Duke sparks debate with request for 15% rate hike

As society’s preference for energy sources shifts from fossil fuels to cleaner alternatives, utility companies endeavor to cover the costs of an evolving business model. That effort could mean higher electric bills for Duke Energy customers in Western North Carolina.

On June 1, Duke Energy Progress filed a request with the N.C. Utilities Commission to raise rates an average of 14.9 percent, to take effect Jan. 1. Residential customers would see an average increase of 16.7 percent, and commercial and industrial rates would go up an average of 13.5 percent. A typical 1,000-kilowatt monthly residential bill would increase from $104.68 to $122.48.

If approved, the plan would affect DEP’s 1.3 million electric customers in the Asheville area and central and eastern North Carolina, and it would increase the company’s revenues by $477.5 million a year.

Separately, on Aug. 25, Duke Energy Carolinas, which serves central and far Western North Carolina, also asked the Utilities Commission for an overall average rate increase across all customer groups of 13.6 percent.

What the rate hike buys

The Utilities Commission summarizes the major components of Duke Energy Progress’ rate request as follows: $253 million to offset money already spent for new natural gas plants in Asheville and Wilmington, $129 million for ongoing ash basin closure costs, $66 million per year for five years for recovering past ash basin closure costs, and $29 million for tax rate changes and costs related to renewable energy, storms, nuclear development and a computer system.

Achieving a full understanding of how the revenue from the requested rate increase will be allocated is complicated, since some of the costs Duke outlines are ongoing, some are for past investments and some will recur for only a few years, after which that revenue could go toward new expenses.

Duke spokesperson Jeff Brooks says the rate hike would pay for needed upgrades. “Recent work to modernize power plants, generate cleaner electricity, responsibly manage coal ash and respond to major storms like Hurricane Matthew and other severe weather incidents have made it necessary for Duke Energy to seek a change to customer bills to pay for these important investments,” he says.

Brooks says it’s reasonable for Duke to pass along such costs to customers. “The operation of power plants, including the retirement of the plant and compliance with state and federal regulatory requirements, are part of the normal operations of an energy company and are costs typically paid for by customers,” he says.

Locally, Duke launched a Western Carolinas Modernization Project last year, which includes building two natural gas-fueled electric generating units at Lake Julian south of Asheville to replace its existing coal plant, which will be retired by 2020. Duke estimates that project will cost $890 million.

The proposed rate increase includes costs associated with the construction of the Asheville plant and the excavation and closure of ash basins there. The company is currently preparing the site; Brooks expects the new plant to be in service by the end of 2019.

Coal ash: Who pays?

Duke asserts that the proposed rate increase is not an attempt to foist the costs of the 2014 Dan River coal ash spill onto utility users. “Duke Energy customers will never pay for the company’s response to the 2014 coal ash release at the Dan River Steam Station, or for any coal ash-related fines or penalties the company incurs,” Brooks says. “We take responsibility for our actions in those matters, and those costs will be borne by Duke Energy shareholders.”

The company does hope to get help from customers in ongoing management of coal ash at other sites around the state, however. Federal regulations now require Duke to excavate and safely dispose of coal ash or to cap coal ash basins in place. According to the Environmental Protection Agency, coal ash contains contaminants such as mercury, cadmium and arsenic, which can pollute waterways, groundwater and the air. Duke Energy Progress intends to utilize the surge in revenue flow to clean up ash at the coal-fired power plants that Duke has operated in North Carolina for decades.

David Fountain, Duke’s North Carolina president, compares the situation to car owners getting the tires changed on their vehicle. “You might take your car to a shop to get it done. You don’t have to do the work. That’s what the experts are for. But when you pay your bill, there is a charge for the safe disposal of those tires,” he states in testimony with Duke’s application for the rate increase. “The shop is required to properly manage its waste to protect the environment, and the customer shares in those costs as part of their service.”

In Asheville, $18.8 million is slated to fund decommissioning of coal and combustion turbines. The rate request includes about $106 million spent from 2015 to 2016 for compliance with state and federal requirements to effect the safe closure of ash basins at the Asheville plant. Brooks expects the total cost to close basins at the Asheville plant to come to about $422 million.

Bearing the burden

Not everyone buys Duke’s argument, however. Dave Rogers, a representative of the Sierra Club’s Beyond Coal campaign based in Raleigh, says his organization doesn’t think Duke has handled coal ash prudently. He points to the practice of placing coal ash in unlined pits, which he says creates a danger of contaminants leaking into waterways.

