The North Carolina Utilities Commission (NCUC) on Friday approved Duke Energy Progress’ latest rate case, which includes “performance-based regulation” meant to help achieve the state’s environmental policies.
Gov. Roy Cooper (D) signed HB 951 into law in October 2021, which required the utility to implement performance-based regulation. The law defined that as “an alternative rate-making approach that includes decoupling, one or more performance incentive mechanisms and a multiyear rate plan, including an earnings-sharing mechanism (ESM), or such other alternative regulatory mechanisms.”
The law recognizes that traditional ratemaking no longer works well because utilities are shifting from making larger and more infrequent investments (such as large-scale power plants) to smaller, more frequent investments such as grid improvements and distributed energy resources, the utility said in its initial application.
Duke Energy Progress told the NCUC that it took a conservative approach on its first application for performance-based regulation (PBR) so it could gain experience from its implementation. DEP serves 1.7 million customers in the Carolinas. The firm’s other utility in the state, the larger Duke Energy Carolinas, has a pending application to implement PBR.
The new rate mechanism represents a “fairly significant departure” from how the state has regulated its utilities for decades, Friday’s order said. Specifically, the new law approved four new concepts in retail rate regulation.
First, the multiyear rate plan means DEP has its rates set for several years, with periodic changes in base rates that do not require an additional rate application. Second, utilities including DEP can use a decoupling mechanism for its residential customers. Third, the ESM allows utilities to decide to file a new rate case when their weather-normalized earnings fall below the authorized rate of return and requires them to refund customers on excess weather-normalized revenue, plus 50 basis points.
The fourth major change is the performance incentive mechanism that links rates with performance in targeted areas consistent with public policies. DEP can earn extra money for doing well under the PIMs, or it could face penalties that go back to customers if it does poorly.
The PIMs are designed to increase the number of customers on time-differentiated rates, raise the number of net-metered interconnections, encourage the interconnection of utility scale generation above DEP’s targets and help large commercial and industrial customers achieve decarbonization goals.
The order drew partial dissents from four of the seven NCUC commissioners. Chair Charlotte Mitchell dissented in part and was joined by Commissioner Kimberly Duffley in full and Commissioner Karen Kemerait on its findings on DEP’s rate of return and recovery of COVID-19 costs. Commissioner Daniel Clodfelter wrote a separate dissent.
The commission approved a rate of return of 9.8%, while Mitchell and her colleagues would have approved 10%, reasoning that the costs of borrowing money have risen significantly and DEP risks a potential ratings downgrade at the lower level, which would cost customers. It could force the utility to cut costs to maintain its rating.
“Given the dynamics of the electric system, including changes in the generating mix, as well as the increasingly extreme summer and winter weather in North Carolina, now is not the time to put DEP in a position to cut to the extent that could impair the reliable operation of the system,” Mitchell said in the dissent.
COVID expenses include costs from having a moratorium on disconnections during the pandemic, which led to bad debt and other costs, as well as costs incurred by DEP and its employees to maintain the grid during the pandemic. Mitchell would have allowed DEP to collect additional funds, and, in her dissent, argued the majority decision is not good for the firm’s financial ratings.
Clodfelter’s dissent focused in part on the PIMs, arguing the commission should have adopted ones that encourage DEP to cut costs in order to offset upward pressures on rates, and to encourage the utility to finish projects early or under budget. He noted the law gave the NCUC and stakeholders little time to implement the first rates and argued they should prepare well for the next rate case in a few years.
Duke said it was reviewing the order and that the multiyear rate plan approved by the NCUC would strengthen the electricity grid while facilitating a cleaner energy future.
“We believe this is a constructive outcome that enables Duke Energy to maintain strong progress toward building a cleaner, more reliable energy future for our North Carolina customers,” the firm said in a statement.
