Coal Ash Cleanup Costs Drive Duke Energy Increase

The North Carolina Utilities Commission announced that it has granted an electric utility, Duke Energy Progress (DEP), less than half of the rate increase it had requested. The company had initially sought $477.5 million in additional revenues, a hike of 14.9%, although that figure was later adjusted downward to $419.5 million. However, both the initial and the revised rate plans had been predicated in part on a proposed rate of return on common equity (ROE) of 10.75%. The commission’s final order, which incorporated the terms of a partial settlement, sets forth an ROE of 9.9%. While the variance between the ROE recommended by the utility and that stipulated to by the parties accounted for some of the difference in the revenue level eventually adopted, another significant factor was the residential customer charge. Whereas DEP had wanted to raise the charge from $11.13 a month to $19.50 a month, an increase of some 75%, the company’s new revenue requirement reflects a monthly residential customer charge of $14 instead, an increase of slightly more than 25%.

While a number of the utility’s cost claims were vigorously challenged, including those relating to extraordinary storm expense and job retention programs, none were as hotly contested as those pertaining to DEP’s ongoing work in cleaning up coal ash residue from the company’s retention ponds. In seeking recovery of its actual costs of closing its coal ash basins, the utility had drawn attention to the fact that since its last base rate case, it had become subject to new legal requirements compelling it to remediate and cease using 19 such basins connected with its coalfired power plants.

According to documentation provided by the company, it incurred $241.89 million in coal ash cleanup costs from January 1, 2015 through August 31, 2017. Although other parties to the proceeding did not dispute the utility’s legal obligation to conduct the cleanup work, several objected to DEP being allowed to recoup the full amount of such costs from ratepayers. They argued that the record showed that inadequate management and oversight of the cleanup projects had resulted in imprudent and unnecessary cost overruns. Indeed, the extent of the protests over the coal ash cleanup matter resulted in a stalemate on that issue in settlement negotiations, with the parties unable to come to any agreement on treatment of the costs or their recognition in rates. Instead, it was left to the commission to resolve the matter.

To that end, the commission determined that because the company was under a legal mandate to clean up and then close the coal ash basins, it was entitled to recover the costs from customers. But, the commission emphasized, such recovery was limited to only those expenses that were shown to be reasonable and prudent. From the commission’s perspective, opponents had presented evidence that not all of the costs claimed by DEP met that reasonable and prudent standard.

The commission elaborated that the record demonstrated that the utility itself had acknowledged that it was not as diligent in overseeing the cleanup projects as it should have been. The company also admitted that it had failed to initiate the cleanup work in a timely manner. In the commission’s view, such lapses were “pervasive” and indicative of “systemwide shortcomings.” The commission was particularly critical of the lax communications protocols used by DEP personnel responsible for managing the cleanup and closures.

In the end, the commission ruled that the utility should be able to recoup from ratepayers $232.4 million in coal ash cleanup costs, amortized over a five-year period. However, that sum was reduced to account for a “mismanagement penalty” of $30 million. The commission opted to apply the penalty as a decrease of $6 million a year over the five-year period of amortization rather than require the company to pay the penalty up front. The commission said the penalty still should be characterized as one covered by shareholders rather than customers though.

While the commission found that the law provided for DEP to recover its past coal ash cleanup costs, it determined that the same could not be said for ongoing cleanup costs. The commission therefore denied the utility’s proposal to include in rates another $129 million a year in further cleanup costs. Instead, it told the company that it should place any such costs in a deferral account for consideration and review in a future rate case.

The parties to the case were not the only ones who argued over DEP’s coal ash cleanup costs though, as the matter engendered significant debate among the members of the commission as well. Two commissioners had such strong opinions on the issue that they attached lengthy dissents to the majority’s decision, which itself came to more than 230 pages. Commissioner ToNola D. Brown-Bland wrote a 13- page dissent, while Commissioner Daniel G. Clodfelter added an even longer 31-page statement. But both commissioners expressed dismay that DEP was being penalized so little after having been shown to have grossly mismanaged the various cleanup and basin closure projects. Both maintained that a mere one-time penalty of only $30 million was not sufficiently consequential to make up for the company’s failures. Commissioner Brown-Bland pointed out that DEP personnel had actually pleaded guilty to criminal negligence related to the unlawful discharge of coal ash residue into surface waters. She asserted that such activity and the resulting guilty pleas should be taken as evidence of imprudence per se, which would negate the utility’s ability to recover the coal ash cleanup costs.

Commissioner Clodfelter took a somewhat different approach in his dissent, however. He alleged that the one-time mismanagement penalty was inadequate because it was too generic in nature and would not serve as an effective impediment to future repeats of DEP practices evidencing “inattention, inaction, and neglect.”

Instead, the commissioner offered a plant-by-plant analysis of management’s missteps in handling the coal residue problem. He averred that specific disallowances would yield a more meaningful penalty and one more likely to produce affirmative corrective action in the future.

Under Commissioner Clodfelter’s final tally, the mismanagement penalty would have risen from $30 million to close to $68 million. Re Duke Energy Progress, LLC, Docket Nos. E-2, Sub 1142 et al., Feb. 23, 2018 (N.C.U.C.).