“We don’t think it’s fair that customers bear the entire burden of that,” Rogers says. “Duke shareholders have been profiting off of that for decades, so we only think it’s fair for some of their shareholders to share some of the burden of those costs, if not all.”

Brooks maintains that the company’s shareholders do play an important role. “As a regulated utility, we typically make investments on behalf of our customers before seeking to recover those expenses through customer rates,” he says. “Those investments are made often with no guarantee of recovery. Shareholders provide much of this investment to ensure that the energy system remains reliable.”

Among the hundreds of letters received by the N.C. Utilities Commission from consumers, a common refrain is that the cost of coal ash cleanup should not come from their checkbooks. “I fail to see how it’s my responsibility to pay for the byproduct of coal when I pay for renewable wind energy credits to be added to Duke’s power grid,” writes Asheville resident Erin Meadows. “This rate increase is unethical and should be opposed at every turn.”

Michelle McAlpin of Asheville asks the commission not to let Duke pass on its own “careless practices” to customers. “Duke Energy’s stockholders and officers need to pay for this cleanup. It happened on their watch due to their greed,” she writes in a letter.

Brad Rouse, an energy industry consultant and executive director of Asheville-based Energy Savers Network, believes the Utilities Commision should look at whether Duke knowingly and irresponsibly put coal ash in unlined pits to save money. “If Duke made a mistake in that, then the shareholders should pay. But in general, in my opinion, the ratepayers should pay because it’s part of the cost of using that dirty fuel,” he says.

NC WARN, a nonprofit focused on cleaner energy alternatives, maintains that customers should not have to pay for expenses arising from corporate wrongdoing, says Executive Director Jim Warren. “We staked out a legal position months before they filed for the rate case and we filed a position with the regulators, pointing out that state law explicitly prohibits a utility from recovering from customers’ expenses that they incur based on negligent or unlawful actions,” he says.

Inescapable base rate

Another aspect of the proposed rate increase with which some take issue is a hike in the basic customer charge from $11.13 to $19.50 for most residential customers, a jump of 75 percent. The last time Duke raised the base portion of rates was in 2013, when it initiated a 5.5 percent increase, which Brooks says was the first base rate increase in 25 years.

Brooks explains this is a fixed charge that covers the cost of maintaining customers’ meters and providing billing and customer service. “Even with the proposed increase, the basic facilities charge would not fully cover the cost the utility incurs in providing service to the customer,” he says.

Rogers says this increase will disproportionately impact low-income customers, who already spend a significant percentage of their income on electricity, and it will discourage energy efficiency measures. “If you can’t actually save that much money by investing in energy efficiency in your home, you’re much less likely to do it,” he says. “We think that Duke should be doing more to encourage people to invest in renewable energy, not less.”

A June report from the Energy Innovation Task Force, a partnership that involves Duke, the city of Asheville, Buncombe County and local businesses and nonprofits, shows that several ZIP codes in Buncombe County have a higher percentage of low-income households than the rest of Duke Energy Progress and North Carolina as a whole. This could mean the impact would be more significant here than in other regions also covered by the rate increase.

Hardest hit

Many consumers wrote to the N.C. Utilities Commission pleading for it to respect the hardship of higher rates on people with low or fixed incomes. “As a Duke customer for almost 20 years, there is no way my wife and I could afford this kind of rate increase as we’re on [Social Security] and it would almost destroy our life along with many other neighbors who live in this senior living community,” writes John Killeen of Hendersonville.

Hendersonville resident Belinda Wray asks the commission to reject Duke’s proposal, saying she already cannot afford to run air conditioning in her house in the summer or to heat it above 64 degrees in the winter. “In just under a year I will retire,” she writes. “At that time I certainly will not be able to afford an additional $20/month to send Duke for minimal power and to clean up their coal ash mess.”

Duke maintains in its application that it has committed considerable resources to mitigating the customer impacts of the costs. “The company has donated millions of dollars to assist low-income customers with their electric bills, facilitated customer access and awareness of agencies and programs that can help them pay their bills or manage their ability to maintain electric service, and implemented programs to give customers a variety of payment options,” the application states. Duke points to its Energy Neighbor Fund as an example of an assistance program for DEP customers in need, helping low-income individuals and families cover home energy bills.

