A Rate Hike is No Walk in the Woods

Community and Economic Development – Blog by UNC School of Government

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A Rate Hike is No Walk in the Woods

By CED Guest Author

Published November 22, 2011

In July of this year, Duke Energy filed a request with the North Carolina Utilities Commission to increase electricity rates in the state by 15%. It probably came as no surprise to local governments that run their own utilities that that this “request” elicited public outcry across the state.

Comments submitted to the NC Utilities Commission (totally over 1,100) and voiced at public hearings across the state cited hard economic times in protest of this “ill-timed” request that would increase an average household electricity bill from $97 to $116 each month for 1,000 kWh, according to Duke Energy calculation that takes into account fuel costs. In its proposal, residential customers would bear a 17% rate increase, while commercial and industrial customers would experience a 14% increase.

Currently, Duke’s rate per kWh is $0.086/kWh. A 17% rate increase would increase residential electricity rates to $0.101. A recent rate study conducted by the Environmental Finance Center found that the average residential rate for electricity in North Carolina provided by municipal utilities is $0.120, and also $0.120/kWh for electricity provided by rural cooperatives.

The rate increase was founded in capital expenditures, some of which have already been made, according to Duke Energy. In their filing with the Utilities Commission, Duke officials argued that, “even with the Company’s proposed rate increase, our customers will continue to pay rates well below the national average and our customers will still be paying lower rates today than they were in 1991 on an inflation-adjusted basis.”

Last week, Duke moderated their rate increase from 15% to 12% – reducing the revenue request by a total of $118 million. One of the ways that Duke Energy negotiated the 3 percentage point reduction was to reduce the rate of return of equity to investors from 11.5% to 11.25%. (Duke rejected the Public Staff’s request for an ROE of 9.25% because they felt that it would put their credit at risk and drive investors away.) Duke Energy also pledged $5 million of the requested revenue requirement and $10 million of shareholder funds to be put toward an affordability program ($12 million of which will go to NC customers).

Duke’s response with a proposed affordability program mirrors the response of many utility affordability programs across the state that attempt to address the difficulty of selling a product that has the dual purpose of providing basic life services needed to live (i.e. drinking water, home heating), as well as premium services to enjoy (i.e. potable water for irrigation, power used for flat screen television). Whether through increasing block rates and/or the provision of affordability programs, utilities walk a fine line between financial solvency (whether measured by return on equity, reserve balance or paying bills), utility affordability and community competitiveness.

Although the details of Duke’s proposed affordability program have not been developed,  Al Ripley of the N.C. Justice Center in Durham was recently quoted in the Charlotte Observer that the $15 million pledged for an affordability program would not be enough. “It’s just far too little money to address the need that’s out there,” Ripley said.

Mary Tiger was formerly on staff with the UNC Environmental Finance Center.