PENNSYLVANIA
PUBLIC UTILITY COMMISSION
Harrisburg, PA 17105-3265
Public Meeting held May 20, 2010
Commissioners Present:
James H. Cawley, Chairman
Tyrone J. Christy, Vice Chairman
Wayne E. Gardner
Robert F. Powelson
Pennsylvania Public Utility
Commission
v.
PECO Energy Company
Docket No.
R-2010-2161592
ORDER
BY THE COMMISSION:
On March 31, 2010, PECO Energy Company (PECO or Company) filed
Supplement No. 92 to Tariff Gas-Pa. P.U.C. No. 2, containing proposed changes in rates,
rules, and regulations calculated to produce approximately $43.8 million in additional
annual distribution revenues. This rate change represents an average increase in
distribution rates of approximately 15.6%, which equates to an average increase in total
rates of approximately 5.28%. Supplement No. 92 proposes an effective date of May 30,
2010.
PECO’s proposed general rate increase is based on a future test year ending
December 31, 2010, and is designed to allow the Company an opportunity to earn an
overall rate of return of 8.95%, including an 11.75% return on common equity. Under
the Company’s proposal, the average total bill for a residential customer using 8.0
thousand cubic feet (Mcf) of gas per month would increase from $105.43 to 113.49, a 7.6
percent increase. The average total bill for a commercial customer using 40.0 Mcf per
month would increase from $512.46 to $532.74, a 4.0 percent increase. The average total
bill for an industrial customer using 3,600 Mcf per month would increase from
$40,011.20 to $40,988.16, a 2.4 percent increase. PECO states that it is proposing the
revenue increase in order to enable the company to continue to make substantial
investments in new gas utility plant; to enable the company to recover lost revenue
because customers are using less gas; and to enable the company to recover unavoidable
cost increases, including wages, pensions and health-care benefits.
PECO states in this filing that, in accordance with the settlement approved
by the Commission in PECO’s last gas base rate case (Docket No. R-2008-2028394 et al.
Order entered October 29, 2008) (Gas Settlement), PECO is proposing certain changes in
rate design to align fixed distribution and variable charges with, or closer to, customerclassified costs. PECO states that pursuant to the terms of the Gas Settlement, it proposes
to eliminate 50% of the difference between the Rate GC and L class rates of return and
the system average rate of return. We note that according to the Gas Settlement’s
Petition for Joint Settlement, at p. 5, any remaining differences would be removed in the
next base rate filing. We note that PECO’s proposal also eliminates approximately 50%
of the difference between the residential class rate of return and the system average rate
of return. Even with the proposed increase, the residential class rate of return would be
92.79% of system average, the Rate GC rate of return would be 118% of system average
and the Rate L rate of return would be 49% of system average.
Under PECO’s proposal, of the $43.8 million increase, residential
customers would receive $32.2 million, Rate GC customers would receive $9.3 million
and Rate L customers would receive $56,000. According to PECO, the monthly bill for
an average residential customer would increase $8.06 and the monthly bill for a
commercial customer would increase $20.28.
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In comparison, to bring all of these customers groups to 100% of system
average, according to PECO’s filing, would result in residential customers receiving a
$40.2 million increase, Rate GC customers receiving a $2.2 million increase and Rate L
customers receiving a $105,000 increase. It appears that under this scenario, the monthly
bill for an average residential customer would increase about $10.05 and the monthly bill
for an average commercial customer would increase about $4.84.
PECO states in the filing that the proposed rates were designed to mitigate
the impact on each major rate class, to the extent practicable, while still making
meaningful movement toward each class’ cost of service. Even with this mitigation, the
proposed revenue increase for residential customers would still be about 80% of the
revenue increase needed to get residential customers to 100% of the system average rate
of return, with the rate of return for Rate GC customers approximately 116% of the
system average rate of return. From a customer class revenue perspective, this base rate
case appears to resolve much of the inequity in the rate of return for each customer class.
Therefore, we believe that it would be appropriate for the parties to revisit the issue to
determine if two base rate cases are still necessary to get residential, Rate GC and other
customers to 100% of system rate of return, or whether it can be accomplished entirely in
this base rate case.
