Pepco Holdings, Inc. (NYSE:POM)
March 27, 2012 9:00 am ET
Anthony J. Kamerick - Chief Financial Officer, Senior Vice President, Chief Financial Officer of Potomac Electric Power Company, Chief Financial Officer of Delmarva Power and Light Company, Chief Financial Officer of Atlantic City Electric Company, Senior Vice President of Potomac Electric Power Company and Senior Vice President of Delmarva Power and Light Company
Joseph M. Rigby - Chairman, Chief Executive Officer, President and Member of Executive Committee
David M. Velazquez - Executive Vice President of Power Delivery
John U. Huffman - Chief Executive Officer of Pepco Energy Services Inc and President of Pepco Energy Services Inc
Carrie Saint Louis
Ali Agha - SunTrust Robinson Humphrey, Inc., Research Division
Anthony J. Kamerick
Good morning, everyone, and welcome to those of you who are here today in person and those joining us by webcast. I'm Tony Kamerick, Senior Vice President and Chief Financial Officer of Pepco Holdings. And our leadership team here today is very excited to be here. This Analyst Conference is a very important component of our annual Investor Relations program, and we view this as an opportunity to highlight our businesses and provide you with the most current information we have, so you can properly value the company.
As all of you know, I will be retiring from PHI after 42 years of service, the last 3 as Chief Financial Officer. And I'd like to say that during my tenure as Chief Financial Officer, I have always enjoyed dealing with you, the financial community, as one of the real highlights of the job, and I've always enjoyed providing you with the information about our business, and I've always viewed the conversation as 2-way because I've benefited very frequently by hearing your perspective on our industry and our business. I want to thank everybody for that.
We also look forward to this conference as an opportunity not only to highlight our business but to provide a little bit of highlights about our nation's capital here. And I know those of you who joined us last night for dinner at the National Museum of the American Indian, I hope you had a good evening.
We always start each meeting with a safety message, so first of all, please note the exit at the back of the room there, and also there's an exit right here to your right. If there is an emergency of some kind, we'll hear an alarm and there'll be somebody coming over the loudspeaker to give us some instructions. And if we need to evacuate, go out through that door, and to the right, there's a patio out there.
So with that, let me get started. First, please take note of our Safe Harbor statement. Some of the remarks today will be considered forward-looking, and I'll leave you to read that at some point. This is our agenda today. And with the exception of Joe Rigby, who will take questions at the end of the conference, each speaker will take questions after their presentation. So because we're on a webcast here, please wait for the mic to -- so that we can get your question on the webcast also. The books are at the table for you, and you can follow through the presentations. It's also filed last evening as an 8-K. So with that, I'd like to introduce our Chairman, President and Chief Executive Officer, Joe Rigby.
Joseph M. Rigby
Thanks, Tony. I just want to also express my welcome to everybody here. It's good to see some of you last night. I mentioned last night and Tony commented that he's going to be retiring, so I just want to remind you all this is your last shot at him, so try not to waste the opportunity that's ahead of you.
Three years ago, right after I became CEO, we had an Analyst Conference, and I was reflecting back that we were a very different company then. We had a mix of assets that we really needed to think through and resolve. We owned 30 significant generation fleet. We were in the retail business. We had a weak balance sheet, a lot of questions about the dividend. We had a significant construction program ahead of us, notwithstanding the outcome on MAPP, but we were really struggling with how were we going to proceed and execute on that plan. And I think we've made a lot of progress over the last 3 years. We've now got a very clear strategy. The slide in front of you should look very familiar. We have a much stronger balance sheet. We have the capability to execute on this plan. So today is not going to be about unveiling any new -- a house or anything like that. It's going to be a fairly in-depth update on the plan that's in front of us. I also look at this in some ways that this is the second full year of executing this plan as we work through the transition in 2010. It was really to position us to get to 2011 and beyond. So I feel like we've made a lot of good progress. For those of you who follow our story pretty closely, you know that we've had some challenges here, particularly in the Pepco region. And you see a little bit -- for those in the room, you can see a little bit of our advertising that we're doing to get our message out, and Dave Velazquez is going to talk to you about more specifically the focus we have on reliability and operational excellence.
Clearly, we're a company that is extraordinarily busy on the regulatory front. We've got 5 cases in front of our regulators. We're going to talk a little bit about some of the headwinds that we're facing, particularly in Maryland, and we want to be responsive to your question. But I also would tell you that the one thing I'm very clear about and I've seen over the last 12 months is as we've talked about building our capacity to execute this regulatory plan, I'm seeing it every day. Our ability to handle 5 cases simultaneously tells me that we have the muscle that we need to execute this plan. And I'm hopeful that we're going to be able to get some headway, particularly on the reliability mechanisms, the reg lag mechanisms. But if not, we have the capability to go in and refile and continue on. I feel very good about the progress that John Huffman and his team has made, both in managing through the wind down at the Retail business and building up the ESCO. So we feel very, very good about that. So as you see us now, this is what we wanted to be. This is the plan, in fact, that we're going to be executing.
Talk a little bit about the current state. We've talked a lot and we've had comments and questions on our earnings calls and on our one-on-one meetings. We have a really significant CapEx plan. We pushed MAPP out to the back end of the 5-year plan. We've got -- I think it’s $205 million for MAPP, but $190 million of that is in 2016, so this is not a CapEx plan that's necessarily dependent upon that kind of a transmission project. And we have ramped up O&M. We spent some time on the year-end call talking about what we might propose as the new normal of our O&M spend, which is very specifically focused on improving system reliability, customer service and really driving to the level of service that we know that our regulators expect us to deliver, and in fact, we think is integral to gaining reasonable regulatory outcomes.
As we look at the regulatory standards -- or the reliability standards, excuse me, across the states, we feel very confident. Where there were standards in place, we are meeting those standards. Where the bar has been raised, we have put this plan in place for us to be able to meet and continue to meet that. So we get it. We understand for a company that's predominantly regulated, a real key to our future is, in fact, customer satisfaction.
We've made great headway in our Blueprint for the Future, the smart grid. I'll talk in a little bit about that. But it's interesting we've not had to deal with some of the significant pushback. For those of you at dinner last night, Tom Kuhn was talking about the radio frequency concerns. We've really not had that drama. We have, I believe, across the 300,000 meters, the electric meters that we've installed in Delaware, I think we have 2 customers that have kind of refused to take a meter. So that -- we just haven't had the drama that others have had. And as we work our way through the District of Columbia and now also in the Maryland for Pepco, we're making really good headway. There's a little bit more discussion but nothing that would cause me to be concerned. So I would anticipate that by the end of 2013, we will have completed the roll out of the electric meters to 1.3 million meters deployed across our service territories. I'm hopeful someday, we'll be able to get the regulators onboard in New Jersey, so we could deploy that technology there.
There's no question that the key financial objective that we're focused on is in reducing the regulatory lag. We understand and we've talked about the level of value, the level of earnings that in some ways, kind of "trapped" in our regulatory lag. And then when you put on top of that just to increase in rate base, we think we actually have a very compelling value story. And John and his team have done just a great job in transforming the business.
So our near-term focus is very, very clear. This is what we get up in the morning and we think about. We think about building the infrastructure, improving reliability, improving customer service, executing our regulatory plan and building out the ESCO and obviously, remaining safe every day. So there's a real alignment from the board all the way down to the loading dock as to what this business is about. We've tweaked our goal structures. We've tweaked our incentive plans. And Dave Velazquez and I, over the first quarter of this year, went and spoke face-to-face with every employee that works in this company to drive home the message that this is what our strategy is, this is what our priorities are for 2012, and this is how you factor in to the success of this company; very well received.
We've been busy since the last time we chatted. I would say that 2011 was clearly a year of challenge, but I would also say it was a year of real progress. And the first quarter of this year, notwithstanding we didn't have a winner, it's been so far, so good. And if I had to choose between a hellacious winter and one that was calm, I'll take the calm one every time.
We've made a lot of progress both on the Reliability Enhancement Plan and the Emergency Restoration Improvement Plan. I cannot emphasize to you enough how important that is, not just in terms of operations, but obviously, in terms of customer sat and good regulatory outcomes. This is a plan that we actually started in the middle of 2010. It was started in advance of a lot of the serious storms we had down here in the Pepco service territory. For us, I would say that not that we ever want a hurricane, but in a strange way, does this company need it to have a test that was going to kind of quiet some of the political and regulatory drama that we were dealing with, and we passed that test. And Dave Velazquez and his team, you see a lot of his team here today, they just did a tremendous job in executing that plan, and really in a very public way, demonstrating what we've been talking about doing in front of our customers.
I commented a little bit about where things stand on the smart grid. Deployment is going just fine. Interestingly enough, as much as we talk about the smart grid, and I think Tom mentioned it last night, it's really -- I think the really compelling message about the smart grid is much more on our side of the meter right now. And I think trying to talk about the smart grid relative to beyond the meter is somewhat outrunning your headlights. And Hurricane Irene kind of gave us an interesting demonstration, not one that we had expected, but I think the lesson for us is that we have to capture these opportunities to talk about what the real benefits of this technology really are. So for example, when we got to the end of Hurricane Irene in the State of Delaware, where all the functionality is turned on, we were able to avoid a significant number of truck rolls because we could actually ping the meter and know that the customer was back in. It was interesting, the reaction from other -- the Governor's Office, all the way down to the customer, that reminding them again that, one, we don't know when you're out of power; and two, now that we know that you're out of power, we can actually have a much more efficient restoration process. So I'm very, very pleased around the progress that we've made.
We had a couple of outcomes in our rate cases last year. But as I mentioned, we're really right in the midst of a significant effort across all of our jurisdictions of the 5 rate cases. I think that it would be fair to say that while we're pushing really hard on the mechanisms, and I'll talk a little bit later about some of the comments in the State of Maryland. I think we might get some headway in the couple of the jurisdictions, but I think it may take a couple efforts certainly in the case of Maryland. We've -- we are pushing this message in every front that we can -- that we have available to us, either through our direct testimony or filed positions or our conversations with key political leaders, to understand the connection of what we're doing and why it's so important for us to put these mechanisms in place. It's interesting when you have a chance to talk, not so much about customer satisfaction, but talk about jobs. We're hiring. We've hired a significant number of people over the last several years and to understand that it -- that another benefit of reasonable regulatory outcomes is the overall broader economic benefits. And we're going to continue that dialogue, and we'll be pushing ahead.
We had a pretty good financial year last year. It's interesting when I think about the history of our company and not giving earnings guidance and what a big step that was for us. It was -- you would've probably found it amusing, the dialogues, and it took all my effort to get Tony onboard. But once I got him onboard, boy, he really did a great job. But I give Tony so much credit because he put in place a very strong process to -- for us to have confidence, and we've been able to in the 2 years that we've given guidance to meet that and actually come in at the high end. We spent the last 2 years talking about issuing equity, and I think the lesson we learned probably the hard way was at the end of 2008 when we issued equity, that was -- caught people by a surprise, which wasn't good and was something that we didn't want to live through again. So we spent a lot of time messaging around our intent, and we took -- as we mentioned on the earnings call, that we were going to look for those windows, and we were able to deal with that need with a very well-executed equity forward transaction. I credit our Treasurer, Kevin McGowan, for doing just a great job. And so we've kind of taken care of a major part of our financing plan. And we mentioned or we noted last that we've actually -- we're bringing onboard Fred Boyle as our new CFO, so that's obviously a big, big component to us being able to execute our financing plan going forward. So I feel good about the progress, but we understand the challenges that are ahead.
This slide is a little busy. I think just a couple of points. We think and we spend a lot of time, not trying to get so focused on ourselves internally, but to make sure that we understand what's happening around us. We try to capture in this one slide what we see as the industry opportunities and challenges, and we come away from it feeling that our capabilities and our focus are fairly well aligned to our core skills, and that we're capable of responding to the industry challenges. So whether it's service and reliability, Dave and his team have put together an extraordinarily detailed plan across all of our jurisdictions. We have a large capital and increasing O&M costs, and that's really just to make sure that we're meeting what our customers expect. And we've talked about building up the capabilities to be able to handle our regulatory plan load.
