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Rate Implications Due To Hg Reductions Presented by Elise Cox Assistant Director – Accounting Division Public Staff – North Carolina Utilities Commission.

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Presentation on theme: "Rate Implications Due To Hg Reductions Presented by Elise Cox Assistant Director – Accounting Division Public Staff – North Carolina Utilities Commission."— Presentation transcript:

1 Rate Implications Due To Hg Reductions Presented by Elise Cox Assistant Director – Accounting Division Public Staff – North Carolina Utilities Commission

2 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.

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

4 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

5 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

6 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.

7 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

8 Reasonable Operating Expenses Fuel Purchased Power Operation and Maintenance Depreciation Federal and State Income Taxes Taxes Other Than Income Taxes

9 Formula for Rate Base Utility plant in service that is used and useful Less: accumulated depreciation Less: accumulated deferred income taxes Plus:materials and supplies (including fuel inventory) Plus: working capital and deferred costs Less: deferred credits

10 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)

11 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

12 Clean Smokestacks Act IOUs are allowed to accelerate the cost recovery of estimated environmental compliance (SO 2 and NO X 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

13 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

14 Rate Freeze Period Continued 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.

15 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.

16 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.

17 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

18 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.

19 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

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