Progress Energy 2007 Annual Report Download - page 91

Progress Energy Annual Report 2007
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B. PEC Retail Rate Matters
BASE RATES
PEC’s base rates are subject to the regulatory jurisdiction
of the NCUC and SCPSC. In PEC’s most recent rate cases
in 1988, the NCUC and the SCPSC each authorized a return
on equity (ROE) of 12.75 percent. In June 2002, the North
Carolina Clean Smokestacks Act (Clean Smokestacks
Act) was enacted in North Carolina requiring the state’s
electric utilities to reduce the emissions of nitrogen oxides
(NOx) and sulfur dioxide (SO2) from their North Carolina
coal-fired power plants in phases by 2013. The Clean
Smokestacks Act froze North Carolina electric utility base
rates for a five-year period, which ended December 31,
2007, unless there were extraordinary events beyond the
control of the utilities or unless the utilities persistently
earned a return substantially in excess of the rate of
return established and found reasonable by the NCUC in
the respective utility’s last general rate case. There were
no adjustments to PEC’s base rates during the five-year
period ended December 31, 2007. Subsequent to 2007,
PEC’s current North Carolina base rates are continuing
subject to traditional cost-based rate regulation.
During the rate freeze period, the legislation provided for
a minimum amortization and recovery of 70 percent of
the original estimated compliance costs of $813 million
(or $569 million) while providing significant flexibility
in the amount of annual amortization recorded from
none up to $174 million per year. For the years ended
December 31, 2007, 2006 and 2005, PEC recognized
amortization of $34 million, $140 million and $147 million,
respectively, and recognized $569 million in cumulative
amortization through December 31, 2007.
On March 23, 2007, PEC filed a petition with the NCUC
requesting that it be allowed to amortize the remaining
30 percent (or $244 million) of the original estimated
compliance costs for the Clean Smokestacks Act
during 2008 and 2009, with discretion to amortize up to
$174 million in either year. Additionally, among other
things, PEC requested that the NCUC allow PEC to include
in its rate base those eligible compliance costs exceeding
the original estimated compliance costs and that PEC
be allowed to accrue AFUDC on all eligible compliance
costs in excess of the original estimated compliance
costs. PEC also requested that any prudency review of
PEC’s environmental compliance costs be deferred until
PEC’s next ratemaking proceeding in which PEC seeks
to adjust its base rates. On October 22, 2007, PEC filed
with the NCUC a settlement agreement with the NCUC
Public Staff, the Carolina Utility Customers Associations
(CUCA) and the Carolina Industrial Group for Fair Utility
Rates II (CIGFUR) supporting PEC’s proposal. The NCUC
held a hearing on this matter on October 30, 2007. On
December 20, 2007, the NCUC approved the settlement
agreement on a provisional basis, with the NCUC
indicating that it intended to initiate a review in 2009
to consider all reasonable alternatives and proposals
related to PEC’s recovery of its Clean Smokestacks Act
compliance costs in excess of the original estimated
costs of $813 million. Additionally, the NCUC ordered that
no portion of Clean Smokestacks Act compliance costs
directly assigned, allocated or otherwise attributable to
another jurisdiction shall be recovered from PEC’s retail
North Carolina customers, even if recovery of these costs
is disallowed or denied, in whole or in part, in another
jurisdiction. We cannot predict the outcome of PEC’s
recovery of eligible compliance costs exceeding the
original estimated compliance costs.
See Note 21B for additional information about the Clean
Smokestacks Act.
FUEL COST RECOVERY
On May 2, 2007, PEC filed with the SCPSC for an increase
in the fuel rate charged to its South Carolina ratepayers.
PEC asked the SCPSC to approve a $12 million increase in
fuel rates for under-recovered fuel costs associated with
prior year settlements and to meet future expected fuel
costs. On June 27, 2007, the SCPSC approved a settlement
agreement filed jointly by PEC and all other parties to the
proceedings. The settlement agreement resolved all
issues and provided for a $12 million increase in fuel rates.
Effective July 1, 2007, residential electric bills increased
by $1.83 per 1,000 kilowatt-hours (kWh), or 1.9 percent,
for fuel cost recovery. At December 31, 2007, PEC’s South
Carolina deferred fuel balance was $21 million.
On June 8, 2007, PEC filed with the NCUC for an increase
in the fuel rate charged to its North Carolina ratepayers.
PEC asked the NCUC to approve a $48 million increase in
fuel rates. On September 25, 2007, the NCUC approved
PEC’s petition. The increase took effect October 1, 2007,
and increased residential electric bills by $1.30 per
1,000 kWh, or 1.3 percent, for fuel cost recovery. This
was the second increase associated with a three-year
settlement approved by the NCUC in 2006. The settlement
provided for an increase of $177 million effective October 1,
2006; $48 million effective October 1, 2007, as discussed
above; and an additional increase of approximately
$30 million in October 2008. On November 21, 2006, CUCA
filed an appeal with the North Carolina Tenth District
Court of Appeals of the NCUC’s order approving the