Progress Energy 2007 Annual Report Download - page 95

Progress Energy Annual Report 2007
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$3.61 on the average residential monthly customer bill of
1,000 kWh, for an additional 12-month period to replenish
its storm reserve. The requested extension, which began
August 2007, is expected to replenish the existing storm
reserve by an estimated $126 million. During the third
quarter of 2006, PEF and the intervenors modified the
settlement agreement such that in the event future storms
deplete the reserve, PEF would be able to petition the FPSC
for implementation of an interim surcharge of at least
80 percent and up to 100 percent of the claimed deficiency
of its storm reserve. The intervenors agreed not to oppose
the interim recovery of 80 percent of the future claimed
deficiency but reserved the right to challenge the interim
surcharge recovery of the remaining 20 percent. The FPSC
has the right to review PEF’s storm costs for prudence.
On August 29, 2006, the FPSC approved the settlement
agreement as modified. Through December 31, 2007, PEF
had recorded an additional $55 million of storm reserve from
the extension of the storm surcharge. At December 31, 2007,
PEF’s storm reserve totaled $63 million.
FRANCHISE MATTERS
On June 1, 2005, Winter Park acquired PEF’s electric
distribution system that serves Winter Park for
approximately $42 million. On June 1, 2005, PEF transferred
the distribution system to Winter Park and recognized
a pre-tax gain of approximately $25 million on the
transaction, which is included as an offset to other utility
expense on the Statements of Income. This amount was
decreased $1 million in the third quarter of 2005 upon
accumulation of the final capital expenditures incurred
since arbitration. PEF also recorded a regulatory liability
of $8 million for stranded cost revenues, which will be
amortized to revenues over six years in accordance with
the provisions of the transfer agreement with Winter Park.
In June 2004, Winter Park executed a wholesale power
supply contract with PEF with a five-year term and a
renewal option.
OTHER MATTERS
On October 29, 2007, PEF submitted a revised Open
Access Transmission Tariff (OATT) filing, including a
settlement agreement, with the FERC requesting an
increase in transmission rates. The purpose of the filing
was to implement formula rates for the PEF OATT in order
to more accurately reflect the costs that PEF incurs in
providing transmission service. In the filing, PEF proposed
to move from a fixed rate to a formula rate, which allows
for transmission rates to be updated each year based
on the prior year’s actual costs. Settlement discussions
were held with major customers prior to the filing and
a settlement agreement was reached on all issues. The
settlement proposed a formula rate with a rate of return
on equity of 10.8 percent. PEF received FERC approval of
the settlement agreement on December 17, 2007. The new
rates were effective January 1, 2008, and PEF estimates
the impact of the new rates will increase 2008 revenues
by $1 million to $2 million.
D. Regional Transmission Organizations
In 2000, the FERC issued Order 2000, which set minimum
characteristics and functions that regional transmission
organizations (RTOs) must meet, including independent
transmission service. In October 2000, as a result of Order
2000, PEC, along with Duke Energy Corporation and South
Carolina Electric & Gas Company, filed an application
with the FERC for approval of an RTO, GridSouth Transco,
LLC (GridSouth). In July 2001, the FERC issued an order
provisionally approving GridSouth. However, in July 2001,
the FERC issued orders recommending that companies
in the southeastern United States engage in mediation
to develop a plan for a single RTO. PEC participated in
the mediation; no consensus was reached on creating
a southeast RTO. On August 11, 2005, the GridSouth
participants notified the FERC that they had terminated
the GridSouth project. By order issued October 20, 2005,
the FERC terminated the GridSouth proceeding.
On November 16, 2007, PEC petitioned the NCUC to allow
it to establish a regulatory asset for PEC’s development
costs of GridSouth pending disposition in a general rate
proceeding. On January 14, 2008, the NCUC issued an order
requesting interested parties to file comments regarding
PEC’s petition on or before January 28, 2008. On February 11,
2008, PEC filed response comments. On December 20,
2007, the NCUC issued an order for one of the other
GridSouth partners. As part of that order, the NCUC ruled
that the utility’s GridSouth development costs should be
amortized and recovered over a 10-year period beginning
June 2002. Until the NCUC rules upon PEC’s petition, PEC
will apply the same accounting treatment to its GridSouth
development costs. Consequently, in December 2007, PEC
recorded an $11 million charge to amortization expense to
reduce the North Carolina portion of development costs,
which is included in depreciation and amortization on
the Consolidated Statements of Income. PEC’s recorded
investment in GridSouth totaled $22 million and $33 million
at December 31, 2007 and 2006. PEC expects to recover
its GridSouth development costs based on precedent
regulatory proceedings; in 2007, PEC reclassified its
investment in GridSouth from other assets and deferred
debits to regulatory assets on the Consolidated Balance
Sheets. We cannot predict the outcome of this matter.