Dear Pepco customers,
We, your neighbors in the Baltimore Gas & Electric service territory, have a sense of how you must feel. A giant national corporation is swooping into town with an offer to buy your hometown utility, one that has been deeply rooted in the community since the 19th century. We've been down this road a couple of times recently, and we know all the questions that must be going through your heads. What will the loss of local control mean for the company's commitment to local customers? What about its civic and philanthropic activities? What about my bills? We don't have all the answers, but we can tell you two things.
The first is that these deals don't always come to fruition. Florida Power and Light pulled out of an offer to buy BGE's then-parent company, Constellation Energy, eight years ago amid a public uproar over utility rates, hostile political conditions and a potentially challenging regulatory environment. Constellation later flirted with Warren Buffett, then entered a joint venture with Paris-based Electricite de France before being bought out by Exelon, the very same company that's now making a play for Pepco. The new proposed deal is arguably more fraught than the various attempts to buy BGE over the years in that it will require approval by four public service commissions — in Washington, D.C., Maryland, Delaware and New Jersey — not to mention the Federal Energy Regulatory Commission and probably the Justice Department. So it may not actually happen, and almost certainly won't any time soon.
But if it does, consider this your moment of maximum leverage. Exelon is promising $100 million, or about $50 per customer, in rate credits or other assistance. Consider that just the opening offer. BGE customers got rate credits of $100 from Electricite de France's deal with Constellation and another $100 when Exelon bought it outright. In that deal, Exelon also promised more investments in green energy, aid for low-income ratepayers, a minimum amount of charitable contributions and a new office tower on the Baltimore waterfront.
What should be a major focus for Pepco customer advocates in this regulatory process is securing commitments for enhanced investments in reliability measures. Customers of both Pepco and BGE have suffered from massive and prolonged power outages in recent years after major storms, but on the whole, Pepco customers have had it worse. Four years ago, Maryland's Office of the People's Counsel documented systematic under-investment in infrastructure maintenance and upgrades by Pepco, and the Public Service Commission levied a record $1 million fine against the company.
Two years ago, a task force commissioned by Gov. Martin O'Malley investigated reliability issues in Maryland and compiled a map showing what neighborhoods had been hit hardest by the recent string of major storms — 2010's "Snowmageddon," 2011's Hurricane Irene and 2012's Derecho. All but one of the neighborhoods whose power got wiped out through distribution line outages in all three storms was in the Pepco service area. Pepco customers experienced more cumulative hours without power per customer from the three storms than any other utility in Maryland.
Pepco has been trying to play catch-up on its reliability initiatives during the last few years, but that has also meant that it has been asking for frequent rate increases to pay for those investments. Its requests in Maryland have been coming at a rate of greater than one per year — testimony on the most recent rate case wrapped up on Tuesday. Washington's Public Service Commission approved higher Pepco rates in March, and customers there are also slated for higher rates during the next several years to pay for Mayor Vincent C. Gray's initiative to bury the 60 most vulnerable overhead distribution lines in the city.
Appealing as rate credits may be, securing a greater commitment by Exelon to invest in Pepco's infrastructure may ultimately be more valuable to the utility's consumers. According to the report from the governor's task force, the average cost per Pepco customer for expenses related to the power outages during the three storms of 2010-2012 was $609, the highest of any utility in the state. Put another way, avoiding an eight-hour long power outage after a summer storm is worth almost twice as much to a typical residential customer as the $50 Exelon is now offering in the form of rate credits.
This proposed deal is worth a lot to Exelon. The company has been struggling because its heavy investment in nuclear plants has become less and less lucrative as the glut of natural gas and, increasingly, wind energy has upended the power markets. Increasing the reliable, predictable revenue it gets from regulated utilities like BGE and Pepco is a key corporate strategy to hedge against its less certain business selling power on the open market. Maryland, Delaware, Washington and New Jersey all require in one way or another that the companies demonstrate a benefit to the public in order for such a deal to win approval. That gives consumers a great deal of leverage in the regulatory hearings ahead. They need to use it.
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