Interview Transcript:
Tom Byrne:
Let's start with kind of where things stand right now and specifically the interim rate increase that was approved last week. Governor Meyer had asked the Public Service Commission to freeze the rates and not approve the interim rate. PSC commissioners said they felt compelled to approve it based on the way the statute is currently written.
What can ratepayers expect to see starting this month with this interim rate increase? And from Delmarva's standpoint, why is it necessary?
Marcus Beal:
Perfect question. Great way to start out. So interim rates, I'll start with just the reason why.
Why do we have interim rates? Why do we have this process? And as you know, we're a regulated utility.
We own and manage the actual grid itself. We know there's an affordability crisis right now driven more by supply. That is the part of the bill that we don't own or manage because we don't own generation.
The delivery side of your bill, which is a terrible name for that, that is really the infrastructure. And when I say infrastructure, I mean the transformers, the substations, the overhead lines, the poles, the underground lines, all of the stuff that makes up the grid. That's what we own and we've built out for over the past hundred years plus.
So, as we're maintaining and upgrading the grid, if a new neighborhood needs to be built, we need to build more infrastructure, we do that. We do that in advance of going in for a rate case. So, we spend the dollars on the necessary investments in the grid, infrastructure upgrades, etc.
And then we go to the Public Service Commission, and we file a rate case. So,when you see the headline, you know, Delmarva Power files a rate case, that doesn't mean immediately that your rates are going to increase. That just means we're beginning the process where we're going to try to get a certain percentage of recovery back on those investments.
That's the model of our industry. So with interim rates, we don't have a set timeline on how long a rate case will actually take. So the protection there for Delaware Utilities, basically us, is we are allowed to go in after a certain period of time and collect a certain percentage back based on what we've already spent.
And that's really just a protection measure so that if a rate case for some unforeseen reason were to go longer than, say, two years, we're still able to recover some of those finances and the money that we've spent. And then, you know, if it continues to lag, meaning the rate case closure process, then we're allowed to collect even more by statute. So we recognize, obviously, that there is a huge affordability crisis right now.
We listen, you know, we've listened to the elected officials. We really listen directly to our customers. So, we are allowed to recover a certain percentage.
We made the decision that we weren't going to go after the full amount that we could pull in now due to that statute. We opted to go for a lesser amount, so 50 percent of what we could have pulled in, and that resulted in about a $3 increase for our customers.
Byrne: That's 50 percent of what you could take for the interim rate.
Beal: Exactly. Yes. So, if we had gone after the full amount that we could, you know, by statute, that number would have been about a $6 impact to our customers. So really, we're just trying to give some...
Byrne: Do you look at that as a compromise between what the governor wanted, which was a freeze, nothing, and that full, what you could take fully, is taking this kind of middle ground?
Beal: I think that, you know, everybody is trying to contribute to a solution here. And the true issue right now is supply, right? That is truly what is driving up our bills.
Over the past two years, for instance, our customers have seen their bills increase to $28, by $28 per month. Twenty-six of those dollars are due to supply. The other two, that is the ongoing investment that we make into the grid.
Our overall percentage of the bill is, we have less of an impact than a lot of folks think. So, and as I mentioned, you know, this is a $3, you know, increase to customer bills. Our overall rate case that we filed, that would have less than a $5 per month impact to the average residential customer.
But the other side of that is, on the supply side of the bill, we actually just saw a $14 increase because of supply charges. So that is something that we don't manage, you know, the price of electricity is set in that PJM marketplace. And that's basically where, you know, the power plant operators and generators go and they set the price of electricity.
So ,we're talking a lot about the utility and, you know, our impact on bills. If you really get into the weeds, people realize, well, we have to do these investments in the grid for reliability and for system growth. We don't really have a choice. We have to do that work. And we try to be as, you know, strategic about, you know, getting the most for what we do spend money on to benefit our customers. But there are some things that we just have to do.
But we're taking every opportunity to also try to lessen the burden on our customers because we know we're in a situation in the region and really in the nation where we have a supply crisis.
Byrne: And just to kind of complete this setup, where do you think stand with the overall rate increase request? Where is that in the process and what would that look like if Delmarva got what it was requesting.
Beal: Yeah. So, you know, it's a long process. It goes to the Public Service Commission, as you know.
We just had four new commissioners appointed by the governor. Last legislative session, there was actually legislation that was passed with a prudency review. So that basically is an additional standard of proof that our investments are indeed required and prudent.
Byrne: Right. So, before it was business decision standard and that prudence test is something that's, I guess, more common nationwide, correct?
