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Duke Energy Carolinas, a subsidiary of Duke Energy Corp. (DUK - Analyst Report), has entered into an agreement with North Carolina Public Staff with respect to the company’s request to raise base rates. Per the settlement agreement, the commission has allowed a revenue rate increase of $235 million versus the requested increase of $446 million.

Per the agreement, the company has been allowed a return on equity (“ROE”) of 10.2% with a 53% common equity component. During the first two years, the average increase would be approximately 4.5% followed by an additional 0.6% increase. This would come to an average increase of 5.1%.

The rate increase would be spread out over three years. The rate increase has been made taking into consideration the interest of the customers as well as securing a fair return for the company's investors. One other clause in the settlement agreement that would ease the impact of rate increase includes donating $10 million as assistance package for low-income customers.

The company seeks for new rates to be effective from Sep 2013. Also, per the agreement, the company has agreed not to file for new base rates until 2015 and beyond unless it incurs costs for new generation facilities or it needs to abide by governmental regulations.

The company had filed for the increase in Feb 2013. It had applied for these rate increases to recover the investments made for new, cleaner and more efficient power plants. These investments are made in order to comply with increasing state and federal regulations.

Duke Energy focuses on core utility operations to build its rate base through capital expenditure investments. Of late, the company has been investing in new plants, retiring older plants as well as working on modernization and upgrade of plants to reduce emissions across its service area. Since 2007, the company has invested approximately $6 billion in new plants and has retired up to 6,800 megawatts of older coal capacity.  All the more, it has invested another $7.5 billion for plant upgrades.

As a part of its ongoing fleet-modernization plan, the company has been building and installing power plants that will provide cleaner air to its customers for decades to come. Some of the major investments include Dan River Combined Cycle Station in Eden with a capital expenditure of $673 million, Cliffside Steam Station Unit 6 in Mooresboro with a capital cost of $863 million, McGuire Nuclear Station in Mecklenburg County with an expenditure of $203 million and capital spending of $448 million for Oconee Nuclear Station at Oconee County.

Despite these investments and the approval of a few regulatory cases, we remain concerned about the present unfavorable macro backdrop, the company’s predominantly fossil-fuel based generation assets and tepid demand for electricity. The company presently retains a short-term Zacks Rank #3 (Hold).

However, stocks worth considering are Companhia Paranaense de Energia (ELP - Analyst Report), CPFL Energia S.A. (CPL - Snapshot Report) and ALLETE, Inc. (ALE - Snapshot Report). While Companhia Paranaense de Energia and CPFL Energia hold a Zacks Rank #1 (Strong Buy), ALLETE, Inc. carries a Zacks Rank #2 (Buy).

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