North Carolina HB 951 could mean windfall for Duke, large rate increases for customers

Duke Energy is attempting to win major concessions from North Carolina lawmakers on an energy bill that would fundamentally change the state’s regulatory landscape, setting up a potential veto showdown with Governor Roy Cooper, and a battle with some of the state’s largest employers. The draft bill, House Bill 951, falls short of Cooper’s calls for 70% decarbonization of the power sector by 2030 and could raise customer bills by as much at 50% by 2035, largely due to provisions favorable to Duke Energy and the bill’s provisions to limit the North Carolina Utilities Commission’s oversight of Duke’s spending.

The bill did not include a provision that the Legislature had recently considered to study market reforms that would introduce greater wholesale electricity competition and a regional transmission organization (RTO) to North Carolina. A Duke Energy-funded group, Citizens for a Responsible Energy Future, recently ran ads attacking Republican politicians and large technology companies who supported the effort to study that reform. A study by Energy Innovation, GridLab, and Vibrant Clean Energy found that creating an RTO in the South, in which Duke would participate, could save customers as much as $348 billion by 2040. Duke has strenuously fought attempts to create, or even study, the potential for a Southeastern RTO in North Carolina despite having supported an RTO study bill in South Carolina.

The textile industry sent a letter to the General Assembly on June 16 stating its opposition to the bill, citing large rate increases as its chief concern. The industry instead called for the passage of House Bill 611, which would study RTOs and market reform efforts, saying it could “reduce customer costs and spark a new era of industrial growth.” North Carolina’s manufacturing industry representatives also opposed the bill. 

Governor Cooper issued a statement in strong opposition to the bill, signaling he may veto the bill if passed in its current form. Cooper’s statement keyed in on potential Duke rate increases and what he viewed as an unacceptable weakening of the North Carolina Utilities Commission authority and oversight functions.

Duke Energy’s gas rush risks creating stranded assets

While the bill would close expensive coal plants which are running less frequently, it would direct Duke to invest in at least 900 megawatts (MW) and possibly as much as 3000 MW of new methane gas-fired power plants, via replacements of Plant Roxboro and Plant Marshall Units 1 and 2, at a time when some utilities are skipping gas altogether in favor of lower-cost alternatives.

The Northern Indiana Public Service Co. (NIPSCO) has told Indiana regulators that it will achieve steep emissions reductions by 2030 by retiring its coal plants, foregoing the construction of new gas plants, and investing in renewable energy and battery storage. The company told Indiana regulators that of all the pathways it analyzed, retiring coal and skipping gas in favor of renewable energy was the one with the lowest cost to consumers.

That finding from NIPSCO comports with what experts are increasingly reporting: A study from the University of California, GridLab and Energy Innovation released earlier this year found that the U.S. can achieve 90% clean, carbon-free electricity nationwide by 2035, dependably, at no extra cost to consumers.

New gas plants have a lifespan of 30 years or longer, which makes them incompatible with President Biden’s goal to decarbonize the electric grid by 2035 unless they are closed early or retrofitted with expensive technologies that are not operating at commercial scale today. Any of those options would add significant costs which Duke has not modeled in its long-term planning to the NCUC, resulting in rate increases to customers. Duke’s gas expansion plans could create as much as an additional $5 billion in stranded assets, according to a report by the Energy Transition Institute and authored by Tyler Fitch of Vote Solar. 

Duke received an “F” grade in the Sierra Club’s recent “The Dirty Truth About Utility Climate Pledges” report, which graded utilities based on their plans to retire coal plants, stop building new gas plants, and invest in clean energy.

Costs driven by multi-year rate plans, over earning potential, small securitization potential

A Duke spokesperson told the Charlotte Business Journal that any “legislation must [ensure] the continued reliability and affordability our customers depend on”. However, an analysis conducted by Nova Energy Consultants estimated that the bill could increase bills by as much as 50% over a ten year period.

Duke has long been trying to pass legislation allowing it to implement multi-year rate plans (MYRP), a process by which the utility can start charging customers for projected costs in the future, as opposed to the current process that looks backward at costs incurred. The bill proposes three-year MYRPs, and while it limits the rate increases possible in the second and third years of the plans to 4%, it does not set a limit for the first year and does not allow the Commission to make changes to a proposal from Duke. The legislature would restrict the Commission to only approving or denying a plan, a significant change from current practice that allows the Commission to make alterations to a utility rate change proposal. 

The bill’s MYRP proposal would allow Duke Energy to keep a certain amount of profits above its allowed profit range, potentially incentivizing the utility to overspend and exacerbating the potential impact on customers. However, no such provision for customer benefit was included for potential under earnings. Investors signaled that the bill’s ratemaking changes could help Duke Energy increase payouts to shareholders, as first reported by the Charlotte Business Journal.

As part of the MYRP, the bill authorizes performance-based ratemaking (PBR), a process which would allow the Utilities Commission to give incentives, and exact penalties, for utilities’ performance against certain public policy goals, such as carbon reduction. As part of authorizing PBR, the bill mandated the Commission to use the “minimum system method” to allocate distribution costs across customer classes. Utility regulatory experts say the minimum system method unfairly places costs on residential customers and “low-use” users, such as apartment dwellers. 

Securitization, which would convert undepreciated power plant balances into lower-cost bonds backed by ratepayers, has increasingly been used across the country to address uneconomic and stranded coal plants. The proposed bill however, restricts securitization to just $200 million. Sierra Club’s David Rogers told the Energy News Network that $200 million would hardly address the $6 billion in uneconomic power plant balances that could be securitized. Duke Energy might seek to avoid securitization since its regulated return on equity, one determinant of its profitability, would be higher if its coal plants remained a part of its rate base rather than being securitized and retired.

Preferential treatment for Duke, threats to distributed generation

While the bill also requires investments in renewable energy, it contains various provisions that would give Duke preferential treatment compared to independent power producers and would reserve much of the new development for the monopoly utility. Duke would be allowed to build 55% of all new renewable energy projects authorized by the bill, compared to 45% for independent power producers. Duke’s projects would not be subject to size limitations of 80 MW, whereas private projects would. 

The bill would cement Duke’s ability to administer the competitive renewable energy procurements, after just one additional year of an independent third party doing so. The third party would retain some oversight authority, but Duke would gain significant control over the procurement process. The third party that administered the procurements in 2020, Accion, did not select any of Duke Energy’s proposals for construction.

Some bill provisions would allow Duke to levy new “standby charges” on customers who install more than 100 kilowatts (kW) of solar on their property, such as small businesses. Standby charges have generated fierce pushback; the municipal utility in Farmington, New Mexico’s standby charge is currently being challenged in federal court, and Alabama Power’s $5.41 per kilowatt monthly fee for grid connected solar of less than 100 kW is likely headed to federal court after two federal regulators raised concerns. The bill would also authorize grid access fees for “oversized” solar arrays, although those would be determined at a later date.