In January 2008, the D.C. Public Service Commission (“Commission”) authorized a $28 million increase in PEPCO’s distribution service rates for the District of Columbia. OPC determined that there were two areas in the Commission’s decision that were legally incorrect and appealed the Commission’s decision in these two areas to the D.C. Court of Appeals.

Supplemental Executive Retirement Plan

In 1995, the last PEPCO rate case before the District’s retail markets were restructured, OPC argued, as a matter of policy, that District ratepayers should not have to pay rates that included Supplemental Executive Retirement Plan (“SERP”) expenses that exceed the amount that IRS allows PEPCO to deduct. The D.C. Public Service Commission accepted OPC’s argument and took it one step further by deciding to disallow all SERP costs.

In the first PEPCO case since 1995, PEPCO admitted that it did not remove capitalized SERP costs, arguing that it did not understand the Commission’s 1995 Order to require the removal of all SERP costs – a holding that the Commission confirmed in its 2008 rate case order. As a result, PEPCO left the capitalized SERP costs in the rates that it filed with the Commission after the 1995 rate case order was issued. Additionally, PEPCO continued to include capitalized SERP costs in its rate base each year thereafter until its most recent rate case was filed.

To simplify the problem, assume that PEPCO’s rate base was 100 at the time of the 1995 rate case order and it added $1 in capitalized SERP to its rate base in each of the next 13 years, the rate base now contains at least $14 worth of disallowed capitalized SERP. Unlike this simple example, the exact amount of these costs is unknown. Although PEPCO admits that it did not remove these costs, it claimed that it could not quantify these costs. OPC argued that all of these costs should be removed from the rate base that is used to establish the rates in this case. The Commission made no factual findings on this issue. OPC is challenging the Commission’s legal conclusion that an adjustment to remove these previously disallowed capitalized SERP costs would constitute retroactive ratemaking and cannot be made. OPC maintains that not allowing these costs to be included in rate base on a going forward basis does not constitute retroactive ratemaking.

OPC raised this issue because if the Commission’s interpretation of retroactive ratemaking is allowed to stand, utility companies would essentially be allowed to ignore a Commission ratemaking order with impunity and unfairly burden District ratepayers and consumers with unjust and unreasonable costs.

Northeast Substation

PEPCO requested an adjustment to rate base of $51.9 million for the construction of the Northeast Substation, a new substation which PEPCO claimed was necessary to provide reliable electric service. OPC pointed out that making the adjustment requested by PEPCO would create a mismatch between costs underlying and revenues to be produced by PEPCO’s proposed rates, i.e., the proposed rates would reflect costs incurred by PEPCO after the test year to bring the Northeast Substation into service, but would not reflect the additional revenues that would result from service that the Northeast Substation would allow PEPCO to provide. OPC therefore argued that if the Commission did make the adjustment proposed by PEPCO, it must also make a corresponding adjustment to revenues since the Northeast Substation would be serving new customers.

After reminding the Commission that it has consistently recognized that the basic ratemaking principle governing the decision whether to adjust revenues as well as rate base is the need to base rates upon data which will be representative of the future period when the new rates will be in effect, OPC cited to past Commission decisions as precedent for a nearly $7 million revenue adjustment. PEPCO opposed any revenue adjustment. The Commission concluded that OPC had not adequately substantiated the need for a revenue adjustment, but failed to explain what made OPC’s $7 million recommendation inadequate.

OPC asked the D.C. Court of Appeals vacate the Commission’s decision to reject OPC’s proposed adjustment to revenues because: (1) the Commission failed to fully and clearly articulate why it rejected OPC’s proposed adjustment to revenues in light of record evidence, (2) the Commission’s decision was contrary to its precedent on this issue, and (3) the Commission failed to fully and clearly explain its decision to abandon its precedent.

OPC raised this issue because the Commission is legally required to explain its decisions and ensure that its decisions are rationally connected to the record evidence. Should the Commission elect to abandon past decisions, it is legally required to explain why it has done so. Moreover, this raises an issue of fairness and equity with regard to ensuring that District ratepayers be accorded credit for revenues to be generated by an asset placed in service to meet the demands of new customers.

The D.C. Court of Appeals heard arguments from OPC, the D.C. Public Service Commission and PEPCO on March 12, 2009. A decision is pending.