NUMBER: RR-2410
DATE: December 30, 2009
MAIL LOG NOS.: 120280, 119932
TO:
Douglas R. M. Nazarian, Chairman
Harold D. Williams, Commissioner
Susanne Brogan, Commissioner
Lawrence Brenner, Commissioner
Therese M. Goldsmith, Commissioner
FROM:
Anthony Myers, Assistant Executive Director
RE:
Potomac Electric Power Company proposes to update its Demand Side
Management Surcharge, renaming it the EmPower Md. Charge.
Description of Application:
On November 16, 2009 Potomac Electric Power Company (“PEPCO” or “The
Company”) filed to update its Demand Side Management Surcharge, renaming it the
EmPower Md. Charge. The EmPower Maryland Charge is designed to recover costs from
PEPCO’s Energy Efficiency and Conservation (“EE&C”) and Direct Load Control
(“DLC”) programs.
Parties which should receive a copy of Staff Recommendations:
Jim Boone, Potomac Electric Power Company
Paula Carmody, Office of People’s Council
Recommended Action (Including Conditions):
Staff recommends that the Commission direct the Company to file a tariff with EmPower
Md. Charge rates based on EE&C costs amortized over five years and consistent with
Staff’s Adjustments One and Two. Additionally Staff recommends that the Commission
grant the waiver of the bill requirement that the RGGI Credit must be listed immediately
below the EmPower Md. Charge.
_____________________
___________________
__________________
Phillip E. VanderHeyden
Director, Electricity Division
Commission Action on
Crissy Godfrey
Director, DSM Division
_____________________________:
Approved ___ Disapproved ___ Accept for Filing ____
cc:
Heather H. Polzin, General Counsel
Bryan G. Moorhouse, Special Counsel to the Chairman
Terry J. Romine, Executive Secretary
Joel M. Bright, Chief Hearing Examiner
Obi Linton, Director of External Relations
LaWanda Edwards, Press Secretary
Ronald Decker
Chief Staff Counsel
Comments of the Electricity Division (RR-2410)
RE: Potomac Electric Power Company proposes to update its Demand Side
Management Surcharge, renaming it the Empower Md. Charge.
Mail Log Nos. 120280, 119932
December 30, 2009
Page No. 2
Summary of Filing
On November 16, 2009 Potomac Electric Power Company (“PEPCO” or “The
Company”) filed to update its Demand Side Management Surcharge, renaming it the
EmPower Md. Charge. The EmPower Maryland Charge is designed to recover costs from
PEPCO’s Energy Efficiency and Conservation (“EE&C”) and Direct Load Control
(“DLC”) programs. Additionally PEPCO is requesting a waiver for a billing requirement
under Order No. 82614 which would require them to place the RGGI Rate Credit
immediately below the EmPower Md. Charge.
Applicable Law
Under Pub. Util. Cos. § 7-211, as amended by the EmPower Maryland Energy Efficiency
Act of 2008, an electric company shall develop and implement programs to encourage
and promote the efficient use and conservation of energy by consumers such that a
targeted per capita electricity consumption reduction of at least 5% is achieved by 2011
and of at least 10% by 2015. The Commission approved the Pepco EmPower Maryland
Plan in Order No. 82836 (Aug. 13, 2009) and directed the Company to file with
alternative tariffs with cost recovery with 2009 program costs are expensed and with all
costs amortized over five years. As directed by Order No. 82614 (Apr. 20, 2009) the
charge will be shown on bills as the EmPower Md. Charge.
Background
On November 16, 2009 Potomac Electric Power Company filed to update its Demand
Side Management Surcharge, renaming it the EmPower Md. Charge. The EmPower
Maryland Charge is designed to recover costs from PEPCO’s Energy Efficiency and
Conservation and Direct Load Control programs. PEPCO then re-filed its EmPower Md.
Charge update on December 2, replacing its November 16th filing in order to correct
errors and include a request to waive a billing requirement.
The new EmPower MD charge will continue to recover costs for Pepco’s Residential
Efficient Lighting program which was approved by Order No. 8168 in Case No. 9111.
