Creative Accounting as Duke Energy NC Aims to Revamp Their Grid: Implications for Duke Customers


Creative Accounting as Duke Energy NC Aims to Revamp Their Grid: Implications for Duke Customers

The first round of hearings regarding Duke's $2.3 Billion plan to upgrade their grid have concluded, revealing their approach to fund such a project. Duke is attempting to use something called "deferral accounting", which makes it possible for the utility to recover costs in a future rate case without listing those costs as expenses on it is quarterly financial reports ... The key is that deferral accounting lets a utility charge its customers for the financing costs for projects, ensuring that the utility does not have to pay the interest on the money it has to borrow to build them. This is nothing new, as one-time, sudden expenditures for utilities such as construction of generation plants are funded in this manner. However, in this case, many believe this is an inappropriate use of the funding method. There are a few concerns from major stakeholders, such as ratepayers, commissioners, and regulators.

For customers, this means rate hikes for both Duke and Duke progress customers. For Duke NC customers, the projected increase proposed during the hearing was 2.1% over the next two years. For Duke progress rate payers, the hike would reach for a 7% increase in the same time period. Kevin O'Donnell, a consultant from Nova Energy, commented that Duke Carolina's' power costs are "rising at an annual rate that will soon put it above the Southeast regional average and approach the higher national average. Duke Progress is already above the regional average." Besides the concern for the rates themselves, commissioners have expressed doubt in Duke's ability to evenly distribute the benefits rendered by such an investment.

Commissioners asked questions as to how they could approve the deferral of costs without ensuring that the payment from customers ultimately exceeds the benefits the customers receive from the investment. Furthermore, if the customers did see benefits, there is still concern that some customers may see more of the improvements while others will have the same rate increase with fewer benefits to power reliability. An obvious worry here is that some regions will be paying more for little or nothing in return.

Kevin Strunk, director of National Economic Research Associates, also argued against allowing this deferral treatment under NC law. In his eyes, Deferral accounting did not apply as these costs are funding a project that addresses "broad systemic changes utilities must address in routine planning", and not "the kind of extraordinary, one-off expenditures that generally justify deferral accounting."

A similar tactic was rejected two years ago, in Dukes attempts to use deferral accounting for grid improvement costs. Today's plan may meet the same roadblocks, as it is difficult to "prove that there [is] an effective way to differentiate the grid improvement costs from regular maintenance and expansions treated as normal costs." Hearings will continue on Monday.

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