Maryland: ROE

The Maryland Public Service Commission has authorized Washington Gas Light Company to increase its base rates by $28,602,000 million. Part of that rate increase is attributable to an increased return on equity of 9.70%. In approving the increased ROE, the Commission considered the economic conditions since it last set WGL’s ROE at 9.50% in 2013. It found that “after several years of low interest rates, this year has seen a strong economy accompanied by a gradual rise in interest rates.” Addressing claims by the utility that risks associated with the particular form of regulation in the state argued for a higher ROE. The commission said that while it recognizes that regulatory lag poses challenges to the operation of a utility, it agrees with its Staff that regulatory lag has both benefits and drawbacks and that WGL is no different from any other utility with regard to the challenges it poses. Re Washington Gas Light Co., Case No. 9481, Order No. 88944, Dec. 11, 2018 (Md.P.S.C.).

Maryland: Inflation and Attrition Adjustments

The Maryland Public Service Commission has denied a portion of the Baltimore Gas & Electric Company’s (BGE) request to increase gas distribution rates by nearly $85 million, instead approving a revenue requirement of $64.9 million. That amount includes $21.7 million currently being recovered through a surcharge on customer bills under a commission-approved infrastructure improvement program. The commission denied the company’s request for a return on equity (ROE) of 10.5%, instead approving an ROE of 9.8%. It granted, however, the company’s request for an operating expense inflation rate adjustment, agreeing with the utility that ratemaking paradigms based on historical test years—-like that used in Maryland—-do not address systematic inflation. The commission approved a 1.4% factor, based on a five-year average of the Consumer Price Index (CPI). It concluded that the average would better align revenue to the rate-effective period than the end of test period CPI as proposed by the company.

At the same time, it rejected a proposal by the company for an “attrition adjustment,” which is designed to account for the potential shortfall between a utility’s actual rate of return and the allowed ROE approved by regulators. The company had proposed setting the ROE at a higher level to offset the attrition, specifically recommending that the Commission add 20 basis points to BGE’s base ROE for this purpose. The commission denied BGE’s request for a specific adjustment to counter the effects of attrition, finding that while the utility had made references to its “chronic inability to earn its authorized rate of return,” it failed to recognize that regulated utilities are not guaranteed to earn its authorized return but rather a utility only has an opportunity to earn a maximum return. The commission said that BGE had not shown any evidence to demonstrate that its financial health, credit rating, or ability to attract capital is at risk. Furthermore, all regulated utilities face some level of attrition risk, and such a risk may be apparent to investors when they choose to purchase a utility stock. In this instance, granting an attrition adjustment may over-compensate BGE for a risk that is already priced into its valuation, the commission said. Re Baltimore Gas & E. Co., Case No. 9484, Order No. 88975, Jan. 4, 2019 (Md.P.S.C.).
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