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Duke Energy Carolinas, a subsidiary of Duke Energy Corporation (DUK - Analyst Report), has requested the South Carolina Utilities Commission (“PSCSC”) to make a 15.1% rate increase. If approved, the rate increase would generate $220 million more from the customers.

Per the proposal, the company has requested an allowed return on common equity (“ROE”) of 11.25% with a 53% common equity component. The current allowed ROE in South Carolina is 10.5%. The proposed rate increase would raise the monthly bill by 16.3% for a residential customer who uses 1,000 kilowatt-hours (“kWh”) of electricity. The commercial and industrial customers would witness a rate increase of 14% and 14.4%, respectively.

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. This increase in rates would help the company in recouping capital cost of $673 million for Dan River Combined Cycle Station in Eden, $236 million for Cliffside Steam Station Unit 6 in Mooresboro, $141 million for Oconee Nuclear Station at Oconee County and $135 million for McGuire Nuclear Station in Mecklenburg County.

Not unlike other energy players, Duke Energy has applied for rate increases to recover the investments it has made for new, cleaner and more efficient power plants. These investments are made in order to comply with increasing state and federal regulations.

Last month, Duke Energy Carolinas requested the North Carolina Utilities Commission (“NCUC”) to make a 9.7% rate increase. If approved, the rate increase would generate $446 million more from the customers. Per the proposal, the company has requested an allowed ROE of 11.25% with a 53% common equity component. The current allowed ROE in North Carolina is 10.5%.

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 MW of older coal capacity.  All the more, it has invested another $7.5 billion for plant upgrades.

Recently, the company announced the closure of two of its coal-fired power plants, Buck and Riverbend, two years earlier than scheduled. These plants were operating irregularly in recent years and the company expected operations to have become more infrequent in the future.

The energy companies continuously need to increase their rates in order to recover the huge capital investments they make. Recently, Mississippi Power Co. – a subsidiary of electric utility firm Southern Company (SO - Analyst Report) –received approval from the Mississippi Public Service Commission to increase customer rates by 15%. This will enable the company in recovering the construction cost of a new power plant in Kemper. This new integrated gasification combined-cycle plant with a construction cost of $3.5 billion is under construction at Kemper County and will have a capacity of 582 MW.

Based in Charlotte, North Carolina, Duke Energy is a diversified energy company with a portfolio of domestic and international, natural gas and electric, regulated and unregulated businesses which supply, deliver, and process energy for customers in North America and selected international markets. The company focuses on core utility operations to build its rate base through capital expenditure investments. Additionally, it is proactively and effectively mitigating long-term environmental-related risks through investment plans and constructive dialogue with policymakers. These developments indicate the company’s commitment to meet electricity needs through advanced and cleaner generation and bring in revenues at the same time.

However, we remain concerned due to the present unfavorable macro backdrop, predominantly fossil-fuel based generation assets, tepid demand for electricity, and pending regulatory cases. The company presently retains a short-term Zacks Rank #3 (Hold).

Other stocks worth considering are The AES Corporation (AES - Analyst Report) and Edison International (EIX - Analyst Report), both with a Zacks Rank #2 (Buy).

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