Legal Update

Order Issued in Progress Rate Case

The North Carolina Utilities Commission issued its order in the Duke Energy Progress, Inc. (“Progress”) rate case on May 30, 2013. The Commission’s 116-page order, and Chairman Ed Finley’s dissent on one issue, can be found here.

The Commission’s Order approved an overall rate of return of 7.55%, reflecting a 10.2% return on equity, 4.57% cost of long-term debt, and a 47%/53% debt/equity ratio. The Commission accepted many of the terms of the settlement agreement Progress and the NCUC Public Staff filed on February 28 (the “Settlement”). With the resolution of the issues not resolved in the Settlement (discussed below), and other adjustments by the Commission, the final result was an aggregate revenue increase of $147.4 million (4.5%) in the first year, and an additional $31.1 million (an additional 1.0%) in the second year and thereafter, for a total annual revenue increase of $178.7 million, or 5.5%.

Progress’s new rate schedules, which became effective on June 1, can be found here.

Two broad issues were not resolved in the Settlement and were, therefore, litigated at the hearing.

Industrial Economic Recovery Rider – denied

The first was whether industrial customer (those with an industrial “SIC Code”) should have their rates reduced approximately four percent under a temporary, five-year Industrial Economic Recovery (“IER”) Rider for economic development purposes, and the lost revenue from the reduction allocated to the other rate classes. In general, the average increase that would have been created by the IER Rider to other customers would have been approximately 0.084 cents per KwH per month. The expressed purpose for this rider was to retain and attract manufacturing jobs  that would otherwise be lost as the result of rising energy costs.

In its Order, the Commission denied the IER Rider for any customers, concluding that

[T]he Commission is concerned about the adverse impact that Rider IER would have on residential and commercial ratepayers. . . . . [T]he recent and persistent high unemployment in DEP’s [i.e. Progress’s] service area causes the Commission concern about shifting a portion of the rate increase from industrial customers to other customer classes. The Commission concludes that Rider IER does not strike a fair balance between the costs and benefits to DEP’s ratepayers, and thus, is not in the public interest at this time.

(Order, page 110). The Commission also concluded that substantial evidence was lacking that Progress’ industrial rates were a significant factor in any industrial customers having reduced the level of its operations or departed North Carolina, or that the IER Rider would in fact cause industrial customers to maintain current employment or operation levels in the state. Chairman Finley, in his dissent on this one issue, disagreed and argued that approving the rider is appropriate ”if the Commission believes Rider IER may succeed.” (emphasis in original) and that the rider, as a temporary, experimental rate was “a reasonable and measured means to address the unique decline of industrial sales and loss of manufacturing jobs in North Carolina”.

1CP Capacity Cost Allocation Methodology – approved

The other issue not addressed in the Settlement was the methodology to be used to allocate Progress’s production and transmission fixed capacity costs between jurisdictions and among customer classes. Progress and the industrial customers’ coalitions argued in favor of a summer coincident peak (“1CP”) method, while the Public Staff and NC WARN advocated a Summer Winter Peak and Average (“SWPA”) method which had previously been used to calculate Progress’ rates. There was substantial evidence at the hearing that Progress’s generation planning is largely based on the company’s summer peak and more accurately reflected by the 1CP methodology. Several witnesses also testified that the SWPA methodology disproportionately impacted high load factor customers. The Commission seemed to have been particularly swayed by the fact that Progress’ revenue request would have been $20 million higher had it performed its cost allocation on the basis of SWPA. For these reasons, the Commission concluded that the 1CP method is the most appropriate method for Progress to allocate costs between jurisdictions and customer classes.

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