Beal: It is. Yeah. Delaware was one of the last states to have that change.
But, you know, for our engineers, the proof is – it's more basic than it sounds. So if you have equipment that is 50 years old that is failing or giving signs of failure, you have to replace it. So when you're making that argument, you know, it's pretty easy to say, hey, like we have to actually do this work.
Or if you have a substation that has water encroaching on it and you need to maybe work on the foundation or raise equipment, those are things that are absolutely necessary. So there's really no argument over the need to do that type of work. Very little of the work that we do, quite frankly, we argue about.
That's why, you know, even though we're regulated, we have to go through the rate case process. You know, it's just like a court case, really. You have witnesses.
We bring our engineers, you know, there and they talk about the projects that we've completed, why we've had to do those projects, the benefits. And we typically aim for, you know, 10.5 – or 9.5 percent, right? That's our goal as a utility industry overall.
That's kind of the average. We never get the full ask. We just don't.
You know, there's always some trimming that occurs. So for us to be a healthy utility, you know, our model is we operate, you know, on – we have to build out the grid. We don't have an option.
We have to do that work. We seek that return at roughly, you know, 9.5 to 10.5 percent return. And then the cycle starts again because we have to reinvest, you know, all of our dollars right back into the grid.
And again, we don't have the profits, you know, a lot of – you know, there's been talk about our profits and, you know, you should just do the work and not raise rates, right? It doesn't work that way. We don't make enough in profits to actually pay for all this very expensive stuff.
Byrne: So you're going right where I want to go to because this is something that Governor Meyer has been pretty outspoken about for quite some time, starting with the State of the State Address this year and most recently, again, on our monthly show, Ask Governor Meyer. I want to play a bit of that conversation from the Ask Governor Meyer show about two weeks ago. Let me play that for you now.
Meyer: Here's the problem. Delmarva is a monopoly, right? It's a monopoly. You don't have a choice in Delaware. The prices must be controlled by someone.
The employees at Delmarva, the leadership, reports to shareholders. Shareholders want that zero risk return. This year, Exelon, the parent company of Delmarva, had revenues of $7.4 billion. $300 million of profit last year went from Delaware ratepayers to those Exelon shareholders. Delawareans don't have the money to pay to keep their lights on. We need to scrutinize every single penny of spend, and these risk-free returns of 9%, 10% are totally unacceptable.
Byrne: So that speaks to a little bit of what you were just talking about. How do you respond to what the Governor is saying there, that Exelon, along with Delmarva, has plenty of resources and doesn't need these rate increases, or at least these larger rate increases they're requesting?
Beal: Yeah, so I feel like our leaders have a responsibility to communicate facts. That's very important when emotions are high from our customers, because we do have an affordability crisis right now. And the reasons for that, you need to be clear.
And the real driver, as I mentioned, are those supply costs. Now that's on our bill. Our logo is on that bill.
So, even though we're not responsible for that, we recognize our customers see it on our bill. We have a responsibility to explain that. Surcharges, taxes, other things that we don't control, those are also on that bill.
About 60% of your bill, we don't control. The other 33% roughly, that again is our responsibility to keep that grid reliable and safe. And we have to continue to upgrade it for homeowners, businesses, et cetera.
We are part of Exelon. That is our parent company, but we are a local company. We have local budgets. We invest 80% of what we bring in as Delmarva Power right back into the grid. So we don't have this pot of money, so to speak, that you can just invest in infrastructure and it's just sitting there. It is a very expensive business.
You know, poles, setting a pole, you know, transformers. These are large, you know, pieces of equipment that have a long lead time. A transformer now takes about a year to get in stock in advance.
So, you know, a lot of our work, you know, it's required, it's necessary. You want a healthy utility because with a healthy utility, we're able to do the required work The cost of capital for us to pay for that work is lower when our credit rating is higher, right? So a healthier company, overall, the costs are lower for our customers.
We have to do the work regardless. And, you know, talking about our parent company, Exelon, we're not an outlier. We are one of the, you know, we're kind of right in the middle of the pack in terms of our earnings and our financials, right?
So, you know, it's a good soundbite to kind of, you know, make this mythical large company appear to not care about customers. But I take that personally. You know, I'm born and raised here in Delaware.
Our customers are my friends, my neighbors, my family members. So I'm a customer. So I really do take it personally when we are attacked.
I try not to get defensive, but we're a good company. We're doing things the right way. We have local budgets.
