Progress Energy to seek first rate increase in a quarter century

Utility hopes to raise an average household’s bill by $120 a year

jmurawski@newsobserver.comOctober 6, 2012 

SHEARONHARRIS01.NE.031711.ASR

Progress's Shearon Harris nuclear plant in southern Wake County.

SHAWN ROCCO — 2011 News & Observer file photo

Over the years Progress Energy customers have fine-tuned the art of kvetching about their power bills, often forgetting that electricity costs here are well below the national average.

That conversation is about to be pitched a few octaves higher.

The Raleigh-based power company expects to file for a rate increase as soon as Friday that could raise the average Progress Energy household electricity bill in North Carolina by more than $120 a year. For customers who typically pay about $103 a month for power, the economic effect of the requested increase would be like paying for an extra month of electricity during the year.

The company’s request will land with a thud at the N.C. Utilities Commission barely three months after Progress was acquired by Charlotte-based Duke Energy. The merging utilities sold their $32 billion deal for its potential to benefit customers by holding down corporate operating costs.

Progress will spell out its rationale in voluminous filings, emphasizing the multibillion-dollar expense of expanding transmission systems and building new power plants. If not for the Progress-Duke merger, officials are likely to say, the rate increase would have been greater.

“There’s never a good time to file for a rate increase,” Progress spokesman Mike Hughes said. “Any request is going to be unpopular, there’s no question about it. But it’s important to have the revenue stream that we need to insure that we have a reliable system.”

Armed with historical charts and spreadsheets, Progress will find few allies among its 1.3 million customers in the state.

Customers will insist that Progress has been jacking up their bills for years. Indeed, fuel-related costs – over which Progress has no control – have fluctuated every year and added $20 a month to the typical residential bill in the past decade.

Customers will be flummoxed by discussions about Progress’ “base rate” – the utility profit center built into every power bill – which was last set by the N.C. Utilities Commission in 1998 and has stayed flat since 1990.

North Carolina’s consumer advocacy agency, known as the Public Staff, is already vowing to challenge the rate request by asking the Utilities Commission to slash the amount Progress will seek. Industrial customer groups, social-justice advocates, environmental organizations and others will get involved in contentious proceedings that are expected to last more than six months and include public hearings throughout the state.

“Trust me, we’re going to cut it lower,” said Robert Gruber, the Public Staff director, who is not sure how much Progress will request. “We’re going to be aggressive.”

The resulting clamor likely will drown out one of the most intriguing aspects of the rate case: how a utility company has been able to go for 25 years without going in for a rate increase. As a regulated utility, Progress can’t raise its rates without permission from the Utilities Commission, and some electric companies in the country file rate cases every few years.

“It is highly unlikely for a utility to go 25 years without a rate increase,” said Richard Cortright Jr., a managing director of the utilities and infrastructure practice at Standard & Poor’s. “The reason is, a utility is constantly building, replacing assets, adding assets and needing to recover those costs.”

Unfamiliar territory

The Utilities Commission today is familiar with reviewing annual fuel adjustments, but the six sitting commissioners have never heard a Progress rate case. The last time that happened, the company was called Carolina Power & Light and had just completed building the Shearon Harris nuclear plant in southwestern Wake County.

The nuclear plant was originally slated to cost $1.1 billion, but cost overruns pushed the final price tag to $3.9 billion, and Progress asked for a 13.9 percent rate increase to pay the bill. The Utilities Commission approved a 9.1 percent increase instead, making CP&L shareholders absorb a chunk of the ballooning nuclear costs.

But this cloud had a golden lining: The commission allowed CP&L to keep a 12.75 percent return on equity, which translates to the maximum profit margin its shareholders can reap in the form of earnings. As interest rates fell over time, so did equity returns approved for utilities, so that today a typical return on equity is about 10 percent.

For example, Dominion North Carolina Power, with 120,000 customers in the northeastern part of the state, this year asked for a 19 percent rate increase, based on a requested return of up to 11.75 percent. The Public Staff is asking the Utilities Commission to cut the return to 9.37 percent, which would bring the rate increase down to 7 percent. The dispute is set for a public hearing on Oct. 16.

Progress was able to coast along on its 12.75 return for years, thanks to a fast-growing customer base, vastly improved nuclear performance, and early retirement programs for senior employees at the top of their pay scales, said James McLawhorn, director of the Public Staff’s electric division.

Progress’s nuclear plants operated only 72 percent of the time in 1988, sitting idle for months at a time because of maintenance and safety issues. But the company improved the performance of its nuclear fleet to 95 percent in 2011.

“That’s like adding capacity without it costing you anything,” McLawhorn said. “They’re able to do that without adding new plants.”

Lucky breaks

As the cheap nuclear and coal power flowed, Progress was adding about 25,000 customers a year in the Carolinas, expanding its customer base in North Carolina by a whopping 63 percent between 1988 and 2012.

Then, almost overnight, customer growth came to a dead stop during the recession, and it has never recovered to boom-time levels that had sustained revenue before the recession.

Progress put the brakes on building costly round-the-clock “baseload” power plants after the Shearon Harris plant went online in 1987, dramatically reducing its overhead. Now, however, the company is resuming major power plant construction, recently logging a $1.6 billion outlay that put a natural gas plant online in June 2011 and another expected to start generating power in January.

State law gives the Utilities Commission authority to call in a utility for a rate review if its profit margin is deemed too generous. But Progress got another lucky break in 2002, when the state legislature passed the Clean Smokestacks Act that required coal-burning power plants to be retrofitted with emissions controls.

That law also froze utility rates through 2007, giving Progress five more years to enjoy its return on equity. By the time the rate freeze expired, the recession was around the corner, power sales would soon nose dive, and new power plants were being planned.

“You’re not going to see a utility going anywhere near 25 years without a rate request again,” said Cortright of Standard & Poor’s.

Murawski: 919-829-8932

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