The current DSM charge this filing is replacing was designed to recover the costs from
this program. The Commission ordered the costs of this program be recovered over a five
year period with carrying costs recovered at the authorized rate of return. Pepco’s DLC
program was approved by a Commission Letter Order dated April 18, 2008 and only
affects residential customers. This Order specified a 15 year amortization for equipment
costs, 5 year amortization for marketing and contract support costs with operation and
maintenance costs expensed annually. Pepco’s EE&C programs were approved by
Comments of the Electricity Division (RR-2410)
RE: Potomac Electric Power Company proposes to update its Demand Side
Management Surcharge, renaming it the Empower Md. Charge.
Mail Log Nos. 120280, 119932
December 30, 2009
Page No. 3
Commission Order No. 82836 in Case No. 9155 and affect both residential and nonresidential customers. In that Order the Commission directed Pepco to calculate rates
under two cost recovery mechanisms, one where all costs are expensed on an annual
basis and another in which all costs are amortized over five years.
Additionally in Order No. 82614 in Case No. 9166 the Commission ordered Pepco to
place the RGGI rate credit immediately below their EmPower Md. Charge on a
customer’s bill. Pepco is requesting a waiver of this requirement in order to continue to
group items subject to the gross receipts tax together on the bill.
Analysis
The Company has filed proposed tariff revisions with two alternative schedules. The two
alternative schedules are the result of recovery of EE&C program expenses annually
versus amortizing costs over five years. The Company has also renamed the DSM
surcharge the “EmPower Md. Charge” pursuant to Commission Order No. 82614 in Case
No. 9166 and combined it with the EE&C program charge.
In addition to the two alternative tariff page riders, the Company provided a summary of
their proposed 2010 rates for the DLC and EE&C programs in Attachment Three of their
filing.
2010 EmPower Md. Charge Alternatives
EE&C
DLC
Residential
5-Year Amortization
Expensed Annually
C&I Schedules
5-Year Amortization
Expensed Annually
Total
$0.000777
$0.002873
$0.001249
$0.001249
$0.002026
$0.004122
$0.000166
$0.000720
-
$0.000166
$0.000720
The proposed Pepco EmPower Md. Charge is a combination of two charges, the Energy
Efficiency and Conservation program charge and the residential Direct Load Control
program charge. The DLC program only applies to the residential class and costs for the
program are only recovered from the residential class. EE&C program costs are
recovered from all classes. In total Pepco calculated 5 rates in its filing, one rate for the
DLC which only applies to residential customers, and four EE&C rates which reflect the
rates for residential and non-residential customers under the two different cost recovery
options. Pepco’s EE&C rates are based on cost estimates which are identical to those
Comments of the Electricity Division (RR-2410)
RE: Potomac Electric Power Company proposes to update its Demand Side
Management Surcharge, renaming it the Empower Md. Charge.
Mail Log Nos. 120280, 119932
December 30, 2009
Page No. 4
filed on June 5th in Case No. 9155. The expected expenditures for the DLC program in
2009 and 2010 have been reduced substantially from $44,978,830 as estimated in the
June 5th filing in Case No. 9155, to $23,355,222. There are three reasons for this
reduction. First the DLC program has thus far had fewer installations than initially
anticipated reducing actual costs. Additionally Pepco was able to sign a contract for its
DLC work at a lower cost than expected. Finally Pepco has received a substantial federal
grant for its DLC program which has offset costs1.
Staff believes that EE&C Costs should be amortized over five years rather than expensed
annually. Five year amortization would mitigate the initial rate increase to customers and
allow costs to increase gradually over several years. Additionally the benefits from
EE&C programs will occur over many years so amortization increases the likelihood that
those who are benefiting from the program will pay the costs of the program.
Rate Calculation
The process of determining the rates for the DLC program and the 4 different rates for the
EE&C program are essentially identical though somewhat simplified for the EE&C
calculation without amortization.
The first step in developing the EmPower MD Charge is to determine the revenue
requirement for 2010. Based on actual expenses and projected costs Pepco determined its
expected expenditures on a monthly basis for these programs. These expenditures are
then placed into groups based on amortization schedule. For DLC there is a 15 year
amortization period for equipment costs, 5 year amortization for marketing and contract
support costs while operation and maintenance costs are expensed annually. The EE&C
calculation includes costs associated with the CFL program which are amortized over
five years and other costs which are amortized over 5 years or expensed annually
depending on the version of the calculation. Even the EE&C program that expenses
annually will have amortized costs due to expenditures made in 2007 and 2008 for the
CFL program. In order to determine the revenue requirement for 2010 Pepco first
determines its revenue requirements on a monthly basis.
