Despite a new round of oil price increases and unabated inflationary pressures throughout the American economy today, Potomac Electric Power Co. executives think they have some welcome news for their area customers.
No, electricity prices won't going down. For one thing, fuel price increase are passed along automatically to consumers in the form of higher monthly bills and if there is one certainty about this country's economic future, it is that energy prices are on a steady upward path.
However, Pepco Chairman W. Reid Thompson said there is every reason to expect that the electric utility's basic monthly charges will increase over the next several years by a rate that is substantially less than overall inflation in consumer prices. For D.C. customers, however, there is a mojor rate increase pending that must be resloved before this apparently bright future can become reality.
In the most simple terms, the Washington utility already has in place or under slow construction enough generating capacity to serve area electricity needs in an era of slow growth in demand. Due largely to conservation efforts led by the federal government, Pepco's largest single customer, the company expects annual growth in sales of 2 percent to 3 percent through 1988.
Because little spending is thus required to build new generating plants -- the costs of which have mushroomed, along with interest rates on funds to finance such plants -- a mojor element of an electric utility's annual cost increases has been sliced to unusally low levels.
Stated another way, customers in previous years paid more to Pepco than was absolutely necessary because earlier forecasts had shown larger population growth here and higher levels of consumption. Their funds helped to build the generating plants that now exist, and current or future customers will get a break because they won't have to pay much higher rates now to build plants in the midst of uncontrollable inflation.
If could be said that earlier customers of Pepco subsidized the current ones because the utility's executives were not able to look into a crystal ball in the early 1970s and see an Arab oil embargo, which was followed by the first energy crisis of this decade and a sharp decline in Pepco sales. It was quite a shock to Pepco, which was used to being one of the fastest-growing utilities in the country in terms of electricity sales.
But Thompson doesn't like the term "subisdy" whether applied to the earlier building program or to what he regards as the utility's biggest difficulty at the moment: getting a rate increase in the District of Columbia.
Currently, the city's residential customers are paying less for electricity than Maryland residential customers, which could be translated into a subsidy of District residents by Maryland suburbanites.
In recent interviews, Thompson emphasized his belief that the term is "inappropriate" and just plain wrong to describe this situation. If anyone is engaged in subsidizing the current customers of Pepco in the District, it is stockholders of the company, he declared, noting that profits are on a steady downhill course and that dividends were not increased earlier this year as they have been in the past.
Moreover, the prospect of lower annual rate increases assumes that the D.C. Public Service Commission ultimately will approve some amount of rate increases filed many months ago.
In other words, at least for D.C customers, before a new era of lower rate boosts can begin, there is first a big hurdle to jump: catching up with past inflation in the company's costs, according to Thompson.
The situation in Maryland is quite different. There, Pepco recently proposed a 5.2 percent rate boost, about half the current inflation rate. This is possible because past rate increases approved by the Maryland Public Serivce Commission have been attached to the company's own cost increases more rapidly.
Today, Maryland rates are based on a cost of providing electrical service in 1977 while D.C rates are based on 1975 costs, Thompson said.
Pepco filed a request with the D.C. commission for a $45 million increase more than 18 months ago, but the commission, which regulates about 42 percent of Pepco's revenues, has made no decision. According to Thompson, the Pepco case is the oldest of more than 130 utilkity rate cases now pending in this country.
Electricity rates in each jurisdiction are based on the company's cost of serving customers there. In effect, the company keeps separate sets of books. Because each regulatory commission sets rates based in this fashion. "It is inaccurate to say that customers in one jurisdiction are subsidizing those in another," Thompson added.
The company claimed that D.C. customers are paying rates "far below" a level reflecting actual costs, and that owners of the company, who have invested their savings, are being denied a fair return on their investment.
Partially because of the D.C. situation, Thompson said he expects 1979 to be an "extremely bad" year for his firm. Even if higher rates were approved now in D.C., they wouldn't take effect until April or May bills, and that would have an impact on revenues for only about half of the year, he noted.
Pepco officers said they have just about exhausted every avenue of appeal to the D.C. commission to act on the 1977 request for a $45 million rate boost. Last fall, Pepco sought an order from the D.C. Court of Appeals for an immediate decision. Although the court expressed concern about the delay, Pepco's appeal was denied on Dec. 6, with the court finding no evidence the commission was acting capriciously.
