Conference Call Transcript

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Conference Call Transcript

DUK - Duke Energy Corporation Informational Conference Call on Ohio

Market-Rate Offer Filing

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C O R P O R A T E P A R T I C I P A N T S

Stephen De May

Duke Energy Corporation - SVP, IR, Treasurer

Jim Rogers

Duke Energy Corporation - Chairman, President, CEO

Julie Janson

Duke Energy Corporation - President Duke Energy Ohio and Kentucky

Keith Trent

Duke Energy Corporation – Group Executive, President Commercial Businesses

Lynn Good

Duke Energy Corporation – Group Executive and CFO

C O N F E R E N C E C A L L P A R T I C I P A N T S

Greg Gordon

Morgan Stanley - Analyst

Daniel Eggers

Credit Suisse - Analyst

Jonathan Arnold

Deutsche Bank - Analyst

Shar Pourreza

Citigroup - Analyst

Paul Patterson

Glenrock Associates - Analyst

Michael Lapides

Goldman Sachs - Analyst

Ali Agha

SunTrust Robinson Humphrey - Analyst

Reza Hatefi

Decade Capital - Analyst

P R E S E N T A T I O N

Operator

Good day everyone and welcome to the Duke Energy Ohio SSO filing conference call. Today's call is being recorded. At this time for opening remarks I would like to turn the call over to Mr. Stephen De May, Senior Vice President, Treasurer and head of Investor Relations. Please go ahead, sir.

Stephen De May - Duke Energy Corporation - SVP, IR, Treasurer

Thank you, Jessica. Good morning everyone and thank you for joining us today. Earlier this week Duke Energy Ohio filed an application with the Public Utilities Commission of Ohio for approval of a Market Rate Offer to determine its generation pricing to customers. Subject to Commission approval, this plan will replace the Company's current Electric Security Plan, which expires at the end of 2011.

We will begin today's call with prepared remarks by Jim Rogers, Duke Energy's Chairman, President and CEO, and Julie Janson, who is President of Duke Energy Ohio. Following those remarks we will take your questions. Jim and Julie will be joined by Lynn Good, the Company's

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Chief Financial Officer; Jim Turner, President and Chief Operating Officer of our Regulated Business; and Keith Trent, President of our Commercial Businesses, which includes our Ohio generation.

Today's discussion is being webcast and it includes forward-looking information. You should refer to the information on this slide as well as additional information contained in our SEC filings concerning factors that could cause future results to differ from this forward-looking information. The presentation materials, which include supplemental appendix information, can be found on our website.

Now let me turn the call over to Jim Rogers.

Jim Rogers - Duke Energy Corporation - Chairman, President, CEO

Thank you, Stephen. Over the past several months we have discussed with you various strategic options related to our non-regulated Ohio generation. Today the plants are dedicated to serving retail customers in Ohio through the end of 2011 under an Electric Security Plan, or ESP. This past Monday, Duke Energy Ohio filed a proposed Standard Service Offer, or SSO, for generation services to its customers beginning in 2012. Our application requests approval of a Market Rate Offer, or MRO. It ultimately will establish market-based prices for customers electing to remain with Duke as their generation supplier. These prices would be determined through an independent competitive auction process. Obviously, this filing represents a change in direction from the ESP-type structures we have proposed in the past. Yet the change is underpinned by several important business considerations. The most important consideration is that the existing ESP structure has evolved into an asymmetrical risk proposition for Duke.

Our Ohio generating assets serve an essentially regulated function by being dedicated to retail customers on a first call basis. However, the Company is not afforded a meaningful opportunity now to earn a return commensurate with this obligation. This is due to high levels of customer switching and the inability to collect a non-bypassable charge for our Provider of Last Resort responsibility.

In addition, the quasi-regulated nature of the ESP ensures that even if market prices were to rise in the future, Duke would be limited in its ability to materially improve its returns.

The ESP pricing structure restricts our ability to increase our price to the market price when such prices are high. In this lower of negotiated rate or market framework, where our Ohio generation business is neither regulated nor non-regulated, we believe the MRO provides the greatest clarity for the future of our generation business. It has the potential to benefit customers and shareholders over the longer term.

To set the stage for this filing, I will first review the history and objectives of deregulation in Ohio. Ohio began transitioning to a deregulated generation model in 1999 with the enactment of Senate Bill 3. During this transition, the Commission's objectives were to balance stable prices for continued, safe, reliable electric service to Ohio customers, to protect the operational and financial integrities of the utilities, all the while facilitating an environment that provides competitive choices.

