Competing interests to spar over Progress rate request

Utility wants a 14.2% rate increase for residential customers

jmurawski@newsobserver.comOctober 23, 2012 

The number immediately jumped out to Jim Hoard: $9 million.

That’s the amount Progress Energy expects to save within its first year of the merger with Duke Energy, according to the rate increase request Progress filed this month. The savings would come from streamlined operations and staff cuts that will eliminate 1,860 positions over three years.

The $9 million figure surprised Hoard, who heads the accounting division at the N.C. Public Staff, because it’s a fraction of the potential merger savings cited last year by the two companies. At the time, Progress and Duke were seeking approval for the $32 billion deal from the N.C. Utilities Commission and wanted to emphasize its public benefits.

“Compared to the numbers we were seeing during the merger, it’s pretty small,” Hoard said. “We’ll send data requests and spend a whole lot of time checking into how all those numbers were calculated.”

The Public Staff is the state’s consumer advocacy agency in utility rate cases. The agency will urge the Utilities Commission to slash the Progress rate request, Hoard said.

The complex rate case is expected to take months, with public hearings not likely to be held until next year. The Utilities Commission will outline a timetable for filings and hearings in the coming weeks.

Hoard said he couldn’t disclose the amount of the previous merger savings estimate because the power companies filed it under seal as confidential data. He cautioned that there could be a solid reason for the discrepancy.

Progress spokesman Mike Hughes said corporate efficiencies will take several years to realize. Those savings will appear smaller in the first year because of severance payments to departing employees and other costs involved to achieve those savings.

The question of how much of the merger savings will show up in customers’ bills is just one of many factors open to challenge that will make this rate case more complex than most. Despite the merger, which created the nation’s largest electric utility and promised significant cost savings, Progress and Duke said they would still need to raise rates.

Progress Energy is asking regulators to increase its North Carolina “base rate” – a regulated utility’s profit center that’s built into customers’ bills. It will be the first base rate case in a quarter century for the Raleigh-based electric utility.

The company wants to raise rates by 14.2 percent for a typical North Carolina household that uses 1,000 kilowatt hours of electricity a month, increasing power costs by nearly $180 a year.

Hardship acknowledged

“The company acknowledges that seeking this rate increase during the current economic times will pose some hardship to its customers,” Progress said in its Oct. 12 filing. The company further wrote that it has “worked for several decades to manage its expenses in such a way to avoid making such requests.”

“At this time, (Progress) simply needs to update its rates to enable it to continue to safely and cost-effectively deliver reliable power to its customers.”

Driving the increase

The request is well over 1,000 pages long and is filled with reams of data that will draw scrutiny. The rate is driven largely by $2.3 billion being spent on new power plants and on upgrades to power lines.

The company also is filling 250 positions in nuclear operations as part of a strategy to improve nuclear power plant performance. And it has accelerated its schedule of building three natural gas plants to replace aging coal-burning plants from a 2017 time horizon to a 2013 deadline, coinciding with the rate review.

“There’s an awful lot of money at stake,” said Jim Warren, director of N.C. Waste Awareness and Reduction Network, a Durham nonprofit. “We are very much on guard against the padding of operating expenses. Once they lock in those expenses, they get recovered annually.”

The company is seeking an overall 11 percent increase in revenue, but the rate increases for business customers would be considerably smaller – ranging from 5.9 percent to 11.6 percent – depending on the size of the business.

The 5.9 percent increase for industrial customers is so small because it includes a 6 percent rate cut for five years, a deal promised during the Progress-Duke merger review to win support for the merger from large customers.

North Carolina major market

North Carolina, with 1.3 million customers, is a major market for Progress. The company also has 1.6 million customers in Florida and about 170,000 in South Carolina, where regulators set utility rates independently of North Carolina.

But the North Carolina market is sufficiently important to send ripples through Wall Street if investors are dissatisfied with the rate set here. A Utilities Commission decision unpopular with investors could affect the stock price for parent company Duke Energy, said analyst Marc de Croisset of FBR Capital Markets.

All of those competing factors must be weighed by the Utilities Commission.

‘It’s an art’

“It is not a science; it’s an art,” said Ralph McDonald, a Raleigh lawyer who represents Weyerhaeuser, Corning and other industrial power users, on regulatory rate reviews.

"They have to decide what the utility needs to operate – to earn a fair return on their investment and to cover their expenses,” McDonald said. “And they have to apportion the rate increase across their customer groups.”

Murawski: 919-829-8932

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