Our analysis of PECO’s proposed general rate increase has identified
additional issues, “ring fencing” and “dividend payout ratios,” that may have a significant
impact on the rates to consumers of the utility.
Ring fencing protections allow the risks associated with the jurisdictional
utility to be isolated from the risks associated with its affiliates of the consolidated entity.
Further evidence should be provided with respect to the effectiveness of any such ring
fencing protections, and the parties should address the effectiveness and its impact on the
credit worthiness of PECO and ultimately the cost of capital of the regulated entity.
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PECO, in its filing, has reported five year dividend levels that indicate,
through subsequent data requests, recent dividend payout ratios that may be excessive.
PECO has indicated that the 2005 – 2009 dividend payout ratios were 91%, 115%, 112%,
149% and 90% respectively. For several years dividends paid have exceeded earnings.
These levels of dividends may be unsustainable in the long run. The Commission is
concerned with the impact these recent dividend payout levels may have on PECO’s
capital structure, cost of debt and equity capital and, ultimately, rates to customers.
Parties should address the effects of these payout ratios, as well as, the impact of
dividends at the levels of the past five years on PECO’s use of external capital.
The Office of Consumer Advocate and Office of Small Business Advocate
both filed formal complaints against PECO’s proposed general rate increase. A number
of other formal complaints and a petition to intervene were also filed in this proceeding.
Our investigation and analysis of PECO’s proposed general rate increase
and the supporting data indicate that the proposed changes in rates, rules, and regulations
may be unlawful, unjust, unreasonable, and contrary to the public interest. It also appears
that consideration should be given to the reasonableness of the Company’s existing rates,
rules, and regulations. In this regard we have identified a number of specific issues,
which we have delineated in Appendix A, attached to this Order. The following list
highlights some of those issues which we deem to be of particular concern:
 PECO states that it is requesting its proposed rate increase due in part to
declining distribution sales and increasing costs. According, it is important that
the Company’s test year revenue and expense claims be closely examined to
determine their accuracy and the extent to which they support the requested
revenue increase.
 PECO states that it expects to invest an additional $383 million in new and
replacement gas plant over the next five years. To the extent that any of this
investment is included in the Company’s rate base claim in this proceeding, such
investment should be closely reviewed to ensure that it was prudently made, and
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that any utility plant acquired is necessary, used and useful to the provision of
natural gas distribution service.
 PECO is proposing to continue its customer education program and customer
energy efficiency programs, and has included claims in its test year operating
budget for these programs. The effectiveness of these programs and the
reasonableness of the associated operating expense claims should be carefully
reviewed.
 PECO is proposing an increase of $2.8 million in the annual allowance for
amortization of the costs for the clean-up of manufactured gas plant (MGP) sites.
The effectiveness of these programs and the reasonableness of the associated
expense claims should be carefully reviewed.
 Per the Gas Settlement, PECO is proposing to eliminate 50% of the difference
between the Rate GC and L class rates of return and the system average rate of
return. This issue should be revisited to determine if the entire difference can be
eliminated in this filing.
 PECO further states in its supporting information that the Company’s dividend
payout ratios from the years 2005 to 2009 of 91%, 115%, 112%, 149% and 90%,
respectively, were the product of the Company’s effort to achieve an equity
capitalization ratio target of around 53%. We note that PECO has not discussed
any real or potential effects such payout ratios may have on rates to customers.
 Subsequent to the Joint Petition for Settlement at Docket No. A-110550F0147
on March 23, 2000, in the Unicom Corporation merger procedure, PECO states
that additional ring-fencing measures have been instituted with the Company.
PECO and the parties should address the impact of any such corporate
protections on the credit protection and on the bankruptcy-remoteness of PECO
Energy Company from its parent or any of its affiliates, and whether any
changes to those ring fencing measures are necessary and in the public interest.
Investigation and analysis of this proposed tariff filing and the supporting
data indicate that the proposed changes in rates, rules, and regulations may be unlawful,
unjust, unreasonable, and contrary to the public interest. It also appears that
consideration should be given to the reasonableness of the Company’s existing rates,
rules, and regulations. Based on our analysis of PECO’s filing, and pursuant to 66 Pa.
