In Pepco outages, Maryland and D.C. regulators accept a measure of blame

The top utility regulators in Maryland and the District accepted a measure of the blame Tuesday for the lingering power outages that have plagued the region for years, saying they did not move swiftly enough to hold Pepco to higher standards for delivering power and restoring service.

“We, as a commission, can fairly be criticized,” Douglas Nazarian, chairman of the Maryland Public Service Commission, said Tuesday in an interview. “We didn’t pick up early enough on the need for comprehensive reliability regulations. . . . You can call us on that one.”

His counterpart in the District, Public Service Commission Chairman Betty Ann Kane, said Pepco’s dismal reliability record met the District’s formal performance requirements until regulations were stiffened last summer.

Their comments came as tens of thousands of Pepco customers endured their fourth day of outages after a fast-moving, powerful storm walloped the region late Friday and initially left more than a million people without power in record-breaking heat. Both regulators declined to say how Pepco was performing in the current outage, stressing that they would wait until more details were available. As of 11:30 p.m. Tuesday, about 85,000 Pepco customers were without power.

Pepco’s reliability began declining about seven years ago, leaving the utility near the bottom among the nation’s electric companies for keeping the lights on and bringing them back once they go out.

Maryland regulators should have realized sooner that Pepco’s performance had been seriously lacking and should have moved more quickly to force the company to improve dependability, Nazarian said. He said he has undergone a learning process since being appointed to the commission five years ago.

“It is fair to say we did not have a sense that Pepco stacked up that poorly with other companies,” he said. “The focus we’ve had the last couple of years on reliability is driven by what we’ve learned and observed.”

Kane said her board also has decided that Pepco should be held to a higher standard in coming years.

The regulators spoke in interviews amid swelling public anger at Pepco, 387,000 of whose customers lost power in the immediate aftermath of the storm.

Performance numbers

Pepco, which delivers power to 778,000 customers in the District and neighboring parts of Maryland, in recent years has ranked at or near the bottom in the United States in terms of reliability, a 2010 Washington Post investigation found. Pepco customers experienced an average of 70 percent more outages than customers of other big city utilities.

The newspaper’s analysis found that the power went out more often in Maryland than in the District. And once out, the lights tended to stay off longer.

It was not always that way. Pepco’s performance was closer to industry averages until a sudden slump in 2005. By 2009, Pepco had fallen into the bottom 25 percent of U.S. energy utility companies in customer satisfaction.

Internal company reports show that from 2005 through 2008, spending on tree trimming and other vegetation management at Pepco and its sister power companies remained “relatively stagnant or decreased.” Over that same period, one internal report pointedly notes, reliability “worsened.”

Although it is not possible to conclusively link that decline to a single set of events, one thing is clear: During that same period, many changes buffeted Pepco and the governmental bodies charged with regulating it.

The first set of changes involved the company itself. In 1999, Pepco won government approval to sell its power plants and became a “wires only” operation, focused on delivering electricity purchased from outside generating companies.

In seeking approval for its transformation — made possible by what’s known as deregulation — Pepco told regulators in Maryland and the District that the changes “would allow it to have a ‘laser-like focus’ on its distribution efforts, systems and facilities,” according to public filings.

Critics such as Betty Noel, a former people’s counsel in the District, say something entirely different happened.

“To preserve the bottom line for their investors, they . . . put their attention on buying up nearby utilities,” Noel said. “They needed money to do that, and they cut from maintenance.”

Pepco executives have dismissed Noel’s analysis, saying that reorganization issues were settled a decade ago and that increasing maintenance is now one of their primary concerns.

“We are in the second year of a five-year, $910 million plan to improve reliability — a level of investment unprecedented in our company’s history,” Pepco spokeswoman Myra Oppel said.

When Democrat Martin O’Malley took over as governor in 2007, he pressured Kenneth D. Schisler, appointed by his Republican predecessor, to resign as chairman of the Public Service Commission. He appointed a replacement described as a consumer advocate.

Retired Pepco vice president James Potts lays much of the blame for the widespread outages on public officials.

After legislators lifted energy rate caps early in the decade as part of deregulation, experts expected that competition would drive down electricity prices. Instead, prices spiked.

Public anger grew, but elected officials no longer had any authority to slow the price rise. Potts said politicians responded by holding down rates on what they could still control — the amount Pepco charged for delivering the high-priced power to area homes.

O’Malley “was elected on the promise he would reduce electric rates,” Potts said. But “the increases that Pepco was allowed were not adequate to cover inflationary costs. So they have had to trim costs wherever they could.”

O’Malley spokeswoman Raquel Guillory called Potts’s account “just wrong,” saying that the governor would never have agreed to allow the company to shirk its maintenance responsibilities.

Hands-off approach

Even in the avowedly pro-consumer O’Malley administration, some critics say, the Maryland commission remained relatively hands-off, at least until after The Post’s investigation into Pepco’s reliability.

At an August 2010 hearing into outages related to summer storms that year, Nazarian seemed unaware of how poorly Pepco had performed in recent years. “How far below average is Pepco in terms of frequency of outages?” Nazarian asked a Pepco executive at one point.

On Tuesday, Nazarian acknowledged that the hearing was “the light bulb moment” when he realized the depth of Pepco’s problems and what would be required to fix them.

“The revelation we came to in 2010 is, we need to be in a position to say, ‘Here are things you absolutely have to do,’ ” Nazarian said.

Since that hearing, and The Post’s investigation, government officials have been more demanding. In April 2011, Maryland legislators passed a bill that imposes a $25,000-a-day fine on electric utilities for each violation of reliability standards. In July 2011, D.C. regulators tightened performance standards for Pepco, threatening to fine the company unless it matches the performance of the nation’s most dependable power providers within a decade.

In December, Maryland regulators fined Pepco $1 million — the largest penalty in the commission’s 102-year history — for failing to fix problems that led to frequent outages.

Alice Crites contributed to this report.

Joe Stephens joined The Washington Post in 1999 and specializes in in-depth enterprise reporting.
Mary Pat Flaherty works on investigative and long-range stories. Her work has won numerous national awards, including the Pulitzer Prize.
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