Duke Energy refuses to consider climate-related risk in North Carolina rate case

Duke Energy Carolinas has submitted rate case testimony in North Carolina that appears inconsistent with its parent company Duke Energy’s enterprise-wide goal of reaching net-zero carbon emissions by 2050.

Witnesses with Vote Solar, a non-partisan solar energy advocacy organization, raised the conflict between Duke Energy Carolinas’ (DEC)’s plans and Duke Energy’s climate goal. Vote Solar also sought to draw attention to the wide range of climate factors that DEC has failed to address or even actively sought to exclude from the rate case, creating risks for the utility’s investors and ratepayers. 

DEC is seeking a six percent rate hike and 10.3 percent return on equity (ROE) – including to support its Grid Improvement Plan, which faces criticism from clean energy and consumer advocates. The North Carolina Utilities Commission (NCUC) will hear DEC’s rate case later this month. Duke Energy Progress (DEP), DEC’s sister utility in the Carolinas, will present its case in early April. 

Duke’s North Carolina decarbonization plan inconsistent with net-zero goal

Duke’s own filings in the Carolinas rate case show a decarbonization trajectory at odds with the utility’s enterprise-wide net-zero goal. DEC has submitted documentation to the NCUC that its average carbon emissions per megawatt hour of energy will fall by just 25% by 2049 from 2019 levels. In its testimony, Vote Solar charted the chasm between DEC’s planned emissions pathway and that required to achieve Duke’s corporate-level net-zero target:

DEC serves nearly 2.5 million customers, approximately 34% of Duke Energy’s total customer base. Accordingly, if the utility’s Carolinas subsidiary fails to implement emissions reductions more closely proportional to Duke’s enterprise-wide commitment, it is unlikely Duke Energy will achieve overall net-zero emissions by 2050, at least without buying massive amounts of carbon offsets while continuing to pollute – a strategy that would render the commitment as pure greenwashing. DEC filed the emissions projections after its parent company had already made the net-zero announcement.

Duke’s emissions trajectory continues to be fueled by its reliance on gas infrastructure, including the 600-mile Atlantic Coast Pipeline project, in which it is a 47% owner, and up to 12 GW of new gas plants in the Carolinas according to its latest integrated resource plan (IRP) filings.

Vote Solar’s testimony in the case is the latest to call attention to the massive gap between Duke Energy’s climate promises to investors and its actual investments at the operating company level. 
Majority Action, which works with a coalition of institutional investors, released a report yesterday with analysis from Synapse Energy showing that Duke is investing in gas pipelines and power plants and underinvesting in clean energy, “without considering the risks of stranded asset potential from fossil assets that will outlive the companies’ 2050 commitments.”

Vote Solar: Duke is ignoring severe risks from climate change

While it continues to pollute at levels that will exacerbate the climate crisis, Duke Energy – and specifically, DEC – faces a host of climate-related risks addressed “woefully inadequate[ly]” by the utility’s grid modernization efforts, Vote Solar testified. 

Throughout its Grid Improvement Plan (GIP) stakeholder process, and in relevant rate case testimony, DEC has said it would not address “climate change” explicitly, but rather as it intersected with the “megatrends” of “Environmental Trends” and “Impact of Weather Events” – despite stakeholder demands to include climate change itself as a megatrend.

Duke’s net-zero goal was itself the result of pressure from Environmental, Social, and Governance (ESG) shareholders, suggesting that failure to successfully implement this target could yield investor-side risks. Twenty of the biggest institutional investors worldwide controlling more than $1.8 trillion in assets in February 2019 called on Duke and peer utilities to adopt a net-zero commitment within six months.

Duke has also stacked up climate risks by doubling down on its investments in fossil gas infrastructure. A Rocky Mountain Institute study concluded in 2019 that a clean energy resource portfolio would be cheaper than 90% of new gas plants. If Duke follows through on its planned gas investments, those additional costs relative to clean energy will inevitably fall on the backs of either customers or investors. Vote Solar’s witnesses testified that Duke’s plans for accelerated depreciation of its fleet of gas plants, which would increase both annual cost and cost per kilowatt-hour of the plants, was a form of climate-related risk to its customers.

Duke’s climate risk exposure further includes physical threats to its assets, and social and economic “transition” risks, such as to its cost of capital, market share, and reputation with customers. More specifically, Duke faces extreme weather events threatening reliability and longer customer outages; increased temperatures straining the grid; precipitation changes and sea-level rise or flooding that could damage coastal assets; and the threat of wildfires to transmission and distribution, as summarized by the Vote Solar witnesses.

While many utilities face these risks, DEC is particularly vulnerable in the Southeast during the lifetime of its GIP-related investments within the scope of current rate case. Moody’s first assessment of climate-related risks for electric utilities from January 2020 shows the utility territory is at some of the highest risk for hurricane devastation. The North Carolina Climate Science Report and S&P and Moody’s ratings referenced by Duke in its own rate case filings further demonstrate the unique threat of climate change in the Southeast.

Vote Solar’s analysis also finds that the risks Duke faces, such as to its physical infrastructure and worker health and safety, are easier to quantify than ever, including at the county and plant level. Examples of innovative analyses on which Duke could build – if it chose to prioritize a comprehensive evaluation of climate risk – include the Moody’s review, in addition to Con Edison’s Climate Change Vulnerability Study from December 2019.

The slate of climate-related risks synthesized by Vote Solar has implications for utilities nationwide. The testimony cites the Task Force on Climate-Related Disclosures, which named the energy sector as one of four non-financial groups with “the highest likelihood of climate-related financial impacts” in 2017. An analysis by BlackRock’s Investment Institute and letter from its CEO Larry Fink both concluded that climate risks “are already present in utility stocks, but they haven’t been adequately evaluated by investors”. An S&P lookback on ratings from 2015 to 2017 showed that environmental and climate (E&C) risks factored significantly into more than 700 assessments; more than 40% of the assessments in which E&C played a key role produced downgrades.

