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Rate Implications Due To Hg Reductions

This presentation by Elise Cox, Assistant Director of the Accounting Division at the North Carolina Utilities Commission, explores the rate implications of mercury reductions. It includes a history of the commission, the role of the Public Staff, rate changes, reasonable operating expenses, the formula for rate base, reasonable return, revenue requirement, the Clean Smokestacks Act, and the rate freeze period.

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Rate Implications Due To Hg Reductions

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  1. Rate Implications Due To Hg ReductionsPresented by Elise CoxAssistant 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 (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

  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 IOU’s last general rate case

  14. 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.

  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) LowAverageHigh 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 AverageGross Capital Embedded Weighted Retention Revenue • Rate Base FactorStructureCostAverageFactorEffect • 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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