Duke Energy 2015 Annual Report Download - page 27

PART I
7
The number of residential, general service and industrial customers
within the Regulated Utilities service territory is expected to increase over time.
However, growth in the near term has been hampered by current economic
conditions and continued adoption of energy efficiencies. Average usage per
residential customer is expected to remain flat or decline for the foreseeable
future. While total industrial and general service sales increased in 2015 when
compared to 2014, the growth rate was modest when compared to historical
periods.
Seasonality and the Impact of Weather
Regulated Utilities’ costs and revenues are influenced by seasonal
patterns. Peak sales of electricity occur during the summer and winter months,
resulting in higher revenue and cash flows in these periods. By contrast, lower
sales of electricity occur during the spring and fall, allowing for scheduled plant
maintenance. Peak gas sales occur during the winter months. Residential and
general service customers are most impacted by weather. Estimated weather
impacts are based on actual current period weather compared to normal
weather conditions. Normal weather conditions are defined as the long-term
average of actual historical weather conditions.
The estimated impact of weather on earnings is based on the temperature
variances from a normal condition and customers’ historic usage levels and
patterns. The methodology used to estimate the impact of weather does not
consider all variables that may impact customer response to weather conditions
such as humidity in the summer or wind chill in the winter. The precision of this
estimate may also be impacted by applying long-term weather trends to shorter-
term periods.
Degree-day data are used to estimate energy required to maintain
comfortable indoor temperatures based on each day’s average temperature.
Heating-degree days measure the variation in weather based on the extent
the average daily temperature falls below a base temperature. Cooling-degree
days measure the variation in weather based on the extent the average daily
temperature rises above the base temperature. Each degree of temperature
below the base temperature counts as one heating-degree day and each degree
of temperature above the base temperature counts as one cooling-degree day.
Competition
Retail
Regulated Utilities’ businesses operate as the sole supplier of electricity
within their service territories, with the exception of Ohio, which has a
competitive electricity supply market for generation service. Regulated Utilities
owns and operates facilities necessary to transmit and distribute electricity and,
except in Ohio, to generate electricity. Services are priced by state commission
approved rates designed to include the costs of providing these services and
a reasonable return on invested capital. This regulatory policy is intended to
provide safe and reliable electricity at fair prices. Competition in the regulated
electric distribution business is primarily from the development and deployment
of alternative energy sources including on-site generation from industrial
customers and distributed generation, such as rooftop solar, at residential,
general service and/or industrial customer sites.
Regulated Utilities is not aware of any proposed legislation in any of
its jurisdictions that would give its retail customers the right to choose their
electricity provider or otherwise restructure or deregulate the electric industry
including broadly subsidizing distributed generation such as rooftop solar.
Although there is no pending legislation at this time, if the retail
jurisdictions served by Regulated Utilities become subject to deregulation, the
recovery of stranded costs could become a significant consideration. Stranded
costs primarily include the generation assets of Regulated Utilities whose value
in a competitive marketplace may be less than their current book value, as
well as above-market purchased power commitments from qualifying facilities
(QFs). The Public Utility Regulatory Policies Act of 1978 (PURPA) established
a new class of generating facilities as QFs, typically small power production
facilities that generate power within a utility company’s service territory for
which the utility companies are legally obligated to purchase the energy at an
avoided cost rate. Thus far, all states that have passed restructuring legislation
have provided for the opportunity to recover a substantial portion of stranded
costs.
Regulated Utilities’ largest stranded cost exposure is primarily related to
Duke Energy Florida’s purchased power commitments with QFs, under which
it has future minimum expected capacity payments through 2043 of $3.1
billion. Duke Energy Florida was obligated to enter into these contracts under
provisions of PURPA. Duke Energy Florida continues to seek ways to address
the impact of escalating payments under these contracts. However, the FPSC
allows full recovery of the retail portion of the cost of power purchased from
QFs. For additional information related to these purchased power commitments,
see Note 5 to the Consolidated Financial Statements, “Commitments and
Contingencies.”
In Ohio, Regulated Utilities conducts competitive auctions for electricity
supply and purchases the gas commodity for natural gas service. The cost of
energy purchased through these auctions and the cost of gas purchases are
recovered from retail customers. Regulated Utilities earns retail margin in Ohio
on the transmission and distribution of electricity and the distribution of gas and
not on the cost of the underlying energy.
Wholesale
Regulated Utilities competes with other utilities and merchant generators
for bulk power sales, sales to municipalities and cooperatives, and wholesale
transactions. The principal factors in competing for these sales are price,
availability of capacity and power, and reliability of service. Prices are
influenced primarily by market conditions and fuel costs.
Increased competition in the wholesale electric utility industry and
the availability of transmission access could affect Regulated Utilities’ load
forecasts, plans for power supply and wholesale energy sales and related
revenues. Wholesale energy sales will be impacted by the extent to which
additional generation is available to sell to the wholesale market and the ability
of Regulated Utilities to attract new customers and to retain existing customers.
Energy Capacity and Resources
Regulated Utilities owns approximately 50,000 megawatts (MW) of
generation capacity. For additional information on Regulated Utilities’ generation
facilities, see Item 2, “Properties.”
Energy and capacity are also supplied through contracts with other
generators and purchased on the open market. Factors that could cause
Regulated Utilities to purchase power for its customers include generating plant
outages, extreme weather conditions, generation reliability, demand growth,
and price. Regulated Utilities has interconnections and arrangements with
its neighboring utilities to facilitate planning, emergency assistance, sale and
purchase of capacity and energy, and reliability of power supply.
Regulated Utilities’ generation portfolio is a balanced mix of energy
resources having different operating characteristics and fuel sources designed
to provide energy at the lowest possible cost to meet its obligation to serve retail
customers. All options, including owned generation resources and purchased
power opportunities, are continually evaluated on a real-time basis to select and
dispatch the lowest-cost resources available to meet system load requirements.