Progress Energy 2007 Annual Report Download - page 52

MANAGEMENT’S DISCUSSION AND ANALYSIS
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gasoline additive. The legislation also provided incentives
for the development of plug-in hybrid electric vehicles and
created new energy-efficiency standards in commercial,
residential and governmental use. In addition, the
legislation authorized increased funding for research
into the use of carbon capture and storage technology,
and directs states to consider “smart grid” improvements
to transmission infrastructure. The law did not contain any
provisions for a federal Renewable Portfolio Standard.
During 2007, the North Carolina legislature passed
comprehensive energy legislation, which became law
on August 20, 2007. The law mandates minimum REPS
for the use of energy from specified renewable energy
resources or implementation of energy-efficiency
measures by the state’s electric utilities beginning
with a 3 percent requirement in 2012 and increasing to
12.5 percent in 2021 for regulated public utilities, including
PEC. The premium to be paid by electric utilities to comply
with the requirements, above the cost they would have
otherwise incurred to meet consumer demand, is to be
recovered through an annual clause. The annual amount
that can be recovered through the REPS clause is capped
and once a utility has expended monies equal to the cap,
the utility is deemed to have met its obligations under the
REPS, regardless of the actual renewables generated or
purchased. The law grants the NCUC authority to modify
or alter the REPS requirements if the NCUC determines
it is in the public interest to do so. The recovery cap
requirement begins in 2008 and, as a result, PEC will
begin deferring certain costs associated with renewable
energy purchases in 2008. These costs are expected to
be immaterial in 2008.
The law allows the utility to meet a portion of the REPS
with energy reductions achieved through energy-
efficiency programs. Energy-efficiency programs include
any program or activity implemented after January 1, 2007,
that results in less energy being used to perform the same
function. Through the year 2020, a utility can use energy-
efficiency programs to satisfy up to 25 percent of their
REPS; beginning in 2021, these programs may constitute
up to 40 percent of the requirements.
The law allows the utility to recover the costs of new DSM
and energy-efficiency programs through an annual DSM
clause. The law allows the utility to capitalize those costs
that are intended to produce future benefits and authorizes
the NCUC to approve other forms of financial incentives to
the utility for DSM and energy-efficiency programs. DSM
programs include any program or initiative that shifts the
timing of electricity use from peak to nonpeak periods
and includes load management, electricity system and
operating controls, direct load control and interruptible
load. PEC has begun implementing a series of DSM and
energy-efficiency programs and deferred $2 million of
implementation and program costs for future recovery for
the year ended December 31, 2007.
The law also expands the definition of the traditional
fuel clause so that additional costs may be recovered
annually. These additional costs include costs of reagents
(commodities such as ammonia and limestone used in
emissions control technologies), the avoided costs
associated with renewable energy purchases and
certain components of purchased power not previously
recoverable through the fuel clause (see additional
discussion below). The North Carolina law also authorizes
the NCUC to allow annual prudence reviews of the
construction costs of a baseload generating plant if
requested by the public utility that is constructing the plant
and removes the requirement that a public utility prove
financial distress before it may include construction work
in progress in rate base and adjust rates, accordingly, in
a general rate case while a baseload generating plant is
under construction.
On October 26, 2007, the NCUC issued its proposed
rules for implementation of the law. PEC expects final
rules to be issued by the end of the first quarter of 2008.
Until the rulemaking process is completed, we cannot
predict the costs of complying with the law. PEC would
be able to annually recover its reasonable prudent
compliance costs.
During 2007, the South Carolina legislature ratified new
energy legislation, which became law on May 3, 2007.
Key elements of the law include expansion of the annual
fuel clause mechanism to include recovery of the costs
of reagents used in the operation of PEC’s emissions
control technologies (see additional discussion below).
The law also includes provisions to provide base rate
cost recovery for upfront development costs associated
with nuclear baseload generation and construction costs
associated with nuclear or coal baseload generation
without a base rate proceeding and the ability to recover
financing costs for new nuclear baseload generation
through annual clauses.
On November 30, 2007, PEC filed a petition with the SCPSC
seeking authorization to create a deferred account for DSM
and energy-efficiency program expenses pending the filing
of application requesting a DSM and energy-efficiency
program expense clause to recover such program costs.
On December 12, 2007, the SCPSC granted PEC’s petition.
As a result, through December 31, 2007, PEC deferred an