Duke Energy Indiana, Indiana Consumer Counselor, Industrial Customers Reach Agreement on Plant Cost Increase Sept. 17, 2010
PLAINFIELD, IND. -
Duke Energy Indiana has reached an agreement with key consumer groups on how cost increases associated with the construction of its Edwardsport coal gasification plant near Vincennes, Ind., should be addressed for ratemaking purposes.
In April, the company announced that the project’s scale and complexity would add approximately $530 million to the previously approved $2.35 billion estimate. That brought the total estimated cost of the plant to $2.88 billion.
Today’s agreement, which is subject to approval of the Indiana Utility Regulatory Commission, was reached with the Indiana Utility Consumer Counselor, the state’s representative of utility customers; Duke Energy Indiana Industrial Group; and Nucor Steel - Indiana.
The parties agreed to cap the project’s costs passed on to customers at $2.975 billion. Duke Energy currently estimates the plant will cost $2.88 billion. In addition, any construction cost amounts above $2.76 billion will be subject to a prudence review similar to most other rate base investments in the company’s next general rate increase request before the IURC.
Today’s agreement would allow Duke Energy Indiana to continue to recover the increased costs in customer rates up to the agreed-upon cap, pending commission review and approval. However, the customer rate impact associated with the plant will be offset by:
- a reduction in depreciation expense charged to customers;
- the company’s waiver of a previously approved incentive related to deferred taxes; and
- a reduction in the company’s return on equity for the most recent cost increase.
The company also agreed not to file for a general rate increase before March 2012.
As a result of the settlement, Duke Energy will record a pre-tax charge to earnings of approximately $35 to $45 million in the third quarter to reflect the impact of the return on equity reduction on project construction costs above $2.35 billion.
If approved, the agreement has the effect of lowering the plant’s customer rate impact from an overall average 19 percent to 16 percent in 2013 - the first full year after the plant is in service. The average residential impact that year would be about 14 percent.
The rate increase will not come at once; costs began phasing into rates in January 2009, and gradually will be added to bills through 2013. This “pay as you go” approach benefits customers by lowering total financing costs and spreading the rate increase over time.
“This agreement gives our customers and investors a road map for cost recovery of the plant,” said James Turner, president and chief operating officer of Duke Energy’s Franchised Electric & Gas businesses. “Our objective has been to lower the rate impact of the escalating costs of the Edwardsport plant on consumers while still providing our shareholders a fair return on their investment. Getting this proceeding behind us will allow us to focus all of our efforts on completing a project that is the centerpiece of our efforts to clean and modernize our Indiana power plants."
The Edwardsport coal gasification plant is under construction in southwest Indiana. The total project, factoring in aspects such as engineering, construction and purchasing, is more than 70 percent complete. It is scheduled to be operating in 2012.
The plant will use state-of-the-art technology to gasify coal, strip out pollutants, and then burn that cleaner gas to produce electricity. The plant’s efficiency reduces its carbon emissions per megawatt-hour by nearly half.
Regulators granted the company permission in 2007 to construct the technologically advanced clean coal power plant in Edwardsport, Ind. It is the first time a plant this size using this advanced clean coal technology has been built anywhere in the world.
The approximately 618-megawatt plant will use advanced integrated gasification combined cycle technology. It will:
- Produce 10 times as much power as the existing plant at Edwardsport, yet with significantly less environmental impact than the much smaller plant it replaces.
- Be the first major new power plant built in Indiana in more than 20 years. The plant is a key step in modernizing the state’s aging electric system.
- Generate marketable byproducts. This plant will produce sulfur and slag for agricultural and construction materials. Per the agreement, any revenues from marketable byproducts will go to customers.
- Use dramatically less water. The IGCC plant will need less than one-tenth the amount of water per day compared to the current plant.
- Replace 60-plus-year-old power-generating units with state-of-the art efficiency. Because it is so efficient, Edwardsport will be one of the first plants called on when power is needed, which reduces the need to run older, less efficient units.
- One of the largest construction projects ever undertaken in Indiana. About 2,500 construction workers and other professionals are currently working on site. That number is expected to grow by another 200 this fall. The plant will employ about 110-120 full-time workers. In addition, the 1.7 million to 1.9 million tons of coal the plant will use each year will support an estimated 170 mining jobs.
Duke Energy Indiana’s operations provide approximately 6,800 megawatts of electricity capacity to approximately 780,000 customers, making it the state’s largest electric supplier.
Duke Energy is one of the largest electric power holding companies in the United States. Its regulated utility operations serve approximately 4 million customers located in five states in the Southeast and Midwest, representing a population of approximately 11 million people. Its commercial power and international business segments own and operate diverse power generation assets in North America and Latin America, including a growing portfolio of renewable energy assets in the United States.
Headquartered in Charlotte, N.C., Duke Energy is a Fortune 500 company traded on the New York Stock Exchange under the symbol DUK. More information about the company is available on the Internet at: http://www.duke-energy.com/. To learn more and contribute to the discussion about the energy issues of today and the possibilities of tomorrow see http://www.sheddingalight.org/.
Technical Highlights of Settlement Agreement
- The company agreed not to seek recovery of any construction cost for the plant above a hard cap of $2.975 billion, except for force majeure events and increases in AFUDC above $160 million if such increases are outside of Duke Energy’s control.
- The parties agreed that the authorized estimate for the Edwardsport project may be raised from $2.35 billion to $2.76 billion. The $2.76 billion will serve as a “soft cap” on project costs, which means that costs over $2.76 billion will be subject to a prudence review in the company’s next retail rate case.
- The parties have agreed that the CWIP rider, which allows current cash recovery of financing costs, may continue up to the hard cap amount, providing for timely cost recovery and a phase-in of rate increases. Costs above $2.76 billion collected under the rider are subject to the prudency review described above.
- Duke Energy has agreed to accept a 150-basis-point reduction in the equity return for any construction costs greater than $2.35 billion, resulting in a pre-tax earnings charge of approximately $35 – 45 million.
- Duke Energy Indiana agreed not file a retail electric base rate case before March 2012.
- The company agreed to a reduction of depreciation expense, resulting in a reduction of retail rates of approximately 1.8 percent. This has no impact on Duke Energy earnings.
- The company waived a commission-approved incentive related to deferred income taxes and the capital structure. Duke Energy Indiana estimates this will reduce the plant’s rider costs by approximately $25 million annually in the near term. This results in a retail rate reduction of approximately 1.2 percent. This is net present value neutral to the company.
- The parties also reached agreement on other items in dispute, such as the benefits from by-product sales which will accrue to customers.
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