We aren't, you know, just worried about profits. You know, we really are worried about our customers, the reliability of the grid, and making sure that we're making sure this grid is ready for the future demands that are being placed on it, which, you know, hopefully we'll talk a little bit about some of the increased usage, which is also driving some of those supply challenges.
Byrne: One of the other things that the governor has talked about, and you mentioned it earlier, is that you have these asks, and ultimately a lot of times they get whittled down in the process, right? And he noted that the last seven rate proposals from Delmarva were approved by the commission at that lower rate than desired, suggesting, I suppose, that this is an indication that you're seeking more than is needed. How do you respond to that, that the way the process works would seem like you're asking for a lot, and then you really only need this amount?
Beal: Yeah. So, you know, again, the projects that we do, these are really, they're real projects, things that you can see and touch. So, you know, what the average across the industry is, it's about 10.5 percent. We usually land somewhere around 9.5 percent, which allows us to stay healthy, but it certainly is not what we are seeking. You know, we'd love to come in at that exact ask at 10.5 percent. But, you know, again, there's a body, a regulatory body in place, the Public Service Commission.
Those five commissioners, they listen to the details, they listen to the witnesses, they have expertise in the utility space, and, you know, they are there to regulate us. So, again, if you look at our bill and break it down, about 60 percent of that bill we don't control. The other 30 percent, which is the grid, is regulated.
So, we can't have a runaway, you know, company here where you're just spending whatever you want.
Byrne: You feel like the guardrails are there.
Beal: The guardrails are absolutely there. And you have additional guardrails now with the prudent standard, which, you know, is supposed to be a little bit more stringent. So, you know, again, our company, we are active and, you know, we think it's a good system because really what we're doing is correct.
We are identifying the projects that need to be done for the greatest impact on reliability for our customers. We execute those and then our engineers go in and they have to explain it and we get our return.
And again, that cycle. We have no choice. We're going to have to continue to invest in the grid.
If you stop doing that, you're going to have really negative reliability impacts. So, you know, we we have to continue to do this work so that we don't negatively impact reliability for a long time for our customers here in Delaware.
Byrne: On the topic of guardrails, there were some additional ones put in place by lawmakers this past session that just completed specifically SB 326 that would, among other things, place a cap on what Delmarva Power can recover for non-essential infrastructure spending, limit what utilities can collect on an interim rate, which we talked about, and require regular audits of Delmarva and other utilities. How do you anticipate those guardrails affecting this process and what Delmarva does?
Beal: Yeah. You know, there are a lot of components to Senate Bill 326. And while we didn't agree with all of them, you know, we generally, you know, accept that there's a give and take here.
Right. The driver, you know, our elected officials are hearing from customers that the bills are too high. The responsibility of those elected officials are to understand the why.
That's the disappointing part here, because the result of SB 326 was essentially you're capping a category of spend that has a bad name. It's called non-mandatory. It is not non-mandatory.
That work is actual required reliability work. It's sometimes proactive replacement of equipment. And the risk here is there was legislation passed that is going to result in about a, I believe it was a 30-cent savings for customers a month.
So less than five dollars a year. That portion of the bill is not driving the increased bills that our customers are seeing. The real issue is supply.
And we did nothing to address the supply side of the bill. I feel like, you know, it was a good headline. The intentions are right and true.
You know, we have to work together with our elected officials. But if you're really trying to address the issue and the crisis that we're in, you have to go after the supply challenge. And that's about building generation, addressing the PJM markets and working together to get more generation here.
And there are other things that we can do. Solar is great. We're in alignment with the governor's office on that.
Battery storage is something that we're really excited about. That can help offset some of the risks that we are seeing with generation shortages, especially as we have these higher temperatures and very, very cold temperatures these past two winters.
Byrne: So I do want to ask you a couple of questions about what you just said first on the topic of non-mandatory spending. There were like exemptions built in there for things like vegetation management inspection and maintenance program, things like that. What non-mandatory investments do you see having a negative impact, like things you're not going to be able to spend on under SB 326 that are problematic to Delmarva?
Beal: Yeah, so proactive programs are going to be cut. Where we see a piece of equipment that is near the end of life but hasn't failed yet, that falls under non mandatory. What it prevents us from doing is being proactive and say we have a 45 year old transformer.
You know, we run tests on that. Our engineers are checking that. And if they're basically certain this is going to fail within the next, say, six months, they'll proactively replace that rather than waiting for it to fail.
If you run to failure, the problem with that is, again, some of this equipment has a long lead time. You can't predict when it's going to fail exactly. If that happens in the middle of the night or during a heat wave, you have the potential to have thousands of customers impacted for for an unreasonably long period of time.
