Progress Energy 2007 Annual Report Download - page 43

Progress Energy Annual Report 2007
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our liquidity over the long term. Among other provisions,
these state energy laws provide mechanisms for recovery
of certain baseload generation construction costs and
expand annual fuel clause mechanisms so that additional
costs may be recovered annually.
Comprehensive energy legislation enacted in 2007 in
North Carolina expanded the costs that may be recovered
annually under the fuel clause, including costs of reagents
used in emissions control technologies (commodities
such as ammonia and limestone), the avoided costs
associated with renewable energy purchases and
certain components of purchased power not previously
recoverable through the fuel clause. Energy legislation
enacted in 2007 in South Carolina expanded the annual
fuel clause mechanism to include recovery of the costs
of reagents used in the operation of emissions control
technologies. We anticipate PEC’s reagent and purchased
power costs eligible for jurisdictional recovery under the
North Carolina and South Carolina energy laws will total
approximately $50 million in 2008.
The North Carolina law mandates minimum Renewable
Energy and Energy Efficiency Portfolio Standards (REPS)
beginning in 2012. Utilities are allowed to recover the
premium to be paid to comply with the requirements
above the cost they would have otherwise incurred to
meet consumer demand. 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 obligation under the
REPS, regardless of the actual renewables generated or
purchased. 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.
In addition, the North Carolina law also allows PEC to
recover the costs of new DSM and energy-efficiency
programs through an annual DSM clause. DSM programs
include any program or initiative that shifts the timing
of electricity use from peak to nonpeak periods. PEC
has begun implementing a series of DSM and energy-
efficiency programs and for the year ended December 31,
2007, deferred $2 million of implementation and program
costs for future recovery.
See “Other Matters – Regulatory Environment” for
additional information about state and federal legislation.
PEF Base Rates
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. 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
a specified threshold and specified cap, which will be
adjusted annually, and 100 percent of revenues above
the specified cap. PEF’s retail base revenues did not
exceed the specified 2007 or 2006 thresholds, and thus no
revenues were subject to revenue sharing. 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. If PEF’s
regulatory return on equity (ROE) falls below 10 percent,
and for certain other events, PEF is authorized to petition
the FPSC for a base rate increase.
On October 23, 2007, the FPSC approved a stipulation and
settlement agreement that settled all issues related to
recovery of the revenue requirements of Hines Unit 2 and
Hines Unit 4 and provided that PEF shall 1) increase its
base rates for the revenue requirements of Hines Unit 2
and Hines Unit 4 and 2) simplify the implementation of the
base rate increase of $89 million by making it effective
with the first billing cycle in January 2008. The revenue
requirements of Hines Unit 2 were previously being
recovered through the fuel clause.
PEF 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 effective January 1, 2008,
by $2.73 for the first 1,000 kWh. 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 was over-recovered in