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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported) July 1, 1998
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POTOMAC ELECTRIC POWER COMPANY
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(Exact name of registrant as specified in its charter)
District of Columbia and Virginia 1-1072 53-0127880
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(State or other jurisdiction of (Commission (I.R.S. Employer
incorporation) File Number) Identification No.)
1900 Pennsylvania Avenue, N. W., Washington, D. C. 20068
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (202) 872-2000
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(Former Name or Former Address, if Changed Since Last Report)
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PEPCO
Form 8-K
Item 5. Other Events.
On July 1, 1998, Potomac Electric Power Company ("PEPCO" or the
"Company") filed with the Maryland Public Service Commission ("PSC" or the
"Commission") (1) a quantification of its Maryland jurisdictional generating,
purchased power and other costs that the Company projects would be stranded in
a competitive market for generating services; (2) a proposed method for
recovering such stranded costs through a non-bypassable Competitive Transition
Charge ("CTC"); (3) proposed unbundled rates for retail service; and (4) a
proposal to freeze retail rates from the time competition begins until January
2004 (collectively, the "Filing"). The Filing was made in compliance with
Orders issued by the PSC in December 1997 which establish a process for
implementing retail competition and provide for the phase-in of customer
choice for generation supply service beginning in July 2000 and ending with
all customers having choice in July 2002. The Filing, in accordance with the
terms of the PSC's Orders, will be the subject of an adjudicatory proceeding
which is expected to conclude in October 1999.
In connection with the Filing, PEPCO reiterated its position that absent
appropriate enabling legislation by the Maryland General Assembly (which has
yet to be enacted and the General Assembly is not scheduled to reconvene until
January 1999), the PSC lacks the legal authority to implement the plan filed
by the Company, or any other restructuring plan providing for retail
competition.
The PSC's implementation process provides for a 15-month period to study
the Filing. After that period, the Company will be required to file a
restructuring plan in November 1999 which would take into account any
restructuring legislation enacted by the General Assembly, as well as the
outcome of the adjudicatory proceeding initiated by the PSC with respect to
the Filing. Accordingly, the Filing does not constitute the Company's final
restructuring plan.
The PSC's December 3, 1997 Order provided that Maryland utilities will
be given a fair opportunity to recover verifiable and prudently incurred
stranded costs that cannot be mitigated and stated that the Commission will
consider proposals to establish a CTC to address stranded costs. According to
the Commission, the recovery of "stranded costs" is meant to address the
economic impact to Maryland utilities of deregulation.
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PEPCO
Form 8-K
Unbundled Rates
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The Company's "unbundled rates" proposal breaks down its electricity
prices into separate rates for generation supply (i.e., the cost of producing
power or buying it from third parties) and for electricity delivery (i.e., the
cost of transmission and distribution of electricity to consumers). In the
Filing, the Company's anticipated 1999 average price of 7.78 cents ($0.0778)
per kilowatt/hour breaks down into a supply charge of 4.60 cents ($0.0460) and
a delivery charge of 3.18 cents ($0.0318). The Company currently has a rate
case pending in Maryland to recover, among other things, scheduled 1999 cost
increases under long-term power purchase contracts with third parties, the
costs to modify the Company's systems and operations to handle Year 2000
computer issues and the costs associated with the Company's 1998 employee
voluntary severance program. These average supply and delivery charges
include the "make whole" portion of the requested rate increase -- $41.6
million -- which, if approved by the PSC, would go into effect on January 1,
1999.
Proposed Freeze on Electricity Price
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As part of the Filing, PEPCO proposes that effective with the beginning
of competition, which is currently scheduled to commence on July 1, 2000, both
the supply and delivery components of PEPCO's retail prices will be frozen at
then-existing levels until January 1, 2004. The Company also proposes to
eliminate its fuel rate on July 1, 2000 and take the risk of fuel cost
increases after implementation of the restructuring plan until January 1, 2004
when the Company no longer has the obligation to supply electricity at the
frozen rate. The only exceptions to the rate freeze would be for unexpected
increases in taxes or new environmental requirements. After January 1, 2004,
supply prices would be set by the competitive marketplace and delivery prices
would be determined by regulators.
Proposal to Provide Full Service at Frozen Rates to Those Who Want It and
Credit to Those Who Choose to Purchase Power from a Source Other than the
Company
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For retail customers who do not wish to buy the supply portion of their
electric service from a source other than the Company once they are free to do
so, PEPCO proposes to provide both supply and delivery service at the frozen
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PEPCO
Form 8-K
rates until January 1, 2004. For customers who enter the competitive supply
market, PEPCO proposes to provide them with a "shopping credit" equal to the
estimated market price for electricity (currently expected to start at 3.61
cents/kWh ($0.0361/kWh) in 2000 and increase to 3.98 cents/kWh ($0.0398/kWh)
in 2003 reflecting forecasted increases in market price). The shopping credit
would terminate on January 1, 2004.
