Duke Energy Corp. has agreed to partial rate-case settlements to shore up its grid improvement spending while the state's attorney general has doubled down on his contention that hikes for the company's two N.C. utilities should be significantly cut.

On July 28, the N.C. Utilities Commission will start joint hearings on Duke Energy Carolinas’ 6.3% rate-hike request and Duke Energy Progress’ 13.6% request.

Settlements with a number of large commercial and industrial customers have essentially won support for — or at least neutralized opposition to — a plan for three years worth of grid upgrades that ultimately could reach $13 billion over 10 years in North Carolina.

“In light of the shocks that have been delivered to the national and the North Carolina economies and the attendant skyrocketing unemployment of North Carolina's work force due to the COVID-19 pandemic, it is more important than ever that the ... commission reject the companies' requested 10.3% (return on equity),” he says in his updated testimony.

The ROE proposed by Baudino would cut about $135 million from Duke Carolinas’ rate as requested and $90 million from Duke Progress’ request. The reduction would be less than the 9.75% Duke has proposed in several of its settlements, but the cut would still be substantial.

Duke response

Baudino points out that the Kentucky Public Service Commission recently set the ROE for Duke Energy Kentucky at 9.25%, and that was “based on data that proceeded the Covid-19 pandemic.”

He argues that utilities are “safe havens” for investors in times of stock-market volatility such as that caused by the pandemic, and that makes utilities attractive even at lower returns.

“The ongoing Covid-19 pandemic continues to significantly affect economic activity, as well as the employment and incomes of North Carolinians,” he tells the commission. “The companies’ ratepayers simply cannot afford to be saddled with an excessive ROE in this (10.3% to 10.5%) range.”

Dylan D’Ascendis, a director with Scott Madden, is Duke’s expert financial witness. He has led rebuttal testimony disputing Baudino’s analysis. He says the volatile market works against utilities in current conditions.

“In my opinion, an authorized ROE of 10.50 percent is a reasonable, but conservative measure of the companies’ required return,” he tells the commission in rebuttal testimony led Monday.

Crisis 'not yet abated'

D’Ascendis says Baudino’s recitation of the facts “echo my observations about current market conditions ... (but) his conclusions from those facts are contradictory.”

In return, Duke (NYSE: DUK) has made concessions in the details about how those costs are charged to large users. And it has agreed with them to reduce its proposed return on equity to 9.75% from a requested 10.3%. That would cut millions of dollars out of its rate requests.

In a similar settlement with the clean energy group Vote Solar, Duke also recently agreed to call for a working group with stakeholders to study the impact of climate change on its physical infrastructure investments in the electric grid. The group will incorporate climate scenarios from the North Carolina Climate Science Report, published in 2020 by a research collaborative to support Gov. Roy Cooper’s Executive Order 80 on promoting clean energy solutions for the state.

All settlements are subject to approval by the commission.

Coronavirus impact

But battles over rates continue on several fronts. Last week, the commission ruled the Attorney General’s Office could file additional testimony on the economic impact of the Covid-19 pandemic to argue for larger cuts to Duke’s return on equity and capital structure that would reduce rates even further.

David Baudino of J. Kennedy and Associates in Roswell, Georgia, is the financial consultant testifying for Attorney General Josh Stein. He has already argued that Duke’s return on equity should be set at 9%. In updated testimony, he contends that the continued recession caused by the pandemic makes the case more forcefully than when he led his original testimony this spring.

“Mr. Baudino discusses the shocks, extreme volatility, unprecedented economic contraction, skyrocketing unemployment and continuing effect on economic
activity brought upon by the COVID-19 pandemic, and yet he continues to support a 9.00 percent ROE, which is below any reasonable measure of the companies’ required return,” he says.

He goes on to argue that “because the public health crisis has not yet abated, its total impact on markets cannot be measured.” And he warns the commission that “because utilities require adequate access to capital to provide safe and reliable service, in times of market distress, the ability to access capital is even more critical.”

The Public Staff of the N.C. Utilities Commission, the state’s utility customer advocate, has also proposed that the ROE should be 9%. Kevin O’Donnell of Nova Energy Consultants, testifying for the Carolina Utility Customers Association, argues it should be set at 8.75% for both utilities.