Progress Energy 2007 Annual Report Download - page 42

MANAGEMENT’S DISCUSSION AND ANALYSIS
40
REGULATORY MATTERS AND RECOVERY OF COSTS
Regulatory matters, as discussed in “Other Matters
– Regulatory Environment” and Note 7, and filings for
recovery of environmental costs, as discussed in Note
21 and in “Other Matters – Environmental Matters,”
may impact our future liquidity and financing activities.
The impacts of these matters, including the timing of
recoveries from ratepayers, can be both a source of and
a use of future liquidity resources.
PEC Base Rates
PEC’s base rates are subject to the regulatory jurisdiction
of the North Carolina Utilities Commission (NCUC) and the
South Carolina Public Service Commission (SCPSC). As
further discussed in Note 21B, the Clean Smokestacks
Act was enacted in 2002. The Clean Smokestacks Act
froze North Carolina electric utility base rates for a five-
year period, which ended December 31, 2007, unless
there were extraordinary events beyond the control of
the utilities or unless the utilities persistently earned
a return substantially in excess of the rate of return
established and found reasonable by the NCUC in the
respective utility’s last general rate case. There were
no adjustments to PEC’s base rates during the five-year
period ended December 31, 2007. Subsequent to 2007,
PEC’s current North Carolina base rates are continuing
subject to traditional cost-based rate regulation.
On March 23, 2007, PEC filed a petition with the NCUC
requesting that it be allowed to amortize the remaining
30 percent (or $244 million) of the original estimated
compliance costs for the Clean Smokestacks Act
during 2008 and 2009, with discretion to amortize up to
$174 million in either year. Additionally, among other
things, PEC requested that the NCUC allow PEC to include
in its rate base those eligible compliance costs exceeding
the original estimated compliance costs and that PEC
be allowed to accrue AFUDC on all eligible compliance
costs in excess of the original estimated compliance
costs. PEC also requested that any prudency review of
PEC’s environmental compliance costs be deferred until
PEC’s next ratemaking proceeding in which PEC seeks
to adjust its base rates. On October 22, 2007, PEC filed
with the NCUC a settlement agreement with the NCUC
Public Staff, the Carolina Utility Customers Associations
(CUCA) and the Carolina Industrial Group for Fair Utility
Rates II (CIGFUR) supporting PEC’s proposal. The NCUC
held a hearing on this matter on October 30, 2007. On
December 20, 2007, the NCUC approved the settlement
agreement on a provisional basis, with the NCUC indicating
that it intended to initiate a review in 2009 to consider all
reasonable alternatives and proposals related to PEC’s
recovery of its Clean Smokestacks Act compliance costs
in excess of the original estimated costs of $813 million.
Additionally, the NCUC ordered that no portion of Clean
Smokestacks Act compliance costs directly assigned,
allocated or otherwise attributable to another jurisdiction
shall be recovered from PEC’s retail North Carolina
customers, even if recovery of these costs is disallowed
or denied, in whole or in part, in another jurisdiction. We
cannot predict the outcome of PEC’s recovery of eligible
compliance costs exceeding the original estimated
compliance costs.
PEC Pass-through Clause Cost Recovery
On May 2, 2007, PEC filed with the SCPSC for an increase
in the fuel rate charged to its South Carolina ratepayers.
On June 27, 2007, the SCPSC approved a settlement
agreement filed jointly by PEC and all other parties to
the proceedings. The settlement agreement resolved all
issues and provided for a $12 million increase in fuel rates.
Effective July 1, 2007, residential electric bills increased by
$1.83 per 1,000 kWh, or 1.9 percent, for fuel cost recovery.
At December 31, 2007, PEC’s South Carolina deferred fuel
balance was $21 million.
On June 8, 2007, PEC filed with the NCUC for an increase
in the fuel rate charged to its North Carolina ratepayers.
PEC asked the NCUC to approve a $48 million increase in
fuel rates. On September 25, 2007, the NCUC approved
PEC’s petition. The increase took effect October 1,
2007, and increased residential electric bills by $1.30 per
1,000 kWh, or 1.3 percent, for fuel cost recovery. This
was the second increase associated with a three-year
settlement approved by the NCUC in 2006. The settlement
provided for an increase of $177 million effective
October 1, 2006; $48 million effective October 1, 2007,
as discussed above; and an additional increase of
approximately $30 million in October 2008. On November 21,
2006, CUCA filed an appeal with the North Carolina Tenth
District Court of Appeals of the NCUC’s order approving
the settlement on the grounds that the NCUC did not
have the statutory authority to establish fuel rates for
more than one year. On October 24, 2007, CUCA filed a
motion to withdraw their appeal. On November 7, 2007,
the North Carolina Tenth District Court of Appeals granted
CUCA’s motion. At December 31, 2007, PEC’s North
Carolina deferred fuel balance was $241 million, of which
$114 million is expected to be collected after 2008 and has
been classified as a long-term regulatory asset.
As discussed further in “Other Matters – Regulatory
Environment,” South Carolina and North Carolina state
energy legislation that became law in 2007 may impact