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Duke Resolves Rate Case with NCUC

Duke Energy Progress, a unit of Duke Energy Corporation (DUK), has received approval from the North Carolina Utilities Commission (:NCUC) for increase in electric rates for its North Carolina customers. The rate increase will be implemented in 2013 and 2014.

The company had originally asked for an 11% or $359 million increase in average retail revenues. In Mar 2013, the company had reached an agreement on a few issues filed under this request. The issues that were still pending have finally been resolved.

Per the terms of the approval, the total increase in rates over the two-year period for all customers would be 5.5% or $178.7 million. Beginning Jun 1, 2013, the electric rates will increase 4.5% or $147.4 million. The second phase will begin from Jun 1, 2014 with an increase of 1% or an additional $31.3 million. The Commission has also approved a return on equity (“ROE”) of 10.2% and a capital structure of 53% equity and 47% debt.

Electric rates for residential customers using 1,000 kilowatt-hours (kWh) of electricity per month would increase to $111.39 from the current $104.06. For the first year, the rates would increase by 6.5% and 7.5% for the second year.

Rates for retail customers would increase by 4.5% and 5.5% for year 1 and year 2, respectively. Rates for small general service customers would increase by 4.2% and 5.1% for year 1 and year 2, respectively. Medium general service customers would experience an increase of 3.5% and 4.5% in two years and the large general service customers would witness an increase of 2.7% and 3.6% in 2013 and 2014, respectively.

The commission has also approved the company's proposed nuclear levelization accounting as well as a new coal inventory rider. This will enable the company to recover carrying costs on coal inventory levels above those included in base rates.

The company is aware of the financial burden on customers from the rate increase. However, it believes that this approved settlement would allow the company to keep the rates lower. It indicated that even after the increase, the rates would remain below the national average.

The company is nevertheless working on energy efficiency programs and providing assistance to low-income customers. Since 2009, the company has developed more than a dozen new energy efficiency programs allowing customers to save more than 357 million kWh. These programs also offer customers payment plan options.

Per the current rate base approval, the company will contribute an additional $20 million to help low-income customers in North Carolina to pay their energy bills and provide training to improve the quality of the workforce. It will thus be permitted to reduce its cost of removal liability by $20 million.

In March this year, another energy company Ameren Corporation (AEE) has requested for an additional electric rate increase of $51 million. The main motive driving utility companies to file for rate increases is the recovery of their investments for the modernization of the power system. This is the first rate increase filing for Ameren after 1987. Since then, the company has invested approximately $11 billion in the power systems. Over the last two decades, the company has invested in a number of additional gas-fueled power plants and has made significant investments in the transmission and distribution systems.

Duke Energy too focuses on core utility operations to build its rate base through capital expenditure investments. Also, the company is proactively and effectively mitigating long-term environmental-related risks through investment plans and constructive dialogue with policymakers.

However, we remain concerned about the present unfavorable macro backdrop, predominantly fossil-fuel based generation assets and tepid demand for electricity. The company presently retains a short-term Zacks Rank #3 (Hold).

Stocks worth considering in the utility space are ALLETE, Inc. (ALE) and DTE Energy Company (DTE), both with a Zacks Rank #2 (Buy).

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