On May 22, 2009, the Potomac Electric Power Company (PEPCO) filed a request for authority to increase existing distribution service rates and charges for electric service in the District of Columbia by $51.7 million. According to PEPCO, the request represents an increase of approximately 13.9% in PEPCO’s distribution revenues and a 6.1% total bill increase for a typical residential customer using 750kWh per month. The requested rates are designed to collect $425 million in total distribution revenues. Under PEPCO’s proposal, the monthly distribution bill increases from $13.82 to $20.26, an increase of $6.44 or 46.5% for a typical residential customer using 750kWh per month

PEPCO is seeking a $77.4 million increase in rate base is composed of: (1) $30.8 million of construction; (2) $20.6 million in additions to Prepaid Pension assets; (3) $6.4 of unamortized expenses; and (4) $19.4 million in changes to deferred taxes, accumulated depreciation and accumulated amortization.

Rate Case Summary

PEPCO’s Goals

PEPCO has two main goals: (1) further shift business risk to ratepayers; and (2) increase its return on equity. PEPCO proposes to shift business risk by: (1) proposing to capitalize and amortize expenses that were incurred in the test year or prior to the test year for Credit Facility costs ($143,000), Customer Education costs ($2,483,000), Blueprint/AMI costs ($759,000), and rate case costs ($3,043,000) and (2) implementing a surcharge and deferred regulatory asset mechanism to recover its pension, Other Post-Employment Benefits (OPEB) and uncollectible expenses. These three costs represent $15.6 million (pension and OPEB are $13.1 million) or 16.8% of PEPCO’s D.C. adjusted operation and maintenance expenses for the 2008 test year. PEPCO’s losses in its pension investments during 2008 and 2009 are the major reason for the increases in its pension and OPEB expenses. PEPCO has a defined benefit plan that promises a monthly check to the employee at retirement based on a set formula.

Pension and OPEB

In addition to the pension and OPEB expense costs for the test period, PEPCO has included $44,151,000 in rate base for the test year to compensate for its “Prepaid Pension and OPEB.” The annual cost of this prepaid asset in this case at PEPCO’s proposed 11.5% ROE is $5,583,000. OPC opposed the inclusion of this asset in Formal Case No. 1053, but the Commission ruled in PEPCO’s favor. In that case the rate base amount was only $23,294,000 and the annual cost to ratepayers was $2,621,000. This prepaid pension asset represents amounts paid into the pension fund that are in excess of the amounts charged to expense and further increase the cost to ratepayers of the Company’s pension program.

Pension and OPEB

PEPCO proposes a 2009 construction budget of $126.8 million ($112.8 million for distribution, $12.1 million for transmission, and $1.9 million for other), not including the Blueprint/AMI and Mid-Atlantic Power Pathway transmission costs. This is a portion of the overall PEPCO construction budget of $260.4 million.

PEPCO’s Construction Budget

PEPCO proposes a 2009 construction budget of $126.8 million ($112.8 million for distribution, $12.1 million for transmission, and $1.9 million for other), not including the Blueprint/AMI and Mid-Atlantic Power Pathway transmission costs. This is a portion of the overall PEPCO construction budget of $260.4 million.

PEPCO’s Construction Budget

PEPCO proposes a 2009 construction budget of $126.8 million ($112.8 million for distribution, $12.1 million for transmission, and $1.9 million for other), not including the Blueprint/AMI and Mid-Atlantic Power Pathway transmission costs. This is a portion of the overall PEPCO construction budget of $260.4 million.

Source: Direct Testimony of PHI Senior Vice President for Asset Management and Planning William M. Gausman Table 3 at 6

Depreciation

PEPCO has prepared a new depreciation study and the calculations of depreciation expense incorporate those new depreciation rates. The new rates increase test period expense by $5.8 million.

PHI Service Company

PEPCO indicates that, in two years, expenses have increased by $10.7 million to $87.9 million. PEPCO also proposes test period adjustments totaling an additional $5.1 million. The $93 million included as test year O&M expense is 20.5% higher than the O&M expenses in the last rate proceeding. A substantial part of the increase comes from the PHI Service Company. In the 2008 rate case order, the D.C. PSC directed PEPCO to procure the services of a contractor to conduct an independent audit of PHI Service Company costs allocated to PEPCO-D.C and to file a benchmarking or industry study of the PHI service Company costs to support their reasonableness. The study prepared by The Hackett Group concluded that PHI Service Company’s costs are in-line with its peers and therefore reasonable. Given the significant portion of PHI Service Company costs being shifted to PEPCO’s D.C. utility, these costs will be examined carefully.initions */ p.MsoNormal, li.MsoNormal, div.MsoNormal {mso-style-parent:""; margin:0in; margin-bottom:.0001pt; mso-pagination:widow-orphan; font-size:12.0pt; mso-bidi-font-size:10.0pt; font-family:"Times New Roman"; mso-fareast-font-family:"Times New Roman";} @page Section1 {size:8.5in 11.0in; margin:1.0in 1.25in 1.0in 1.25in; mso-header-margin:.5in; mso-footer-margin:.5in; mso-paper-source:0;} div.Section1 {page:Section1;} -->

Formal Case No. 1076 Distribution Rate Changes for Residential Classes

Formal Case No. 1076 Distribution Rate Impact for Residential Classes