Duke claims climate risk “irrelevant” to Carolinas rate case, contradicting own analysis

Despite all of these grave warnings, in an objection to Vote Solar’s discovery requests last October on the utility’s climate change preparedness, Duke Energy Carolinas claimed climate change was “irrelevant” to its request for a rate hike. The utility attempted to argue that inquiries regarding climate risk were outside of the scope of its application, which did not contain the words “climate change” or “global warming”. Both the inquiries and DEC’s responses were filed after the utility’s enterprise-wide net-zero announcement, calling into question the company’s commitment to its goal.

In its October objection, DEC argued that its parent company’s corporate analysis was unrelated to the costs it is seeking to recover in the rate case. For instance, it claimed, “The Duke Energy 2017 Climate Report to Shareholders, which speaks for itself, is intended to ‘provide information on Duke Energy’s strategy and the steps [it] is taking to mitigate risks from climate change.’ It does not, and was not intended, to identify actual or potential costs for which recovery is sought in this proceeding.” In a further filing, the utility claimed that Duke, “as well as its stakeholders, are unable to say with certainty what the future impacts of climate change may or may not be.”

Duke similarly attempted to block climate discovery from its 2018 integrated resource plan docket in Indiana, as detailed in Majority Action’s report. The utility again downplayed its own publicly available climate analysis, stating “it is not relevant to Duke Energy Indiana’s 2018 IRP as the assumptions for the referenced climate report were not used for Duke Energy Indiana’s 2018 IRP.” 

Using similar language as in the pending Carolinas rate case, the Indiana objection continued: “this request was not reasonably calculated to lead to admissible evidence in this process and Duke Energy Indiana objects to providing the requested information. Duke Energy further objects to this request as overbroad and unduly burdensome.”

Additional publicly available Duke analysis undermines its objection to the relevance of climate risk in the Carolinas rate case. For instance, Duke’s 2018 10-K filing identified among its “Risk Factors” that “[e]xtreme weather […] associated with climate change could cause seasonal fluctuations to be more pronounced. As a result, the overall operating results of the Duke Energy Registrants’ businesses may fluctuate substantially.” This section also found that “Destruction caused by severe weather events […] can result in lost operating revenues due to […] additional and unexpected expenses to mitigate storm damage.”

However, the utility’s treatment of “Global Climate Change” in the same document fell short of meaningfully quantifying or committing to accountability to plan for impending climate-related risks:

“The Duke Energy Registrants recognize certain groups associate severe weather events with increasing levels of GHGs in the atmosphere and forecast the possibility these weather events could have a material impact on future results of operations, should they occur more frequently and with greater severity. However, the uncertain nature of potential changes in extreme weather events (such as increased frequency, duration, and severity), the long period of time over which any potential changes might take place, and the inability to predict potential changes with any degree of accuracy, make estimating any potential future financial risk to the Duke Energy Registrants’ operations impossible.”

Similarly, Duke’s submission to the Climate Disclosure Project for its Climate Change 2018 report fell short of assigning responsibility within the corporation for climate-related risk planning. “Because of the nature of Duke Energy’s business,” the company said, “climate-related issues touch many aspects of our organization, making it difficult to list all the positions with responsibility for issues arising due to climate change.”

PG&E bankruptcy offers cautionary climate profiteering parallel

California utility PG&E has the infamous distinction of being, in the words of the Wall Street Journal, “the first climate-change bankruptcy,” and “probably not the last”. Facing deadly and ongoing fire crises – often sparked by its own transmission lines, PG&E had to cut power to hundreds of thousands of residences and businesses last October. PG&E has itself identified climate change as responsible for catastrophic wildfire risk in its service territory. Attorneys representing fire victims in federal court have further argued that the company’s own decision-making in the face of these conditions led to its infrastructure starting fires. 

PG&E has asked regulators for an unprecedented increase in its ROE, or profit margin on capital investments, which it claims is required to attract investors in the face of extreme wildfire risk. Its April 2019 request for a 16 percent ROE – up from the current 10.25 percent figure aligned with industry averages – would have increased customers’ bills by 7 percent. (PG&E lowered the requested wildfire premium after California set up a wildfire insurance fund, but the regulators still ruled preliminarily to reject that smaller increase.) Just months earlier in January 2019, PG&E filed for the largest utility bankruptcy in U.S. history, owing to an estimated $30 billion in liabilities from Northern California wildfires caused by the company’s equipment – including the 2018 Camp Fire, which claimed 85 lives. 

Vote Solar’s testimony warns about the risk of Duke’s failure to adequately consider climate-related risk in its Carolinas rate case and other proceedings. However, it roundly rejects the argument that such risks would justify an increased ROE, citing work by the Brattle Group:

“First, climate-related risks may be described as “asymmetrical” risks—that is, prudent management may avoid a loss of return on equity, but is less likely to secure a higher return on equity. Experts at the Brattle Group have noted that these risks are not suitable for addressing through a simple risk premium. Second, exposure of the Company to these risks is at least partially dependent on the actions it takes in the operation and planning of its enterprise. Therefore, the risk for the Company is only present to the extent that it pursues business decisions that ignore that risk. The same experts at the Brattle group note that ‘It often may be easier to mitigate a risk directly rather than to measure its marginal effect on the cost of capital.’”

Vote Solar also refers to the California Public Utilities Commission’s conclusion in regard to wildfire risk that “investor-owned utilities should not be rewarded with an ROE that is inflated due to imprudent actions.”

Image by jentomaloff is licensed under CC BY-NC-SA 2.0