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Duke Energy's profit margin is questioned

North Carolina Attorney General’s staff questions utility’s proposed rate hike

RALEIGH Attorney General Roy Cooper’s staff spent much of a Tuesday hearing probing the profit margin for investors built into Duke Energy Carolinas’ request for a 5.1 percent rate hike.

The return on common equity, or ROE, is a critical component of the case before the North Carolina Utilities Commission. By agreeing to pare its initial 11.25 percent request to 10.2 percent, Duke gave up $112 million in new revenue.

But Assistant Attorney General Margaret Force wanted to know how Duke and the commission’s Public Staff, which represents consumers, arrived at that number. The short answer: It’s complicated and, in large part, subjective.

Duke Carolinas’ interest is in maintaining a healthy return to attract favorable financing terms for the $6.5 billion it plans to spend on transmission, distribution and other upgrades over the next three years.

A lower figure means less new revenue for Duke and lower customer bills.

But it’s not smart for even consumer advocates to insist on the lowest possible return, said Public Staff consultant Ben Johnson. Too small an ROE would reduce customer bills for the short term, he said, but cause the company long-term problems.

The focus, he said, should be on “providing a return that provides (Duke) financial stability and the ability to deliver power when it’s needed.”

Cooper’s staff hasn’t suggested what it considers a proper return, but its interest is not casual.

The attorney general appealed Duke’s 2012 rate hike on grounds that customer impacts had not been adequately assessed, and won. The North Carolina Supreme Court this year sent it back to the commission for review. Cooper also appealed a rate hike granted to a sister utility, Duke Energy Progress, earlier this year.

Force this week cited a February report by Moody’s Investor Services that ranked North Carolina sixth-highest in the nation for the proportion of disposable income spent on utility bills – 4.4 percent – in 2011.

Duke’s economic consultant, Robert Hevert, testified that settlement terms including the 10.2 percent return “are such that it will be able to raise external capital when needed and at reasonable cost rates.”

But Hevert had recommended that Duke be allowed an ROE of 10.5 percent to 11.5 percent.

“The ROE you recommended … turned out to be higher than what Duke actually needed, is that correct?” Force asked.

Hevert replied that the recommendation should be looked at in the context of Duke’s settlement with the Public Staff, which was signed after lengthy negotiations. He pointed to Duke’s agreement not to seek another rate case before 2015 and its phasing in of higher rates over two years.

Force asked if Hevert’s analysis took into account the impact of his recommended ROE on customers. Under the settlement, most residential customers would pay about $7 more a month beginning in September.

Hevert said he had read transcripts of customer testimony at five field hearings and assessed measures of economic conditions such as gross domestic product.

“I understand we have to look at the effect on customers, and we do,” he said. “… It becomes a question of judgment.”

As part of the settlement, Duke agreed to donate $10 million to help low-income customers pay their utility bills.

With recommended returns ranging widely, said Public Staff consultant Johnson, “I doubt that it’s coincidental” that the negotiations led to the same figure the commission awarded Dominion North Carolina Power in a rate case last November. State commissions rarely depart markedly from returns they’ve recently set in other cases, he said.

Henderson: 704-358-5051 Twitter: @bhender
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