Duke Energy Carolinas to face critics at rate hearing

bhenderson@charlotteobserver.comJuly 5, 2013 

  • How utility rates are set

    Under North Carolina law, the Utilities Commission assesses the value of “used and useful” power plants and other utility property, including construction projects. The commission is supposed to set a rate of return on investment in that property that is fair to customers and investors.

    Customers’ rates are based on the amount of revenue needed to pay for “reasonable operating expenses” and the rate of return.

When Duke Energy Carolinas goes to Raleigh next week for its latest rate hike hearing, the usual dry testimony will be spiced by claims the Charlotte utility is scamming consumers.

In its third rate case since 2009, the result of a massive building spree, Duke will defend not only the utility’s bottom line but its relationship with 1.9 million recession-rocked customers.

Last month, Duke agreed to terms with the N.C. Utilities Commission’s consumer advocates, the Public Staff, which usually leads to approval by the commission itself. Duke had originally asked for $446 million, but in negotiations with the Public Staff cut its revenue request by nearly half. Typical residential bills would rise about $7 a month starting in September.

But the commission may view this year’s settlement more cautiously.

The state Supreme Court reversed Duke Carolinas’ 2011 rate case, in which Duke gave up more than half the revenue it had wanted, and sent it back for a review of its consumer impact.

State Attorney General Roy Cooper, whose appeal led to that reversal, has signaled he’s still skeptical of rate increases. This week, Cooper appealed a 5.5 percent rate increase granted Duke Energy Progress, which serves Eastern North Carolina and the Asheville area.

Duke Carolinas maintains it’s being fair to consumers in agreeing to take less revenue than it sought. A Durham advocacy group, N.C. WARN, says the utility is cynically trying to bill customers for millions of dollars in unwarranted expenses.

“Duke walks away happy with whatever they get,” said director Jim Warren. “It’s not just a pattern of incompetence, especially when they come in asking for so much more than they walk away with.”

In this year’s rate case, Duke Carolinas settled for 47 percent less revenue than it first requested. In 2011, it agreed to 52 percent less and in 2009, to 36 percent less.

“A settlement by its very nature is a give-and-take process,” Duke said in a statement. Lengthy negotiations with the Public Staff, it said, led to an agreement “we believe … is fair and balances the needs of our customers with that of the company.”

WARN claims Duke improperly tried to overcharge customers by $30 million, including stock-based executive compensation that it says other states don’t allow and political contributions, advertising, dues and donations. Its expert witness says the commission should fine Duke at least $5 million.

Duke acknowledged some accounting errors and differences of opinion on what expenses are allowed.

“But the regulatory process is most comprehensive and the diligent approach the parties take to that process clearly works and adjustments have been made,” it said.

The Public Staff, in settling with Duke, carved off $188.6 million in sought-after revenue.

Deletions included merger-related legal fees, some lobbying expenses and the political contributions, charitable donations and promotional advertising that WARN also challenged.

‘It’s extremely subjective’

“It’s certainly typical that the North Carolina-litigated case arrives at a number between what the utilities ask for and what customer groups ask for,” said David Drooz, the Public Staff’s lead attorney on the Duke rate case.

“We’re kind of doing a reality check not on what (Duke) thinks they deserve but what a litigated outcome would be.”

The Public Staff settles rate cases when it believes customers will benefit more than if they were contested before the commission, Drooz said. Settlements can also include provisions, such as the $10 million in low-income aid and phased-in rate increases that Duke agreed to, that the commission can’t order.

Some customer groups, including Wal-Mart and other commercial customers and the 1.1 million N.C. AARP, still oppose the settlement.

Duke took its biggest revenue hit – $112 million – when it agreed to drop its return on equity, a profit margin allowed investors, from the requested 11.25 percent to 10.2 percent.

A higher return on equity, Duke says, helps it finance billions of dollars in construction at good rates. A lower one can save customers hundreds of millions of dollars.

Economists hired by Duke, the Public Staff and customer groups come up with widely different recommendations – between 7.8 percent and 11.5 percent in this case – on the size of the return. Those depend in part on assumptions the experts make about the returns Wall Street will require and what other utilities will be allowed.

“It’s the (factor) with the least science and the most, let’s say, art,” Drooz said. “It’s extremely subjective.”

Sending a ‘price signal’

WARN also claims Duke lures power-hungry industries such as data centers with low rates, justifying the need for new power plants, while raising rates for residential and commercial customers.

Under the settlement, residential customers will initially pay 5.1 percent higher rates, industries 4.7 percent and commercial businesses 3.8 percent more. Duke pulled back a proposal to rebate the higher rates for industries that it said would create new jobs.

The settlement doesn’t resolve a long-running dispute over how Duke determines the costs of providing service, a key factor in setting rates, among customer groups.

For more than 40 years, Duke has based costs on delivering electricity on the hottest single hour of the year – 3 p.m. on July 21, 2011, in this case.

Duke says that method sends a “price signal” that encourages customers to save energy. Consumer advocates, including the Public Staff, say it costs homeowners and small businesses proportionately more than industries.

The commission sided with Duke in the Duke Energy Progress rate case in May.

Henderson: 704-358-5051 Twitter: @bhender

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