Is the Energy We Provide Affordable?

The first question we ask when we consider making a long-term investment to achieve our mission is: Will it provide affordable energy for our customers? Given our long lead times for construction, we must consider both present and future affordability.

We are investing today in more efficient coal-fired plants and other technologies to maintain the fuel flexibility of our generation fleet. This will help to mitigate the impact of future price spikes for any one fuel, and smooth out customer bills. Replacing some of our oldest coal-fired plants with new, efficient and lower-emitting coal units makes economic sense because of our nation’s vast supply of affordable and reliable coal.

Our 825-MW Cliffside advanced coal project in North Carolina is about 55 percent complete. We call this a “bridge plant” because when the new advanced-technology generating unit is finished in 2012, it will begin to replace a total of 1,000 MW of older, higher-emitting coal units, which we will retire from service.

In Indiana, our 630-MW Edwardsport integrated gasification combined-cycle plant is about 50 percent complete. This is one of the cleanest, largest and most advanced coal gasification projects in the world. When completed in 2012, it will replace 160 MW of older and higher-emitting generation that is more than half a century old. We are investing $17 million to study carbon capture at the site. We are also proposing to spend $42 million for the first phase of site selection and characterization studies for the permanent underground storage of up to 60 percent of the plant’s carbon dioxide (CO2) emissions.

Additionally, we are building two very efficient 620-MW combined-cycle natural gas-fired plants at two existing coal-fired power plant sites in North Carolina. When completed in 2011 and 2012, these cleaner-burning units will leverage our ability to use growing supplies of domestic natural gas. They will also enable the retirement of about 250 MW of older coal-fired units as part of the 1,000 MW referenced above.

Another component of our modernization strategy includes investments in a more efficient electric grid to improve future reliability and to promote end-use energy efficiency. I will discuss more about that below.

Frequently Asked Questions

Q: How will your modernization strategy lead to revenue and earnings growth?
A: This strategy is based on investing capital today to replace older, inefficient and higher-emitting fossil generating plants, and to build a smarter grid to help us prepare for a lower-carbon, cleaner-energy future. This prudent investment of capital will increase our rate base and, with constructive regulation, it will lead to revenue and earnings growth.

Q: Why are you investing significant capital in new power plants when load growth has fallen?
A: We build plants to meet the long-term needs of our customers. Although the recessionary economy has impacted our near-term load, we must prepare for the future when demand growth returns. Regardless of the recession, we will need additional capacity to meet our peak demand in the future. In both the Carolinas and the Midwest, we have not built a new baseload power plant since the 1980s. The new cleaner-coal and gas-fired generating units we are building will replace the older fossil plants we anticipate retiring over the next decade.

Q: How do you intend to achieve constructive regulatory outcomes?
A: We have a track record of recovering our investments through regulatory proceedings with an approach that balances the needs of all of our stakeholders — and involves all parties in negotiations to reach constructive settlements. Our current focus is to build support for closing the gap between the time we invest and the time it takes to recover our investment.

Q: Why is operational excellence significant for meeting financial goals?
A: Operating our plants and system with high availability and efficiency, while also providing excellent service at affordable rates, is necessary to build customer satisfaction and regulatory support. Our commitment to operational excellence demonstrates our discipline in allocating capital to achieve top-tier performance.

Q: Are you identifying other revenues beyond your traditional business?
A: We are working to grow revenues outside the traditional electric sales business. These new sources include energy efficiency products and services, wholesale origination (supplying power to rural electric co-ops and municipalities) and our economic development efforts.

Constructive capital recovery

As a regulated utility, our only vehicle for earning on our plant and grid investments is the recovery of capital and earning a return on equity that regulators allow through our electric rates. The rate settlements we reached last year with nearly all of the parties in four of our five jurisdictions are prime examples of our work to achieve constructive regulatory outcomes for our customers and investors alike. We also successfully continued the ongoing construction work in progress (CWIP) recovery of financing costs for our Edwardsport cleaner-coal project in Indiana.

Given the state of the economy, it’s not easy asking for rate increases. But keep in mind, in the Carolinas alone, we have not raised our nonfuel base rates in those states since 1991, and our rates remain competitive for our customers and for the communities we serve. For instance, in North Carolina, if our rates had kept up with inflation, our 1991 residential base rate of 7.1 cents per kilowatt-hour (kWh) would be nearly 11.2 cents per kWh today. With the recently approved rate increase, the average residential customer will pay about 9.2 cents per kWh, well below the national average of nearly 11.8 cents per kWh for residential customers.

To be able to provide customers with affordable power, we must seek and obtain constructive regulatory solutions in all five of our state jurisdictions. As we are granted timely recovery of our construction costs and expenses, and fair returns on our equity capital, we will be able to raise new capital at competitive and fair costs. Our regulatory framework to expand energy efficiency will also help to reduce energy costs, while earning fair returns for our investors.

New partnerships to advance affordable power

To accelerate the development of cleaner and more affordable coal technologies, we are sharing research and experience with U.S. partners, such as the Electric Power Research Institute (EPRI), an independent, nonprofit organization of scientists, engineers and other electricity experts from around the world.

Last year, we entered into agreements with China’s Huaneng Group and ENN Group, two of the nation’s largest energy providers. We will work jointly to develop an array of clean energy technologies, not only carbon capture and storage, but also renewable energy, smart grid and battery storage. Like the United States, China has enormous coal reserves and huge potential for the permanent underground storage of CO2. These ventures, along with our EPRI collaboration, will allow us to scale up and commercialize new technologies more rapidly, and at less cost.

Nuclear is the only baseload generation that has zero greenhouse gas emissions. We continue to pursue plans, including potential regional partnerships, to develop a new 2,234-MW nuclear power plant, the William States Lee III Nuclear Station, in Cherokee County, S.C. If approved, the plant could come on line in the 2021 time frame.

Bringing new nuclear energy capacity to the Midwest will help diversify that region’s dependence on coal. Last year, we created the Southern Ohio Clean Energy Park Alliance to explore development of a nuclear power plant at a U.S. Department of Energy site in southern Ohio.

Both nuclear ventures will help us achieve important economic and policy goals, and maintain our strategic flexibility. However, we will proceed with these projects only if we can be assured of constructive rules that allow us to recover our costs and earn fair returns.