North Carolina Sets ROE at 9.9% while New York OKs 8.8% Rate under Multi-Year Plan

The North Carolina Utilities Commission has denied a request by  Duke Energy Carolinas, LLC (DEC) to increase rates by $700 million, reduced the company’s annual revenue requirement, and ordered the electric utility to  refund, for four years, $60 million annually of state excess deferred income taxes. Under a partial settlement agreement DEC agreed to an overall rate of return of 7.35%, which included a rate of return on common equity of 9.9% applied to a capital structure with 52% shareholder equity. In DEC’s last general rate case order issued September 24, 2013, the Commission approved a 10.2% rate of return on equity applied to a capital structure with 53% equity.

DEC had initially requested a rate increase of approximately $611 million in annual revenues, which increased to $700 million during the case.  While the exact amount of the overall decrease in the electric utility’s annual revenue requirement is not stated and will be calculated by the company in accordance with the commission’s findings, the commission noted that one of the primary drivers for its decision to reduce rates is the passage of the Federal Tax Cut and Jobs Act, which reduced the corporate income tax rate from 35% to 21%.  In that regard, the commission recognized a $211 .5 million per year reduction in DEC’s revenue requirement to reflect the savings in federal income taxes going forward.

It also imposed a $70 million management penalty against the company based on a determination that DEC’s handling of coal ash waste “placed its consumers at risk of inadequate or unreasonably expensive service.” At the same time the commission authorized the utility to increase its monthly residential fixed customer charge from $11.80 to $14.00 based on cost of service evidence.  According to the commission, the rate design shift will be offset by decreases in the per kilowatt-hour charges for residential customers. Re Duke Energy Carolinas, LLC, Docket Nos. E-7, Sub 1146 et al., Jun. 22, 2018 (N.C.U.C.).

The New York Public Service Commission has approved new electric and natural gas rates for Central Hudson Gas & Electric Corporation.  The decision establishes a three-year electric and gas rate plan that allows an overall revenue increases in the first year to $13.7 million or 1% for electric customers and an additional $3.2 million or 1.5% for natural gas customers. The company had requested a $63.4 million revenue increase in electric rates or 21.2% of delivery service revenue and a $22.2 million increase or 24.3% of gas delivery service revenue. The commission noted that the approved increase provides funding for technology upgrades, expanded tree-trimming, and the company’s low-income discount program.

Customer charges for residential electric and gas service customers will be reduced by $3 a month in the first year, $1 a month in the second year, and $0.50 in the third year. By the third year, the customer electric charge will fall to $19.5 a month, down from $24 currently, and the gas rate charge will drop to $24.25 per month, down from $26 a month currently. The Commission’s decision also reflects the impact of changes to the federal corporate tax rate prospectively, with a net first-year benefit for customers totaling $18 million. Central Hudson had initially sought a 9.5% ROE in its application of an annual increase.

The commission staff, however, presented evidence indicating that a level of 8.3% is indicated based on traditional financial models. The commission ultimately found that a return on equity of 8.8% is reasonable considering the added financial and business risk accepted by Central Hudson under a multi-year rate plan. It explained that as opposed to a single-year rate decision, the extended term of the approved multi-year  rate plan inherently carries more financial risk as investors are subject to additional risk economic conditions will change and the actual cost of capital will increase during the three-year rate period. It also approved an increase in the common equity ratio used in setting rates from 48% in year one to 50% in year three of the rate plan to address cash flow issues attributable to the Tax Act. Re Central Hudson Gas & Electric Corp., Cases 17-E-0459 & 17-G-0460, Jun. 14, 2018 (N.Y.P.S.C.).

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