Customer and Rate Implications Due To Hg and CO2 Reductions Presented by Elise Cox Assistant Director of Public Staff Accounting

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Rate Implications Due To Hg ReductionsPresented
by Elise CoxAssistant Director Accounting
Division Public Staff North Carolina Utilities
Commission
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DISCLAIMER

• The views and comments are mine alone and do not
  represent, nor are they to be interpreted to
  represent, the views comments, positions, or
  policies of the North Carolina Utilities
  Commission or the Public Staff.

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• Capital and annual variable operating costs
  associated with mercury reductions were provided
  by the Division of Air Quality.

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History of North Carolina Utilities Commission
(NCUC)

• 1891 Founded as Railway Commission
• 1899 Railway Commission became North Carolina
  Corporation Commission
• 1913 Electricity, Light, Power, Water, and Gas
  became regulated
• 1933 Corporation Commission abolished and North
  Carolina Utilities Commission established with
  three members
• Current Composition of Commission seven
  commissioners, commission staff chief counsel
  and legal staff, fiscal management section,
  accounting staff, support personnel
• Role hears cases and rulemakings, makes policy,
  serves as decision maker

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History of Public Staff - NCUC

• Came into existence July 1, 1977 G.S. 62-15
  Independent Agency
• Headed by Executive Director Appointed by the
  Governor six year term
• Statutory duty is to represent the using and
  consuming public in rate cases, investigations,
  certificate applications, and transfers, and to
  review affiliate contracts
• Divisions Legal, Electric, Communications,
  Natural Gas, Water and Sewer, Transportation,
  Accounting, Economic Research, Consumer Services,
  Information Technology
• Role serves as consumer advocate in all
  Commission proceedings affecting rates or services

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Rate Changes

• The electric utilities are franchised monopolies.
• The NCUC regulates the electric investor-owned
  utilities (IOUs) rates.
• The utilities are required to file for approval
  of rate changes and bear the burden of proof to
  show changes in rates are justified.

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Rates are set to cover

• Reasonable operating expenses, including
  depreciation expense
• A fair return, i.e. net operating income, on net
  assets (rate base) used to provide utility
  service
• Formula
• Reasonable expenses plus reasonable return (net
  operating income) should equal revenue requirement

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Reasonable Operating Expenses

• Fuel
• Purchased Power
• Operation and Maintenance
• Depreciation
• Federal and State Income Taxes
• Taxes Other Than Income Taxes

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Formula for Rate Base

• Utility plant in service that is used and useful
• Less accumulated depreciation
• Less accumulated deferred income taxes
• Plusmaterials and supplies (including fuel
  inventory)
• Plus working capital and deferred costs
• Less deferred credits

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The Reasonable Return (or Net Operating Income)

• The amount that the company is allowed an
  opportunity to earn to pay interest expenses,
  preferred dividends, and a return on common stock
  / equity
• Calculated as
• Rate Base
• Times
• Reasonable Rate of Return
• Equals
• Reasonable Return (Net Operating Income)
  

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Revenue Requirement

• Amount of revenues that need to be generated from
  ratepayers
• Sources from NC retail ratepayers include
  payments for electricity, late payment charges,
  reconnection charges, etc.
• Enables the utility to pay its reasonable
  expenses and have the opportunity to earn a
  reasonable return

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Clean Smokestacks Act

• IOUs are allowed to accelerate the cost recovery
  of estimated environmental compliance (SO2 and
  NOX reductions) over a seven year period from
  January 1, 2003 December 31, 2009
• During the rate freeze period (2003 2007), the
  IOUs shall, at a minimum, recover 70 of the
  estimated environmental compliance costs by
  recording the costs as expenses without
  increasing rates
• Maximum annual amount of recovery during rate
  freeze shall not exceed 150 of the annual
  levelized environmental compliance costs listed
  in the bill
• North Carolina Utilities Commission (NCUC) shall
  hold hearings to determine the annual cost
  recovery amount that each IOU shall be required
  to record during the calendar years 2008 and 2009