Senate Bill 3 gave Ohio customers the opportunity to choose their generation supply from either their incumbent utility or from certified alternative generation providers. At the same time, each utility was required to be the default supplier for customers in the service territories. In an effort to demonstrate clear customer benefits, even as utilities and competitive suppliers were gearing up for competition, Senate Bill 3 mandated that electric utility rates, including the fully regulated transmission and distribution components, be frozen during a market development period that could extend until 2005 or until customer switching reached 20%, whichever came first.

As this market development period came to an end, the Commission grew concerned that customers would experience rate shock if they went immediately from frozen rates to unfettered market prices. In an effort to minimize the potential for such customer rate increases, Duke's rate stabilization plan allowed the Company to increase its market-based SSO price. It allowed for certain specific components such as fuel, purchased power and environmental compliance to be recovered. It also ensured stable prices for consumers.

This regime worked well for both customers and the Company, both in terms of affording customers with safe, reliable and economically priced electric service and in maintaining the financial viability of the utility.

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In 2008, the Ohio legislature passed Senate Bill 221. It continued many of the pricing mechanisms under the previous legislation. It also reinforced the recognition of emerging competitive electricity markets. Additionally, it established an option to determine customer pricing based upon competitive market prices.

Pursuant to these rules, Duke negotiated an ESP in 2008 with a three-year term through the end of 2011. At the time it was negotiated, the ESP rate was comparable to market prices. However, shortly after the ESP was implemented, the unprecedented recession in the US and subsequent fall in gas prices resulted in a sharp decline in power prices, leaving the Company's negotiated rate above prevailing market prices.

This disparity between our ESP rate and market prices has resulted in significant customer switching. It has also served to reinforce the reality that Ohio has become a lower of negotiated rate or market environment in which it will be very difficult to earn consistent and appropriate risk-adjusted returns on our generation investment in the state.

As you can see on this slide, we have outlined three challenges with the ESP structure in Ohio. First of all, the utility is not adequately compensated for its Provider of Last Resort obligation. Under this obligation the utility is required to provide service to customers that choose to be served at the utility's Standard Service Offer price. Also, customers who switch to lower-cost providers today have a free option to switch back to the utility if market prices rise above an established SSO price in the future.

A second challenge is that the short-term nature of the ESP agreement makes it difficult, if not impossible, for utilities to invest for the long term in Ohio and be assured of recovery of their investments.

As a result of customer switching, riders intended to provide recovery of past environmental capital spending, such as our scrubbers, have been bypassed, resulting in less than a reasonable return on these investments. And pending environmental regulations have the potential to result in significant future capital expenditures or the closure of our older, less efficient plants.

The ESP provisions of Senate Bill 221 include an opportunity for recovery of specified environmental costs in a non-bypassable charge. However, this opportunity is only for the life of the generating facility, and only if the facility is dedicated to serving the native load. For these and other reasons the implementation of these provisions is untested and makes the actual recovery of such costs far from certain.

Regardless of the form of an SSO, whether ESP or MRO, the Company believes that coal ash compliance costs should be recovered from native load customers on a non-bypassable basis. We are evaluating the need for legislative clarity on the recovery of these costs.

Given the long-term capital intensive investments for power generating facilities that are normally made for 30, 40 or even 50 years, we need more long-term clarity than short-term ESP plans can provide.

Finally, Senate Bill 221 also includes a significantly excessive earnings test provision, which caps the profits that utilities can earn under an ESP. Obviously, this has not been an issue for us over the term of our existing ESP, but it clearly limits the return that a generation owner can earn. Notably, there is also no floor or low earnings test incorporated into the ESP provisions. This asymmetrical treatment exposes Duke to downside risk, while capping its upside opportunities, running counter to the spirit of truly competitive markets.

Julie will cover how our MRO application addresses these challenges. Additionally, as detailed in our filing, we believe the proposed MRO satisfies the applicable MRO requirements by which the Commission will evaluate the filing.

Before I turn the call over to Julie, I want to thank the many employees that work hard every day to provide safe and reliable service to our customers in the state. Additionally, I appreciate the efforts of those who have worked diligently over the past several months to evaluate our options and ultimately finalize and file our MRO application with the Ohio Commission.

We still have a significant amount of work ahead of us, as we move to the approval process of this application; however, this filing represents a significant milestone in that process.

This filing strikes the right balance between our customers' right to reliable and reasonably priced electricity and our shareholders' need for a reasonable return on their investment. Now let me introduce Julie Janson.