We don't talk that much about our focus on renewables and the renewable energy standards, but this is a company that's been fairly, fairly progressive in addressing these evolving needs. So whether it's the offshore wind contract, which didn't really pan out, but we've shown the willingness to work with our key constituents across our service territory, most notably last year in engaging with the Bloom Fuel Cell Company to be able to introduce that technology. Tom Kuhn talked last night about he owns a Chevy Volt. Well, we own about 10 or 12 of them, and we're working right now in exploring what it means and what it would look like to have charging stations across our service territories. So while we're obviously focused on the real meat and potatoes, it's -- we don't take our eye off the ball with regard to evolving technology. And I think if you think about us relative to others, I feel we're fairly well progressive in terms of our development of the smart grid and applying that technology.
This next slide is something that we don't spend that much time talking about either. But I think it's important to take a minute and focus on this just a little bit because it's -- there is a significant part of our investor base that looks at companies and tries to discern whether these companies are focused properly on our environment and our sustainability. So we're kind of a modest company. We don't thump our chest too much, but I think it's important for you to know that our environmental group, our operations group, our communications group is very focused on making sure that we're operating as a company that we can be proud of environmentally. Our opening speaker last night spoke to the focus in the Smithsonian to make sure that they are LEED-certified. Well, our corporate headquarters is LEED-certified, and that's something that we and our employees take very, very seriously. We've been named last several years to the Carbon Disclosure Leadership Index. You can see how well we rank relative to 34 utilities that responded to the CDP survey. We've been noted and recognized in various publications certainly as 1 of the top 3 utilities in Newsweek's 2009, '10 and '11 Green Rankings. So I want you to know that as much as we focus on the hard assets and the performance in front of the customer, this is a team that takes our corporate values very seriously, and we think this is just one demonstration of that.
I think this is kind of an interesting slide. We were trying to depict here -- I talked earlier what we get up in the morning and think about, and in some ways that you may think of this as a circle of life. I don't think of it as a treadmill. I think of it as an interesting journey, but one that is constantly refreshing itself. So I think if you start at the top, there's no surprise. I mean, the basis of success in this business is largely written and driven from the level of customer satisfaction and how that all plays into it. The other thing that I would mention is that -- and again, we don't talk too much about this -- but part of the success in the smart grid has been on our focus on customer education and making sure that we're properly out reaching out to our customers. We've taken a very strong view of enhancing the skills of our folks in a call center to migrate them as we implement a smart grid, to become not just problem takers or problem solvers, but to evolve into energy advisors. And we're in the process now of tackling what most utilities' CEOs try to avoid, which is replacing our billing system. But what we have is we have a smart grid that's operating with 40-year-old technology, so we're going to steer [ph] that problem down. But clearly, that is part and parcel of us being able to communicate and be responsive to what our customers need. There's no question and Tony is going to spend a lot of time later on talking about our focus of the regulatory front. And with our sense that we'll get reasonable outcomes, but we know that with that CapEx plan in front of us and that level of O&M spend, we're going to be in rate cases no matter what, and we're going to be able to manage through that.
We focus a lot on managing the business in the way that maintains the credit profile. We understand clearly that there's a tremendous opportunity in front of us, I think a fairly compelling story around growing EPS and how that all factors into driving shareholder value. We look to have a very-well-thought-out financing plan to pursue low cost debt, equity financing. And again, I'm very pleased with the work that we did most recently to complete the equity forward. We're very focused on dealing with the additional CapEx in the O&M. I would -- I commented a little bit that we try to carve out some of that spend around looking at new technologies, so that we can make sure we're understanding where the industry is heading, where technology is going to take us and obviously, where our customers want to be. And then obviously, all that factors back in to what the customer really experiences. And we've seen significant improvement on the reliability front, and Dave will talk a little bit about that.
So this is the way we look at the business. It's fairly straightforward. The business is organized around this kind of a premise, and there's an alignment across the management team in terms of how we talk and think about the business. Just a little bit -- this is a little bit of a heads up around what I think Tony will get into, but -- and you kind of lay out what our infrastructure should drive in terms of our rate base growth. You can see here that by the end of 2016, we're going to have a significant increase in our rate base. And obviously, this not only drives improved customer service, but also the EPS growth that we should be able to realize. One thing, as I think about this, and we spend time -- we talk about it relative to how things are going to play out in rate cases, there's not $1 in this plan that we think is not necessary or prudent. We're not gold plating anything. This is about addressing what our customers want. So I feel very good about the plan.
Regulatory lag. I would imagine given the 42 questions I got last night over cocktails of our regulatory lag, this will probably dominate our conversation today. And it's real simple. This level of spend that we're talking about, we think, is essential. It's going to be in front of us for a while. While it's noted as a necessary headwind, it's really just -- it creates somewhat of a challenge as we move forward to be able to convince decision-makers that this is necessary spend to deliver what we all want to deliver. And we've been very focused in our filed positions, in our public statements, in our conversations with key political leaders around the fact that some of these mechanisms are in place around the country. They're not necessarily controversial. And we're going to continue to keep that dialogue going.
I think it would be fair to say -- and some of you, we've talked over dinner last night and even this morning, if you look at the -- some of the comments coming out of Maryland, if you look at the filed positions, from OPC and the staff in Maryland, I would have to say with regard to the Pepco in Delmarva case that we would look at that as being somewhat disappointing. And we intend to -- as you would expect, we're going to vigorously present our position, craft our arguments in a respectful way, and we're going to address this in the hearings and the briefs. And I would anticipate we should be getting reasonable outcomes. But I think the question that would be on your mind is, well, what happens if you don't? And we'll be prepared to assess that when we get there, and we'll be prepared to refile as necessary. So I think it's fair to say that we need to kind of let this play out a little bit. We're not going to do something that I think would create more drama. We're not going to make threats or anything like that. We're going to be very reasonable ourselves. So I think it's important to just note that some of -- we're going to need to let this play out and see how things perceive. But we are definitely prepared to continue the process of filing cases to continue to execute this plan. I don't want to have any question about that.
We think we have a very compelling value proposition. There's nothing on this slide that I think would necessarily surprise you. We have a rate base that grows in a 10% CAGR through 2016. We've been able to deal with our external financing requirements. It was very heartening, frankly, when we did the equity forward, the level of demand that there was for the stocks. So we look at that as a very, very good sign. And so that I can have the pleasure of saying this, we are committed to the dividend. And so in case anybody was thinking that we had veered off that, I'm looking at someone in the back of the room, but obviously, we remain committed to the dividend. One of the things that we want to evolve into is a more typical payout level. So I think you should expect that, that's what our plan is going to be over the next couple of years, and then to be able to grow the dividend in line with earnings growth once we get to that point.
I'm not going to really repeat this. I think we've covered what the 2012 focus is going to be. This is all about execution. This is all we talk about when we're together as a team and obviously, across the properties. So I think I've covered that enough.
So I started off talking a little bit about the last 3 years. It's been a very interesting journey. I think we've made a tremendous amount of progress. I'm extremely proud of my team as we faced even our challenges. We are what we want to be. We see ourselves as a very attractive investment. We have the wherewithal to invest in this system, to meet our customers' expectations and to execute this plan. So I have every confidence in our future as we go forward in time. And I just would want to say that how much we as a management team appreciate the interest that you've had in our company.
And with that, I'm pleased to introduce Dave Velazquez, who will go into the Power Delivery part of the program. Thanks.
David M. Velazquez
Good morning to everyone. Before I start, I'd like to take the opportunity to introduce the members of my team that are here with me today. At the front, we have Bill Gausman, who's our Senior Vice President of Strategic Initiatives. The table behind him is Mike Sullivan, the Senior Vice President of Business Performance. And in the back, at the back table is Mike Maxwell, who's the Vice President of Asset Management. So during the break or at lunch, if you have any questions, they're here as well to be able to answer your questions.
I think most of you are familiar with the company, so I'll just spend a moment here. We operate the Power Delivery business across 3 different brand names, serve almost 2 million customers from Washington D.C., across the Delmarva Peninsula, into south of New Jersey and through Atlantic City.
I wanted to start by talking about 2011. Made a lot of progress on several fronts in 2011 in our business. The top of these, as Joe had mentioned, is improving reliability for all our customers, not just in the Pepco region, but also in the Delmarva Power in Atlantic City regions. Our efforts have been making a noticeable difference to our customers, both during storms and also in day-to-day. So you can see there when we look at the feeders, the specific distribution feeders in the Pepco region, where we have been working since the fall of 2010, those customers realized the almost to 40% reduction in number of outages and over 50% reduction in the duration of those outages when they occur and makes some very noticeable difference to our customers. We had great performance during Hurricane Irene, not just in actual restoration performance, but the way we communicated with our customers. That was recognized recently by the Edison Electric Institute and received one of their 2011 Emergency Response Awards.
Moving forward, on the smart grid, making good progress. In a couple of our jurisdictions, we're almost done installing the meters, beginning to move on to the next phase. Tony is going to talk about the rate cases we have ongoing. And then finally, we've ramped up -- continue to ramp up our spend and investment in our infrastructure. In 2011, we completed almost $900 million in projects, both in the distribution and transmission system. In 2010, our focus hasn't changed, and we're focused on the same things. Number one on that list is improving our reliability, also in our storm response and overall customer service. 2012, we've over $1.1 billion of projects planned. So the spend we spent in 2011 in our infrastructure is continuing to ramp up, continuing to move forward with the Blueprint and finally, also moving forward with our regulatory strategy. And all this work, however way look at it, is all really focused on the bottom line, which is meeting our customers' expectations going forward.
Before I start talking about both our O&M spend and our capital spend going forward, I want to take a minute to talk a little bit about kind of our customers and the customer growth. So on this slide on the left-hand side, it shows that we've got both good customer diversity in the types of customers we have and serve, and then also in regulatory diversity. So we have a pretty good mix having, in the time of recession, 10% of our sales to government customers is pretty recession-proof category and works out well for us. We have a fairly small portion that's tied to industrial, which again, is a pretty good thing in the recessionary environment.
And again at the bottom, you can see that we're not overly dependent on any single jurisdiction for our revenues. When you look across our territory at customer growth and sales growth, it's a little bit of a mixed story between the different regions. Pepco has been the most stable region, been recovering the quickest from the recession, has been almost recession-proof. Unemployment rate is below the national average, expected to track somewhat similar to that, already in the presence of a modest recovery. Delmarva is probably the most similar to the rest of the nation, both in the way it dipped during the recession and also the way it's recovering, and we expect that to continue to track out of the nation as it comes out, beginning to see some signs in some of the different surveys that are out there as hiring occurring in the manufacturing sector. And ACE, I guess, has been the most lagging of the different territories, but beginning to see some uptick there as well. A lot of that is being driven out of Atlantic City, in the casinos. Revel casino was scheduled or rescheduled to open in April. Yesterday, they received approval from the New Jersey Casino Commission to move forward with that. There's 2 major casinos that are under remodeling renovation. And again, all that will be creating jobs there, but still expect that the unemployment rate to be a little bit higher than the national average, and that's going to continue for a period of time going forward.
The next page shows the actual sales and customer growth. We show both sales and customer growth, I remind you, because in a number of our jurisdictions, we have decoupling from revenue. So it's really the customer growth that drives our revenue growth as opposed to the sales growth. If you look at the sales growth going forward and the customer growth going forward, 2012 to 2016, it's pretty steady across all the territories, a little bit under 1% per year, 0.8%. So we're expecting some steady growth, not necessarily high growth, but expected to be steady as we go forward.
For the next slide, I want to talk a little bit about our O&M expense. So this shows the actual O&M for the last 2 years, 2010 and 2011. And it also shows our forecast for 2012. So we're providing a range or a forecast range for O&M expense for 2012, between $850 million and $880 million. And this is consistent with what we've said before that 2012 O&M should be in line with 2011 actual spending.
