Transcript Customer and Rate Implications Due To Hg and CO2

Rate Implications Due To Hg
Reductions
Presented by Elise Cox
Assistant Director – Accounting Division
Public Staff – North Carolina Utilities
Commission
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.
Capital and annual variable operating
costs associated with mercury
reductions were provided by the
Division of Air Quality.
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
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
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.
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
Reasonable Operating Expenses
• Fuel
• Purchased Power
• Operation and
Maintenance
• Depreciation
• Federal and State
Income Taxes
• Taxes Other Than
Income Taxes
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
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)
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
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
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
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.
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.
Potential Revenue Requirement Impact
per MWH for 53,000,000 MWH System
(for illustration purposes only)
100 MW
500 MW
1000 MW
5000 MW
Low
$0.01
$0.03
$0.05
$0.26
Average
$0.01
$0.03
$0.07
$0.35
High
$0.01
$0.05
$0.10
$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.
53,000,000 MWH System Example for Impact
per MWH on Average Cost Assumption
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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
Example for Impact on Revenues for
Adding Plant Continued
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•
•
Average
Capital Embedded
Rate Base Factor Structure
Cost
Long-term debt
49%
6.04618%
Common equity
51% 11.00000%
Total
100%
Weighted
Average
2.96263%
5.61000%
• The retention factor is calculated on the next slide.
Gross
Retention Revenue
Factor
Effect
.9637002 .0307422
.5831832 .0961962
.1269384
Example for Impact on Revenues for
Adding Plant Continued
Net Income Factor
Total revenue
Uncollectibles
Balance
Gross receipts tax (3.22%)
Regulatory fee (.12%)
Balance
N.C. state income tax (6.9%)
Balance
Federal income tax (35%)
Retention factor
1.0000000
0.0030000
0.9970000
0.0321034
0.0011964
0.9637002
0.0664953
0.8972049
0.3140217
0.5831832