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Pepco shareholders faring better than customers

By Annys Shin
Washington Post Staff Writer
Sunday, February 13, 2011; 12:11 AM

The day after the Jan. 26 snowstorm swept through the Washington region, knocking out power for 220,000 Pepco customers, the utility's parent company, Pepco Holdings, announced a $60 million dividend payment to its shareholders.

As Pepco customers in the District and Maryland have contended with inaccurate outage maps, rising electricity bills, and long hours and days of waiting for their lights to come back on, Pepco Holdings investors have prospered. In the past year, they have reaped the benefits of surging revenue, a 12 percent increase in the stock price and a steady stream of dividends. Last year, Pepco Holdings paid more than $240 million in dividends.

The increasingly divergent experiences of ratepayers and stockholders have become fodder for Pepco's local critics, who accuse the utility of putting its investors ahead of its customers. At a hearing this week, Montgomery County Council member Hans Riemer (D-At Large) cited figures from Pepco's public filings showing that Pepco Holdings paid $1 billion in dividends - three times more than Pepco spent on transmitting power and maintaining its distribution network - between 2005 and 2009.

"It appears to me Pepco has been commandeered by a group of executives who are picking every penny out of the company they can and ruining the service," Riemer said in an interview. Pepco is regulated by the state government, but Montgomery has hired a special counsel on utility regulation to press its argument that Pepco be held accountable for service lapses.

Pepco officials say Riemer unfairly counted dividend payments made by Pepco Holdings, which includes the company's utilities outside the Washington area, Delmarva Power and Atlantic City Electric.

The local utility pays dividends to its parent company, which then passes that money along to shareholders. Pepco spokesman Clay Anderson said that between 2006 and last year, the local utility paid $180 million in dividends to the parent company.

Pepco pays one-third of its net income as dividends and invests the rest in the electricity system, Anderson said.

Pepco, which serves 778,000 customers in Washington and the Maryland suburbs, spent $1.4 billion on capital improvements and $1.5 billion on operating and maintenance expenses between 2006 and last year, the company says.

Beyond defending their investment in the grid, Pepco officials are increasingly sensitive to public outrage over service failures and to the sharp contrast between the company's service record and its financial performance.

The day after the Montgomery hearing, Pepco Holdings chief executive Joseph M. Rigby went to Annapolis for his first public appearance since the Jan. 26 storm to tell legislators that the company's response was "not acceptable, and we're going to fix it." As a result, he said, he would forgo up to $900,000 in compensation this year by not accepting a raise or bonus.

Rigby is eligible for a bonus worth his $880,000 annual salary, Anderson said. But the bonus is not guaranteed. Rigby, who joined Atlantic City Electric in 1979 and became Pepco Holdings' chief executive in 2009, did not receive a bonus in 2009 but did in 2007 and 2008, Anderson said.

The bulk of Rigby's compensation as chief executive is stock and stock options. His salary, plus the value of stock options, incentive pay, pension benefits and perks, brought his total compensation for 2009 to more than $3.1 million. As of March, he owned about 150,000 shares in the holding company, which earned him more than $160,000 in dividend payments.

In addition to their pay and stock options, Rigby and Pepco Holdings' other top officials get executive perks including some club dues, spouses' travel costs, and tickets to sporting events and shows for business or pleasure, according to company filings.

Such perks are not unusual for a chief executive, said Aaron Boyd of Equilar, a California research firm specializing in executive compensation, but in the wake of the recession, companies have been cutting back. Utilities similar in size to Pepco Holdings across the country have frozen executive pay or cut back on perks, he said.

Pepco declined to release compensation information for Thomas H. Graham, head of Pepco's operations in the District and Maryland, saying the figures are confidential because the company is not required to report them to the Securities and Exchange Commission.

Not surprisingly, investors hold Pepco management in higher esteem than do local politicians or customers. The rise in the stock price over the past year reversed a downward trend. In 2009, Pepco Holdings' stock price sank more than 7 percent, compared with a 6.62 percent increase in the value of shares for Dominion Resources, the Virginia utility's parent company, and a 34.45 percent increase for Constellation Energy, Baltimore Gas and Electric's parent.

One major factor boosting investor satisfaction, said Maurice May, an energy analyst with the Power Insights consulting firm, has been Pepco Holdings' dividend, which has given Pepco shareholders a greater return than many other power companies offer. Whether Pepco can keep the lights on in Gaithersburg or Greenbelt matters less to investors than management's commitment to paying a quarterly dividend of 27 cents a share.

But May said analysts and shareholders might start to pay more attention to customers' reliability concerns if they start to affect the company's bottom line.

That has not been much of a concern until now. Despite Pepco's steadily declining service reliability, as measured by industry surveys, regulators in the District and Maryland have continued to grant increases to the utility. Maryland has even allowed Pepco to temporarily raise rates to recoup costs related to fixing outages.

In the wake of last month's storm, however, Gov. Martin O'Malley (D) is backing a proposal to allow the state to fine utilities when they fail to meet reliability standards. And the D.C. Public Service Commission has put Pepco on notice that "service quality issues could be ripe for consideration in Pepco's next rate case."

Late last fall, Pepco officials announced a $256.5 million plan to improve service by automating distribution, putting some power lines underground and trimming more trees. The company has blamed tree branches that fall onto wires as a major cause of service interruptions. A Washington Post investigation in December, however, showed that equipment failures caused the most sustained power outages.

In Annapolis on Tuesday, Rigby said he will speed up the plan by at least a year. But Pepco officials are also looking to consumers to shoulder some of the cost of the improvements. Pepco Holdings executives intend to lobby regulators for higher rates.

In an October conference call with analysts, Rigby said that the latest rate increases in the District and Maryland "have been very disappointing" and that in 2011, he would seek to "change the dialogue" with regulators, trying to convince them that without larger rate boosts, they are "putting us in this position [that] is not good for anybody, certainly not good for the customer in the long term."

The utility can expect blow back on that. Riemer said that given Pepco's financial performance, it doesn't have to pass on those costs.

"They need to pay for it," he said. "That's the bottom line. They've got plenty of money, and the last thing we need to do is to give them more."

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