The next page actually breaks that down for 2011 a little more detailed to give you a sense of where the O&M expense goes, where the O&M dollars go. About half -- about 50% total O&M goes into operations and what we call customer care. Operations includes both gas and electric operations. All the restoration we do, except for major storms, falls in that category. All the day-to-day operations, any construction, expenditures that are expensed and not capital, all falls in the operations category. Customer care, of course, includes the reading of meters, the sending of bills, the answering of phones. Also includes our uncollectibles, as well as our customer communication and education efforts. That's about 50%. You can see we've broken out the maintenance for both the substation transmission and distribution in a category. And then also tree trimming and those together, about another 20%. And the last is primarily driven by administrative and support, which is the overall costs, including all the indirect, I'll say, corporate costs needed to run the business. And 2012, the category breakdown, I believe, at the end of the year is not going to be significantly different from that either.
Moving on to talk about our construction expenditures going forward, 2012 to 2016. This really is just designed to be a summary chart -- a summary table for the 5 years, the total. So the total plan over the 5 years is $5.6 billion. You can see from the pie chart on the left, about 25% of that's in transmission. The rest is in distribution. We put a couple of bar charts on the right to show that, that's pretty evenly spread over the years. At the top chart, you can see an uptick in 2016. That's driven primarily the uptick by blueprint activities in New Jersey, which again, we don't have approval for, but I've put them in the budget in the further end, and also driven by MAPP expenditures in 2016. That assumes a 20-20 in service data from MAPP. And then in the bottom chart on the right just shows the breakout by each of the jurisdictions. It's somewhat evenly spread as well. The change -- if you think about where we were last year at this time in the overall forecast of the dollars haven't changed. There's about $1 billion of MAPP expenditures that are in here now, and that's been replaced, if you will, by about $650 million of additional distribution expenditures, biggest chunk of that being directed towards reliability and about $370 million of additional transmission expenditures, primarily driven by older equipment that we're replacing.
So if we begin to look at the different pieces, first, looking at the distribution expenditures, we break our distribution expenditures when we look at them into 3 broad categories. Reliability, which is about 60% of the total of the distribution expenditures. And as Joe had mentioned, we expect with the level of investment that we have here to be able to meet and continue to meet the reliability standards that we have in the different jurisdictions. There's the customer-driven work, which comprises about 20%, and then load growth, which is also about 20%. And even though we don't have -- we have steady load growth, not real high growth, but we're going to continue to need to add to our facilities. In fact, we have 11 new substations that are planned. I think there's 3 in the Pepco region, 3 in Atlantic City Electric and 5 in the Delmarva region. So they're somewhat spaced out across there as well.
The next page just breaks that out a little bit -- what I've been talking about, in a little bit of detail, shows the actual numbers, as well as exact percentages for each of the categories I just talked about. Also at the bottom right-hand corner is a pie chart that breaks apart those expenditures over the 5 years by jurisdiction. And again, it's somewhat relative to the size of the different jurisdictions. Talking more about the details, I wanted to mention and note the reliability standards, which are new in Maryland. As Joe had pointed out, we have -- we already have reliability standards in Delaware, New Jersey and D.C., and we generally meet those standards. Expect that we will meet the standards in Maryland. Overall, the standards hit a bunch of different areas, not just kind of the overall reliability of the system, but also service restoration, response to downed wires, telephone service factors, a range -- the way we do vegetation management, a range of items in the standard, and each of them has specific requirements we have to meet, which we believe we can meet. I think we've characterized, or would characterize the standards as overall, they're fairly tough standards, but think that they're fair and standards that we'll be able to meet here. The standards are expected to go into effect this summer as soon as they're finalized. Don't expect any changes at this point to them going forward.
I mentioned we have standards in the District of Columbia. The district also went through a process last year to adopt new standards, which they adopted last summer. There are a number of called technical revisions that were made since then in both November and in February. These rules require -- whereas D.C. had a specific standard that was kind of flat or constant over time -- These new standards kind of take that and ratchet it down year-over-year. The standards are set for both frequency and duration of outages for each of the years from now through 2020. We've been pretty clear on the record and publicly that we think that as time goes on, these standards are going to be more and more difficult to meet in a way that I think the customers will find that they're cost-effective in the way we're spending money to continue to get small incremental improvements in the reliability. One of the things we had a petitioned for, that the Commission agreed to, where anytime we do have the right to go in and ask for a revision of the standard, they were explicit in saying that after June of 2015, we could come back into the Commission and talk about our having them reevaluate the standards going forward after that for 2016 to 2020, just about this cost and feasibility issue that we have with them.
As Joe has said, we've been doing a lot of work, and just wanted to give you a little bit of a snapshot of what's been going on in the Pepco region. Made a lot of progress, as I said. We've seen significant reductions in -- or significant improvements in the reliability for the feeders we've been working on. We've made a lot of progress. Our work continues both on these feeders and continuing to expand that to other distribution feeders in the Pepco territory. The first few items on that page talk about, I said, this physical work that we're doing on the system to improve the reliability as we go forward around tree trimming cable replacement, undergrounding at certain areas, and there's additional programs that we haven't listed here, all driving improvements in reliability. But I think the bottom half of that page is equally important, which talks about the way we're communicating with our customers and also allowing our customers to communicate with us, both during events and also just day-to-day around any specific outages they might have, and that is also very important for driving our improvements. And as Joe had mentioned, some of the pictures that you see here are shots from some of the advertising and communication we've been doing with customers just around the reliability work that we've been doing to communicate that with them.
One of the example of how technology and distribution automation is really part of the smart grid, but it's also part of our Reliability Enhancement Plan, I wanted to just give you one example of how this technology distribution automation can help our customers and has been helping our customers. So distribution automation is really taking sophisticated automatic switching devices and moving them closer and closer to the customer, out on the poles that you see up and down the street, so the -- we're really trying to create almost the self-healing network. So that when an event occurs and an outage occurs, we don't have to manually send a truck out there to operate the switch to restore customers and isolate the area of trouble, but rather it's done automatically and very quickly just in a matter of minutes. So we had started a pilot program here, actually back in 2008. This particular pilot involved 3 different feeders that are all tied together in the Maryland area of Pepco's territory. And it shows that there are actually 20 outage events on these circuits. This shows 7 of them where we actually used this, I'll say, kind of self-healing as distribution automation to restore those customers automatically in a matter of seconds and minutes as opposed to taking -- could've taken hours to be able to get the truck out there to do the switching. So the blue bars show the number of customers that would have had an extended outage if we hadn't had this automation scheme in place. The green bars, much shorter, show the actual outages that were experienced by customers. So overall, looking at these events -- these 7 events, there was a 74% -- almost 3/4 reduction in the number of customer outages during these events. We've actually since tweaked this particular scheme a little bit as we've learned more. And if we went back in history, the scheme actually wouldn't have worked for just 7 of the events, but actually would have worked for 14 of the different events that we saw. And I don't -- I won't say that these results were typical. I think 74% reduction is a little bit on the high side, but even as we continue to roll this out, I think we're seeing very significant reductions in the number of outages that customers have.
Moving to the transmission expenditures. It just comprised about $1.4 billion. On the following page, there's some detail around this as well. And again, we break it into similar categories that we do for the distribution. Customer-driven tends to -- category tends to be things like whether it's RAAs [ph] or co-ops who we need new taps off our lines or something like that and providing the work to do that, the reliability category here is primarily driven by age and condition of equipment, the transmission lines or the transmission substations. This would be kind of a like-for-like replacement. We're not really upgrading the facility. They don't need an upgrade. They just that they're very old and need to be replaced. Spare transformers, things like that, would be in there. The load category is driven by our need to supply new substations. I talked about the '11 new substations that we're bringing online. The dollars there would be for that. And then the biggest chunk at the bottom is really the PJM projects, which are in the RTEP plan that they have and is broken down further into some categories under there. The N-1-1, if anyone is not familiar with that, is really the reliability standards that PJM builds to, and there's projects that are designed to help us meet that and any new major transmission lines we have. Show a couple of pictures of a couple of the larger project at the bottom of the page there. So some of these projects are significant dollar amounts. There's also transmission line upgrades and stuff that's done in the substations as well, and we look at all that. We also show in the bottom right-hand corner how that breaks apart by each of the utilities.
I wanted to spend a minute talking about MAPP specifically. I don't really have new news around MAPP. We continue to wait for the results of the May capacity RPM auction. And then also PJM completing their 2012 RTEP, Regional Transmission Expansion Planning, process. Expect that, that process will be concluded probably over the summer or beginning of the third quarter. And some point in that time frame, we have been promised and expect that we will get from PJM a kind of a definitive in-service date for the MAPP project. Note that in January, as part of this process, PJM came out with their new load forecast. That forecast was a little bit weaker, softer or lower than the forecast they had done the prior year. In general, reduced load levels at the eastern part of PJM tend to reduce the need for the project, but there's a lot of other factors that affect the project as well, and we just have to wait to see where PJM comes out with this. Again, the $205 million that we have in the projections, for MAPP project, about $190 million of them are in 2016, so it really does not comprise a major portion at all of our construction plans going forward.
I wanted to spend some time talking about the Blueprint. And although on the construction plan, when you look at the dollars for Blueprint, $184 million, it doesn't seem really significant. I think more than any other project we have here, the Blueprint for the Future that we have will impact our customers more than anything else we have here. The $184 million you see reflected really only is for the advanced metering infrastructure portion of the Blueprint. The Blueprint comprises a host of activities. Like I've mentioned, distribution automation, which is reflected in the distribution side. We've got some advanced transmission projects, which are in the transmission side, Joe had mentioned, replacing our legacy customer billing system. I want to talk about dynamic pricing, which I think is a big next step for our customers, which are beginning to roll out this year. Also of the $184 million I mentioned, about $101 million of that is really allocated for New Jersey. And again, the figures that are shown here, the $184 million is net of the DOEAR, a funding that we're receiving as well.
On the next page is kind of some details around where we stand in each of the jurisdictions, with the rollout of the advanced metering infrastructure. The first row across is where we stand with installation, virtually done in Delaware, over 95% done in D.C., approaching 25% done in Maryland. As Joe had mentioned, very, very -- almost no customers in Delaware. We were almost done with the electric meter installation, have objected, I think, in Pepco territory, in D.C. and Maryland combined, we're still under 2 dozen, I'll say, specific complaints of customers who are refusing meters at this point. So continuing to work that.
The next column really shows electric meter activation. And by activation, we mean, if you look at the third row, really when those benefits that are shown in the third row are becoming available or the amount of customers that have access to those benefits. And we're really focused here on the customer benefits. There's also internal benefits, plus operationally as well, including things like remote meter reading that we're not showing here because that's really our benefit not seen directly by customers. And then finally at the bottom, I've mentioned dynamic pricing, that's beginning to move forward in our jurisdictions, and I think that -- again, that is -- will really provide tremendous benefit to our customers.
One of the aspects that often we don't talk about around the Blueprint is the whole customer and communications piece. If you think about -- although people have used, paid for electricity the same way for 100 years, and we're making some fundamental changes to that in the level of information that people have, the choices they'll have and the ability they'll have to control their usage in ways they never have before. And that's going to take and is taking a very extensive communication effort to be able to make customers aware of the -- make them not just aware of it, but aware of it in a way that they see how they can benefit from taking action. I've shown here just for illustrative purposes what we've been rolling out in Delaware, which is where we're furthest along, but I'll note that we also have a very similar program underway in the Pepco territory. So if you'd start from the top, it's a holistic campaign. We're using all host of different channels to reach our customers. The picture you see in the top right is really kind of a billboard we've been using in Delaware. We've been marketing this under the name of Take Control and there's actually a separate website, the URL, you can see there takecontroldelaware.com for customers to go to. Then reaching directly into community groups and to reach customers that way. And then on top of that, we have a multipart campaign to reach customers directly through direct mail and other direct communications. We've actually rolled through now the first part and the second part of that campaign. And a lot of this highlights and is focusing customers on moving them towards using all the tools and information that's available under what we call "My Account" through their kind of electronic billing platform.
