SURFA – 43 rd Financial Forum The Post-Recession Environment: A Regulatory Perspective

1. SURFA – 43rd Financial ForumThe Post-Recession Environment: A Regulatory Perspective Brenda K. Pennington Interim People’s Counsel, Washington, D.C.

2. How OPC-DC Works for District of Columbia Utility Consumers • OPC-DC is the statutory consumer advocate for natural gas, electric, and telecommunications consumers in the District of Columbia. • The Office represents D.C. utility ratepayers’ interest before the Public Service Commission, Federal Energy Regulatory Commission, Federal Communications Commission and other regulatory bodies.

3. Organizational Structure of OPC-DC • Litigation: OPC-DC develops the agency’s overall litigation strategies, including managing cases and presenting them before regulatory bodies. • Consumer Education: OPC-DC staff provides D.C. consumers with general information and technical assistance about current utility issues and trends. • Consumer Compliant Resolution: If consumers have a problem with their utility bill or service, OPC-DC staff is available to assist with resolving the matter.

4. Smart Polices For Smart Grid • Our electric company, PEPCO, is in the process of deploying smart grid at the cost of $85 million and 50% of these expenditures are funded by the DOE from the ARRA funds. The remaining balance will borne by D.C. electricity ratepayers. • Once the Council approved legislation regarding PEPCO’s deployment of the smart grid, OPC-DC still had one concern. • According to the Harris Poll, two - thirds of Americans have never heard of smart grid and about the same percentage never heard of a smart meter.

5. Smart Polices For Smart Grid • OPC-DC’s concern was lack of PEPCO’s early consumer education about how the smart grid will be deployed and the benefits consumer can expect in the short term. • OPC-DC filed a petition with the Commission requesting PEPCO delay its smart meter deployment until the Company submitted its detailed consumer education, media outreach proposal and budget. The Commission rejected OPC’s petition. • RISKS Consumers may not realize the savings from smart grid, if the customers are not educated. Then the customers will not only have to pay for the smart meters, but also for the old meters which still have a book value of 70%.

6. Utilities Obligation to Serve and Deliver Reliable Service • All utilities have an obligation to serve, but some do not deliver reliable service. • According to an article in The Washington Post, PEPCO has one of the most unreliable electric distribution networks the country. • Earlier this year, more that 56,000 customers lost power due to a snow storm. Many customers remained out of power for as long as four days.

7. Utilities Obligation to Serve and Deliver Reliable Service • In PEPCO’s most recent rate case, Formal Case No. 1076, the OPC-DC proposed 25 basis point penalties on ROE for poor performance, but our commission rejected on the ground that the reliability is not an issue in this rate case. • Utilities don’t take reliability seriously --- unless there are heavy financial penalties. • RISKS When power goes out, the electric companies lose some revenue, but businesses and residential customers also pay a heavy price.

8. Defined Pension Plans • PEPCO’s pension obligations are $1.9 billion and pension assets are $1.6 billion. • In 2009, PEPCO requested the DC PSC recover $8 million because the market value of their pension plan assets has fallen below the level required by SFAS #87 due to 30% drop in the Dow Jones Industrial Average. • Why should the ratepayers pay twice: once for the pension plan and then for the risks take by the Company’s management? • RISKS The stock market can crash any time in the future. Why should the ratepayers pay for the risk taken by the Company’s management?

9. Renewable Portfolio Standards (RPS) • Renewable and clean energy from the existing sources may be a noble cause and best for the society in the long run, but it will come at a significant cost. • Many states have RPS and for the District it is 20% by 2020. • The ITC provisions of ARRA expired in 2010. According to an article in Public Utility Fortnightly, Morgan Stanley estimated that 20 to 25 projects , totaling 3GW of capacity will be canceled for lack of equity funding when the ITC cash-grants expire.

10. Renewable Portfolio Standards (RPS) • Does it make sense for each states to have its own RPS? Or is it better to have one national standard? • Capital requirement to meet RPS and the transmission to move the renewable energy is a huge challenge. • RISKS Will the demand for renewable hold up with lower income and high unemployment? It is a new risk for utility companies when a government tells it what to build and ratepayers to pay for it.

11. Bill Stabilization Adjustment (BSA) or Decoupling • In 2009, in Formal Case 1053, the Commission approved a BSA plan for PEPCO which guarantees the Company base line revenue and allows the Company to adjust the “BSA rider” to achieve the base line revenue. • The OPC opposed the Company’s plan. • By approving the BSA plan, the Commission reduced PEPCO’s cost of equity by 50 basis points.

12. Bill Stabilization Adjustment (BSA) or Decoupling • RISKS The Plan does not give incentive for efficiency because the Company is guaranteed for base line revenue and in 2010, the BSA rider raised the rates by approximately $3.5 million.

13. The Recent Japanese Situation • In the USA, we did not have nuclear generation for the last 30 years and the Obama has administration has proposed an additional $36 billion in loan guarantees. • Standard & Poor’s said that the events in Japan, “renewed public focus on the inherent risks of nuclear power that could led to deteriorating economics for new plant construction.” WSJ March 23, 2011. • Rep. Markey thinks that after the Japanese meltdown, it is important to revisit whether taxpayer subsidies for new nuclear plants is a good idea? • RISKS From a public safety point of view, there will be a lot more scrutiny on the existing nuclear plants and on new nuclear plants which will not only delay the construction of new nuclear plants but will also increase the cost of nuclear energy in this country and put pressure on all sources of energy.

14. Brenda K. Pennington Interim People’s Counsel bpennington@opc-dc.gov Office of the People’s Counsel for the District of Columbia 1133 15th Street, NW, Suite 500,Washington, DC 20005 Phone: (202) 727-3071, Fax: (202) 727-1014 www.opc-dc.gov