7/29/2019 Understanding a Regulated Electric Utility Rate Case

1/3

1

Understanding an Electric Rate Case: 2011 Rate Case Primer

The information below provides background on the general rate case process in theCarolinas.

NOTE: Regulated electric utilities in the Carolinas have different statutes andregulations 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 thatprovides vital services to the public. Regulated electric utilities have the obligation toserve customers within a specific area and can only charge rates allowed by the utilitiescommission. In exchange, the utility is allowed the opportunity to earn a fair return forinvestors.

Investors are an important part of the business, especially when the utility needs toraise money to modernize the electric system. The utility goes to the financial marketsto 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, resultingin lower total costs to customers.

When customers get their bill each month, they are paying for the cost of providingelectric service, based on their usage. This includes the cost of the fuel needed toproduce energy and the cost of building, operating and maintaining the system of powerplants, 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 therevenues collected no longer cover the cost of building, operating and maintaining thesystem.

As Duke Energy Carolinas modernizes its system to meet customers energy demandsand comply with increasingly stricterfederal environmental regulations, the revenuerequirement increases. A Revenue Requirement is the money needed to cover all theoperating 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 baserates (defined below) charged by the utility are just and reasonable.

The utility files an application and testimony with the utilities commission. Thisapplication includes the total costs to serve customers and the justification as to whycurrent rates are no longer sufficient.

7/29/2019 Understanding a Regulated Electric Utility Rate Case

2/3

2

Interested parties submit requests to intervene in the proceeding to allow them to fileopposing testimony or question witnesses in the evidentiary hearing. Typical intervenersinclude the states public advocates, business customer groups, and environmentalorganizations.

The utilities commission holds public hearings to hear directly from customers about thecompany's request to increase electric rates.

The commission then holds an evidentiary hearing to review the case. This is a court-like proceeding where witnesses are cross examined by interveners and answerquestions from commissioners.

Following the evidentiary hearing, the commission issues its decision on the companysrequest 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 hearingand present a settlement agreement to the commission for approval. The ultimatedecision rests with the utilities commission to establish just and reasonable rates forcustomers.

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 theutility has made significant investments in the electric system, it seeks approval to begincollecting those costs from customers. In the case of a power plant in general:

First the company seeks permission from the utilities commission to build newgeneration 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 isable 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 utilityusing 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 returnto investors. The calculated Revenue Requirement is compared to the revenue underexisting rates to decide if a base rate increase or decrease is needed.

7/29/2019 Understanding a Regulated Electric Utility Rate Case

3/3

3

Expenses include operating and maintenance costs, depreciation and amortization onassets, income and general tax expenses.

Rate Base, representing investor supplied capital, is made up of plant in service (net ofdepreciation to date) and working capital less deferred income tax and othermiscellaneous adjustments.

Cost of Capital includes the cost of debt or the average interest rate paid onoutstanding debt. It also includes the cost of equity the return an investor expects toreceive when they buy stock. That return includes dividends and growth in stock value.

The total revenue requirement can be distributed across customer groups, includingresidential, 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 utilityto 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.