One of the other benefits that Joe mentioned already was our ability to use the smart meters during major outage events. In Delaware, where the majority of the meters are activated, every day we receive outage messages from the meters automatically before the customers call us, letting us know that an outage occurs. Very, very helpful in us being able to see exactly what the problem is. We're not relying on customers to have to call in to help us diagnose kind of who's exactly in or out. In a major event, the end of a restoration typically takes a long time because instead of being able to restore hundreds of customers at a time by fixing a piece or thousands, by fixing a single piece of failed equipment or single tree down, now every time we fix something we'll be able to put in 1 or 2 customers at a time because that's all that's out and the ability to be able to use the meters to be able to check before you send a truck out to check on these individual customer outages is very valuable. And then the storm in Delaware, we saved actually several hundred truck rolls to be able, just by being able to test the meters ourselves from the office to see whether the customers were in or out.
I mentioned dynamic pricing and wanted to talk about this for a little bit. This is really, as I said, the real, this is when the real benefits, I think, really begin to accrue to customers, to begin to see it in a way that they haven't before. Because not only are they, be able to see the information of their usage kind of on an hourly basis across the day, across months, but now they also are getting pricing signals through dynamic pricing to be able to take action, modify their behavior and therefore save as much energy as they want. And like many utilities, we've done a number of studies. We've actually did a test in a pilot program or whatever you want to call it in the district under the name of Power Sense DC to test this -- a number of different pricing schemes. Our general plan in all the jurisdictions is to start rolling it out to customers with a small set of customers, just several thousand, and then follow up the next year with a much broader rollout. The plan is to move customers to kind of a no lose rate, kind of default them off their current rate to a no-lose rate which I'll describe in a little bit. It's typically called a Critical Peak Rebate rate. We -- and then the following year, we're starting the commercial customers that aren't already on hourly pricing, start moving them, again several thousand the first year, and then the following year, to move the rest of the customers over there.
It's in different -- I'll say in different places, in different jurisdictions in Delaware, we're planning to begin implementation. It's been approved in Maryland, Pepco had, had the concept approved and we're still working on kind of the exact form the pricing's going to take. And in District of Columbia, we're kind of almost in the same place. We had hoped to start all 3 jurisdictions in 2012 for the entire summer because that's where you see the biggest benefit. But as it's taking time to work through all of the regulatory issues, that may be delayed a little bit.
So how does dynamic pricing work? What we're calling the Critical Peak Rebate program? And again like I said, this is designed to provide customers a no-lose way to participate. I think that's pretty essential as we're changing pretty radically the paradigm under which customers operate and pay for electricity.
We are cautious. Commissions are cautious of wanting to move forward in a way that customers could see a negative impact. So the way the Critical Peak Rebate rate works and we're calling it the Peak Energy Savings Credit rate is that during the peak periods during the year, especially during the summertime, customers are incented to reduce their usage during those periods. So we would notify customers ahead of time. They would have the opportunity, if they want it, to either automatically or manually turn off various appliances, adjust air conditioning settings whatever they want it to do to reduce their actual energy usage during the peak period. We would tell how much they save by looking at the 3 highest days in the prior month that customers had and look kind of at that hourly profile for each specific customer. Then compare that with what they did during the Critical Peak Day. And whatever savings they had, we would provide them with an incentive, a $1.25 per kilowatt hour is what we've proposed. If customers didn't change their profile, they would just, they would get billed no higher than they would have had they not made any changes. So there's no penalties, if you will, for increasing your usage above your baseline.
On the next page, kind of walks through the actual way this will work with customers. So we move the customers to dynamic pricing rate, as I said we kind of default them over. The first year, it'll be several thousand customers that we would move over to that new rate. Customer lets us know how they want to be notified ahead of time, that there's a Critical Peak day coming up. We'd let them know the day before. If they want to be notified by text, by phone, at their home phone, on their mobile phone message, whether they wanted to receive an e-mail or whether they want to receive it through all of those. However customer wants to be notified, we'd let them know. So we would initiate at step 2, the peak period, customer receives the notification. And then after the event, they can go back up on the Internet through their My Account and see how they actually performed during that and then at the end of the month, there'll be a special section of bill kind of set out that kind of details exactly how they did. And our hope is that after customers begin to get comfortable with this, we can roll out additional dynamic pricing programs. Like with most things, it's not one-size-fits-all, and different customers based on their preferences, their ability to control their usage. I think we'll want different sorts of programs and we'll work our way through offering all of those programs to the customers.
So I think in summary, looking at it, our focus is pretty clear on what we need to do and what we're going to do. We've been focused in 2011, 2012 and going forward, I think on the same things we need to continue improving our reliability, our overall operating performance, our customer service. We have a great infrastructure, our plan ahead of us, $5.6 billion over the next 5 years. This really doesn't include much for MAPP at all, and we still continue to need to invest in our infrastructure. I think we've got a good pathway ahead to continuing to move forward with our blueprint for the future. And again, we need to continue to work on the regulatory process. I think as Joe had commented earlier, we very much understand and believe this linkage between increasing value to our customers and how that drives value to our investors. So with that, I'd be glad to take whatever questions you might have.
On the O&M side, I was just curious if you could allude to like the past 2012 is the expectation that it would return to more normalized levels, like -- or, could you kind of give us a view of how the O&M spending would continue? Is it at this new level for forever?
David M. Velazquez
We haven't really sat down and looked at 2013 in detail yet, to be able to give a detailed projection. But I think when you look at 2011, '12 that's much more indicative of our O&M spending going forward than if you had looked back 3 or 4 years.
Okay. And then I guess just sometimes what I'm still struggling with, is you've had these reliability issues and I'm just never been quite clear if you guys did a very thorough, like root cause? Like what was it specific to guys that created these issues that were more noticeable than other industry peers and then again, your CapEx is so large, like, is it just that when you guys were doing more diversified activities, that the utility had tremendous underspending or -- I'm just trying to understand specifically what it is with your business that had the reliability issues and now has this ongoing high level of CapEx that -- are your -- like I know some of the gas put LDCs have like, need to replace all the bare [indiscernible] of your pipe and things like that. Is that something that's systematic of your service area? I'm just trying to better understand why you stand out so much in this arena.
David M. Velazquez
Let me start with I guess the first half of your question around reliability. I think over time, we've seen that our customers' expectations around reliability and service have changed. Also specifically in the Pepco region, I think when we look historically in a, I'll say, I think it was a 20-month period, we had something like 4 or 5 of the worst, top 10 storms that we've had over the last 10 years in a very short period of time. That certainly helps drive or highlights kind of any difference between what your system is able to do and what customers' expectations are. So I think that was price some of the driver there. With respect to your second question around kind of our infrastructure spend, I think some of what we're spending is, I'll say, just more symptomatic in general of where the industry is. That there's, there is a fair amount of infrastructure spend that's occurring across the industry. Some of the spend we had and we've talked about this, was a result of, especially some of the transmissions, was as a result of timing in the sense that we were doing the MAPP project, there were some other projects we had that, that we had, because of the need to be able to get outages and coordinate all that. We had kind of pushed out further as MAPP has moved out, we've kind of moved those products in, so some of that's just been a timing standpoint as well.
Dave, I was wondering, how set in stone is that $5.6 billion CapEx number over 5 years as you pointed out? MAPP were delayed, but the total numbers didn't really come down. Do you see any scenario in which you guys end up spending less than that or even more than that? And then I have a second question for that.
David M. Velazquez
Yes, we're very comfortable with the number we have out there, the $5.6 billion. These are all, I'll kind of say, traditional utility projects. There's nothing fancy in there, certainly if load growth changes, that could drive the need to increase the amount we spend on kind of a load projects. As we continue to understand, the standards for instance, in Maryland are new. As we go forward, we should think we have the right level of CapEx to meet those standards. As we get more experience in what it takes to meet those standards we may have to adjust it a little bit for that as well.
Okay, that's good. And just given the returns that you see in your distribution projects and the lag issue was is -- the way the transmission returns work in higher ROEs, is there an opportunity for you to change that mix it all? Could we potentially see more transmission spending versus distribution over that 5-year period?
David M. Velazquez
I think the, certainly, MAPP would be, if MAPP were to move in closer, that would certainly drive that. We rely on somewhat on PJM and their process to identify projects that are needed for reliability reasons. If again, because of load growth, generation retirements, less demand response coming in somewhere like that, that could also drive additional transmission spend.
Dave, can you just talk a little bit at how your decoupling mechanisms have worked as customer growth has continued to slow in the ability to kind of make sure that mechanism is true enough appropriately to help the revenue top line?
David M. Velazquez
Maybe I'd defer that to Tony when he does his presentation.
I guess the other question, just on this critical path, the critical pricing load. Does that get counted as demand response from a PJM perspective or does that lower your system load forecast as you think about how it layers into system resource needs?
David M. Velazquez
I think I'm not sure of the formula that's used, but I think it fits in with the formula into kind of the demand response, and we would bid it into PJM that way. And then the credits we'd get from that would accrue back to the customers and help offset the cost of the program.
And what is kind of the timing and expected adoption of the critical path that would reduce load mechanisms?
David M. Velazquez
We're hoping to start in Delaware, Pepco Maryland and Pepco DC in this year, in 2012. That'd probably several thousand customers each I think. Maybe a little bit slower than that, and then the year following we would hope to roll out to the entire residential customer base. So and then a year after that, roll out to the remaining portion of the commercial base that doesn't have hourly pricing already. So it's probably full implementation, trying to count in my head, it's probably like 2, 3 years off, I would say.
How much of your load does that account for then, that's not covered in narrowly pricing mechanism?
David M. Velazquez
I don't know exactly offhand.
With the peak shaving, there's -- the customer is a no-harm standard. What's your concern about -- I can think of several ways to gain that system. I can take the 3 highest days and jack up my usage and that's my baseline. If I'm going to get called on 24 hours beforehand, I'm going to tune my house down to 65, get paid $1.25 a kilowatt hour just to cut down and then jack up after 2 hours. I mean, it's getting there.
David M. Velazquez
There's always going to be free riders on any program. The easiest one would be if you're on vacation, right, on the day we call it, right? You don't have to do anything. But when you talk about people precooling their homes and things like that, that's actually what we hope they do. That's the point of the program, is to shift the load from the peak to another, other hours of the day. So I certainly hope some customers would do that. And if they're not willing to live with a slightly higher temperature during a critical peak day, that's perfect.
There are no further questions. Let me turn it over to Tony to walk through the regulatory strategy.
Anthony J. Kamerick
Okay, I'd like to start by introducing my team that's here for your questions. Unfortunately, Matt Waffen, who's our VP of Regulatory Affairs cannot be here today. But we have Art Agra, who's Vice President of Strategic Planning. Thank you, Art. Ron Clark, our Vice President and Controller; Kevin McGowan, Vice President and Treasurer; and of course, Donna Kinzel, Vice President of Investor Relations. We also have Brian Shivery, who is Manager of Investor Relations and Annie Berry [ph] in the back, helping get everybody here on time and fed. We also have Morgan O'Donnell and Penny Smith, who are the folks outside helping with the nametags and whatnot.
And I also noticed we have Jeff Schneider, our Assistant Treasurer, Jeff, would you stand up for a second? And Tom Sheddy [ph], I think I saw Tom. Tom is our resident CFA and works on our pension.
Okay, I'd like to start, really by highlighting one of our strengths and that is a very deep and talented regulatory team and I want to get into some more details about that a little bit later. They are focused on our rate cases, as you know, and we've got regulatory lag is in our crosshairs and will be probably for the next couple of years.
But also I wanted to highlight a couple of our strengths and some of the successes we've had. Dave talked about some of that. We had a lot of success with our Smart Grid, particularly the cost recovery mechanisms. We've been able to get through a lot of decoupling issues and some pricing things. All these programs are really designed to help our customer manage energy more wisely and efficiently and save money on their bill. We think that accrues to our benefit, as well as theirs. And we will continue to work on the regulatory lag issue over the next several years. And hopefully we'll get some success at some point along the way there.
A little more detail about our regulatory team. We have 60-plus professionals. They all have a lot of experience and decades, literally, of regulatory work. Of course I've got 4 decades myself.
They're all -- we also focus a lot on succession management. We have a very formal process around succession management, as well as training our newer and younger staff in the regulatory field because it is a little bit unique and there aren't a lot of colleges that -- that teach regulatory theory.
