Getting to the Root of Rate Hikes

BY STEPHANIE HANSEN, ESQ.

THIS PAST WINTER, many Delmarva Power ratepayers were surprised by electric and gas bills that far exceeded their expectations and their previous monthly bills. Town halls were packed with hundreds of angry ratepayers demanding answers about their specific bills, how the situation arose, and how it will be addressed.

In mid-February, I called a special Senate Environment, Energy and Transportation Committee meeting, where Delmarva Power presented information explaining what they viewed as the cause of the increase, largely colder-than-expected temperatures.

It’s true that it was colder than last year, but there was more to the story. Delmarva Power’s frequent rate increases, granted by the Public Service Commission (PSC) over the past 12 years, continually drove up the prices that ratepayers paid for gas and electricity, as well as the delivery of both.

Discussions with the executive director of the PSC and current and former public advocates revealed that they have felt hamstrung for many years by the current review standard that the PSC is bound by in a rate case.

Regulated utilities like Delmarva Power recover their operational and capital expenses by applying to the PSC and requesting that recovery. The PSC reviews those expenses under the business judgment rule and, as long as the expenses are not the result of waste, bad faith, or abuse of discretion, recovery is allowed.

This has been the rule in Delaware for a long time, but Delaware is one of only two states in the country that still use the business judgment rule. All other states use the prudence rule, which is less deferential to the utility. The prudence rule evaluates the objective reasonableness of the expenditure based on what the utility knew or should have known at the time the expenditure was made and asks whether the expense was prudently incurred.

Other states made this switch in recognition that regulated utilities are generally monopolies that serve a particular area, and customers are captive. Unlike in a competitive market, customers are not free to take their business elsewhere when the service becomes too expensive. The prudence rule provides balance and a check on utility spending, and Senate Bill 59 enacts the prudence rule in Delaware.

Senate Bills 59 and 60 are complementary pieces of legislation in the same process—the recovery of money by the utility during the PSC’s rate-making process. However, while Senate Bill 59 addresses the standard of review the PSC will use for the recovery of money already spent by the utility, Senate Bill 60 sets ground rules for what expenses are recoverable at the onset.

Under Senate Bill 60, certain expenses are no longer recoverable, including lobbying activities, political contributions, membership dues used for lobbying, charitable contributions, and certain advertising and public relations activities.

Additionally, Senate Bill 60 puts in place a cost cap of $125 million on capital expenses for Delmarva Power from 2026 to 2028, with exceptions for emergencies or extraordinary circumstances. This amount was determined by the expert hired by the PSC and the public advocate to review Delmarva Power’s rolling three-year Infrastructure, Safety and Reliability (ISR) Plan, with an escalator to account for inflation and increased labor and material costs.

Lastly, Senate Bill 61 focuses on bringing transparency to PJM decision-making. PJM is our regional grid operator, and its decisions affect what generation and transmission gets built in Delaware, the reliability of our electric grid, and the wholesale price of electricity. Currently, the votes cast by Delmarva Power at PJM stakeholder meetings are not public. Senate Bill 61 would change that.

Stephanie Hansen, Esq. is a Delaware state senator representing the 10th district.

To read the other viewpoint on this topic, click here.