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Julie Janson - Duke Energy Corporation - President Duke Energy Ohio

Thank you, Jim. For those of you who do not know me, I am the President of our Ohio and Kentucky utilities. And in this role I oversee our efforts to deliver safe, reliable and reasonably priced electric and natural gas service to our customers. Our organization is headquartered in Cincinnati, Ohio.

I am pleased to discuss our filing with all of you today. I will spend the next few minutes talking about the various ways to procure generation services we evaluated under Ohio Senate Bill 221, and address why we believe the MRO option is in the best interest of our customers, as well as Duke Energy Ohio and our investors.

As you can see on this slide, there are three available options under Senate Bill 221. First, an ESP option, with pricing determined through negotiation or litigation. Next, an ESP option very similar to the first, but with pricing determined through a competitive auction process. And lastly, an MRO option in which pricing is ultimately determined through an independent competitive bidding process. This slide compares and contrasts each of those three options.

Before discussing the more significant provisions of the MRO, such as the blending period and the competitive auction process, I will briefly discuss the strategic advantages of the MRO filing that are important to keep in mind.

First, the MRO provisions maintain prices to customers which are fair and competitive, as the auction process helps ensure customers are afforded the pricing benefits of competitive market forces.

Additionally, the staggered nature of the auctions mitigates customer rate volatility. The MRO provisions continue to give customers the option to switch generation providers, which is a benefit many have exercised over the term of our recent ESP.

The MRO filing also removes the asymmetrical risk Duke Energy Ohio has experienced under the ESP structure, which Jim discussed. In particular, after the transition to full market rates under the MRO, the utility is no longer subject to the significantly excessive earnings test. As a result, the MRO provides us more opportunity to capture the upside from market fluctuations, rather than just the downside risk we are exposed to today.

Under the MRO, after completion of the transition period to market, generation supply for our Ohio load will be secured in competitive markets on an ongoing basis.

As I have already mentioned, one of the key components of our MRO filing is the blending period. This slide contains an illustrative example of how pricing is determined during the blending period. The purpose of the blending period is to safeguard customers from rate spikes and to protect the financial integrity of the utility while customer pricing transitions to full market rates.

The duration of the blending period will be determined by the Commission, but cannot be less than two years or longer than 10 years. The price charged to customers will be a blend of the most recent ESP price and a competitive market price. After year two the Commission has discretion to alter the blending percentages prospectively in order to mitigate an abrupt or significant change in the utility's price.

Our application proposes a blending period from January 1, 2012 to May 31, 2014. As you will recall, effective January 1, 2012, FERC has conditionally approved the transfer of our Ohio and Kentucky transmission to PJM, as well as the participation of our regulated generation in Ohio in PJM-based residual auction beginning with the 2014/2015 delivery period.

Therefore, we have proposed the first year of the blending period to be 17 months, so our SSO auction periods can be matched to the PJM planning cycle for its capacity options beginning in year two. All subsequent periods would align with the 12-month PJM planning cycle. Our application proposes that customer pricing be determined based upon a blend of 10% market in year one and 20% market in year two, with the remaining components being the most recent ESP price. As we describe in our filing, the most recent ESP price is the price that will exist at the end of 2011. In year three and thereafter pricing would be based on 100% market prices.

As outlined in the appendix, our application proposes a competitive auction process to determine the market price component of the blend price, and over time the entire price of the MRO. This competitive auction process is similar in format to the two options approved by the Ohio

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Commission and conducted by First Energy's Ohio utilities. We are proposing that these descending price clock full requirements options are conducted on an annual basis.

Once the Company fully transitions its customer generation pricing to market rates after the blending period, we believe the competitive marketplace will provide for adequate and affordable generation service to our customers. For an MRO filing the PUCO must determine within 90 days whether that application meets the statutory requirements, rather than the 275 days required for approval under an ESP filing.

If the MRO requirements are met, the Commission must approve such filing. If the Commission does not deem the MRO application to be statutorily compliant, it must direct the utility as to how any deficiency may be cured in a timely manner.

The Commission has established a procedural schedule, which have is included in the appendix to this presentation. A technical conference will be held on November 22, with hearings scheduled for January 4. In order to meet the 90 day requirement, we expect a Commission ruling on our MRO by mid February 2011.

With that, I will turn it back over to Jim for closing comments.

Thank you, Julie.

Before I close, I would like to briefly discuss how our generating assets fit into our MRO plans. During the blending period we expect that Duke will supply generation to the SSO load through its legacy generation and through the competitive auction process. However, no later than the expiration of the blending period, we intend to transfer our generation assets to an affiliate outside of the utility. This request to transfer the assets will be made at a future date separate from this MRO filing.

