Power will be allowed to collect interest from
customers who elect to defer part of the gargantuan
electricity rate increases which take effect May 1,
but the company has long enjoyed what amounts to an
interest-free loan from Uncle Sam.
Lawmakers at a state House of
Representatives' energy committee hearing assured officers
of Delmarva Power and Pepco Holdings, its parent company,
that they will get every penny they have decided is due
them, even in the unlikely event that a household or small
business which elects to 'opt out' of paying the full
59%-higher rates in increments finds an alternate supplier
willing to sell power for less.
"They (Delmarva Power
customers) will have to pay back what they didn't pay during
the deferral time," committee chairman Robert Valihura said
during consideration of one of six measures dealing
with the rate increases that are being 'fast-tracked'
through the legislature.
As now written, the proposed
legislation would require customers who do not 'opt out'
before Apr. 14 to pay at a 15%-higher rate from May 1,
an additional 25% from Jan. 1, 2007, 19% from Jun. 1, 2007
and the remaining balance from Jan. 1, 2008. The law does
not specify what rate of interest Delmarva Power can charge
on the deferred amounts.
Delmarva Power president Gary
Stockbridge testified at the hearing on Mar. 29 that
"we would have to borrow approximately $60 million to
finance the proposed phase-in" and asked that there be a
provision inserted into the proposed law specifying that
customers "will be required to pay back the deferred
amounts, including carrying costs (interest), within a
He objected to a provision
now in the measure which would give the state Public Service
Commission "authority to unilaterally extend the timeframe
of this deferral without going back to the legislature."
Valihura said that provision was put in as a hedge against
'what may happen with rates a year from now."
David Peterson, a utility
rates consultant to the Public Service Commission, confirmed
that, by taking advantage of Internal Revenue Service rules,
Delmarva Power has been able to avoid paying $414 million in
federal corporate income tax. He said about $300 million of
that is attributable to its operations in Delaware.
"Basically, that's a tax-free loan from the government," he
That money is generated by
the difference between being able to depreciate physical
assets over a long periods of time for tax purposes but
allowed to do so for short periods for rate-making purposes.
Although in theory the deferred taxes have to be paid at
some point, continuing to add physical assets defers the
reckoning indefinitely, Peterson said.
"I want to hear a good excuse
why that money cannot be used for the benefit of [Delmarva
Power] customers," representative Roger Roy said.
Joseph Rigby, Pepco Holdings'
chief financial officer, said that money is used to finance
"continuing infrastructure" which he acknowledged under
questioning meant maintaining its poles and wires.
"It gets rather complicated.
... If we no longer had the deferral of taxes, the rate base
would have to go up," he said.
Peterson said the deferral
practice is long-standing. Valihura raised it at the
committee hearing with reference to a recent New York Times
article about the practice. The article had been included as
a direct link in Delaforum's 'Pulse'.
Peterson testified that Pepco
Holdings, like most corporations, consolidate profits and
losses by subsidiaries into one bottom line when calculating
tax liability. Using that method, they are able to apply
losses by some subsidiaries to offset part of the tax due
from profitable subsidiaries. He said Delmarva Power
"contributed a loss" to Pepco Holdings' tax calculations.
He told Delaforum after the
hearing that he did not look into the company's state-tax
situation. Roy said the state Department of Finance advised
him that Delaware taxes subsidiary companies operating in
the state as separate entities. However, state law shields
as confidential information how much state tax a company
pays or even whether or not it pays any tax.
None of the committee members
asked that of Delmarva Power officials about that
during the hearing. The officials could have voluntarily
disclosed that information.
The committee postponed
clearing the deferral bill for floor action when time
allotted for the hearing ran out. Noting that the committee
had "promised the public an opportunity to be heard,"
Valihura recessed the hearing, scheduling its
resumption for the morning of Mar. 30. That makes it
possible for committee clearance to come before the General
Assembly convenes in the afternoon.
The agreed-upon timetable
calls for both the House of Representatives and the Senate
to act immediately on its half of the package.
Observers expect there to be little opposition in either
chamber. Assuming the opposite chamber concurs, the measures
will be signed into law by Governor Ruth Ann Minner during
the week of Apr. 2.
In addition to the deferral
measure, the package includes Senate measures to make
supplemental appropriations totaling $10 million to increase
the size of the funds to assist low-income households pay
their energy bills and to provide incentives to promote
energy efficiency, and to enlarge the 'Green Energy Fund',
which is supported by surcharges on utility bills. The other
House measures call for holding an 'electricity summit' in
June and to authorize state agencies, including school
districts, to combine their energy purchasing so that it
will be large enough to entice alternate suppliers to seek
The only bill to which
Delmarva Power and Pepco Holdings officials raised
objections was the one dealing with deferral.
Stockbridge said the main
objection was its combining the deferral provisions
requiring the Public Service Commission -- which still
regulates part of Delmarva Power's operations -- authority
to set up a long-range plan which the company would have to
follow with regard to such things as acquiring electricity
for distribution and resale to its customers.
"We believe integrated
resource planning is a concept that made sense in a
regulated monopoly situation, but is fundamentally
inconsistent was a restructured environment where customers
have choice," he said.
Imposing such a plan, he
said, would be tantamount to limited re-regulation. In any
event, he said, there is no reason why the deferral and plan
provisions have to be in the same piece of legislation.
"There is no compelling need to combine them. ... Before we
change course and ill-advisedly place the risks back on our
customers, as re-regulation would do, we should take the
time to think this through and make informed decisions," he
Valihura said that "there is
no will" in the Assembly to substantively change the wording
in that measure or any of the other proposed laws. They were
"carefully constructed as a result of many hours of work by
the [Minner] administration" with bipartisan support from
legislators, he said. To a large extent, their provisions
reflect the recommendations in the recently published report
of the governor's Cabinet Committee on Energy.
"We have come up with what we
think is a very workable plan," he said.
He added that the measures do
not include re-regulating the electricity business because
to do so "would require an increase in the exorbitant rates
we are going to see ... to pay for the infrastructure that
Valihura did hint that
re-regulation is not necessarily a dead issue. "The right
first step looking at re-regulation [is] by planning
for it," he said.
Senator Harris McDowell,
chair of the Senate energy committee, at the hearing on that
chamber's portion of the legislative package described the
entire package as "a very, very small first step" toward
providing for the state's future energy needs.
"People tend to take energy
for granted .. until it's a crisis. When the crisis goes
away they stop thinking about it," he said.