The North Carolina Utilities Commission on Nov. 19 approved the latest fuel cost passthrough case of Duke Energy Progress, which is a subsidiary of Duke Energy (NYSE: DUK).
The application for this case was filed on June 18. The “test period” for the purposes of this proceeding is the 12 months ended March 31, 2014. The period Dec. 1, 2014, through Nov. 30, 2015, is known as the “billing period.”
The commission wrote, in referring to testimony from Duke fuel official Alexander “Sasha” Weintraub: “According to witness Weintraub, the Company’s average delivered coal cost per ton decreased approximately 2.0%, from $91.36 per ton from the prior test period to $89.28 per ton in the test period. The Company’s transportation costs increased approximately 7.0%, from $28.77 per ton in the prior test period to $30.78 per ton in the test period.
“He testified that coal markets continue to be in a state of flux due to a number of factors, including (1) recent U.S. Environmental Protection Agency regulations for power plants that result in utilities retiring or modifying plants, which lowers total domestic steam coal demand, and can result in some plants shifting coal sources to different basins; (2) softening demand in global markets for both steam and metallurgical coal; (3) increased prices and volatility for gas due to adverse winter weather; (4) continued increase in gas supply combined with installation of new CC generation by utilities, especially in the Southeast, which also lowers overall coal demand; and (5) increasingly stringent safety regulations for mining operations, which result in higher costs and lower productivity.
“Witness Weintraub stated that due to increasing competitiveness for low cost electricity between natural gas and coal, it is anticipated that DEP’s coal generation will fluctuate with prevailing market conditions. Witness Weintraub testified that DEP’s actual coal burn for the review period was 7.9 million tons, which is more than 61% higher than the 4.9 million tons originally anticipated in the currently billed rate. The projected coal burn reflected in the rate proposed in the initial Application for the billing period is 8.0 million tons. Witness Weintraub stated that DEP’s billing period projections for coal generation, however, may be impacted due to changes in natural gas prices, volatile power prices, and demand.
“Although inventory levels were below target at the end of the test period as a result of much stronger than expected coal burns due to severe winter weather and lower than expected receipts of coal, DEP has returned to near target inventory levels as of the end of April 2014. According to witness Weintraub, future inventory levels are dependent on actual versus projected coal burns and actual coal deliveries based on performance of the railroads. He also testified that combining coal and transportation costs, DEP projects average delivered coal costs of approximately $85.68 per ton for the billing period.
“Company witness Weintraub also testified that DEP continues to maintain a comprehensive coal procurement strategy that has proven successful over many years in limiting average annual coal price increases and maintaining average coal costs at or well below those seen in the marketplace. Aspects of this procurement strategy include having the appropriate mix of contract and spot purchases, staggering contract expirations which thereby limit exposure to market price changes, diversifying coal sourcing as economics warrant, and pursuing contract extension options that provide flexibility to extend terms within a particular price band. Witness Weintraub also testified that the Company expected to address any spot and long-term coal requirements throughout 2014 with any potential competitively bid purchases, if made, taking into account projected coal burns, as well as coal inventory levels.
“Company witness Weintraub testified that the Company consumed approximately 121 billion cubic feet (Bcf) of natural gas in the test period, compared to approximately 91 Bcf in the prior test period. This increase was driven by the addition of new Lee CC generation at the end of 2012. In addition, DEP’s Sutton CC went into service in the latter part of 2013.
“For the billing period, DEP’s current forecasted natural gas consumption is approximately 99 Bcf. This forecast is based on higher natural gas prices which are forecasted for the billing period. Witness Weintraub also testified that, ultimately, natural gas usage forecasts are dynamic and can change over time based on factors that include fuel price relationships.
“Witness Weintraub also testified that the development of shale gas has created a fundamental shift in the nation’s natural gas market. Shale gas is natural gas that is trapped within shale formations, and which can provide an abundant source of petroleum and natural gas. Within recent years, improvements in production technologies have allowed greater access to the natural gas trapped in these formations, and has resulted in increased reserves that can produce natural gas supply more quickly and economically. Given continued production increases, forward natural gas prices continue to remain at lower levels. With respect to natural gas prices experienced during the recent Polar Vortex, extreme weather and higher than normal natural gas demand resulted in DEP experiencing much higher spot natural gas prices during January and February 2014 than it experienced in previous test periods. The Company’s average price of gas purchased for the test period was $6.18 per Million British Thermal Units (MMBtu), compared to $5.11 per MMBtu during the prior test period.”