In summary, Duke's proposed MRO meets the applicable requirements. Secondly, it results in competitive rates to customers. Thirdly, it removes some of the significant asymmetrical earnings challenges experienced by the utility under an ESP. And, finally, it results in longer-term clarity for our generation portfolio.

As a result, the MRO provides us more opportunity to capture the upside from market fluctuations, rather than just the downside risk we are exposed to today. Taking together, these strategic advantages increase our opportunity to earn an appropriate long-term, risk-adjusted return. Additionally, the MRO supports the Ohio Commission's objectives, which are outlined on this slide. That is balancing customer rate stability, the financial integrity of the utility and competition.

Now that the initial application has been made, we will focus our efforts on working with the Commission staff, our customers and other parties to obtain approval of the filing. We will update you as we progress through this process over the next several months.

Now let's turn it over to your questions. Operator?

Q U E S T I O N A N D A N S W E R

Operator

(Operator Instructions). We will go first to Greg Gordon with Morgan Stanley.

Greg Gordon - Morgan Stanley - Analyst

Jim, in the past the current sitting Commission has been -- has acted as if they are extremely loath to accept MRO filings. One of your competitors in the state attempted to achieve an MRO and was directed back towards a negotiated ESP.

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Can you talk about the dynamic there and what their flexibility actually is under the law, and how you might deal with that?

Well, my understanding is that FirstEnergy filed twice for an MRO. The first time it was rejected, and for a variety of different reasons. And, obviously, we have studied that rejection, and in preparing our current MRO filing we have addressed those issues appropriately.

In their second filing they -- really ended up being an ESP -- kind of evolved from an MRO into an ESP type of structure. And I think the short answer is the Commission has been reluctant to address and to approve an MRO, but that was in the past.

And I think today we are in a fundamentally different place than we have been in the past. If I look back over the last nine years, going back to 2000, the market prices have been above the prices to our customers during the frozen rate period, as well as during the period of our RSP and the first year of our ESP. But it was a period where both the customers benefited and our investors benefited from those arrangements.

Today we are in a fundamentally different place. The plummeting price of power in PJM is really what has led to the switching on our system. Consequently this much different situation, in my judgment, underpins why the Commission will probably look at this in a different light today than it looked at MROs in the past.

And as we look forward in PJM, we see the prices to be very low for the next three to four years, and so, obviously they want to give customers as much access as possible to these lower prices.

Greg Gordon - Morgan Stanley - Analyst

Another question, Jim, that is somewhat ancillary. I know under the statutory time limit it looks like the current sitting Commission will rule on this decision. But if for some reason it were delayed, do you think that you will have a significantly different makeup of the Commission reviewing this filing if it slips into midyear?

Under the law the Commission has to act on this within 90 days. And they can't really delay acting beyond that period of time. The current Commission, in my judgment, there are no Commission seats expiring, with the exception of one of the Commissioners in, I think, it is April. And so the existing Commission, assuming all the Commissioners stay on the Commission -- with the change in administration in the state, assuming they all stay on the Commission, they will have to act -- it will be this Commission that will act on this proposal.

Operator

We will go next to Daniel Eggers with Credit Suisse.

Daniel Eggers - Credit Suisse - Analyst

Jim, I guess just question number one. I am just trying to marry the comment you said about PJM prices looking low for an extended period of time. Even -- you are fairly vocal about the idea of the need for the inevitable closure of coal plants, and clearly you operate in a market where that would be a major impact. How do you see delivering to the Commission the idea that prices are going to stay low, while also talking about a fairly meaningful need for change in the supply/demand fundamentals in the region?

I think the important point here is that we have been focused on the fact that our customers have a free option in this period where the prices have plummeted. And we are not compensated for standing ready to serve when the prices rebound, and inevitably they will rebound, because eventually the anemic recovery we see will -- it will -- the economy will come back. It is anybody's guess as to when.

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The shutdown of 20% to 30% of the coal plants in the United States will in all likelihood significantly affect the Midwest, because that is where most of the coal plants are located. And the gas prices remain low. So you've got some factors in the future that have the potential to push prices up, like the shutdown of coal plants.

If shale gas turns out to be real and not a mirage, or not blocked because of environmental requirements, you could see excess gas supply, which could put downward pressure on prices in PJM, where roughly 85% of the time gas is on the margin, at least historically that has been the case. So it is my judgment, Dan, that if I look at the economy -- maybe the best way for me to answer is to simply make this observation. When we look at our entire system demand, it is our judgment that our 2007 load doesn't return until 2014 or 2015. That basically says the economy is going to be very anemic during this period of time -- high employment, low GDP growth. So we think power prices are going to be depressed during this period of time.

