- When Delmarva proposed the rate increase in December, then-Delaware Public Advocate Drew Slater called it “one of the largest requests we’ve ever seen.”
- A rate increase went into effect July 15 on an interim basis. On Sept. 1, a smaller, permanent bump will take effect.
- The sides are scheduled to host initial settlement conferences through early September with a final settlement conference slated for Nov. 21 or Nov. 28.
Delmarva Power is proposing a rate increase on electric customers that will boost its revenue by $55.5 million.
By September, the average customer’s electricity bill will be more than $7 higher than it was at the start of the summer.
Customers are already starting to feel the impact. A rate increase went into effect July 15 on an interim basis. On Sept. 1, a smaller, permanent bump will take effect.
“In a time when EVERYTHING costs more, the last thing the customers of Delmarva need is another higher bill,” a public commenter from Dover wrote.
When utilities want to raise rates, they must go through a legal case with the Delaware Public Service Commission. The request is scrutinized by the commission and Delaware’s Public Advocate over several months as regulators decide whether to award the rate increase or a partial increase. The sides can also work toward a compromise and settle the case.
If the commission does not grant the rate increase in full, Delmarva will have to return the difference to customers. The process is expected to be completed by early next year.
Why request the increase?
When Delmarva proposed the rate increase in December, then-Delaware Public Advocate Drew Slater called it “one of the largest requests we’ve ever seen.” It’s driven by recent high inflation, increased repair costs caused by severe weather events in 2020 and planned investments in system reliability.
Delmarva Power spokesperson Zach Chizar said the rate increase is necessary “in order to continue to provide the reliable service our customers expect.”
PREVIOUS REPORTING: Delmarva Power is requesting one of its largest rate increases for electric customers
Representatives of the Public Service Commission and the Division of the Public Advocate said Delmarva’s ask was too high in testimony filed Friday. The testimony, which includes arguments that the company’s inflation adjustment would remove incentive for them to control costs and that their storm damage request amounts to a “double recovery,” was their first official say in the case.
The last electric base rate increase the Public Service Commission approved was $16.7 million in 2021. Delmarva Power has requested a rate increase in four of the seven years since being acquired by Exelon Corp. In 2018, state lawmakers passed legislation that set up a mechanism for Delmarva to adjust rates on a semi-annual basis depending on market conditions. That legislation barred the company from requesting a rate increase from when it passed until 2020.
The sides are scheduled to host initial settlement conferences through early September with a final settlement conference slated for Nov. 21 or Nov. 28. Should a settlement not be reached, a hearing is scheduled for Dec. 4-Dec. 7.
The rate increase request has been adjusted down from $72.3 million as Delmarva replaced forecasted data with actual data throughout the year. Delmarva is scheduled to file additional data next month that could adjust the rate increase request again.
Here’s what consultants and staff analysts representing the commission and Public Advocate had to say about Delmarva’s proposal as it stands today. The company is scheduled to file rebuttal testimony Sept. 29.
Overinvesting in the system
Public Service Commission staff recommended adjusting down the revenue increase by $19.4 million to $36.2 million.
Among the gravest concerns shared in testimony by commission and Public Advocate staff is that Delmarva Power has overinvested in its infrastructure. Delmarva has routinely exceeded reliability standards set by the commission. Representatives of the commission and Public Advocate believe further improvements aren’t worth the cost to the company’s 331,000 electric customers in Delaware.
A joint testimony from Gregory Booth and William Watson on behalf of the Public Advocate division outlined why the consultants believe Delmarva has engaged in “gold-plating” − unnecessary grid improvements that are made without a cost-benefit analysis.
They say this practice has unfolded since a $225 million cap on capital investment instituted when Exelon acquired Delmarva in 2016 expired in 2019. The planned $430 million spending through 2024 represents an increase of 155% over Delmarva Power’s 2019 plant spending, according to the Public Advocate division.
Booth and Watson cited the “Averch-Johnson effect,” which states that when an allowed rate of return exceeds a utility’s cost of capital, an incentive is created for inefficient use of resources that leads the utility to overinvest in capital projects.
