an executive order to find ways to improve and strengthen the state’s electric distribution system. The executive order sets in place a process to evaluate the effectiveness and feasibility of underground lines in selective areas, options for other infrastructure investments in the electric distribution system and options for financing and cost recovery for capital investments.

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