Cost of Transition to Competition, Including Stranded Cost Recovery, to be
Absorbed within Existing Rate Levels
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Under PEPCO's proposal, the transition to customer choice, including
recovery of stranded costs, would be made without any increase in prices to
customers. Initially, prices would be held at the levels in effect when
competition begins for customers who choose to buy both supply and delivery
from PEPCO. During the freeze, a non-bypassable CTC will be included in the
frozen rate. After the end of the freeze in January 2004, all customers would
pay, as part of their delivery charge, an explicit CTC which would initially
be .97 cents ($0.0097) per kWh, but would decrease to .51 cents ($0.0051) per
kWh in 2006, decrease again to .13 cents ($0.0013) per kWh in 2011 and
decrease again to .12 cents ($0.0012) in 2016. The CTC will end in 2021 when
the last of the Company's pre-competition power purchase contracts ends. The
proposed CTC will allow the Company the opportunity for full recovery of its
prudent, non-mitigated stranded costs, as contemplated by the PSC in its
December 3, 1997 Order, without causing an increase in rates.
Stranded Costs Identified
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In the Filing, PEPCO identifies stranded costs (the total economic value
of previously expected regulatory earnings that will not be recovered in a
deregulated energy market) having a net after-tax present value of
$600.4 million, which it proposes be securitized and recovered over the period
from 2000 to 2010. The $600.4 million is composed of $319.8 million relating
to generation assets, $242.6 million relating to power purchase contracts, and
$38.0 million in other stranded costs. The present value of the pre-tax CTC
revenues necessary to recover these amounts over the ten-year period is $944.1
million. The Company proposes to recover additional stranded costs associated
with its long-term Panda and SMECO power purchase contracts, having a present
value of $42 million, over the period 2011 to 2021, which it does not propose
be securitized.
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PEPCO
Form 8-K
All stranded cost recovery would be accomplished through the non-bypassable
CTC discussed above. The Company has also proposed a "true up" mechanism
which would update prospectively in July 2004 its stranded cost estimates
taking into account changes in market price or other factors.
The stranded costs in PEPCO's case relate to costs (with the exception
of costs which are the subject of the currently pending rate case) which are
already included in PEPCO's rates. They have been approved by regulators as
being appropriate to recover because they were found to have been prudently
incurred to meet PEPCO's regulatory-era obligation to provide reliable service
to everyone who wants it. It is anticipated that under PEPCO's plan these
costs would be amortized to match the revenues collected by the CTC. As part
of its plan, the Company proposes to securitize a portion of its stranded cost
recovery and thereby achieve savings through a reduction in capital costs.
If a competitive market for generation supply is implemented in
Maryland, the Company assumes that the Commission will follow through on its
commitment to provide a fair opportunity for the Company to recover its
prudently incurred stranded costs and that the stranded costs identified by
the Company in the Filing will be determined to have been prudently incurred.
The inability of the Company to recover its stranded costs fully could have a
material adverse impact on the future earnings and cash flows of the Company.
District of Columbia Filing
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Although not currently required to do so, the Company intends to file a
restructuring plan for consideration by the District of Columbia Public
Service Commission later this summer relating to its D.C. service territory.
The information in this Form 8-K contains forward looking statements, as
defined by the Private Securities Litigation Act of 1995, with regard to
matters that could have an impact on the future operations, financial results
or financial condition of the Company. These statements are based on the
current expectations, estimates or projections of management and are not
guarantees of future performance. Actual results may differ materially from
those anticipated by the forward looking statements, depending on the
occurrence or nonoccurrence of future events or conditions that are difficult
to predict and generally are beyond the control of the Company, such as what
actions the PSC and the Maryland General Assembly will take with regard to
competition, rate setting and stranded
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PEPCO
Form 8-K
cost recovery and securitization of stranded costs. In addition, the Company
made numerous assumptions in the Filing, including assumptions as to the
outcome of its pending rate case before the PSC, the future price of
electricity, including fuel charges, future revenues, the costs of
transmission and distribution, and service territory demographics, some or all
of which may prove not to have been accurate.
Signatures
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Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by
the undersigned hereunto duly authorized.
Potomac Electric Power Company
(Registrant)
By /s/ KIRK J. EMGE
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Kirk J. Emge
Vice President
July 1, 1998
DATE
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