So that's one of the major challenges, but also growth. We have to do work on the system for new developments that are being built. Right.
Homebuilders, new commercial properties. And you can't wait until everything is completely, you know, all the contracts are signed because that increases the time that it takes for that customer to be able to be there. We do some of that work in advance where we have the data and the intelligence that, OK, this neighborhood is going to be built in this county.
We need to basically upgrade the infrastructure to be able to support those additional homes or those additional businesses. We have to do that work in advance. What now can happen is we're not going to spend that money over that cap.
So, when a developer comes to us and says, hey, you know, we want to start building and have these homes ready to go by X date. That now is going to get shifted out, which is not good for economic development in the state. There are a number of other examples. That non-mandatory category name sounds like, oh, this is optional work, but it really isn't. And it has cascading impact.
Byrne: Is the cap the key part of what Delmarva has a problem with 326 or are there other pieces? You mentioned there's some things you are OK with, I guess, and some that weren't. It sounds like the cap is in the weren't category. Is there anything else that that was problematic with that legislation from your perspective?
Beal: You know, again, we're we are here. We're part of this state as the largest utility. We recognize the crisis. We know why we're having these discussions. Management audits. OK. You know, that's going to cost us some money, but we're fine with that. We're a pretty transparent company.
The other elements to the bill. We're going to cooperate with the state. We want to work together with the elected officials and the governor. But the spending cap, our primary job is to make sure we're providing reliable and safe electricity and gas for our customers.
That bill damages that goal. It really is going to hinder us in the state. So, for me, I take it so personally because I understand the cascading impacts. It will negatively impact reliability. It's not a matter of when, it will. And you may not see it in six months, but you're going to start to see signs of failures. You’re going to read about some outages….
Byrne: And that's where people start to complain about I can't get my power back. So, you're kind of caught in a tough spot here because people are complaining about their bills right now.
Beal: Yes.
Byrne: And they also will complain when their power goes out and it doesn't come back on.
And I'm going to kind of put words in your mouth here a little bit. But you're saying that these investments are necessary to mitigate the secondary complaint of “Hey, my power went out. Why is it not coming back on faster?”
Beal: Yes. Our customers demand reliability. You know, I got a phone call from a gentleman during the blizzard and our crews were there. The power had only been out for a few minutes. It's, you know, 3 a.m. And he was like, I'm upset that the power even went out at all. So, that is the expectation. We have 50 mile per hour winds going. And, you know, and I'm like, wow, our crews are right there on site already in this. You know, this is great. But that's the expectation.
But jobs are also the other the other negative with that SB 326. If we don't have the work for our contractor workforce to do, and these are small local businesses, we're not going to be able to provide those jobs. And that has a cascading impact. That part is really, really challenging as well, because, again, I want to help with affordability. We care.
Our Exelon Promise is all about assisting and helping customers get through this crisis. And we've done a number of things. We've got a customer relief fund where not just low income, but middle income customers can actually get money to offset their bill $300 to 500.We've got payment plan arrangements, things that can smooth out the bill year-round. We understand there's an issue. We hear everybody loud and clear. Every dollar matters.
But doing this legislation impacts customers by 30 cents a month and you're going to negatively impact reliability and you're going to negatively negatively impact jobs and economic growth in the state. So that's why we were so adamant about trying to explain the details and making sure that everybody understood what this meant.
Byrne: You've talked a lot about the distinction between the part of the bill that you do handle and the part the supply side that you don't handle. And I guess that kind of leads me to my next question - what does Delmarva believe should be done policy wise to address rates? And I guess more specifically, I guess that other side that is also driving a lot of this, this increased cost.
Beal: Really, we need more generation. So that process, you know, independent power providers, the folks that own the power plants, they just haven't built over the past 15 years. And, you know, we've seen some of the traditional fossil fuel plants age and need to be closed. You know, there was sort of a thought that some more of the renewables would be built out and help.
Byrne: And those things haven't really lined up.
Beal: We haven't built enough, right? Not enough solar, not enough wind. You know, we're all in on all of the different technologies, including, you know, gas.
You know, we're not opposed to any of that. People are talking about small modular nuclear, which for a state like Delaware of our size, the costs might be challenging. But really, that queue that PJM manages, which basically brings the projects in, nothing is coming out that is helping Delaware.
We don't have generation. And, you know, our region, we're actually part of, you know, PJM is our regional transmission operator. They're like the air traffic controllers of the grid.
