A major study of how the Potomac Electric Power Co. is run praises the utility's current management and calls Pepco "a model for management" in the electric utility field.
The 7-month study was prepared by Ernst & Ernst, an accounting firm, at the request of the District's public service commission which wanted to know just how efficient the large power company is. A copy of the study was made availabel yesterday to The Washington Post.
It has become an annual ritual of sorts for Pepco to complain to the commission that it is not earning enough. The utility has asked for a rate increase in each of the last 5 years, and 2 weeks ago it asked again, this time for rate increases averaging 16 per cent for all classes of District customers.
But the study concluded that these higher rates are not the result of either inefficiency or ineptitude. Instead, it blames them on "factors outside the control of management," such as regulatory constraints and a sluggish growth in the demand for electricity.
"While not attaining the allowed earnings could theoretically occur because of inefficient management, we found no evidence to conclude that this is the case with Pepco," the study says. To the contrary, management places considerable emphasis on cost containment, and does so, in our view, effectively."
The criticisms Ernst & Ernst makes recommendations offered are simply votes of confidence for projects the utility already has planned.
The study faults Pepco mainly for making some very wrong predictions about demand for electricity from 1967 to 1973. The result of these bad forecasts has been an excess in utility reserves, the forced short-term deferral of power units under construction at Chalk Point and Dickerson, and the indefinite deferral of a nuclear power station at Douglas Point.
The study explains these miscalculations, however, as the mistakes largely of past methods and past management. In the past, the utility relied on what Ernst and Ernst calls "judgmental trending" for predicting demand, an approach which in effect uses historical performance to make forecasts.
Recently Pepco began developing a mathematical forecasting model and has refined its predicting process. Its latest forecasts have come closer to the mark, the study notes.
"(C)ertain aspects of company results that presently appear unfavorable, have as their roots decisions made years ago under a less sophisticated management process," the study says.
Later, the study adds, "Based on all of our digging, challenges and analyses, we must conclude that Pepco is, in our opinion, an exceptionally wellmanaged company."
To support this claim, the study refers to a survey conducted last year by the National Association of Regulatory Utility Commissioners. The survey showed that Pepco's residential District rates are fifth lowest among 20 major cities for 500-kilowatt-per-hour monthly usage.
But his, and another survey performed by a group of 23 utilities called the Intercompany Performance Comparison Group, also showed that, based on other criteria such as administrative expenses and operating and maintenance expenses per customer, Pepco ranked at the bottom of the bunch.
The Ernst & Ernst study addresses each of these criteria, and ends up by complimenting Pepco particularly on its cost control systems. Further, the study says that Pepco has achieved substantial saving both through its participation in the Pennsylvania-New Jersey-Maryland power-sharing network, and through its controversial purchase of electricity from Baltimore Gas and Electric's Calvert Cliffs plant.