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March 30, 2006


Delmarva 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 three-year period."

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 said.

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 business.

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 said.

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 would require."

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.

© 2006. All rights reserved.

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Read previous Delaforum article: Delmarva said pay us now or pay us more later
Read Delaforum commentary on proposed relief from electricity rate increases

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