Duke Retail Reports Lower Margins; Duke Energy Ohio Considering Additional Capacity Cost Recovery

Duke Energy's Commercial Power segment, which includes its non-rate-regulated generating assets and competitive retail supply business, reported second-quarter 2012 adjusted segment income of $32 million, compared to $30 million in the second quarter of 2011.

Duke Energy reported that several gains in the segment were partially offset by lower margins and volumes realized by Duke Energy Retail, which were down by about $13 million versus the year-ago quarter.

During an earnings call, executives noted the Public Utilities Commission of Ohio's recent decision setting a state compensation mechanism for capacity provided to retail suppliers by AEP Ohio. Duke Energy said that it is currently reviewing the applicability of this decision to Duke Energy Ohio, which is similarly a Fixed Resource Requirement entity.

The AEP Ohio state compensation mechanism (about $188/MW-day) is cost-based. Under Duke Energy Ohio's electric security plan, for its service as an FRR entity, it collects the RPM market price for capacity provided to retail suppliers and default service suppliers, and also collects, from all customers on a nonbypassable basis, a stability charge recovering $330 million, reflecting an amount negotiated in the ESP case (rather than a solely cost-based level).

Lynn Good, Duke Energy Corporation EVP and CEO, said, "[T]he basic issue is that a cost-based method of recovery for capacity in our mind would be -- result in a greater level of earnings than the stabilization charge that we negotiated in our existing settlement in Ohio. So we are closely looking at it. We are evaluating it and we will have more to say as we complete that evaluation.."

To the extent Duke Energy Ohio (or competitive corporate affiliate once the generating assets are transferred out of the utility) seeks to recover additional costs under a state compensation mechanism, it is unclear whether such costs would be added to the current nonbypassable stability charge; or whether the costs would be applied to retail suppliers and/or default service suppliers, and therefore raise competitive issues concerning the pricing of default service.