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Pepco: Phasing in rates would harm credit rating

Company could face higher interest rates on borrowed money

Friday, March 24, 2006

ANNAPOLIS — The ongoing uncertainty over electricity rates in Maryland could jeopardize the credit rating of Pepco, the company’s president said Friday.

As a result, the company could face higher interest rates on the money it needs to borrow to cover payments to electricity producers, and that will be a cost passed on to consumers.

‘‘Our greatest concern is we don’t want to be in a situation where our customers have to pay more money than they have to,” said Thomas H. Graham, president of Pepco Holdings, the company that owns Pepco and Delmarva Power and Light.

A Thursday rating action by Moody’s Investors Service put Pepco Holdings ‘‘under review for possible downgrade.”

‘‘The rating action is in response to recent political, legislative, and regulatory developments in Delaware and Maryland that increase the likelihood of a material deferral of regulatory recovery of substantially higher costs that will be incurred when below market power purchase contracts expire in April and May,” according to the Moody’s letter, which was provided by Graham.

Lawmakers have several proposals on the table to try to ease the pain of immense electricity bill increases across the state particularly in light of a 72 percent increase in rates for BGE, the power company that services Baltimore and its suburbs.

One bill would have rates increase no more than 5 percent a year. Others would stretch out the increase over a number of years. Lawmakers have yet to settle on a solution and are trying to use the $11 billion merger between BGE parent Constellation Energy and Florida Power & Light as leverage to lower rates.

Power costs have increased 38.5 percent for Pepco, Graham said. The company has proposed a mitigation plan in which rates would increase 21 percent on June 1. The remainder would be deferred until Feb. 28, 2007, when the rates would increase 38.5 percent plus the deferral amount.

The company will have to borrow $61 million to cover the costs of its power contracts under its own plan. If a 5 percent legislative rate cap covers Pepco customers, the company would have to borrow $977 million, Graham said.

Customers may choose to accept the full 38.5 percent now and not face a subsequent increase in 2007, Graham said. Company research showed most customers would prefer that option. However, the Public Service Commission insisted the company adopt the phased-in rates.

House Majority Leader Kumar P. Barve said the Moody’s letter was very ‘‘concerning” but confident Pepco’s credit rating would not be downgraded.

‘‘When he adjourn on sine die, that credit watch will be rescinded,” said Barve (D-Dist. 17) of Gaithersburg.

House Speaker Michael E. Busch said his lawmakers are worried about the ‘‘three who’s” — ‘‘who pays, who suffers, who profits.”

The package of electricity bills passed by the House would have ‘‘quite a bit of money to Pepco customers,” said Busch (D-Dist. 30) of Annapolis.

Senate President Thomas V. Mike Miller Jr. (D-Dist. 27) of Chesapeake Beach has made clear that Pepco’s rate hike will be addressed in whatever legislation is passed concerning BGE. Miller said that the 72 percent increase for BGE has swallowed up most of the debate, but people around the state need to be protected from rate hikes.

‘‘Somehow if a benefit is being carved out for BGE service area because of their political might, then those same efforts have to be expanded to other areas of the state,” Miller said.

Montgomery County Executive Douglas M. Duncan (D) also said that rate payers in Pepco’s service area need to have a cushion from the scheduled rate hike.

‘‘Whatever is done has to cover the whole state — not just BGE,” Duncan said.

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