I also pointed out Kirk Emge, who is our Senior Vice President and General Counsel, has been working as well with our internal legal staff to beef them up and bring in some talented regulatory legal help. All this is designed to not only help our team learn a deep, regulatory background, but also to develop a good bench strength. So we think we've got what it takes, and we're going to keep hammering at the rate case issue over the next couple of years.
2011 highlights, we'll start with transmission. As you know, we update our transmission rates once a year. And of course, we got that done this past year. It incorporates a true up each year and we pretty much earn our rate of return on transmission. It's one of the parts of our business that does seem to work on a regulatory basis, better than some of the others.
We also have completed 2 rate cases and filed 5 more. We've filed a rate case in each of our electric jurisdictions. And in each case, we pushed the regulatory lag issue. We've proposed the thing that we're calling the RIM, which is a reliability improvement mechanism and we put that in every 1 of our cases. In New Jersey, of course, we already have something similar to the RIM in place, and have had it for a couple of years and were trying to expand that concept in New Jersey, introducing it in the others. And we're also asking for forward test years. We think the combination of the rim and the forward test year is really what's needed in our particular circumstances to allow us to have an opportunity to earn our authorized rate of return.
As I mentioned earlier, we did have a lot of success with our Smart Grid. Dave talked about that, as well as the dynamic pricing issues.
We talk about our regulatory environment. This is 1 of what we think is our strong points. That's the diversity of our revenue. As you noticed, we have a FERC component there of 22%. And as Joe showed and I will probably show later on 1 of my slides, that 22% grows to 28% over the 5-year period. None of our jurisdictions is more than 25% of the pie, so that, that shields us somewhat from some adverse regulatory issues that arise here and there.
We also think that over the past several years, in spite of the regulatory lag issue, we've been able to demonstrate that our regulators, as a rule, follow past precedents and have also helped us with cost recovery for the Smart Grid and some other areas where we can claim that our regulators have really been very supportive. I think this regulatory lag issue is something that -- as you know, we really started in earnest, working on the regulators, providing them evidence, bringing in expert witnesses to discuss regulatory lag, bringing in other kinds of people to try to make sure that the regulators understood the situation in its depth. And we will continue to do that and we will continue to do whatever we think it takes to work on this regulatory lag issue and wrestle it down. So what that means probably, at least from what we can see at the moment, is a lot of rate cases. We don't think that's the preferable way to do this because rate cases tend to be pretty inefficient way of doing things sometimes.
This shows just another way of breaking the pie up. It breaks out the transmission of the distribution pieces of our rate base and shows company by company how that breaks out.
Now we introduced this slide last year, and I think it's an attempt to try to quantify this regulatory lag issue. And I think if you were here last year, you remember me saying that it's probably going to get worse before it gets better. Well that turned out to be true, we now have a regulatory lag issue that we quantify as about $170 million which represents about 3.9% of our revenue and we're doing that on a GAAP basis, pretty much the same way we did last year by coming up with a weighted average, authorized rate of return by company and comparing that to our GAAP income as adjusted for things that don't really apply to the regulatory world. And we quantified the nonrecoverable items in our financial statements as about 25 basis points.
I'd also like to point out that because we calculate that 3.9% as a percent, we calculate the 170 as a percentage of total revenue for the company. What's missing in that denominator is revenue that goes to third-party suppliers so if you try to look at what the effect would be on a typical customer’s bill, it's even less than that 3.9%. It's more in the range of 2.5%. So we don't think it's a major issue for the consumer, but it is a major issue for us.
We also, at the bottom of the slide there, we are quantifying -- if we can make some headway here, cut into the lag by 50 basis points, we can add $0.07 to our earnings per share, and if we can cut it by 100 basis points, we can cut it by $0.14 a share, all calculated on current shares outstanding.
This is really just a summary of our -- the rate cases that we have pending at the moment. Filed, all of these were filed in 2011. You could see the numbers there and the expected timing of the decision. It's a total of $247 million that we're asking for.
And this is a new slide. We thought maybe if we could take the $247 million and kind of break it down into what's really behind the need. And as you can see, it's split kind of evenly between rate base and operating expenses and we quantified the proposed increase and the return on equity as $35 million, and then there's some AMI costs, as well as some storm-related cost, but it's really being driven by what we all know and that is the operating expense and the rate base.
As you all know, regulatory lag, we say it so often we think we're a broken record. But regulatory lag will continue to be our primary focus. We've gone at it in these cases, with these mechanisms that we think will help. And if we can't get that, then we're back in filing more rate cases. What's really driving it is what I just showed you. We're growing the rate base. The operating costs are growing. We're really not growing the top line, the revenue line. Somebody mentioned low growth in the number of customers. The sales, whether it's customer growth or sales growth, they are all basically around 1%, maybe a little less, and you can't grow the revenue organically with a 1% growth in billing determinants and then grow your rate base by 10% and earn your authorized rate of return unless the regulators help us out and give us something that's more appropriate for our circumstances. We have had a lot of work that's gone into these 5 rate cases. And I think every time we go in for a rate case, we set new records for data request questions that come from the other parties in the case. In Maryland, for example, we're up over 2,700 a day requests that we've had to respond to and they're still coming in, even though the parties have filed their cases, they're still asking data request questions. So when I look at those questions, and I see the product that comes from the testimony that the other parties file, it's pretty clear that some of the questions are really not relevant to what they're testifying on, so we think it's an inefficient process. And in order for us to be able to respond and still do our day-to-day jobs in accounting and in other parts of the company, because these day requests ask about everything in all functions of the company. So Dave's folks for example, particularly Bill Gausman, spend a lot of their time doing day request responses. And so we're finding that the volume as such that we may even have to start hiring more people to answer the questions.
These next several slides cover each of the cases that we're -- that are pending and give you some additional detail about it. This one is the District of Columbia. We've been through the hearings in the District of Columbia. Toward the end of the hearings, the chair of the DC commission asked us for a lot of more detailed information around the projects that were included in our reliability improvement mechanism. And it caused a little bit of a delay in the procedural schedule because it took us a couple of 3 weeks to pull all that detail together. And so as a result of that, the case has been delayed somewhat. We think now we're looking probably at the third quarter for a decision in DC.
New Jersey is another one we filed earlier in 2011. We're supposed to get testimony from the intervening parties next week. And also, this is a case where we didn't have the RIM as I mentioned earlier as part of our case. That's a whole idea of I think it’s a -- an infrastructure investment program is what that mechanism is called, and we're handling that as a separate case in New Jersey, so we've actually got 2 cases going on there in New Jersey.
In Delaware, Delaware is that -- one of the states that has a 7-month statute. And so if the order is not out in 7 months on the date we filed it, we're allowed to put the rates into effect and that happened in our last Delaware case. And it looks like, based on the procedure schedule, that's what'll happen here. We've already put $2.5 million of the request into effect and under law we're allowed to do that. And it looks like the Delaware case won't be decided until the third quarter, which is beyond the 7-month period, so we will probably, we will put the full rate increase into effect in July.
In Maryland we, as you know, we have 2 cases. This 1 is the Delmarva case. We got last week, last Monday we had the opposing party, parties filed their case. Obviously, we're very disappointed in the proposals that they've got. Our rebuttal testimony is due July 6, but it does look like the case will be resolved on hand in July.
Our view is that in order for us to be operationally successful, we need to be financially successful too. The 2 go hand-in-hand. We can't go out there as you know, spending money and not get compensated for it. It will hurt our financial ability and eventually lead to the customers having to pay more than they otherwise would, so we're trying to de-stress that point in our cases, with -- particularly with the Maryland commission.
The next one is the Pepco Maryland case. And as I said, we've got some very, very, almost bordering on, in my view, unreasonable proposals in the Pepco Maryland case. Our rebuttal is due July 11.
Remember that in Maryland, and for the Pepco case, there's a big depreciation issue here also, so we proposed actually lowering our rates, depreciation rates, as part of our proposal when we filed the case, and some of the proposals that the 2 parties are putting forth take those rates even a little bit lower. So in spite of the low revenue numbers you see there, the earnings effect will be considerably higher.
We thought we'd pull this slide out from the appendix and put it in the presentation because it's been several years since we covered in detail how the transmission formula works and we thought that'd be a good idea to do again this year.
It's basically a bottom-up driven formula where we start off with data from all our Form 1s and we use the data to develop a rate base, to put the capital structure together and calculate the overall rate of return, which is based upon a preset returns on equity. As you know most of our transmission plant earns an 11.3% rate of return on equity and certain incentive projects that we ask for. And if we're approved, we're allowed to a 12.8% rate of return, 150 basis point adder. And so all that goes into developing the overall rate of return, which multiplies by rate base and that produces the income and then you just add from the income all the various expenses that are transmission-related until you get to the revenue number. And the revenue number goes in into effect in July. And we true it up to last year's expenses and rate base. So that in theory, over time, we will earn the authorized rate of return. It's just a question of sometimes there's a little bit of a lag and we also are allowed to put in projected transmission additions or cut-ins as we call them, during the year. So that for example, in 2012, if we have projects that we're projecting to go into service anytime during 2012, we calculate that as an average in terms of the number of months it was in service and that gets added to rate base, and so we really don't have much lag on our transmission business.
I'd also mention that we earn on allowance for funds used during construction for the transmission business and I'll get into a little bit more of that on this next slide.
This shows, the -- for each company, the old revenue and the new revenue and the bottom line income that we expect out of the transmission formula. You'll note that some of it again is at 11.3%, and some of it's at 12.8%. And it really gives you a preview of what we're going to have in the new 2012 to 2013 year. Slight increase in total, compared to last year.
As I said, we also, in 2011 had about $11 million of earnings on transmission that came from AFUDC, so that's additive to these numbers.
Just a real quick summary of where we are on decoupling. As you know, we have decoupling in the District of Columbia and Maryland and the Delaware Commission has approved decoupling and in concept, we've been working on customer education issues and things that the commission wanted to have us work out in terms of implementation of it. As we look at it, there's about 2x during the year when you can implement decoupling and have it the revenue neutral for the calendar year. And so we're hoping to get by the end of this year, all the customer education and all implementation plans finalized so that we can implement it at a point in time when there's -- when it can be revenue neutral.
We've asked for some nontraditional cost recovery mechanisms to help us with the regulatory lag and people ask us, well, are there precedents for this kind of thing throughout your service territory, and the answer is yes. So we put a slide together here that shows, state-by-state, some of the nontraditional cost recovery mechanisms that we have in place, obviously decoupling. We have several surcharges for various things. We have the tracker that we use for our Smart Grid investments. So all of the commissions out there have these precedents.
So in summary, I would say we've changed our strategy as Joe talked about earlier. We're committed to this business, this T&D business. We're going to be in it in the long-run and then we are going to hammer on the regulatory lag issue, year in and year out. And you will see either success with these regulatory lag mitigation mechanisms, or you will see us doing rate cases virtually all the time. We're going to be basically in the rate base business. And so we are committed. We think we have the talent, the tools and the strategy to wrestle this regulatory lag issue down, and we're just going to keep at it until we're done. So with that, I am open to questions.
In Maryland, if you get a disappointing result in the 2 cases pending there, especially the Pepco Maryland case, your response would be to file another rate case. But are you also considering seeking redress fronts?
Anthony J. Kamerick
Yes, we are. Obviously we have to read the order and we'll do that very closely and see if we have any opportunities for an appeal.
And this would be in state courts?
Anthony J. Kamerick
I assume so. Kurt, do you want to? He's nodding, so the answer would be yes. Now I guess I would also say that if we got a really, really horrible order in Maryland, let's say they adopt the staff proposals. In my mind, we have some really tough decisions to make around our spend. So any other questions?
Looking at your -- the various states that you operate in, are there target ratings?
Anthony J. Kamerick
Target credit ratings? Well, I don't think we really have target credit ratings, but I would say we don't want to be downgraded. Start there. And we would like to get upgraded, but I think somewhere in the BBB+, A, A- range, is in our view, where we want to be. It seems to minimize the cost of the customer and still give us a good, strong access to the credit markets.
