Pepco shareholders are guaranteed a 9% return — taken directly from your bills
As an investor-owned utility (IOU), Pepco will always prioritize its shareholders. Its main goal is to turn a profit for its shareholders; however, their profits aren’t determined by how well Pepco runs its operations. Instead, Pepco lobbies the utility regulators at the PSC for a fixed return on equity (ROE). Right now, that sits at a whopping 9.5%. In short, that 9.5% ROE is added into our rates to reward shareholders for investment.
Why does Pepco even have a ROE? To finance infrastructure investments (like powerlines, substations, and other capital that is needed to deliver electricity), one mechanism Pepco uses is shareholder equity. This equity is expensive — with the return requested by shareholder boards. Additionally, this equity is directly tied to what Pepco invests in the grid. If Pepco spends more on grid investment, the shareholders get a higher return. For example, a $100 investment will generate a higher return than a $50 investment if both have a fixed ROE of 9.5%. Therefore, Pepco is incentivized to spend even more money to achieve a huge return, often overspending, mismanaging money, and hiking up our rates to do so.
The 9.5% return on equity bloats our electric bills since we’re essentially subsidizing a shareholder’s return. Oftentimes, Pepco over-earns this 9.5% cap, taking in more money than legally allowed, as seen by this graph from PSC Commissioner Beverly’s dissent.
An analysis performed in We Power DC’s white paper found that in 2024, Pepco paid $232.5 million of its net income to debtholders and shareholders because of these high rates. That’s money from DC residents and businesses being removed from DC. In turn, if DC had a public utility that was financed through cheaper municipal bonds, only $120 million of its net income would be paid to bondholders.
Our current system rewards Pepco and its shareholders for spending huge sums of money on poorly audited projects. As PV Magazine puts it, this “creates a rate spiral: the more utilities spend, the more they justify higher rates of return, which incentivizes more capital projects.” And our rates continue to go up and up and up.
Across the board, a publicly owned utility is the smarter decision. Our rates will continue to rise at the request of infinitely greedy shareholders unless we move to stop it. We need the DC Council to lower Pepco’s ROE and seriously work towards creating an electric utility here in the District: one that serves the public, not the shareholders.