Understanding an Electric Rate Case: 2011 Rate Case Primer

The information below provides background on the general rate case process in the Carolinas. NOTE: Regulated electric utilities in the Carolinas have different statutes and regulations in each state for recovering costs, but the overall process is similar. Regulated Electric Utilities: Unlike Other Businesses Duke Energy Carolinas is a regulated electric utility, which is a natural monopoly that provides vital services to the public. Regulated electric utilities have the obligation to serve customers within a specific area and can only charge rates allowed by the utilities commission. In exchange, the utility is allowed the opportunity to earn a fair return for investors. Investors are an important part of the business, especially when the utility needs to raise money to modernize the electric system. The utility goes to the financial markets to raise the necessary money to build power plants and make other capital investments. Financially strong companies are typically able to borrow money at lower rates, resulting in lower total costs to customers. When customers get their bill each month, they are paying for the cost of providing electric service, based on their usage. This includes the cost of the fuel needed to produce energy and the cost of building, operating and maintaining the system of power plants, wires, poles and equipment to generate and deliver electricity. When is it time to adjust rates? Regulated electric utilities typically need to adjust rates when costs have risen and the revenues collected no longer cover the cost of building, operating and maintaining the system. As Duke Energy Carolinas modernizes its system to meet customers energy demands and comply with increasingly stricter federal environmental regulations, the revenue requirement increases. A Revenue Requirement is the money needed to cover all the operating and capital costs of providing electric service to customers. The process to adjust rates is called a rate case. What is a rate case? A rate case is a formal process, conducted by utility regulators, to determine if the base rates (defined below) charged by the utility are just and reasonable. The utility files an application and testimony with the utilities commission. This application includes the total costs to serve customers and the justification as to why current rates are no longer sufficient.
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Interested parties submit requests to intervene in the proceeding to allow them to file opposing testimony or question witnesses in the evidentiary hearing. Typical interveners include the states public advocates, business customer groups, and environment al organizations. The utilities commission holds public hearings to hear directly from customers about the company's request to increase electric rates. The commission then holds an evidentiary hearing to review the case. This is a courtlike proceeding where witnesses are cross examined by interveners and answer questions from commissioners. Following the evidentiary hearing, the commission issues its decision on the companys request for a rate increase. The decision could include: approval as requested, approved with modifications, or denial. Parties can reach settlement on some or all of the issues prior to the evidentiary hearing and present a settlement agreement to the commission for approval. The ultimate decision rests with the utilities commission to establish just and reasonable rates for customers. In a period of modernization, a big driver in rate cases is usually capital additions. How does a utility recover its capital investments? For a regulated electric utility, recovering dollars spent is a complex process. Once the utility has made significant investments in the electric system, it seeks approval to begin collecting those costs from customers. In the case of a power plant in general: First the company seeks permission from the utilities commission to build new generation prior to construction. Then the company invests its money to build the power plant. Once the power plant starts generating electricity for customers, the company is able to request those costs be recovered through rates. How appropriate rates for customers are determined? Intervening groups and ultimately the commission study cost information by the utility using the following basic formula: Revenue Requirement = Expenses + (Rate Base x Cost of Capital) Revenue Requirement is the money needed to cover costs. Costs include a fair return to investors. The calculated Revenue Requirement is compared to the revenue under existing rates to decide if a base rate increase or decrease is needed.

Expenses include operating and maintenance costs, depreciation and amortization on assets, income and general tax expenses. Rate Base, representing investor supplied capital, is made up of plant in service (net of depreciation to date) and working capital less deferred income tax and other miscellaneous adjustments. Cost of Capital includes the cost of debt or the average interest rate paid on outstanding debt. It also includes the cost of equity the return an investor expects to receive when they buy stock. That return includes dividends and growth in stock value. The total revenue requirement can be distributed across customer groups, including residential, industrial and commercial, based on the cost of service for that group. Other Terms Construction Work in Progress, better known as CWIP, in rate base allows the utility to recover financing costs while the power plant is still being built - versus waiting until the station is complete to put the total project cost into rates. Collecting (and paying off) financing costs along the way helps lower the total cost of the project.