An initial unamortized balance is determined for January 2010 based on the appropriate
amortization schedules and then the amount to be amortized that month is determined.
This amortized amount is the first component of the monthly revenue requirement. Next
program costs for that month which are subject to an amortization period are determined.
Taking the previous month unamortized balance and subtracting the amount amortized
1
This federal grant is contingent on the approval of Pepco’s AMI program.
Comments of the Electricity Division (RR-2410)
RE: Potomac Electric Power Company proposes to update its Demand Side
Management Surcharge, renaming it the Empower Md. Charge.
Mail Log Nos. 120280, 119932
December 30, 2009
Page No. 5
and adding the additional costs subject to amortization for that month will calculate the
next month’s unamortized balance.
The next step is to determine the monthly capital cost recovery. This is intended to
compensate the company for the portion of its expenditures which have not yet been
recovered due to the amortization schedules. However this calculation is complicated by
taxation. For all programs Pepco is proposing to base this calculation on the allowed rate
of return in its previous rate case which was 7.99%. Pepco than adjusted this rate to
determine the rate required to collect the necessary revenue absent taxes, which is 6.69%.
The process of amortization also allows Pepco to defer tax expenses, as a part of this
calculation Pepco has determined its accumulated tax deferrals for each month. The
monthly tax deferral amount is determined by subtracting amount amortized that month
from that months costs which are subject to amortization and multiplying that by its
income tax rate (which is approximately 40%). The amount of money subject to capital
cost recovery each month is equal to the average of the accumulated end of month
unamortized balance minus accumulated deferred taxes for that month and the prior
month. This calculation approximates the average amount of money that should be
subject to carrying costs that month. This amount is then multiplied by its assumed
capital cost net of taxes which is 6.69%. That amount is then increased to account for
taxation by dividing by 1 minus Pepco’s income tax rate which determines the needed
capital cost recovery for that month. Ultimately Pepco collects carrying costs of 11.22%
which allows it to earn its authorized rate of return after taxes.
Pepco has also determined the monthly amount of costs that are expensed for each
program as well as monthly revenues associated with the program. Adding the expensed
monthly costs to the monthly amortization and monthly capital cost recovery and then
subtracting monthly revenues will determine the expected monthly revenue requirement.
Adding this up for all 12 months of the year determines the annual expected revenue
requirement. This is the amount of revenue Pepco estimates it needs to collect to account
for projected expenditures in 2010.
The next step is to determine the annual true up amount. There will be a true up amount
for the DLC program due to unamortized expenses and revenues which occurred prior to
2010. Additionally there will be a similar true-up for the EE&C related to the CFL
program. In general the process for determining the true up amount involves the process
described above for calculating the expected annual revenue requirement except actual
expenses and revenues are used instead of projections. Once the actual amount of revenue
which was needed to be collected in the prior year is determined the amount of money
actually collected from the surcharge is subtracted from it in order to determine the true
up amount.
Comments of the Electricity Division (RR-2410)
RE: Potomac Electric Power Company proposes to update its Demand Side
Management Surcharge, renaming it the Empower Md. Charge.
Mail Log Nos. 120280, 119932
December 30, 2009
Page No. 6
This true up amount is than added to the annual expected revenue requirement to
determine the amount of money needed to be collected in the coming year. This amount
is then divided by the projected electricity usage to determine the rate for the year.
Pepco describes this rate calculation process in detail in Attachment Four of its filing.
Attachments Five through Nine of the Company’s filing show the details of the
company’s calculations.
In general Pepco’s proposed rates are determined in six steps:
Step One: Based on a mix of actual and estimated costs and revenues for 2009 and 2010
monthly unamortized balances and amortized amounts are determined. When applicable,
costs are classified by amortization schedule.
Step Two: Monthly deferred tax activity and accumulated deferred tax activity are
calculated. Monthly deferred taxes are equal the amount of additional program costs in
the month minus the amount amortized that month multiplied by Pepco’s tax rate.
Step Three: Carrying costs are calculated on the unamortized ending balance for the
month minus the accumulated deferred tax activity. This amount is then multiplied by the
monthly return adjusted for taxes to determine the carrying costs for that month.