“There is no benefit-cost analysis to justify the added technology and millions of extra dollars required. The technology additions are an expensive, rate base-adding solution looking for a problem which does not exist,” they said. “There are currently no controls over or incentives for Delmarva to manage its capital additions.”
Citing language included in recent earnings call presentations, Glenn Watkins, another consultant for the Public Advocate division, argued this overinvestment is part of Exelon’s business model. The company is targeting earnings per share growth of 6-8% from 2021-2025, according to the documents, driven by rate growth. The strategy for getting rate increases approved leans on the capital plan.
“Its business strategy is, and has been, to increase the rate base of its regulated utilities in order to increase earnings per share,” Watkins said.
Storm damage recovery
Another increase over previous years is the amount included in the rate increase request for storm restoration expenses.
The commission precedent is to use a three-year average for storm restoration expenses. The previous case average was $4.2 million. This request’s average is $8.7 million.
Tropical Storm Isaias and tornadoes in 2020 pulled that average up – for the year ending June 30, 2021, Delmarva logged $18.8 million in storm damages.
Delmarva proposed using the three-year normalization but also asked to create a regulatory asset for individual storm damage expenses greater than $3 million. The company would then be able to recover amounts greater than $3 million for each storm, in addition to $8.7 million annually.
Most analysts agreed with using the three-year average, but opposed the creation of the regulatory asset.
Larry Blank, a consultant for the Public Service Commission, said the system would create an incentive for the company to spend more than what is necessary when recovering from storms.
“This would result in a forward-looking double recovery of storm damage expenses,” considering anomalous events are already considered as part of the average, added Watkins. He recommended normalizing to a 10-year cycle, but excluding storms whose damage exceeds $5 million. Those events would trigger an 18-to-24-month surcharge under his proposal.
Watkins also criticized Delmarva’s ask for a rate increase of more than $2.7 million related to its COVID assistance. In 2020, Gov. John Carney required utilities to extend a four-month payment plan to customers who indicated they were affected by COVID in any way and said future case rate proceedings would determine whether the costs were recoverable.
“DPL, a monopolist, is asking this Commission to insulate it from negative impacts it may have suffered by now imposing additional pain on its ratepayers,” Wakins said.
Inflation
The commission has previously ruled against including inflation adjustments, arguing that “institutionalizing” an inflation adjustment would remove the incentive for the utility to control expenses.
Ryan Pfaff, a consultant that testified on behalf of commission staff, cited a quote from former commissioner Jeffrey Clark.
“Once you get into projections and inflation, you are getting outside of the known and measurable standard that we are supposed to apply,” he said in a previous case.
The argument against sticking with precedent, as Pfaff sees it, is that the higher level of inflation provides a basis for the adjustment. Pfaff said until there is “new and compelling evidence,” the commission should maintain its precedent. The inflation adjustment is worth $2.6 million.
Some of the analysts also opposed a $8.5 million adjustment that would pass on costs of a potential 15% corporate tax Delmarva could face to customers.
The Corporate Alternative Minimum Tax (CAMT), implemented as part of the Inflation Reduction Act of 2022, imposes a 15% minimum tax on corporations that meet certain criteria. It’s unclear if Delmarva will face the tax or what its 2023 tax liability will be. The IRS is still reviewing the legislation and has not provided guidance.
The analysts recommended removing the adjustment, especially without knowing whether Delmarva will face the tax.
Andrea Maucher, an analyst with the Public Advocate division, cited United Way’s ALICE survey, which sets local thresholds for “financial survival” designed to reflect a base-level cost of living. Of the 395,656 households in Delaware, 160,868 – 41% – had income below the ALICE threshold in 2021 ($2,527 per month for a single adult and $5,954 for a family of four).
Since then, housing costs have continued to increase and Delaware has remained behind the national pace in unemployment, personal income and economic output.
“Delmarva’s application seems to disregard the one thing that is arguably as important to a customer as reliability (if not more so), and that is affordability,” Maucher said. “After all, for customers, all the reliability in the world is meaningless if you cannot pay your bill.”
Contact Brandon Holveck at bholveck@delawareonline.com. Follow him on Twitter @holveck_brandon.
