Businesses question Duke’s rate hike request

May 10, 2013

By Bill Poovey | GSA Business Journal

Duke Energy says additional revenue from a rate increase is needed to offset investments in infrastructure and new energy production, including $141 million for safety and security measures at the Oconee Nuclear Station near Seneca. (Photo/Duke Energy)

Duke Energy says additional revenue from a rate increase is needed to offset investments in infrastructure and new energy production, including $141 million for safety and security measures at the Oconee Nuclear Station (above) near Seneca. (Photo/Duke Energy)


DukeEnergy’s request to raise rates for a third time since 2010 — this time by an average 15.1% — has businesses charged up.

“The public needs to rise up, residential and businessowners,” said Frank Knapp, president and CEO of the S.C. Small Business Chamber of Commerce, aColumbia-based group with more than 5,000 members. He called Duke’s proposedincrease “unjustified.”

Duke Energy’s filing for a $220 million annual increase isset for a July 31 hearing before the S.C. Public Service Commissionin Columbia.

The request would increase rates by an average 16.3% forresidential customers, 14% for commercial customers and 14.4% for industrialusers. Duke’s South Carolina rates are among the lowest in the Southeast, butrates are determined in part by utilities’ profit margins, or return onequities. At the proposed rates, Duke is requesting a return on equity of11.25%, up from 10.5%. The PSC, the state’s utility regulator, must determinewhether to allow that increased profit margin and decide what Duke’s customerscan afford.

Public hearings are set for June 20 at Spartanburg CommunityCollege, June 24 at the Greenville County Council Chambers and June 27 at theAnderson Civic Center. Hearings start at 6 p.m.

“There are going to be a lot of people upset,” Knapp said.

Knapp said his organization opposes the attempt to pile onanother rate hike for the utility’s 540,000 retail customers in South Carolina,mostly in the Upstate. Knapp said higher rates subtract from his members’bottom lines.

Duke’s need

Duke Energy wants the extra revenue mainly to provide $673million for the new Dan River natural gas plant in Eden, N.C.; $236 million forhigh-efficiency technology at its Cliffside Steam Station in Mooresboro, N.C.;$141 million for safety and security measures at the Oconee Nuclear Stationnear Seneca; and $135 million for upgrades at the McGuire Nuclear Station inMecklenburg County, N.C.

“The thing to keep in mind is the utility operates in NorthCarolina and South Carolina. It doesn’t stop at the border,” said Ryan Mosier,a spokesman for the utility in Greenville.

He said the Duke Energy investments “have dramatically cutback on emissions and reduced fuel costs.”

The increase would also help pay for improvements to theutility’s vegetation management program that includes keeping tree limbscleared away from power lines and other equipment.

A Duke Energy statement shows that residential customers whouse 1,000 kilowatt-hours per month pay $100.45. If the increase is approved,that cost will jump by $17.83.

Duke is seeking the increase after reporting net earnings of$1.76 billion in 2012, up from $1.70 billion in 2011 and $1.32 billion theprevious year.

“As long as our Public Service Commission is so tolerant ofrate increases why wouldn’t they come back?’’ said uPowerSC spokeswoman and ConservationVoters of South Carolina Director Ann Timberlake. The uPowerSC initiativeencourages citizen involvement in issues before the PSC.

“Unlike most businesses, the regulated utilities are almost guaranteeda return on equity,” Timberlake said.

Return on equity

Duke’s rate request seeks regulatory approval of an 11.25%return on equity — the maximum allowed profit margin — compared with thecurrent 10.5% limit for Duke Energy. That maximum percentage is the return theutility is allowed to earn on its rate base, or the investment in utilityplants and electrical service, and if Duke Energy exceeds it the PSC couldintervene. The utility’s retail rate base is projected to be about $4.3 billionthrough the date of the hearing.

“That’s a big jump,” Knapp said of the 11.25% ROE.

Mosier said the rate increase application is based on theactual costs of new power plants and upgrades, as well as the 11.25% return onequity rate recommended by outside consultants. He said that maximum profitmargin is a limit, not a guarantee.

“Like any other business, we still must manage our businessand costs to achieve a return on our investments,” he said.

The filing for higher rates could start hitting customers’pocketbooks in the fall. It follows two recent rate increases for theCharlotte-based utility. In both of those instances, Duke settled with stateregulators to lessen the rate increase it first sought. In 2010, Duke sought a7.2% increase, or $104 million, and settled for a 5.2% increase, or $74million. In 2012, Duke sought a 14.2% hike to raise annual revenues by $216million. The utility settled down to a 6% increase that added $93 million innew revenues. Duke Energy could seek another increase in 2013 unless there is asettlement to delay another request.

Timberlake said Duke Energy customers should not feelintimidated about filing with the PSC as intervenors in the rate filing.

“It is an opportunity for ratepayers to participate,” shesaid. “It doesn’t mean you are anti-Duke Energy.”

Sharing costs

Knapp said the PSC Office of Regulatory Staff’s prehearingreview of the rate filing includes looking for expenditures that should not beincluded when the PSC determines what Duke is allowed to charge for electricity.John Flitter, director of the regulatory staff’s Electric and Gas Department,said its audits on rate requests “sometimes find things that are notratepayers’ responsibility.”

“Some of the things we find are certain flowers beingcharged with expenses, or somebody’s retirement, or maybe liquor or drinks,”Flitter said. “We look at the bonus structure they have for their employees andwhether they are justified, just all kinds of things. Salary increases, do theyseem reasonable?”

Scott Elliott, an attorney for the S.C. Energy Users Committee that includesabout 40 industries, said the request is not realistic and Duke Energy knowsit.

“They know they are going to get beat down so they ask formore than they realistically expect to get,” he said. “It’s real early in this.The ask is too high, they are playing this cat and mouse game.”

Elliott said “all the utilities do it. They all understandthey are stewards of the resources of their ratepayers. I am always a littlepuzzled that they start off with these unrealistic expectations.”

Elliott said the proposed 11.25% return on equity is toohigh and suggested a return on equity of less than 10% is more comparable tothe national average.

He said industries in South Carolina compete internationallyand nationally and such large increases put them at a competitive disadvantageand put the state at a disadvantage in recruiting businesses.

Elliott said it is unlikely the PSC will not allow someincrease.

“Occasionally the commission has denied rate increases alltogether but at the end of the day these rates are fashioned around the capitalexpenditures” the utilities have made, he said.

Elliott said he expects a recent N.C. Supreme Court rulingagainst Duke’s most recent increase in that state, based on failing toadequately show the effect on ratepayers, will have an impact on the SouthCarolina request. A Duke Energy spokesman has said there will not likely be anyimpact.

While Duke Energy is looking to boost its profits, thedirector of the Cancer Society in Greenville said another rate increase takesmoney away from services that the locally funded nonprofit organizationprovides for about 3,000 different cancer patients each year.

The director, Joyce Boyette, said at the Cancer Society’sHouse of Hope the financial assistance provided to some cancer patients meanshelping pay their electric bills, in addition to loaning medical equipment,counseling and educational services.

Boyette said the electric bill for the House of Hope hit$320 last summer and averages about $250 a month.

“We don’t charge for any of our services,” she said.“Anything that affects our bottom line affects what services we can provide. It affects our patients as well.”

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