For Atlantic City Electric, earnings were hard to come by during much of the last decade, with a nine-year stretch beginning in 2009 where the utility experienced consistent and substantial earnings shortfalls.
The shortfalls led the utility, serving 545,000 customers in South Jersey, to seek frequent rate increases during that period to compensate for under-earnings that amounted to $285 million, according to an expansive audit by Liberty Consulting Group for the New Jersey Board of Public Utilities.
As a result, from 2015 to 2017, the utility filed four rate cases, which resulted in $126.5 million in increases in customers’ bills, according to data compiled by the New Jersey Division of Rate Counsel.
“They kept coming in every year or so asking for rate increases,’’ recalled Stefanie Brand, director of Rate Counsel. “They kept complaining they were not making any money.’’
The nearly 700-page audit by Liberty Consulting found Atlantic City Electric (ACE) was making far less than their authorized rate of return over that period. In fact, the audit noted the utility earned less than a 5% return on equity (ROE) in each year from 2011 to 2017. Utilities typically earn an authorized ROE in the 9-10% range.
The earnings deficiency averaged $28.5 million over the time frame with the shortfalls rising to as much as $50 million in 2012, 2015, and 2016, according to the audit.
The audit laid most of the blame for Atlantic City Electric earning far less than authorized primarily on two factors: increased spending on operation and maintenance (O&M) costs ($136 million) and capital expenditures (CAPEX) that were not quickly included in rate base ($126 million).
During that time, Brand said the utility had to ramp up spending on reliability, in part because of a series of extreme weather events. “From what I read, they were spending a lot more on operation and maintenance,’’ she said.
Examining what went wrong
“I still don’t understand why they were not earning their authorized return on equity,’’ Brand said. The division is hiring a consultant to examine what exactly went wrong, she added.
The board, in accepting the report, had little to say about the audit. Atlantic City Electric, once owned by Pepco Holdings, Inc. (PHI), was acquired by Exelon in March 2016. The audit found that both Exelon and PHI have improved ACE’s financial performance regarding O&M expenses and CAPEX recovery in their long-term plans.
In response, Frank Tedesco, a spokesman for the utility, called the extensive audit part of a regular process conducted by the BPU, adding ACE is continuing with a full review.
“We will work with the BPU to address the opportunities identified in the report, including rate of return, as part of our ongoing effort to further enhance our operations and better serve our customers,’’ he said.
“We have been making significant investments in the local energy grid to enhance the reliability of service for our customers and we are pleased to see the audit recognize many of these improvements,’’ Tedesco said.
Generally, the audit found that ACE and Exelon had complied with requirements imposed by the BPU under its approval of the merger as well as various statutes regarding utility operations.