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Florida lawmaker warns North Carolina against controversial power plant financing plan

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fla_sen_mike_fasano.jpgA Florida lawmaker recently wrote the governor of North Carolina warning her state against adopting a financing plan for new power plants that turned into a economic disaster for his state's ratepayers.

Florida State Sen. Mike Fasano (in photo) -- a conservative, pro-business Republican representing the Tallahassee area -- sent a letter [pdf] last month to North Carolina's Gov. Beverly Perdue, a centrist Democrat. The letter discussed the plan North Carolina is considering that would give electric utilities even greater leeway in recovering the costs of new power plants before they're up and running.

"We've learned the hard way in Florida that allowing utilities to recover the costs of a new power plant before the plant is even placed in service is unfair to consumers and bad public policy," Fasano wrote.

Back in 2007, North Carolina passed a law creating a Renewable Energy and Energy Efficiency Portfolio Standard that requires investor-owned utilities to meet up to 12.5 percent of their energy needs through renewable energy resources or energy efficiency measures by 2020.

As part of a compromise to win utility support for the measure, the legislature added a number of controversial provisions to the law. One of them ended the state's previous ban on a power plant pre-payment scheme known as "construction work in progress" (CWIP), a mechanism allowing utilities to charge ratepayers for the cost of financing new power plants during construction. Utilities have turned to CWIP in many states to pay for new power plants given Wall Street's reluctance to finance such risky projects.

There are currently discussions underway at the N.C. General Assembly to allow Duke Energy and Progress Energy, which are currently in merger proceedings, to pre-charge ratepayers for the cost of building up to four new reactors in the Carolinas without first having the plan reviewed in public hearings at the state Utilities Commission. Consumer and environmental advocates have dubbed the proposal "super CWIP" and are taking action to keep it from becoming law.

"Duke and Progress say such legislation would save financing costs during construction," the directors of N.C. Fair Share and N.C. WARN wrote in a recent newspaper op-ed. "Sure. It might save the utilities money, but it would come out of customers' pockets up front. Especially for those living on low or fixed incomes, rising power bills could come at the expense of food, medicine or rent."

Both of those groups are part of a new North Carolina coalition called Consumers Against Rate Hikes, which recently released the results of a poll [pdf] that found 70 percent of the state's voters oppose the super CWIP plan. The survey was conducted jointly by a Republican polling firm based in Texas and a Democratic firm from Louisiana.

"We believe that it is unacceptable for the general public to support risks that stockholders and bankers are unwilling to assume," says Dr. Kathy Shea, executive director of N.C. Interfaith Power & Light, which is part of the coalition. "Increasing the burden on our citizens with an annual rate hike is fundamentally unfair, inappropriate at best, and foolish at worst."

How big of a rate hike could consumers face? As Fasano pointed out in his letter to Gov. Perdue, Progress Energy filings with the Florida Public Service Commission indicate that the average customer can expect an estimated increase of nearly $50 per month by 2020 for two new nuclear reactors at a site in Levy County, Fla. on the state's Gulf Coast. North Carolina consumer advocates estimate that the Duke Energy plan could result in rate hikes for its customers of as much as 50 percent.

Fasano voted in favor of the Florida CWIP program back in 2006 but later changed his mind as he became aware of the law's consequences. Last January, he sent a letter [pdf] to his state's Public Service Commission asking for a refund for customers given the delays in the Levy County project after a rate hike request was denied. He is also the primary sponsor of Florida Senate Bill 200 [pdf] repealing provisions related to advance cost recovery for new nuclear reactors and other power plants.

In North Carolina, opponents of CWIP are planning to come out in force for a March 15 hearing at the Utilities Commission where Duke Energy CEO Jim Rogers is expected to request approval to spend another quarter billion ratepayer dollars for new reactors at the Lee nuclear station in South Carolina. The hearing comes as Duke and Rogers are embroiled in an ethics scandal in Indiana over improper influence-peddling with state regulators regarding a coal plant that's experiencing enormous cost overruns.

Meanwhile, a video by the N.C. Conservation Network poking fun at Duke's super CWIP plan has gone viral on the web. You can watch the video, which offers an easy-to-understand explanation of the financing scheme's implications for consumers, here:

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re: Florida lawmaker warns North Carolina against controversial

What this is mainly about is not just rate hikes, but unjust risk allocation and creation of moral hazard, i.e. inducing utilities to take unwarranted risks with other people's money (tersely mentioned in an interesting Weekly Standard piece at www.weeklystandard.com/articles/nuclear-socialism_508830.html). The 1970s and 1980s CWIP experience suggests that utilities unloaded construction and forecasting risks onto ratepayers, often got paid anyway for risks they no longer bore, but actually increased their own financial risks over the longer run. Why? (1) Higher rates had longer to work during construction, depressing demand below forecast levels and thus needing even higher rates later to cover the revenue shortfall. (2) Higher rates during construction put more political pressure on state regulators, so by the time the plant is finished, they may be less inclined, or have been replaced by others less inclined, to give the utility favorable regulatory treatment. Both reasons contributed to the "death spiral" risk of rising rates and stagnating or falling demand.