Progress Energy 2004 Annual Report Download - page 47

Hurricane Costs
Hurricanes Charley, Frances, Ivan and Jeanne struck
significant portions of the Company’s service territories
during the third quarter of 2004, significantly impacting
PEF’s territory. As of December 31, 2004, restoration of the
Company’s systems from hurricane-related damage was
estimated at $398 million. PEC incurred restoration costs
of $13 million, of which $12 million was charged to
operation and maintenance expense and $1 million was
charged to capital expenditures. PEF had estimated total
costs of $385 million, of which $47 million was charged to
capital expenditures, and $338 million was charged to the
storm damage reserve pursuant to a regulatory order.
In accordance with a regulatory order, PEF accrues
$6 million annually to a storm damage reserve and is
allowed to defer losses in excess of the accumulated
reserve for major storms. Under the order, the storm
reserve is charged with operation and maintenance
expenses related to storm restoration and with capital
expenditures related to storm restoration that are in
excess of expenditures assuming normal operating
conditions. As of December 31, 2004, $291 million of
hurricane restoration costs in excess of the previously
recorded storm reserve of $47 million had been classified
as a regulatory asset recognizing the probable
recoverability of these costs. On November 2, 2004, PEF
filed a petition with the FPSC to recover $252 million of
storm costs plus interest from retail ratepayers over a
two-year period. Storm reserve costs of $13 million were
attributable to wholesale customers. The Company has
received approval from the FERC to amortize these costs
consistent with recovery of such amounts in wholesale
rates. PEF continues to review the restoration cost
invoices received. Given that not all invoices have been
received as of December 31, 2004, PEF will update its
petition with the FPSC upon receipt and audit of all actual
charges incurred. Hearings on PEF’s petition for recovery
of $252 million of storm costs filed with the FPSC are
scheduled to begin on March 30, 2005.
On November 17, 2004, the Citizens of the State of Florida,
by and through Harold McLean, Public Counsel, and the
Florida Industrial Power Users Group (FIPUG) (collectively,
Joint Movants) filed a Motion to Dismiss PEF’s petition to
recover the $252 million in storm costs. On November 24,
2004, PEF responded in opposition to the motion, which was
also the FPSC staff’s position in its recommendation to the
Commission on December 21, 2004, that it should deny the
Motion to Dismiss. On January 4, 2005, the Commission
ruled in favor of PEF and denied the Joint Movant’s Motion
to Dismiss.
PEF’s January 2005 notice to the FPSC of its intent to file
for an increase in its base rates effective January 1, 2006,
anticipates the need to replenish the depleted storm
reserve balance and adjust the annual $6 million accrual
in light of recent storm history to restore the reserve to an
adequate level over a reasonable time period.
PEC does not have an ongoing regulatory mechanism to
recover storm costs; therefore, hurricane restoration
costs recorded in the third quarter of 2004 were charged
to operations and maintenance expenses or capital
expenditures based on the nature of the work performed.
In connection with other storms, PEC has previously
sought and received permission from the NCUC and the
SCPSC to defer storm expenses and amortize them over
a five-year period. PEC did not seek deferral of 2004 storm
costs from the NCUC (See Note 8B).
Regulatory Environment and Matters
The Company’s electric utility operations in North
Carolina, South Carolina and Florida are regulated by the
NCUC, the Public Service Commission of South Carolina
(SCPSC) and the FPSC, respectively. The electric
businesses are also subject to regulation by the FERC, the
NRC and other federal and state agencies common to the
utility business. In addition, the Company is subject to
SEC regulation as a registered holding company under
PUHCA. As a result of regulation, many of the
fundamental business decisions, as well as the rate of
return the electric utilities are permitted to earn, are
subject to the approval of governmental agencies.
PEC and PEF continue to monitor any developments
toward a more competitive environment and have actively
participated in regulatory reform deliberations in North
Carolina, South Carolina and Florida. Movement toward
deregulation in these states has been affected by recent
developments, including developments related to
deregulation of the electric industry in other states. The
Company expects the legislatures in all three states will
continue to monitor the experiences of states that have
implemented electric restructuring legislation. The
Company cannot anticipate when, or if, any of these states
will move to increase competition in the electric industry.
The retail rate matters affected by the regulatory
authorities are discussed in detail in Notes 8B and 8C.
This discussion identifies specific retail rate matters, the
status of the issues and the associated effects to the
Company’s consolidated financial statements.
The regulatory authorities continue to evaluate issues
related to the formation of Regional Transmission
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Progress Energy Annual Report 2004