Rouse says he understands why Duke is looking to increase revenues through raising the base customer charge. “More and more of their costs are not reflected in the amount of energy that’s consumed,” he says. “For example, the more people that adopt solar and self-consume, then the utility cost doesn’t go down very much and yet the revenue goes down quite a bit.”

One argument holds that utility customers should always have been paying more in order to account for the detrimental environmental effects of burning fossil fuels. “The problem is that the true cost of the energy that we use is not reflected in the rates that we pay,” Rouse says. “Utility rates don’t provide enough incentive to conserve or use alternative energy.”

Public interest, private profit

Duke posits in its rate request that the additional revenue will make the company a more attractive investment, which it believes is better for everyone in the long run. “The opportunity for the company’s investors to earn a fair and reasonable return on equity will help ensure access to capital markets on reasonable terms,” the application states.

Complicating the issue is the distinction between Duke Energy, the publicly traded holding company, and its subsidiary, Duke Energy Progress, which is regulated. “So you have part of the corporation that’s a public utility, supposed to act in the public interest, and another part of the corporation that isn’t quite bound in that same way,” Rouse says.

Instead of viewing Duke as an “evil corporation,” Rouse says, people should consider the company’s balancing act in providing for both shareholders and customers. “They’re given a certain ability to make a steady, consistent profit on the assets that they employ, and in return for that they are required to act as a public utility, which means that they are required to act in our best interests,” he says.

Duke Energy is seen by many investment analysts as a predictable stock, because an increasing percentage of its business is in the regulated market, where government regulators exert a level of control. Duke’s profitability has remained steady over the past few years, and the company said in its 2016 financial report that it expects to grow adjusted diluted earnings per share between 4 and 6 percent through 2021.

Voice of the people

The N.C. Utilities Commission scheduled five hearings to gather input from Duke Energy Progress customers in September and October. A hearing in Asheville is slated to take place Wednesday, Sept. 27, at 7 p.m. at the Buncombe County Courthouse. Community Roots, an Asheville-based nonprofit, plans to host a “No Rate Hike for Dirty Energy” rally at the Vance Monument from 5-7 p.m. prior to the hearing before heading to the courthouse to participate.

A final evidentiary hearing is planned for Monday, Nov. 20, at which the commission can hear expert witness testimony from Duke Energy Progress, public staff and any other parties to the proceeding.

Brooks explains that Duke must demonstrate to the NCUC why the rate increase is needed. “The public staff (who represents the customer) and other interested stakeholders audit our filings and vet the company’s request” prior to the hearings, he says. Duke expects a decision from the commission around the first of the year, he adds.

The result of the public hearings and discussion among Duke and the NCUC will be a lower increase than proposed, Rouse predicts. “I think what happens in the end is Duke throws a bunch of stuff up to see what they get and there’s a lot of talk back and forth in the commission and the commission doesn’t want politically to raise rates 15 percent, so they come up with a little smaller number and they disallow certain things,” he says.

Rogers points out that it’s problematic that much of the negotiating process involves only discussions among commission members, staff and Duke Energy. More emphasis should be given to the comments of regular folks, he says. “We think it’s really critical that the Utilities Commission take input from customers who are going to be the ones to bear the brunt of this and really take into account the comments delivered at the public hearing,” he says.

The commission has already received hundreds of letters from consumers and organizations raising concerns about the rate hike. Comments can be emailed to the N.C. Utilities Commission at statements@ncuc.net and to public staff at legal1@psncuc.nc.gov.

A future of rising rates?

The Sierra Club holds that this rate increase could be a harbinger of Duke’s practices in the future. “I don’t think Duke should be able to shift the costs of coal ash cleanup onto their customers, so we hope the outcome is that they won’t be able to do that,” Rogers says. “This is only a portion of the coal ash cleanup, but in a lot of ways it’s the most important one, because whether or not they’re able to recover those costs sets a precedent for the future.”

Higher utility rates may simply be the new reality, as climate change fuels more frequent storms requiring costly repairs, says Rouse. He points out that in 20 years Eastern North Carolina has experienced two “1,000-year flood events” — hurricanes Floyd and Matthew — both of which caused widespread damage to the Duke infrastructure. “We better just get prepared, because of our inaction on climate change in this country, that we’re going to have to pay for it in what we pay,” he says. “People need to understand that we’re already seeing the pocketbook impact of our inaction on climate.”

Additional reporting by Molly Horak