Duke Deal on State Oversight Could Boost Wholesale Profits

Duke DUK just boosted its earnings power.

Under a deal reached this week, the company's regulated utility, Duke Power, is now free to rake in all the wholesale power profit it can without fear of exceeding the rate of return that regulators consider fair in its major North Carolina market. In return, Duke Power will split those profits with its customers, a compromise that effectively reduces power bills without subjecting the company to the upheaval of a full-blown rate review.

Previously, Duke Power counted wholesale profits, which are generated by selling excess electricity to other utilities and power users, in its regulated earnings -- earnings that were already considered by some critics to be fishy. Many of Duke's industrial customers believe this week's agreement simply confers the state's blessing on an accounting change that lets the company keep earning more than it should.

For its part, Duke celebrated the deal as a way to provide relief now rather than later for its struggling industrial customers. And John Olson, an analyst at Sanders Morris Harris, called the arrangement a "happy settlement" that is fair for all parties involved. Still, Duke's critics are complaining.

Under terms of the deal, Duke industrial customers are poised to receive an estimated rate cut of 2% by sharing wholesale power profits with the utility. But the Carolina Utility Customers Association, or CUCA -- which labels Duke's rates "grossly excessive" -- believes its members are entitled to a rate cut of up to 20%. The group failed to convince state regulators to even hold a public hearing on the matter, however.

"The commission finds no basis to grant the relief requested by CUCA because CUCA has not raised compelling issues in support of its protest and request for an evidentiary hearing," the North Carolina Utilities Commission stated in a formal order on Wednesday. "The commission believes that Duke Power's application is in the public interest and should be approved as filed."