On December 3, 2019, FERC denied a challenge filed by Southern Maryland Electric Cooperative, Inc. (“SMECO”) challenging Potomac Electric Power Company’s (“Pepco”) balance of prepaid pension assets (“Prepaid Pension Assets”) included in Pepco’s annual transmission rate update. FERC found that SMECO did not raise any serious doubt about the prudence of the Prepaid Pension Assets and that Pepco’s inclusion of a portion of the Prepaid Pension Assets amount in its rate base was reasonable.

On May 15, 2018, Pepco submitted its 2018 annual formula rate update (“Annual Update”) as required by its tariff. Pepco included Prepaid Pension Assets of approximately $325.6 million in its Annual Update, raising its transmission rate base by approximately $34.5 million. The Prepaid Pension Assets represent the contributions Pepco has deposited into its employee pension trust fund and which exceed Pepco’s accounting cost for pensions. On January 18, 2019, after engaging in preliminary discussions with Pepco, SMECO submitted a challenge to Pepco’s Annual Update, challenging the reasonableness and prudence of the amounts that Pepco included as the Prepaid Pension Assets balance in the Annual Update. SMECO’s arguments to FERC largely focused on transparency, stating that Pepco failed to provide adequate documentation demonstrating why the amounts in the Prepaid Pension Assets were prudent and reasonable. SMECO requested that FERC disallow the Prepaid Pension Assets balance and require refunds or, alternatively, require Pepco to provide additional documentation and establish hearing and settlement procedures to determine the amounts within the Prepaid Pension Assets.

In its order, FERC first found that the Prepaid Pension Assets were a prudent expenditure. FERC stated that while precedent states that the regulated entity has the burden of proof to establish prudence, the party challenging the prudence must first do more than simply make an allegation; it must also raise serous doubts of the prudence. FERC found that SMECO did not provide sufficient evidence to raise serious doubts about the prudence of Pepco’s Prepaid Assets amount and so denied SMECO’s challenge on those grounds.

FERC also looked at whether the balance of the Prepaid Pension Assets was reasonable, and found that Pepco’s contributions to the Prepaid Pension Assets reflected necessary costs, and that it was reasonable for Pepco to include some of its Prepaid Pension Assets amount in the rate base. Based on these findings, FERC also denied SMECO’s request to establish hearing and settlement judge procedures.

FERC’s order denying the SMECO’s challenge can be found here.