The reason I ask that is, you look at the transmission business and the thing that I worry about is the state regulators might be using that as a subsidy for the distribution business and there's continued lag on the distribution side because of, on a consolidated basis, you're still seeing the preservation of a certain metric or a certain rating profile. Is that a concern on your end or --
Anthony J. Kamerick
I've never seen any evidence of that. It's not a factor in any way in any of our distribution cases, no one has mentioned it or brought it up. So I would say from my vantage point, I would say there's none, but at least I can say I don't see it.
On the revenue lag front, is it O&M that's causing more of the pressure? Or the lack of rising O&M in the revenue amounts? Or is it the historical test year that's being used? Which of those 2, or is it a combination of both?
Anthony J. Kamerick
Well, I guess I would say it's probably the use of historical test year with average rate base. Now, you can use any historical test year and average rate base if you properly adjust it for things that are coming in the future. The whole idea, in my view, of the regulatory process is that it's suppose to allow us as an opportunity to earn the rate of return during the period the rates are into effect, and so in order to use a historical test period, and still give us an opportunity to earn the rate of return, people have to look out into the future at future types of spend, like particularly the projects that we've proposed for the RIM. We're spending a lot of money. It doesn't generate revenue organically. It's for infrastructure, it's for reliability and we don't get any revenue from that. So it'd be fairly easy, in my view, to say "Well gee, why don't we add that to the rate base, take a historical test year, but add the, a year's worth of these types of investments because we know the company's not going to any revenue from it." But that's something that we talk about a lot in the cases but -- and the commissions have done a limited amount of that but I don't think they do enough. So you can use historical test period, but you've got to put a lot of stuff in there.
Carrie Saint Louis
I guess where I just struggle with is that there's utilities in the States that you operate in and Maryland and New Jersey that don't seem to have these acute regulatory lag issues like you do, I think of BG&E. They seem to earn a more normalized rate of return. I think of PSE&G in New Jersey, and I think the same way and I also know they've been using trackers and other mechanisms. And have you guys hit a point where you're just like, do you need to hire talent from the outside to help, like-- what is, like what's the situation where these other companies have managed to implement rate design and structures that are allowing them to earn closer to their authorized return and you guys have just continued to suffer. And I would just think that was low commodity cost, you're saying that customer bill impacts 2.5%, like these things are not insurmountable. I understand DC and Delaware are very unique jurisdictions. I'm not targeting those, but I would think at least in Maryland and New Jersey you would have a better opportunity as others are. I mean, when do you -- if you're thinking of cutting back CapEx, that's one solution. Do you think about changing up your management as another like -- when do you start to take more aggressive stances to getting this problem corrected, because it just seems to kind of linger.
Anthony J. Kamerick
Well, Carrie, we have put on very, very strong cases in all of our jurisdictions. I don't think changing the company's management is going to change the mind of the public service commissions that regulate us. So I think that is, in my view, a bizarre question. I do think that our regulators are reluctant to adopt mechanisms that are adopted in other states. And in our situation, we have, as I said, kind of a flat revenue line and a growing investment. And so I think that, that sort of produces the result that we have. If we don't have a mechanism that allows us an opportunity to earn a rate of return, we're going to have regulatory lag. We'll eventually catch up with it when the spend starts to level off. But this is a 2 or 3 or 4 or 5-year period where it's a struggle.
Tony, I mean when you look at what the Chairman of Maryland said in New York last week and kind of the way the staff has responded in their filings so far. Is there a disconnect, an educational disconnect going on between your situation and how they perceive the world such that when you got to do whatever happens with these cases that you're better off taking time to try and educate them in a less public forum to have a more honest dialogue before filing again? Is that a viable strategy or is it going to be your filing the day after unless something really good happens?
Anthony J. Kamerick
Well you know we have a Phase II in our Delmarva case last year, where we had an opportunity to meet with the other parties, particularly staff, and People's Council outside the hearing room. And we did hire some third-party people, somebody who is renowned for his work on regulatory lag issues and has published several articles. And we hired that person specifically to help educate the parties in Maryland, and we thought that, that would be very helpful when we went back in again. But the parties still are reluctant to adopt any of these proposals. We put a lot of educational content into the filings that we had this last round. Again, we hired 3 or 4 outside witnesses to present the case and the evidence. The evidence is there, I mean it's stark and it's uncontroverted by any party in the case. So I think it is just a reluctance on their part to veer off their traditional way of doing things. So...
When you look at your other jurisdictions where you've had contentious situations, where you have not been able to earn your live return, and Arizona stands out as being one of the spaces historically. Your action didn't happen until the credit quality of the utility and the parent were put at harm's way, if you will. How important, ultimately, is it for you guys to protect the credit rating of the Maryland utilities today? And is there kind of a reinforcing element of issuing equity right now that makes the commission thinks you guys will subsidize the customer rates on an ongoing basis?
Anthony J. Kamerick
I don't know how to answer that question. I think that we've got to keep hammering at the issue and eventually I hope that the commission will begin to realize that they need to change what they're doing. As I said earlier, we had some successes on Smart Grid, cost recovery. We have decoupling. We've been able to move the commission in the direction that is best for the customer and best for the company. All it really requires is a balance. And right now on this particular issue, the balance is just way in the wrong direction. We need to swing the pendulum back more in the direction of the shareholders. So I don't know how to say it any better than that. We just got to keep filing rate cases and keep doing everything we can.
Tony, to clarify a point you made earlier. If you do go down the path of annual rate case filings and they continue to focus on historic test years. Should we assume that, that strategy will be to annual CapEx is what it is? Will that strategy lead to a freeze of the lag and keep it where it is, will that actually reduce it or will that still cause it to grow, but perhaps not by the same amount? What does that really gets you in that scenario?
Anthony J. Kamerick
I think if we could file every 9 months, we would make some inroads on it.
Even with the historic test year?
Anthony J. Kamerick
Yes, I think so.
Okay. And secondly, also to clarify, you said if the Maryland decision is close to the Star position, you have to make some tough decisions. CapEx would have to be looked at. At what point do you actually throttle back on that CapEx? Do you feel that maybe another round or 2 of rate cases is still required to get a clearer picture of what these guys really want from you? Or I mean, is that something we could really see later this year, revisiting then production of that CapEx program?
Anthony J. Kamerick
Well, I think that as Joe said earlier, we need to let this process play out, and I don't think we're in a position where we are going to throw down the gauntlet, or do something like that. We want to work the issue.
Tony, maybe following up on all those questions you highlighted in a part of your formal presentation that you stood here a year ago and said, lag would probably get worse before it gets better, and you were right as you indicated. Maybe you can tell us, it seems by your comments and in response to these questions, it's not getting better in '12. It -- and maybe you respond to that and then, if that is right, when do you think it starts getting better? And obviously, I think you're saying it depends, and we're not sure how fast, but sort of ignoring the acceleration factor or potentially, deceleration factor, now just talk about direction. When do you think we hit that sort of bottom? When does it stop getting worse?
Anthony J. Kamerick
Let me start by saying that we're not thinking negatively on this. We're thinking positively. So we think that we will make some headway. We have put on, as I said, some very strong cases. We hope that the Maryland Commission will use a more balanced approach to setting the rates. And that would go to the other jurisdictions too. We hope they use a balanced approach, so that we have some opportunity to earn the rate of returns. Again, I'm not being negative at all, I hope. I'm very optimistic that the commissions will take note of what we've testified to and do something. Realizing that in the long run, it helps the customer if they can strike the right balance.
So you think regulatory lag will be lower sitting here next year?
Anthony J. Kamerick
Yes. I'm confident that it will be lower this time next year. Of course, I won't be here that long, but it's going on a strong basis. We're going to refile. I think it's going to get better. Joes?
Joseph M. Rigby
Yes, based on that -- yes, if it's not lower, he will be here next year. I wanted to make a couple of comments. And I'm glad, we're having kind of an extended dialogue on this. I wanted to maybe start with a question, I think, Carrie asked actually to Dave. And I don't mean to kind of go off on a tangent. But I think maybe this might offer some perspective. I would say sometimes, towards the beginning of the latter part of 2007 into 2008, actually when I became COO, just kind of looking at where the company was, understanding the reliability metrics across a whole range of performance parameters. It was pretty clear to me, and I think to others, that we were in a situation where we needed to really ramp up our investment, and to make some changes to the way that we were doing business. We understood, and it certainly got much more difficult towards the latter part of 2008 when the world started to come to an end, that we were facing a tough situation. And if you recall at that time, I think we modified our CapEx program back. Now did that have an impact in the near term? No. But as we moved out of 2008 into 2009, it was very clear that the situation and the company was such that we could not sustain a spend level that we felt that we needed to meet customer expectations. I don't say what I'm about to say to offer an excuse. It's just the facts. We began on that program towards the middle of 2010. We had just sold Conectiv Energy. And we got hit with some hellacious storms and the timing wasn't working on our behalf. It was right on the front end of an election season. And I can tell you, that the level of stress and the criticism was like anything that we had ever experienced in our corporate history. And a lot of it was obviously located right here. So it was very clear to us, that we needed to run even faster. So when you look at the ramped up O&M spend, when you think about how we are talking about this commitment to this CapEx program, it is really to take a longer view to avoid what we just lived through. The standards that are put in place have real teeth in them. So we're not going to stand here today and tell you that we're going to draw a line in the sand. We are telling you that we hold very close to our chest, the credit ratings of our company, and we're going to do what we need to do to preserve and protect PHI and its subsidiaries. We need to let this process play out. It would be easy, but probably not well-informed for Tony or I to stand here and say, if we get a bad outcome, we're going to cut cost. I just don't think that's a winning hand right now. Last summer, we took customer satisfaction survey in -- for Pepco. It was really bad. In 4 or 5 months, we had made a dramatic improvement. We are improving every day. Every day, we get anecdotal information that our customers are more and more satisfied. I don't want to step off that path yet. I am just convinced that we're on the right path and that those -- that improvement operationally is going to intersect at some point with the regulatory process. We are fully ready to refile. We're going to make good decisions. We are talking everyday about options. Should we get a bad outcome or a series of bad outcomes, I think all of your question of like, would you go right back in? And how many bad outcomes would it take? Well, we're going to figure that all out. But we are going to stay the course. We can handle this situation. I'm convinced that if we were to veer off and to behave in a way that we're not committed to improving reliability, is going to create a bigger problem that we don't want to have. But we will be smart, and we'll deal with the facts as they unfold. So can I just want you to understand that, as Tony mentioned, this is the key financial issue that's in front of this company. I believe that we can get to where we need to be. Jay, I do believe things will be better next year. We can move the needle. And if we don't, then we'll just bring Tony back. Thanks.
Anthony J. Kamerick
Further questions? Okay, I think it's break time. 15 minutes. So back at about 5 after 11.
John U. Huffman
Okay, I want to welcome everybody back from the break. We're going to go ahead and get started. I'm John Huffman, President and CEO of Pepco Energy Services. And this morning, I have 2 of my teammates here. First, I'd like introduce Mark Kumm, who is doing an excellent job in terms of managing the wind down of our Retail Energy Supply business; and Pat Sweeney, who I think is not back from break yet, but he is leading our sales and business development efforts. There he is. For our ESCO side, David Weiss, who runs our ESCO, is out of town today, but I'm pleased to have both Mark and Pat here today with me.
So with that, I just wanted to go ahead and get started. I think most of you, you all know that Pepco Energy Services is the unregulated competitive arm of Pepco Holdings, where we focus on serving the energy needs of government -- large government customers, such as military bases, universities and other large institutional-type facilities. We're a leader in terms of developing energy efficiency projects. That's the primary driver of our business. We're building our Combined Heat and Power business, which is becoming an important part of what we do and complements our energy efficiency business. And then through our subsidiary, W.A. Chester, we also construct underground transmission lines for utilities.
Our Energy Supply business is well on track in terms of winding down. The business has been profitable and again, through this year, we expect it to continue to be profitable. We provided some gross margin and O&M updated numbers for 2012. And as you can see from the chart in the lower right here, that once we get through 2012, the size of the business really trails off dramatically. So at that point, we really expect that the -- any earnings contribution to be negligible from the Retail business.