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Rate Freeze Period

• During the rate freeze period, from the effective
  date of the Act through December 31, 2007, the
  base rates shall remain unchanged. However, the
  NCUC may, consistent with the public interest,
  allow adjustments to base rates or deferral of
  costs or revenues, due to one or more of the
  following conditions occurring during the rate
  freeze period
• Governmental action resulting in significant cost
  reductions or requiring major expenditures, other
  than environmental compliance costs
• Major expenditures to restore or replace property
  damaged or destroyed by force majeure
• A severe threat to the financial stability of the
  IOU beyond the reasonable control of the IOU
• IOU persistently earns a return substantially in
  excess of the rate of return established by the
  NCUC in the IOUs last general rate case

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Rate Freeze PeriodContinued

• The NCUC may, consistent with the public
  interest
• Approve a reduction in base rates applicable to a
  customer or class of customers during the rate
  freeze period, if requested by the IOU
• Allow proposal submitted by the IOUs to implement
  optional rates and services provided that the
  proposal does not increase base rates during the
  rate freeze period
  
• After rate freeze period, increased costs are
  eligible to contribute to increases in rates.
  However, increases in costs may or may not be
  offset by other increases or decreases in
  revenues, expenses, or rate base.

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Potential Direct Impact on Revenue Requirement
from Adding Plant to Control Mercury

• Calculated the potential impact of adding
  equipment for Hg control for the following size
  coal plants / system 100 MW plant, 500 MW plant,
  1000 MW plant, and 5000 MW system.
• Operational costs were calculated based on the
  size of the facility and an assumed capacity
  factor of 65 for coal plants.
• All calculations assume a 30 year life for
  depreciation purposes.
• Calculations were performed for low, high, and
  average cost scenarios based on cost information
  provided by DAQ.
• Costs possibly not considered overheads,
  property taxes, etc.

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Potential Revenue Requirement Impact per MWH for
53,000,000 MWH System (for illustration purposes
only)

• Low Average High
• 100 MW 0.01 0.01
  0.01
• 500 MW 0.03 0.03
  0.05
• 1000 MW 0.05 0.07
  0.10
• 5000 MW 0.26 0.35
  0.48
• Low assumes equipment costs of 3,680 per MW.
• Average assumes equipment costs of 4,979 per MW.
  
• High assumes equipment costs of 6,840 per MW.
• Low assumes variable costs of 0.000363 / KWH.
• Average assumes variable costs of 0.000491 /
  KWH.
• High assumes variable costs of 0.000674 / KWH.
• All scenarios assume a 65 capacity factor.

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53,000,000 MWH System Example for Impact per MWH
on Average Cost Assumption

• Return on Rate Base Formula ((Initial amount per
  MW MW capacity of plant) Depreciation)
  Revenue Factor
• Operational Costs Formula ((Variable costs per
  KWH MW capacity of plant 1000 8760
  Capacity Factor) Depreciation) / Retention
  Factor
• Rate Base Formula Operational Costs Formula
  System Costs
• System Costs / System KWH Sales Impact per KWH
• Initial amount per MW rate base 4,979
• MW capacity of plant 5,000 (total system-coal)
• Variable costs per KWH .000491
• Capacity Factor 65
• Depreciation 30 year life assumed
• Revenue factor rate base .1269384
• Retention factor operational costs .9637002
• Formula for return on rate base ((4,979
  5,000) 829,833) .1269384 3,054,794
• Formula for operational ((.000491 5,000
  1,000 8,760 65) 829,833) / .9637002
  15,366,400
• Total 3,054,794 15,366,400 18,421,194 /
  53,000,000 0.35

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Example for Impact on Revenues for Adding Plant
Continued

• 
  Average
  Gross
• Capital
  Embedded Weighted Retention Revenue
• Rate Base Factor Structure Cost
  Average Factor Effect
• Long-term debt 49 6.04618
  2.96263 .9637002 .0307422
• Common equity 51 11.00000
  5.61000 .5831832 .0961962
• Total 100
  
  .1269384
• The retention factor is calculated on the next
  slide.

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Example for Impact on Revenues for Adding Plant
Continued

• Net Income Factor
• Total revenue
  1.0000000
• Uncollectibles
  0.0030000
• Balance
  0.9970000
• Gross receipts tax (3.22)
  0.0321034
• Regulatory fee (.12)
  0.0011964
• Balance
  0.9637002
• N.C. state income tax (6.9)
  0.0664953
• Balance
  0.8972049
• Federal income tax (35)
  0.3140217
• Retention factor
  0.5831832