Step Four: The monthly revenue requirement can now be determined by adding, the
amount to be amortized that month, carrying costs, and expensed costs and subtracting
any revenue.
Step Five: A true up amount is calculated for the previous year using actual data instead
of estimates. Steps One through Four are repeated using the previous years actual data to
determine the amount that should have been collected in the prior year. The actual
amount collected in the previous year is subtracted from this amount to determine the true
up amount.
Step Six: Based on the estimated revenue requirements for 2010 and the true up amount
for 2009 the amount of revenue needed to be collected in 2010 has been determined. This
amount is then divided by the expected electricity usage for the respective customer class
to determine the rate.
Comments of the Electricity Division (RR-2410)
RE: Potomac Electric Power Company proposes to update its Demand Side
Management Surcharge, renaming it the Empower Md. Charge.
Mail Log Nos. 120280, 119932
December 30, 2009
Page No. 7
Staff has reviewed the Company’s proposed rates and determined that they are in general
accurately calculated as described above. Staff found minor errors in the Company’s trueup calculations which the Staff has corrected. Correct rates using Pepco’s proposed
methodology are included in the tables at the end of the analysis section. Pepco has
acknowledged that Staff’s corrections are appropriate.
Bill Impacts
Based on Pepco’s Calculations with EE&C costs amortized over five years a typical
residential customer using 1000 kWh a month would pay $2.03 per month or $24.31 a
year for the EmPower Md. Charge. If EE&C costs are expenses annually the monthly bill
impact would be $4.12 and $49.46 annually. With the 5 year amortization schedule for
EE&C the EmPower Md. Charge is expected to collect $11,615,814 from residential
customers in 2010. If the EE&C program costs are expensed annually the EmPower Md.
Charge is expected to collect $ 23,632,326 from residential customers in 2010. With
EE&C costs amortized over 5 years the EmPower MD Charge is expected to collect
$1,562,041 from non-residential customers and $6,769,185 if expensed annually.
Staff Adjustment One
While Staff generally agrees with Pepco’s methodology for determining its EmPower
Md. Charge, we disagree that the Company’s weighted average costs of capital should
determine its capital cost recovery factor for all amortized costs. Staff agrees that the
weighted average cost of capital is appropriate for costs amortized over fifteen years,
however it does not accurately reflect the company’s cost of capital for items amortized
over a five year period. Costs amortized over five years are essentially short-term in
nature and would not require equity investment and therefore should be recovered at the
cost of five-year debt. Additionally the Company pays carrying costs to its DLC
Contractor at a rate substantially lower than its authorized rate of return. Staff recognizes
that the Commission has previously ordered that, in general carrying costs associated
with demand side management programs should be calculated using the company’s
authorized rate of return.2 In order to estimate Pepco’s cost of debt for five years, Staff
calculated the estimated credit spread in 2010 between long-term Public Utility Bonds
and long-term Treasury Bonds from the November issue of Global Insight’s U.S.
Economic Outlook. This spread, 101 basis points was then added to Global Insights
estimate of 5-year Treasury Bond yields for 2010, which resulted in an estimated 5-year
capital cost for Pepco of 3.52%. This is substantially lower than the 11.22% rate that
2
See Order 81637 in Case 9111.
Comments of the Electricity Division (RR-2410)
RE: Potomac Electric Power Company proposes to update its Demand Side
Management Surcharge, renaming it the Empower Md. Charge.
Mail Log Nos. 120280, 119932
December 30, 2009
Page No. 8
must be recovered in order provide Pepco with its weighted average cost of capital after
taxes. This adjustment resulted in rates as described in the table below.
2010 EmPower Md. Charge Alternatives With Staff Adjustment
EE&C
DLC
Total
Residential
5-Year Amortization
Expensed Annually
C&I Schedules
5-Year Amortization
Expensed Annually
$0.000705
$0.002873
$0.001211
$0.001211
$0.001916
$0.004084
$0.000151
$0.000720
-
$0.000151
$0.000720
If EE&C costs are amortized over 5 years this adjustment would reduce the amount to be
collected from residential customers in 2010 by approximately $650,000 or $400,000 if
EE&C is expensed annually. This adjustment would reduce amount of money collected
in 2010 from non-residential customers by about $140,000 if EE&C costs are amortized
over five years and would have no effect if EE&C costs are expensed.
