Progress Energy 2007 Annual Report Download - page 93

Progress Energy Annual Report 2007
91
C. PEF Retail Rate Matters
BASE RATE AGREEMENT
As a result of a base rate proceeding in 2005, PEF is
party to a base rate settlement agreement that was
effective with the first billing cycle of January 2006 and
will remain in effect through the last billing cycle of
December 2009, with PEF having sole option to extend
the agreement through the last billing cycle of June
2010 pursuant to the agreement. In accordance with the
base rate agreement and as modified by a stipulation
and settlement agreement approved by the FPSC on
October 23, 2007, base rates were adjusted in January
2008 due to specified generation facilities placed in
service in 2007. The settlement agreement also provides
for revenue sharing between PEF and its ratepayers
beginning in 2006 whereby PEF will refund two-thirds of
retail base revenues between the specified threshold
and specified cap and 100 percent of revenues above the
specified cap. However, PEF’s retail base revenues did
not exceed the specified 2007 threshold of $1.537 billion
and thus no revenues were subject to revenue sharing.
Both the 2007 base threshold of $1.537 billion and the
2007 cap of $1.588 billion will be adjusted annually for
rolling average 10-year retail kWh sales growth. PEF’s
2006 retail base rates did not exceed the threshold and no
revenues were subject to the revenue sharing provisions.
The settlement agreement provides for PEF to continue
to recover certain costs through clauses, such as the
recovery of post-9/11 security costs through the capacity
clause and the carrying costs of coal inventory in transit
and coal procurement costs through the fuel clause.
Under the settlement agreement, PEF is authorized to
include an adjustment to increase common equity for
the impact of Standard & Poor’s Rating Services’ (S&P’s)
imputed off-balance sheet debt for future capacity
payments to qualifying facilities (QFs) and other entities
under long-term purchase power agreements. This
adjusted capital structure will be used for surveillance
reporting with the FPSC and pass-through clause return
calculations. PEF will use an authorized 11.75 percent ROE
for cost-recovery clauses and AFUDC. In addition, PEF’s
adjusted equity ratio will be capped at 57.83 percent as
calculated on a financial capital structure that includes
the adjustment for the S&P imputed off-balance sheet
debt. If PEF’s regulatory ROE falls below 10 percent, and
for certain other events, PEF is authorized to petition the
FPSC for a base rate increase.
PASS-THROUGH CLAUSE COST RECOVERY
On September 4, 2007, PEF filed a request with the
FPSC seeking approval of a cost adjustment to reflect a
projected over-collection of fuel costs in 2007, declining
projected fuel costs for 2008 and other recovery clause
factors. PEF asked the FPSC to approve a $163 million,
or 4.53 percent, decrease in rates effective January 1,
2008. This cost adjustment would decrease residential
bills by $5.00 for the first 1,000 kWh. As discussed
above, residential base rates increased due to specified
generation facilities placed in service in 2007 by $2.73
for the first 1,000 kWh effective January 1, 2008. After
considering the net effect of the base rate increase
and the proposed fuel cost adjustment, 2008 residential
bills would decrease by a net amount of $2.27 for the
first 1,000 kWh. The FPSC approved the cost-recovery
rates for 2008 in an order dated January 8, 2008. At
December 31, 2007, PEF’s current regulatory liabilities
totaled $173 million, which were comprised of over-
recovered fuel and capacity costs of $140 million, accrued
disallowed fuel costs of $14 million, over-recovered
conservation costs of $14 million and over-recovered
environmental compliance of $5 million.
On August 10, 2006, Florida’s Office of Public Counsel
(OPC) filed a petition with the FPSC asking that the
FPSC require PEF to refund to ratepayers $143 million,
plus interest, of alleged excessive past fuel recovery
charges and SO2 allowance costs during the period
1996 to 2005. The OPC subsequently revised its claim to
$135 million, plus interest. The OPC claimed that although
Crystal River Unit 4 and Crystal River Unit 5 (CR4 and
CR5) were designed to burn a blend of coals, PEF failed
to act to lower ratepayers’ costs by purchasing the most
economical blends of coal. During the period specified
in the petition, PEF’s costs recovered through fuel
recovery clauses were annually reviewed for prudence
and approval by the FPSC. On July 31, 2007, the FPSC
heard this matter. On October 10, 2007, the FPSC issued its
order rejecting most of the OPC’s contentions. However,
the 4-1 majority found that PEF had not been prudent in
purchasing a portion of its coal requirements during the
period from 2003 to 2005. Accordingly, the FPSC ordered
PEF to refund its ratepayers approximately $14 million,
inclusive of interest, over a 12-month period beginning
January 1, 2008. For the year ended December 31, 2007,
PEF recorded a pre-tax other operating expense of
$12 million, interest expense of $2 million and an
associated $14 million regulatory liability included
within PEF’s deferred fuel cost at December 31, 2007. On
October 25, 2007, the OPC requested the FPSC to reconsider