As you know, we own 2 power plants here in DC, and we are prepared to retire those at the end of May of this year. And based on where the current energy prices are, again, we -- our collateral is -- we've been reduced dramatically and we expect it to be about -- at the $40 million level by the end of the year. It's currently just under $100 million.
So in terms of -- in 2011, as -- we made a lot of progress in terms of growing our Energy Services business. Just from a financial performance, the -- our operating income of the business doubled year-over-year. And we signed almost $130 million worth of contracts. And the volume of the business that we're pursuing, what we call our perspective project development pipeline, our pipeline, grew significantly during the year. And so -- and we were able to do that in really some challenging economic conditions, which I'll talk about a little bit later in the presentation. We made progress in terms of building for future growth. We added additional staff, and we opened up 2 new offices. And also, we just recently landed our first big Combined Heat and Power, or CHP project, the DC water project that I'll talk about in a moment as well. And our underground Transmission construction business also performed well. So all in all, very pleased with the progress that we made in 2011.
So as the wind down of the Retail business nears completion, we're -- going forward, PES will be organized really in 3 groups. And this chart shows energy efficiency, and it also details kind of how we're organized in terms of pursuing the different market segments. Our Combined Heat and Power and Thermal group, as well as the W.A. Chester. And the pie chart shows kind of the breakout of where we expect the earnings to come from. As you can see, the primary driver is the energy efficiency business, while the CHP business also provides an -- plays an important role.
And so this next slide, what I thought -- I've reviewed in the past with you all, kind of how the energy efficiency projects work. And I thought it will be useful to compare the Combined Heat and Power projects because there are some differences. And the first thing you'll note is that Combined Heat and Power projects tend to be bigger in terms of the size of the projects and what we charge our customers, and the revenues we get. And -- but on the flip side, the margin percentages tend to be lower than energy efficiency projects. Another difference is for pretty much every Combined Heat and Power project that we've done and that we intend to do, there's a -- once we construct a project, there's a long-term O&M service agreement that goes along with it where we'll operate the plant for the customer.
For energy efficiency projects, that's true in about 20% of the cases. Most times, we just build the project and the customer operates the equipment that we install. But in some cases, on the energy efficiency side, we do operate and maintain, and actually, we're seeing a trend of that increasing and it's something that we're -- we're pursuing more of those.
I've talked about the lengthy sales cyle on the energy efficiency side of the business. Again, we're -- our focus is government customers and they are deliberate in their decision-making. Combined Heat and Power projects because they tend to be bigger and more complex, just carry a slightly longer sales cycle with them. And then in terms of kind of the guarantees that we provide, are really the value proposition that we bring to our customers. We're on the energy efficiency side where we guarantee the energy savings that allows the customer to have confidence that there'll be money to pay for the P&I on the -- on financing the project. We don't do that, really, for Combined Heat and Power projects. It's more based on where we design, build and operate the facility. And so the customers look to us for a minimum energy efficiency guarantee. So we convert the fuel to useful energy and it's that guarantee or efficiency guarantee that we provide.
In no case, do we take commodity risk. That's always maintained with the customer. And then, I guess just the other thing I'll note, is that both parts of the business, again, the customer either finances it or there's third-party financing involved. And so that the capital required from PHI is really working capital and not a long-term investment. So that fits well with PHI's overall strategy.
So I wanted to talk a little bit about our recent project that we signed in February, the DC Water Combined Heat and Power project. It's a project that we're really excited about. It's a 15-megawatt facility. The construction value is about $80 million. And then once we complete the construction beginning in 2015, we'll begin a 15-year O&M agreement that's valued at about $90 million.
So -- now what makes this project really interesting is that our Combined Heat and Power facilities is integrated with DC Water's project. DC Water is actually constructing at what's called an advanced wastewater treatment facility. The technology has been used in Europe. This is the first project in the U.S., and what we'll do is we'll take the biogas from DC Water's facility, run that through a turbine to produce electricity, and then we'll capture the waste heat and send the steam back to the DC Water's treatment facility.
So it's a really interesting technology and it's the first of its kind here in the U.S. And one of the things that's happening in the wastewater business is that with landfills really being -- becoming filled up really and the cost to send solid waste to landfill is becoming cost-prohibitive. This new facility that DC Water is building will obviate the need to send any solid waste to landfills.
So it's a highly visible project in the industry. A lot of folks are watching this, and we expect that more of these types of opportunities will come along. And this project certainly enhances our competitiveness, not only in this specific sector but just in terms of pursuing Combined Heat and Power projects in general.
So in terms of our overall market expansion, we kind of think about this in 2 ways, because traditionally, we have done the energy efficiency. But here in the last 3 or so years, we've really -- I've talked about the Combined Heat and Power and we started -- and we've always had that skill set. We've -- our first Combined Heat and Power project, we actually did back in 2000 at the NIH campus. But -- so it's a skill set we've had, but we really set our sights in terms of purposely growing that team and pursuing that market. And so we're starting to see the fruits of that labor here with the DC Water project.
Another kind of new segment that we've been building is the public housing authorities segment which is -- it's a specific niche within our energy efficiency business that deals with subsidized housing. And so HUD [ph] is involved, the housing local authorities involved. So it's a unique -- requires a unique set of market knowledge. But again, we started building that business in the team about 3 years ago, and we've so far been awarded 6 projects. And I think we have actually signed about 3 projects in different states.
So those -- so we're going to continue that kind of growth in terms of exploiting those market segments and perhaps to the extent others come about, we'll take advantage of those.
The other aspect to our growth is just a geographic expansion. Historically, we've been really focused here in the narrow Mid-Atlantic region. But over time, we've expanded and we've -- I've mentioned the 2 offices we opened up last year. So we now are -- the map depicts where we're actively pursuing projects, where we've actually won projects. And so that -- again, these 2 factors are helping to fuel our growth.
Now obviously, it's a people business. So we need -- we do need people to be able to have the capacity to be able to grow. And the chart in the upper left shows our staff in terms of the -- that are focused on developing these types of projects, how it's grown, and you can see it's basically doubled over the last 3 to 4 years. And so, it's really a combination of the staff, geographic, new markets that then really turns into a -- really driving the amount of business that we can pursue, which again we characterized as our pipeline. And then that in turns -- drives the contracts that we signed. And again, it's a lumpy business. I mean, that's just the nature of it. But you can see the chart in the upper right, that the trend is certainly going up. And in 2012, the year to date, that the biggest part of the green bar, the contract signed, is of course the DC Water project. And -- so that came out of our pipeline. So as we go forward this year, I'm quite confident that we're going to set out a record kind of high level in terms of signing contracts, and then I fully expect that we're going to replenish our pipeline.
And then, we also have a chart in the lower right that kind of ties into the -- I think it's Slide 16 but it's the last slide in the PES deck that talks -- that you've seen before, that talks about our backlog. And this kind of -- what we did here is we broke it out by the next 5 years. Of course, our longer-term contracts like DC Water and the ones in Atlantic City extend way beyond there. But anyway, this -- we thought this would be helpful.
One thing I did want to note, that basically the purpose of this, is if we did -- if we sign nothing else, this is kind of what the gross margin that we'd expect. So obviously as we go forward, we plan to sign more. One point of clarification for the W.A. Chester and the renewable energy project, those 2 actually don't represent signed contracts. That's -- those, as you can see on the slide in the appendix, kind of represent the run weight. But other than those 2, the other -- the CHP and Thermal, the construction and the O&M, all represent contracts that we have signed and our estimated margin from that.
So anyway, that is -- hopefully, that's useful. And -- so anyways, so I -- I mentioned on the earnings call and earlier in my presentation, we've really achieved and our achieving good growth. But the market -- there's been some market challenges and I -- really in 2 areas, on the federal and other local and state governments.
The pie chart on the right shows kind of the breakout of the different segments that we're pursuing in the energy efficiency business. And you can see state and local is almost half, and the federal is a big key to that. And there's different dynamics that's going on. On the federal level, when the government awarded the contracts to different escrows such as ourselves 2.5 years ago, the expectation is that a lot of work would come from that. And the reality is, not much has happened. And this is not just PES but it's an industry-wide phenomena. Really, what kind of slowed it down at the beginning is the stimulus program actually diverted all the attention and the resources to spending that money, and really took away the focus from our type of contracts.
That's all kind of cleared the system and all that money has been spent. And so the attention is now coming back to our types of contracts. But again, just given the sales cycle and whatnot, it just -- it takes time to build up the pipeline. But I'll talk a little bit in a moment about some of the positive signs we're seeing.
The state and local government market is a really completely different dynamic that's going on. There, it's really the economy, and as state and local governments are feeling the stress of lower tax revenues and whatnot, their focus really has shifted to being very cautious and worrying about balance sheets. Our projects, because they're financed with third-party debt, do use capacity on the state government and local government's balance sheets. So what we're seeing, it doesn't mean that the projects have stopped, by any stretch, we're still doing projects and you can see that from our growth. But we can point to many examples of projects being scaled back and customers taking more time to make decisions. So these 2 kind of challenges have really impacted, we at PES as well as our competitors in the industry.
So now having said all that, there's still some positive market drivers that are out there that really speak well of long-term growth for this business. And really, the significant -- I guess the key driver really, has been and will continue to be the fact that there is a significant amount of deferred maintenance at federal, state, local government facilities that -- and that facility managers can't get the capital through a normal capital budgeting processes. So that there's a real demand for our types of performance contracts where the energy savings basically fund these capital improvements. And that's really what's driven the growth in our business, and it's still there. And as the economy improves, we fully expect to see the activity increase on the state and local government markets.
At the federal level, President Obama recently came out with a memo directing all federal agencies to implement $2 billion worth of performance contracts over the next 2 years, and he specifically referenced performance contracts. And just last week, at an industry conference here in Washington, the Army came out, announced that they are planning on spending -- or implementing almost $1 billion of worth of performance contracts over the same time period.
So again, we're starting to see a real focus and attention, being drawn to this sector. There are tax credits available. The 179D tax credits add to our profitability. They've been extended once. They're up for renewal in 2013. We're watching that. We're expecting that those will be renewed. The interest rates continue to be very favorable. Typically these projects are financed with tax-exempt interest or debt. And then -- and what we're seeing of an active market for our Combined Heat and Power projects, there are projects that we have under development, and we plan to continue to grow that business.
So what does all this mean in terms of our earnings expectations going forward? And what this chart lays out is in a pretty granular fashion kind of what our expectations are. And I just would start with the -- on energy supply side, you'll note that, that for 2011, we're expecting about a $0.09 per share drop, and again, still profitable but just a reflection of the wind down of the business. And given the market challenges that I just discussed, we're expecting that 2012 for Energy Services is going to be flat. And then, as we evaluate kind of where we are, how we see the market, we're expecting that we'll be at $0.15 by 2016. So we're moving our EPS growth target out by 2 years.
And so, our growth will no doubt be continued to be driven by kind of our increased capacity to do business, our increased staff, our geographic and market segment reach. And coupled with what we believe will -- that the economy through this period will rebound and that we do expect to get that traction on the federal level, that the $0.15 is doable. So, to summarize, the profitable winding down of the Retail business is squarely on track. We're making significant progress and profitably growing the Energy Services business. And it's a business whose risk profile really fits with PHI's, while contributing increased earnings as the business grows. So with that, I'm happy to take any questions.
Anthony J. Kamerick
Okay, this won't surprise anybody but our financial objectives are the same ones we've been showing you for the last couple of years. We're focused on investing in our T&D business, earning our authorized rate of return, and maintaining good strong credit ratings for the balance sheet and the cash flow.
Dave Velazquez showed you the Power Delivery construction budget for the next 5 years. This shows the total construction budget so it adds PES into the mix, and really is a lead-in for my next slide, which focuses on rate base. You've seen this slide a couple of times before, but I think what's notable here is that we've moved the map project out to 2019 to 2021 period. And we're still looking at about a 10% annual growth rate for our rate base. And you can see there the transmission part of that, of the rate base is growing from the 22 to the 28 that we showed you earlier.