Staff Adjustment Two
In the process of analyzing this tariff filing Staff has reviewed numerous invoices
provided by the Company and examined the Company’s contract with Comverge, which
is the Company’s main contractor for the DLC program. Staff is satisfied that the actual
costs provided by the Company to calculate this rate are consistent with the invoices
provided to Staff. However Staff is concerned that DLC program actual costs thus far are
significantly lower than projected costs. The Company in its December 2nd filing
calculated rates based on actual costs through September 2009 and relied on its
projections through the end of 2010. Actual equipment and installation costs in
September 2009 for the DLC program were $54,160 and Pepco projected that October
2009 costs would be $590,536 more than ten times September’s actual expenditures. The
Company is projecting that equipment and installation costs will remain around $590,000
dollars through 2010. When asked about the disparity between actual costs and projected
costs the Company cited problems with licensing requirements needed for workers to
install switches. The Company then provided Staff with the actual expenditures for the
DLC program in October and November, which were well under the $590,000 estimate.
Staff then determined new rates based on actual October and November expenditures.
Staff then used the average of October and November Expenditures as an estimate for
December, January and February expenditures and increased expenditures from that level
in March and April so that the May expenditures matched The Company’s estimate. Staff
Comments of the Electricity Division (RR-2410)
RE: Potomac Electric Power Company proposes to update its Demand Side
Management Surcharge, renaming it the Empower Md. Charge.
Mail Log Nos. 120280, 119932
December 30, 2009
Page No. 9
believes this is a reasonable adjustment as there it is likely that expenditures will not
increase over the next few months. Staff assumes that expenditures will gradually
increase beginning in March and Pepco will be at its projected expenditure level
beginning in May. Staff has been informed that there is currently a significant backlog of
customers enrolled in the DLC program waiting for installation so that once the licensing
issues are resolved Pepco should be able to rapidly increase installations. The tables
below summarize the EmPower Md. rates with Staff’s adjustments and also include
annual and monthly bill impacts for a residential customer with electricity usage of 1000
kWh a month. The first table includes rates with EE&C costs amortized over five years,
while the second table’s rates assume EE&C costs are expensed annually.
EmPower MD Rates with EE&C Costs Amortized
DLC Rate
Residential EE&C Rate
Total Residential Rate
Non-Residential Rate
1000 KW per Month
Annual Residential Bill
Impact
1000 KW per Month
Monthly Residential Bill
Impact
Pepco
With Staff
Correction
$0.001259
$0.000777
$0.002036
$0.000167
Staff
Adjustment
1
$0.001211
$0.000705
$0.001916
$0.000151
Staff
Staff
Adjustment Adjustments
2
1 and 2
$0.001093
$0.001061
$0.000777
$0.000705
$0.001870
$0.001766
$0.000167
$0.000151
$24.43
$22.99
$22.44
$21.19
$2.04
$1.92
$1.87
$1.77
Comments of the Electricity Division (RR-2410)
RE: Potomac Electric Power Company proposes to update its Demand Side
Management Surcharge, renaming it the Empower Md. Charge.
Mail Log Nos. 120280, 119932
December 30, 2009
Page No. 10
EmPower MD Rates with EE&C Costs Expensed
DLC Rate
Residential EE&C Rate
Total Residential Rate
Non-Residential Rate
1000 KW per Month
Annual Residential Bill
Impact
1000 KW per Month
Monthly Residential Bill
Impact
Pepco
With Staff
Correction
$0.001259
$0.002873
$0.004132
$0.007200
Staff
Adjustment
1
$0.001211
$0.002873
$0.004084
$0.007200
Staff
Staff
Adjustment Adjustments
2
1 and 2
$0.001093
$0.001061
$0.002873
$0.002873
$0.003966
$0.003932
$0.007200
$0.007200
$49.58
$49.01
$47.59
$47.18
$4.13
$4.08
$3.97
$3.93
Staff Recommendations
Staff recommends that the Commission direct the Company to file a tariff with EmPower
Md. Charge rates based on EE&C costs amortized over five years and consistent with
Staff’s Adjustments One and Two. Additionally Staff recommends that the Commission
grant the waiver of the bill requirement that the RGGI Credit must be listed immediately
below the EmPower Md. Charge.
________________________
Matthew Schultz
Regulatory Economist
Electricity Division