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BGE Line Workers
Utility crews respond to a service problem in Towson in 2014. (The Daily Record/Maximilian Franz)

A tug of war over rates

Regulators, utility companies increasingly at odds over annual cases

Energy consumers may be concerned by a rate increase requested last week by Baltimore Gas and Electric Co. But based on recent history, it’s unlikely that request will be granted in full.

“It’s a negotiation process,” said Charles Fishman, analyst for Morningstar who covers energy businesses and utilities. “Utilities go in asking for more than they know they’re going to get.”

BGE, which has about 1.9 million customers in the Baltimore region, has requested rate hikes four times since 2010, including the most recent filing. In the last three rate cases, the company was never granted more than 65 percent of the increase it asked for.

Another major utility, Potomac Electric Power Co., has fared even worse with the Maryland Public Service Commission. It has filed five cases since 2007, four in the last five years alone, and got no more than 25 percent of what it requested. In 2012, the company requested a $60.8 million electricity rate increase and got approval for almost half of that, but it had also requested a grid resiliency charge of $192 million, of which it only got $24 million.

Potomac Electric’s most recent case was decided last week. The company got 23 percent of the increase it had sought.

Delmarva Power & Light Co., which is owned by the same holding company as Potomac Electric, has had slightly better luck. The company has sought four increases since 2007, and on average the PSC allowed nearly 60 percent of what it requested.

It’s almost a game, said Fishman, between utilities and the regulators.

“As far as the intention of the companies, you’d have to ask them if it’s a sort of game they’re playing,” said Paula M. Carmody, Maryland people’s counsel. “We comb through every adjustment piece of it that they’ve proposed. It doesn’t matter what the company is thinking or not thinking, we have to take what is filed.”

A spokesperson for Pepco Holdings Inc., parent company to Potomac Electric, said that the company is sincere in its requests, although it knows the commission may disagree.

“We include only costs that we believe are prudent and justified and should be included in rates,” Courtney A. Nogas, regional communications director for Pepco, said in an email.

Mark Case, vice president of strategy and regulatory affairs for BGE, said each time his company requests an increase, he expects the commission to grant only part of it.

The commission examines actual costs, investments the utility has made and revenue, then it decides how much of an increase is needed to recover the costs. But it typically does not take forecasted costs into account.

But that means more frequent rate cases, said Fishman. The alternative, he said, would be a system that allows the companies to make changes as needed to cover their costs, while regulators follow up with an audit.

Case said that’s what he would like to see — what he calls a contemporaneous system. It would allow a quicker payback for the utilities, he said, compared to the rate request procedure.

The current system is “like getting a new roof for your home and saying you’re going to pay the roofing contractor two years later,” he said.

But Carmody isn’t a fan of the contemporaneous idea. She said that forward-looking systems create more work for regulators in the form of auditing after the fact. And, she said, it’s more difficult to tell whether the consumers’ money was spent properly.

“You’ve got to figure that when these numbers are adopted, they become fixed,” said Carmody. “Those are fixed numbers that are used … whether they spend that money or not.”

Case argued that he doubts utilities would be able to spend the rates inappropriately anyway, because the commission tends to examine them so closely.

The reason for the tight vise on utility prices is that consumers’ energy companies are predetermined by where they live. It’s too complicated to have multiple utilities in one area, so the Public Service Commission regulates heavily as a substitute for competition.

“The consumer should know that there is a sophisticated staff at the commission that’s looking over the costs,” said Fishman.

Pepco said it has always experienced tough scrutiny from regulators.

“What has changed in recent years is our increased investment in our system to provide better service to our customers and the need to recover those investments so we can continue to make further improvements,” said Nogas.

Case said this has been a change at BGE as well but that progress could be limited by the current regulatory process.

“A utility, like any business, has to live within certain financial limits. You can’t spend money you don’t have,” he said. “We’re committed to making the improvements, but we’re also asking the state and the commission to do their part.”