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C.S. §1308(d), we will permit Supplement No. 92 to be suspended by operation of law
for a period not to exceed seven months, or until December 30, 2010, unless permitted by
Commission Order to become effective at an earlier date. In addition, we will direct that
an investigation be instituted to determine the lawfulness, justness, and reasonableness of
the rates, rules, and regulations contained in the proposed Supplement No. 92, as well as
the Company’s existing rates, rules, and regulations. We will further direct that the case
be assigned to the Office of Administrative Law Judge for the prompt scheduling of such
hearings as may be necessary, culminating in the issuance of a Recommended Decision.
As part of this investigation, we will instruct the parties to the proceeding to give
particular consideration to the areas of concern identified above, and as further delineated
in Appendix A, attached to this Order. The parties are also advised to investigate any
other issues they may deem important to the fair and thorough review and analysis of
PECO’s general rate increase filing; THEREFORE,
IT IS ORDERED:
1.
That the proposed Supplement No. 92 to Tariff Gas-Pa. P.U.C. No. 2 will
be suspended by operation of law until December 30, 2010, unless otherwise directed by
Order of the Commission.
2.
That an investigation on Commission motion be, and hereby is, instituted to
determine the lawfulness, justness, and reasonableness of the rates, rules, and regulations
contained in the proposed Supplement No. 92 to Tariff Gas-Pa. P.U.C. No. 2.
3.
That this investigation shall include, but not be limited to, consideration of
the issues identified in the body of this Order, as well as in the attached Appendix A, as
representing specific areas of concern with regard to the Company’s base rate filing.
4.
That this investigation shall include consideration of the lawfulness,
justness, and reasonableness of the Company’s existing rates, rules, and regulations.
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5.
That the case be assigned to the Office of Administrative Law Judge for the
prompt scheduling of such hearings as may be necessary, culminating in the issuance of a
Recommended Decision.
6.
That a copy of this Order shall be served upon the Company, the Office of
Trial Staff, the Office of Consumer Advocate, the Office of Small Business Advocate,
and any persons who have filed Formal Complaints against the Company’s proposed
tariff.
BY THE COMMISSION,
Rosemary Chiavetta
Secretary
(SEAL)
ORDER ADOPTED: May 20, 2010
ORDER ENTERED: May 20, 2010
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APPENDIX A
PECO Energy Company (PECO)
Supplement No. 92 to Tariff Gas - Pa. P.U.C. No. 2
R-2010-2161592
General Rate Increase Filing
Areas of Concern
1. PECO’s test year revenue and expense claims must be closely examined to
determine their accuracy and the extent to which they support the requested
revenue increase.
2. The level of capital investment appearing in PECO’s rate base claim must be
closely reviewed to ensure that it was prudently made, and that any utility plant
acquired is necessary, used and useful to the provision of electric distribution
service.
3. PECO’s proposed revenue allocation must be carefully examined to determine
whether or not it is just and reasonable.
4. The cost allocation methodologies utilized in PECO’s class cost-of-service study
must be thoroughly scrutinized in order to ensure that the results of the study are
reasonably accurate, and to determine whether or not they support the Company’s
proposed revenue allocation.
5. PECO’s proposed customer education program and customer energy efficiency
programs must be thoroughly reviewed to determine whether or not they are
effective and cost justified. Also, the levels of PECO’s claimed operating expense
for these programs must be examined to ensure they are just and reasonable.
6. PECO’s proposed updates to its tariff to clarify certain provisions and eliminate
other provisions must be reviewed to determine whether or not such changes are
appropriate.
7. PECO further states in its supporting information that the Company’s dividend
payout ratios from the years 2005 to 2009 of 91%, 115%, 112%, 149% and 90%,
respectively, were the product of the Company’s effort to achieve an equity
capitalization ratio target of around 53%. We note that PECO has not discussed
any real or potential effects such payout ratios may have on rates to customers.
8. Subsequent to the Joint Petition for Settlement at Docket No. A-110550F0147 on
March 23, 2000, in the Unicom Corporation merger procedure, PECO states that
additional ring-fencing measures have been instituted with the Company. PECO
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and the parties should address the impact of any such corporate protections on the
credit protection and on the bankruptcy-remoteness of PECO Energy Company
from its parent or any of its affiliates, and whether any changes to those ring
fencing measures are necessary and in the public interest.
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