Here's a snapshot of the transmission rate base, a process through our formula rate for the next several years so that you can see the expectation for earnings out of the formula of -- for the next several years. And you can see that, that's growing at an annual compound rate of 15.7%. And again I'll mention that, that does not include the AFUDC earnings that would come out of accruing on construction work in progress, which amounted to about $11 million last year.
Strengthened credit profile, this is -- this chart we showed you a couple of years ago. We're staying true to our goals of maintaining a good strong credit rating, and keeping the metrics so that, that's assured. The equity forward transaction that we did a week or 2 ago, obviously, will help us maintain those balance sheet statistics.
We renewed our credit facility last year. It's now expiring in 2016. We kept the $1.5 billion number unchanged. Some of the added credit facilities that we had added over the years did drop off. So this is our credit facility at the moment. It also add -- gives us a little more flexibility to increase or decrease the sublimits within the $1.5 billion among the utilities and non-utilities.
Financing, as you know, we completed the equity forward. As I mentioned a minute or 2 ago, the proceeds from that offering, and we're planning to take the shares down later this year, probably in December, the cash will be used to make sure that our equity ratios are in the 48% to 50% ballpark for the utilities and in the mid-40s for the utility -- I mean, for the consolidated. I think with that issuance, we've debated how to say this, but I don't think we see another equity issuance for at least 2 years. So I'll say it that way. I think that it's likely that it will be more than 2 years, but at least 2. I'd also mentioned that -- we've mentioned a couple of debt offerings, one for Pepco, one for Delmarva. We're probably going to finish those before the end of the second quarter.
This slide just gives you a snapshot of our debt maturity profile and as you can see, it's a pretty diverse by company and very manageable in size, and spread out over several years. So there's no one year that should cause us any heartburn.
Here's our projected cash flow for 2012. As I mentioned, we do have a couple of debt offerings in there for the utilities. So we've got that averaged out at about $300 million, and that I'd mentioned that the $200 million that's shown there as pension funding, we completed that in January.
And speaking of the pension, here's a snapshot of some of the metrics. We think that based upon the funding in January and where the market is today, we are at about 96% funded. And as you know, we did change our asset allocation strategy last year to more closely match the duration of the assets with the duration of the liabilities. We're more like 60% debt and 40% equity, somewhere in that ballpark. The debt being more closely matched with the duration, as I said. So it's longer duration. And as you can see, we're being very conservative with the discount rate and the expected return on assets. Those have come down over the last several years. So we're pretty sure that our measurements are accurate at the moment.
I know we've talked about bonus depreciation over the years. Nothing has really changed much here. We're trying to quantify some of the numbers for you in terms of when we might expect to get the cash benefit of it. And it looks like from our estimates, somewhere between 2013 and 2015, is when we would expect to get the bulk of the bonus depreciation benefits. And that obviously is part of the reason why I'm confident that an equity offering will probably be out in several years.
So our dividend yield still remains very attractive, we think, and it's 24% higher than the average dividend yield for companies in the S&P 500 Electric. We think that the plan obviously is to grow the earnings so that the dividend payout is more in line with industry averages, and of course, that's regulatory lag, our favorite topic.
We haven't changed the earnings guidance at all. We're confirming the guidance that we showed you in February, $1.15 to $1.30. And obviously that's again, dependent on the results of our rate cases. This Slide 2 is a slide that we showed you on the first quarter -- or the year-end earnings call. And there's no changes to that either. This slide gives you some picture of what the basic assumptions are, that are in the earnings guidance for 2012. Again, no changes there. Again, dependent on rate cases.
John talked a lot about his Pepco Energy Services, so I don't think we're -- I'm going to spend much time there. I think he gave you a very good rundown on what they're doing there. I would also add that we don't have any major, big tax items built into our guidance for 2012. I think that again, given the number of years we have under audit which are still all the way back to 2003, we are hopefully closing in on the 2003 to 2006 audit. So there's a possibility that something could come out of that. But again, it's not built into the guidance. We also have 2006 to 2008 is a little past the starting point. So we are well into that audit also. So we basically have 6 years under audit, and it's not inconceivable that we could reach a settlement on all those audits.
So to some, PHI is positioned as a fundamentally T&D utility dedicated to providing reliable customer service and earn the authorized rate of return, and we believe that we will provide a growing and predictable earnings stream, continued commitment to the dividend, and continued commitment to investment grade credit ratings. And with that, I'll turn it back to Joe Rigby for some closing remarks, unless there's questions? Okay, I guess we got a couple.
Joseph M. Rigby
Just real quick, and obviously, we'll take any questions. I just want to thank all of you for joining us today. I hope you found this of value and certainly it's -- hopefully, it was informative. And I also want to just tell you that the management team really appreciates your interest in our company. So with that, Tony would be happy to take any questions.
Just with regard to the cross-border lease portfolio. It's still an outstanding issue, and I think some other parties that had similar portfolios have unwound and just shut down that business or close to, is that something that you're looking at, and what keeps you from doing something like that?
Anthony J. Kamerick
We're not doing them anymore. So I don't know what you mean by shut down. But we haven't done.
Anthony J. Kamerick
Okay. Well, we believe are cross-border leases are perfectly legitimate and in conformance with the Internal Revenue Code. And we intend to litigate that. Carrie?
Carrie Saint Louis
Just a couple of questions. Still on the pension funding. If you are saying your 96% of funding after this year's contribution, would you expect there to be minimal contributions -- cash contributions going forward?
Anthony J. Kamerick
We're thinking so, yes. With the assets and the liabilities that are matched, we think the funding in the future will be considerably lower than what we've seen in the last several years. And maybe, we can go a couple of years without any.
Carrie Saint Louis
Okay, and then just on the parent level funding. I'm assuming that obviously, dividends up from the utilities are a primary support to your common dividend payment, but are probably, you're not fully funding the common dividend with money coming up from the utilities so there's a deficit. And I'm just trying to think about how you're thinking about, since you're not going to be issuing equity over the next few years, does that mean that you would be borrowing to fund that deficit at the parent level over the course of the next few years, either through CP or debt issuance at the parent?
Anthony J. Kamerick
Well, I'm not sure what you mean by deficit. I mean, our earnings are above the dividend. So our earnings support our dividend.
Carrie Saint Louis
Yes, but I think you have to actually pay it with cash. I think it stands that your cash generation at the utilities was sufficient, like I thought the dividends up from the use of cash -- from the utilities is not equal to $240 million?
Anthony J. Kamerick
I think you can look at it as if the utilities are basically funding the dividend one way or another. The way we look at it is we maintain the balance sheet of the utilities.
Carrie Saint Louis
Okay, so you don't anticipate any parent level debt funding?
Anthony J. Kamerick
No. We do not anticipate PHI, the entity issuing debt.
Carrie Saint Louis
Okay. And you had a lot of CP outstanding there and that I'm assuming was paid down with that [indiscernible]
Anthony J. Kamerick
That's basically it, Carrie. We do run some short-term debt at the parent and the equity offering. And that short-term debt is used to sort of manage the capital structure of everybody. And then we issue the equity to pay that down. That's sort of the way I think about it.
Ali Agha - SunTrust Robinson Humphrey, Inc., Research Division
Either Tony or Joe. You've talked about some need for equity down the road, so when I look at the 10% rate base guider that you laid out for us, assuming that's what you're spending, with the regulatory lag in your system as well. You got some dilution from equity down the road. How should we think about the underlying earnings growth rate or EPS growth rate of that 10% rate base growth, sort of support, would that be pretty much in line with rate base?
Anthony J. Kamerick
Well as you know, we don't really put out for public consumption, our growth and earnings. It's -- we think that there's certainly great potential by being successful with the regulatory lag issue. But it's just not something that, with all the rate issues there, that it's predictable. But obviously, it's 10% minus dilution. And I don't really want to put a number on it.
Ali Agha - SunTrust Robinson Humphrey, Inc., Research Division
Okay. And then in terms of getting the dividend down to what you would consider to be appropriate payout levels, in the past I think you've said 65% to 70%. I just want to confirm that's still what you're thinking and...
Anthony J. Kamerick
Ali Agha - SunTrust Robinson Humphrey, Inc., Research Division
And just looking at your plan, I mean, when do you think you'll be in a position to leave it at that? Are we 2 years out, 5 years out?
Anthony J. Kamerick
Well, I think if we're successful with the regulatory lag, which, I guess means we've cut into it by 200 or 300 basis points, it's conceivable we could get there in 3 years.
You've got [indiscernible]. In the past, you've kind of reiterated that you tend to be pretty conservative with regards to the reserves you booked. Is that still the way you'll be thinking about this? [indiscernible] if you -- as you settle these, we could expect a positive outcome?
Anthony J. Kamerick
Well, I think the way I'd characterize is I don't expect a negative.
So neutral to positive?
Anthony J. Kamerick
Neutral to positive.
And one of your '12 guidance assumptions is normal, whether kind of where are we through March with regards to that? I know you're going to do anything extraordinary to try to reverse some of that impact?
Anthony J. Kamerick
Well, it's certainly been warmer than normal for the first 3 months of the year. And we did see some effect of that in particularly, in the gas business. But...
At this point, just kind of wait for summer if it's hotter [indiscernible]
Anthony J. Kamerick
Yes, I know it's a little too early.
Joseph M. Rigby
Yes, I mean, the impact on the gas business, while to the people in the gas business is very significant, it's not overall to PHI. So any kind of impact from a mild winter, particularly, obviously in Delaware or Jersey, could more than make up for that. So it's way early, Paul, to have a concern about that.
Tony, when do you guys expect to be a cash taxpayer? I mean, you said the bonus depreciation will take effect, '13 to '15, so that means no cash taxes for the next 4 years?
Anthony J. Kamerick
No cash taxes probably for the next few, anyway.
So for either '12, '13, '14, and maybe '15, is that way to think about that?
Anthony J. Kamerick
Yes, somewhere in that ballpark. If I had to pick a date, I'd say probably '14.
And Joe, not to belabor Maryland too much but clearly, there's a disconnect between what you guys are trying to accomplish once the commission wants to award you. At what point in time do you reevaluate the strategy you guys put out there? And so in '10, you decided you were going to focus on the utility and put capital in and focus on the reliability. You had 12 months of much better reliability. At what point in time have you guys decided you've done enough with that effort and you have to pivot a different direction?
Joseph M. Rigby
Yes, that's a good question, Dan. I think that the-- sitting here today, I mean, I would say that our basic feeling would be that if we were in the mode of having kind of continued less than reasonable outcomes, it would probably take another cycle of the rate case for us to, I think to use your word, pivot, but that doesn't mean that we're going to sit still or sit on our hands in the meantime. I think that the progress we're making -- as I said earlier, I think that progress is going to intersect with the regulatory process. So I think before we would veer off course dramatically, it would probably be another year or so. But it's something that we're keenly aware of.
When you look at the returns you were able to get the different businesses and if Maryland stays at 6%, or whatever that number maybe, and the other states gets you closer to 9%, call it, is there CapEx within the budget that you guys would then look to shift among meters or blue plan, or things like that, you kind of use, not reliability, but more discretionary where you could arbitrage to a better return?
Joseph M. Rigby
I think Tony's point that he made earlier that we're assessing options. I think that would fall within that list of options. But it would be premature for me to try to signal that we're going to jump there. But it's in the toolkit. But it's one that I hope we don't go to. Any other questions? Well with that, let me just make 2 quick closing comments. First, important order of business, lunch is served upstairs at the Seasons restaurant. And I just thought it would be -- I would be remiss if I didn't close this meeting with just making a comment about my CFO. He has been a great partner. As I think about the -- our past, our more recent past, but perhaps more importantly, the trajectory that we're going on, Tony's handprint is all over this. He's been just a tremendous value to our company. And on behalf of my Board and all of his teammates, I want to thank you, Tony, and I would ask everyone here to just join me in a round of applause. And if he doesn't stall the regulatory lag issue, he gets to come back next year. So with that, the meeting is adjourned. Thanks.
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