They have to make sure we have enough generation on hot days running and not in maintenance or, you know, down for repairs. And the kind of the two-sided crisis that we have here is one, without having more generation built, basic supply and demand, right? The demand is up because of, you know, data centers and AI growth and really people expanding, right?
Which is a good thing. Demand is up, more electric vehicles, that sort of thing, electrification. But the actual supply, the amount of generation available, that's going down.
So, you created this pressure point there, basic supply and demand, where now the price of electricity that's set at that PJM marketplace, you know, we don't control that. That is really, really high right now. It went from about $28 a megawatt day to about $333 in a matter of like three years.
And then the governors had to come in, put a cap on that because it was going to go even higher. That is what's driving that supply crisis. The answer, we need to build more generation.
Our company, we don't own generation, but we are willing to get involved in things that generate like batteries.
Byrne; I was going to say there was a point in time where Delmarva was involved in generation and the state said, OK, we're getting you out of the generation business. Would you like to get back in the generation business? Do you think that would be an effective answer, at least part of the solution?
Beal: It is part of the solution. We saw, you know, some other utilities that are vertically integrated, which basically is a term that means they own the transmission and distribution assets, but they also own generation. They're able to sell back power into that marketplace.
But because you're regulated, you have to give that to your customers. So, it helps offset some of those higher supply costs. It would be beneficial for us to get back into generation.
It would allow us, if the markets stay as high as they are, which there's no indication that that's going to change, you know, we'd be able to help offset some of that with our customers.
We had a battery bill this year that we were, you know, working with a number of folks to advocate for that would allow us to build batteries, large scale utility battery storage, which is great because it allows you to offset, you know, some of those peak usage moments. You can also use it in an emergency situation where, say, for instance, we do have a really hot day and we've already seen two of them this year where PJM has had to call a max gen event, which means, hey, all you power plant operators, we know everybody's going to be using a lot of electricity by the forecasted data and the temperature.
You can't be down right now. If you can run, you need to be running and generating electricity. The problem is right now we're teetering on that brink of not having enough generation to meet the demand.
If something were to fail, a large plant, when we're in a max generation type situation, we would potentially be in a situation where we have to cut customers off proactively to protect the grid. So that is another major concern with not having enough generation here. Those folks are making a lot of money right now and they've been making a lot of money over the past 15 years.
You mentioned deregulation. It was, again, good intentions, right? You create a market where it's competitive and you have folks build power plants competitively.That should increase the amount of power plants that you have and therefore lower the price of electricity. They didn't build. So that didn't happen. Instead, now the usage caught up. Generation has dropped and now they're making a ton of money. There's no incentive.
You know, for us, since we're regulated, it's a great option for the state because, again, we have to go through the Public Service Commission. Our books are open. You know, if we were to build generation, it has to be approved by the commission, essentially the state.
And, you know, you can see all the costs associated with it. So there's a lot of transparency. That's the benefit.
And again, we'd love to have, you know, the independent folks come in and build because it helps us. It helps our customers with that side of the bill that we don't control, but we're getting, you know, really a lot of heat for. So come on in, build. We are not trying to box anybody out. But since there hasn't been any work done to resolve this, we are willing to do that. And we're making that very well known.
Byrne: As we wind down, I do want to go back to the requested rate increase and just mention something that the PSC chair, Harold Gray, said last week - settlement agreements are desired and preferred. Is there a chance that a settlement agreement would be reached here? And going back to the governor's comments, does that hurt the process, having this kind of friction over what's going on and what should be done?
Beal: Yeah. You know, absolutely. A settlement would be great.
You know, it cuts down on the cost of the actual rate case process itself. So that is desirable. And, you know, right now, you know, our customers, our Delawareans are hurting because of affordability, not just with electricity, but with everything.
I feel it's our responsibility to work on the solutions together and be factual, you know, attacking a local company that employs a lot of people in the state. We are an economic driver in the state. You know, a healthy utility is a great thing for the state of Delaware.
And you want to keep it that way. Doing things like SB 326 that kind of impact our company negatively, impacts jobs, impacts reliability, impacts our ability to bring businesses in because we're going to have to lengthen the time that it takes to put the infrastructure in place for a new manufacturer to come and be on site. You know, those are negatives.
So, focus on the positive things that we can do to help keep things affordable for our customers. Focus on supply. We are open to the regulatory process and scrutinize every cent, every dollar, every cent matters for our customers.
We're open to that process. Keep it fair and factual. And, you know, hey, by the way, let's work together on some solutions here because that's really, you know, what we what we should be focusing on.
