Duke Energy (NYSE:DUK) has faced a lot of criticism in the past few weeks for its plan to pass on the incremental costs of development of the coal gasification unit at its Edwardsport plant to its customers. In one of our previous notes, we discussed how the company was forced to lower its initial plan of a 15 percent rate hike to 12 percent due to widespread backlash from customers. However, in an unfortunate turn of events for the company, it has now been forced to agree to an average 7.2 percent rate hike for all its customers in North Carolina  and 6 percent in South Carolina  Duke Energy is one of the largest electric utilities in the U.S. with approximately 35,000 megawatts of electric generating capacity in the Carolinas and the Midwest as well as natural gas distribution services in Ohio and Kentucky. Its competitors include companies like Exelon Energy Corp and Allegheny Energy (NYSE:AYE).
Our price estimate for Duke is about $21, which is roughly in line with the current market price.
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General Rate Increases Prohibited for Next Three Years
As per the latest numbers, if the settlement is approved by the Public Service Commission, Duke will be allowed to exercise a 7.2 percent hike for the residential, commercial and industrial customers in North Carolina. In South Carolina, the company has been allowed a 7 percent hike for the residential customers, a 5.2 percent hike for commercial and 5.1 percent for the industrial customers.
These numbers are significantly lower than the initially proposed 15 percent hike by Duke. Moreover, the major setback comes from the fact that the company will not be able to implement a general rate hike in South Carolina until February 2015. However, state authorities have given the company some relief by allowing it to raise rates by 2.74 percent in 2013 and by 2.07 percent in 2014 if it can prove that the planned electricity and environmental compliance improvements have been implemented. Therefore, it makes sense for the company not only to carry out the existing upgrades efficiently, but also invest in the development of renewable resources of energy.
The current nominal rate hike comes as a setback for the company as it definitely hurts margins and the capability to realize better rates going forward. The company is already battling charges from regulators related to its proposed rate increases and a possible violation of the regulatory process. Hearings in front of the Indiana regulators began in October to determine how much of these costs the company’s customers can bear. Should any of the regulatory accusations prove to be true, Duke could not only be forced to absorb all of the cost overruns but also face penalties.Notes:
- Duke Energy agrees to 7.2 percent rate hike in NC, WRAL.com [↩]
- Duke Energy reaches agreement on SC rate hikes: 6 percent overall, instead of 15 percent, The Republic [↩]