On Dec. 21, Pepco once again petitioned the commission for an immediate decision and applied for a $19.8 million interim rate boost, to be in effect until a final order was made. To date, there has been no reply, and Thompson said no additional court appeal is likely because the company can't show an "abuse of power" by the agency, where some internal staff shifts have helped delay the case.
Finally, Pepco went again to the D.C. commission on Feb. 15, inaugurating an entirely new rate case. The company asked for an annual rate increase of $15.5 million on top of the long-pending $45 million.
"It is not reasonable for Pepco, or any business, to operate in 1979 with prices based on 1975 costs," Thompson said. "The 4.3 percent additional rate increase request filed in February is well below the general rate of inflation. If the commission approves the rate relief in the old case immediately, and approved the requested increase in this new case in a timely manner, future rate requests should continue to be below the general rate of inflation."
In testimony filed with the commission, Thompson went on: "We share completely our customers' concern about higher electric rates as well as higher prices generally. Our rate payers must be fairly treated and must be assurred that they are paying only the appropriate and reasonable costs of providing reliable service. We have stringent cost-control procedures to minimize all of our costs. Having kept our costs down, we must adjust our prices."
The utility's rate increase filed in February would raise the bill of an average D.C. residential customer by $1.10 a month, or about four cents a day, in addition to the amount previously requested. The earlier case would result in an increase of $3.10 a month, or about 10 cents a day.
In interviews, Thompson and H. Lowell Davis, senior vice president for finance, made these points about the rate situation and the company's financial condition:
In 1978, Pepc profits fell to $1.70 a share from $1.82 in 1977 despite a 7.6 percent increase in revenues to $715 million. If the rates in effect in D.C. also had been in effect in Maryland, profits would have plummeted to $1.24 a share, but if rates in both jurisdictions had reflected recent costs, earnings would have been $2.05 share.
Pepco's rate of return on average equity (stockholders' investments) in the company fell to 10.76 percent in 1978 from 11.75 percent in 1977. In D.C. alone, Pepco's return on equity in 1978 was under 8 percent, less than the current cost of borrowing money.
If higher rates had been in effect in D.C. last year, improved profitability would have permitted the firm to increase its dividends to stockholders and hlep Pepco stock well in the market "at competitive prices... to more adequately compensate share-holders in these inflationary times."
Pepco has 40.7 million shares of common stock outstanding -- many hled by small area investors -- and their dividend increases last year hit 4.7 percent to $$1.34 a share. They face the prospect of no increase in dividend checks this year, and the common stock was traded last week at a 52-week low of $13.25 a share compared with a book value of more than $16 and a high in the past year of $15.75.
Thompson said that, although Pepco has not yet taken any steps to reduce service because of declining profitability from its D.C. business, maintenance work would be accelerated if the earnings outlook were brighter. Between $10 million and $15 million of construction work has been delayed because "it didn't have to be done absolutely now," he added.
As for new construction spending this year, it will be down to an estimated $160 million from $175 million last year. Most of the new outlays will be for system maintenance, replacement of parts, new substations and enviroment control equipment.
Although the construction program is very small, Davis said Pepco will need about $275 million of outside financing this year and in 1980. Pepco has $42.5 million of pollution control debts that must be refunded by Aug. 1, either permanently or on an interim basis. The firm expects to sell some pollution control bonds, regular bonds, and preferred and common stock in the next 24 months.
Among Pepco's 120,000 stockholders, about 22,000 live in the D.C. area and the average individual investment is less than 300 shares, worth under $50,000. There is limited interest in the company among large institutional investors. Said Thompson:
"We need to convience small people with several thousand dollars of hardearned savings to invest in Pepco... what will it take to get that?We are in direct competition with other firms for the sale of our securities... the individual investor is interested in dividends."
What is needed in the city, in Thompson's view, is some sort of statute requiring action by the Public Service Commission within a certain time frame, such as exists in Maryland. Mayor Marion Barry's transition team studied such a proposal but Thompson said he thinks any initiative for a time limitation should come form the commission itself, "to give them pressure to get the job done."
Public Service Commission Chairwoman Elizabeth Hayes Patterson said last week she "would not say now" when the agency might act on Pepco's various petitions. She also delcined to discuss factors behind the commission's long consideration of the 1977 proposal other than explanations cited by the agency last fall in the successful defense against Pepco's Court of Appeals suit.