Pepco’s residential customers should take a bigger hit than businesses if the electric utility needs to raise Maryland rates to cover its costs, a consultant hired by Metro told utility regulators this week.
The electric company’s residential customer base is its fastest-growing rate class, and Pepco earns barely any profit on those customers as a result, William Foster, president of Foster Economic Research, said in testimony before the Maryland Public Service Commission.
While the costs of providing electricity to residential customers has risen by 44.5 percent, residential revenues have only increased by 19.5 percent, he said, pointing to a 2009 study. “The difference between the rate of growth in the two areas means that the residential sector is not covering its cost.”
If Pepco wants to increase its rate of return, it should do so without placing unequal burden on its business customers, Foster said. Currently business and industrial customers are paying for residential customers’ electricity, putting business and industrial customers “at a competitive disadvantage with similar customers in other jurisdictions.”
In December, Pepco filed a request with PSC to raise the rates of Maryland customers by $68.4 million, which amounts to about 4 percent — an average of $5.56 a month — more for residential customers.
Pepco justified the request by pointing to increasing operating costs and declining revenues. “Simply put, the company is losing money on its Maryland operations,” the application says.
Those increasing operating costs, in turn, are the result of the company’s need to replace its aging infrastructure and improve reliability in Maryland, Pepco argues.
The PSC has forbidden Pepco from charging customers for the cost of improving its service, a point that Stanley Balis, attorney for Montgomery County, emphasized in a memo filed in response to Pepco’s request. Pepco’s lack of reliable service earned it a $1 million fine from the PSC two days after it filed its request to increase rates.
The poor service also caused Business Insider to declare the company the “most hated company in America,” based on ratings from the American Customer Satisfaction Index.
The rate increase would allow Pepco to increase its rate of return for investors to 10.75 percent, which Foster pointed out is higher than the average for comparable electric distribution companies.
Because Pepco does not generate electricity — it simply delivers it to customers — and because little of its business comes from industrial facilities, it also faces less financial risk than most similar electric utilities, Foster said. These factors, combined with the fact that the Washington area is more affluent than the country as a whole, help to enhance Pepco’s revenue.
Pepco spokesman Bob Hainey said the company is reviewing Foster’s testimony and will file rebuttal testimony by mid-April.
