Gas and electric utilities should be ordered to reduce their rates because of falling interest rates and the reduced cost of capital, the Maryland Office of the People's Counsel said yesterday.
The counsel, which represents the public interest in utility rate cases, asked state regulators to cut $65 million from rates charged each year by Baltimore Gas & Electric Co. and cut $30 million from Potomac Electric Power Co. charges.
"The decline in the cost of money, which most of us see in lower mortgage rates, makes it less expensive for these utilities to attract investment capital," said John M. Glynn, Maryland people's counsel. "Ratepayers should see the flow-through benefit of the dramatic change in the economy and interest rates."
The amount regulators authorize utilities to earn as a profit has traditionally been closely tied to interest rates because the regulated monopolies must compete for investment dollars against other businesses that operate in a free market.
If rates were reduced by the amount the petition requests, residential electric rates for typical BG&E customers would decrease by $2.50 a month, or 5.8 percent, while residential natural gas rates would decrease by $1.40 a month, or 4.7 percent. The overall decline would be 7.1 percent for Pepco electric customers, or about $2.75 a month. The petition would affect only Maryland Pepco customers, not customers in the District.
Pepco and BG&E both said the Maryland request was "unjustified." According to Nancy Moses, spokeswoman for Pepco, the cost of providing service has gone up, the company still has debt outstanding that carries high interest payments, and Pepco already is planning to lower rates by an undisclosed amount when tax reform legislation is passed.
John Metzger, spokesman for BG&E, said the counsel's action was "premature" in light of the tax bill, which would lower rates to utility customers. Both utilities said they consistently have not earned the maximum profit they are authorized to earn.
If the suggestions were adopted by the PSC, investors in the two utilities would see the return earned on their investment in the form of dividend payments drop. For BG&E investors, earnings would drop from 14.8 percent on their investment to 12 percent, according to the counsel. For Pepco investors, the return would drop from 15.5 percent to 12 percent.
In Virginia, state regulators recently lowered the return on shareholder investment in Virginia Power from 15 percent to 14.5 percent. Residential customers received a $28 million, or 1.4 percent, decrease in rates.
Utility experts say the trend toward lowering the amount utilities can earn in profits, and therefore the amount investors get in the form of dividend payments, is a national one.
"We're seeing this all across the country right now," said Scott Fenn, energy program director at the Investor Responsibility Research Center Inc., a Washington research organization for large institutional investors. The amount utilities can earn is still staying slightly higher than current interest rates because regulators perceive utilities as a riskier investment in light of increased competition in the industry and escalating costs, he said.
Ken Hurwitz, executive director of the Maryland PSC, said it remained to be seen what the commission would do. "All would concede that capital costs decreased since the last Pepco and BG&E order," he said.
The D.C. PSC has not yet opened a proceeding on the issue.