The rules with respect to the shutdown of these plants probably won't take effect until the about 2015. So when you put all this together, and with the uncertainty, because the EPA will not rule, I don't believe, until 2012 on the environmental aspects of shale gas, so it is sort of a wild card in all this. But we just believe prices will be low in PJM for the foreseeable near term.

Okay, thank you for that, Jim. And, I guess, just one other question. As you guys compare the MRO versus the ESP option, as I understand it, there is the option in the MRO transition, instead of going at the third year to 100% market that they could phase that in at 10% a year, effectively over a 10-year transition period.

Do you think that creates some level of asymmetry of risk that the Commission could slow play a transition in market rates that you keep the risk of prices staying low or going lower, but if prices go up, you could get capped on a long-run basis by the legacy ESP price?

I am going to ask Keith to address this.

Keith Trent - Duke Energy Corporation - President Commercial Businesses

Yes, Dan, certainly the Commission does have discretion in years three and beyond to determine what percentage of market versus the prior ESP goes into the pricing. We have structured this in a way that we think makes sense for both us and for customers. And you can see some of the expert testimony that has been filed that talks about that, and talks about the beginning in that later period and you start seeing the market converge, and at that point the customers should be expecting to pay at or near market.

And so we think that it is a very reasonable conclusion for the Commission to adopt the blending profile that we proposed. But certainly, we recognize that there is some discretion there for the Commission to alter that. And it is difficult for us really to speculate what they may or may not do.

Okay, and just to clarify on that, I'm sorry, but would the Commission -- when you reach an MRO agreement, would they commit to at what year you would go fully to market, or would that be -- would they have discretionary authority over time to make that decision?

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Operator

We will go next to Jonathan Arnold with Deutsche Bank.

Jonathan Arnold - Deutsche Bank - Analyst

I wanted just to pick up on something you mentioned, Jim. Early on you talked about your view that coal ash compliance costs should be recovered on a non-bypassable basis, and that you were evaluating -- I think you said the need for legislative clarity. Can you just elaborate a little more on -- this presumably means you are seeking to have legislation to that effect passed, and how would that work?

A good question. Jonathan, let me turn this over to Julie, if I may.

Hi, Jonathan, this is Julie Janson. There is currently a statutory provision under the ESP that provides for recovery of certain environmental costs. And as Jim discussed in the script, the issue there is just a limitation around that recovery, that those costs be post 1/1/09 only for the life of the asset, and that the assets be of the EDU. So presumably it requires that the assets be in the utility.

So that is a pretty limited provision as we see it, And so we think it is just certainly makes sense that we would look at the recovery of certain environmental costs, such as the coal ash, regardless of whether we are an ESP or an MRO on a non-bypassable basis through some legislative action.

That would involve changing or clarifying the current law?

Changing.

Okay. And, then just separately, if I'm not wrong, if you do this blending there is a provision for the Commission to adjust the legacy ESP price for, I believe, things like fuel, etc. Is there -- absent your proposal, would you anticipate an adjustment in 2012 at the end of '11 for -- under any of those mechanisms there are in the ESP?

Lynn Good, - Duke Energy Corporation - CFO

Jonathan, during the blending period we have an option to adjust former ESP components that would have been contemplated in the 2011 ESP price. But what we have proposed is if the Commission allows us to go to market over the period that we have set forth, that we would agree to freeze those ESP components at the 2011 level.

I am just looking for clarity on whether, absent that offer to freeze that they would be moving up, down, sideways?

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You know, I think that would be premature for us to talk about. I think it would be an appropriate discussion and negotiation as we go through this, but I don't have any further clarity I would offer at this point.

Operator

We will go next to Shar Pourreza with Citigroup.

Shar Pourreza - Citigroup - Analyst

When we met at EEI you mentioned that other failed MRO attempts were really based on technical factors and less than subjective or arbitrary factors. Can you elaborate on what some of those technical factors were?

You know, Shar, I would refer you to slide 11 in the deck, which lays out some of the statutory requirements. And as Jim mentioned in his remarks to a prior question, the original denial of FE's MRO filing in 2008 was at a very different market period. And as we have seen a competitive market development develop, we have seen successful auctions in the state of Ohio. As we look at these statutory requirements we believe we can meet them.

Operator

Our next question comes from Paul Patterson with Glenrock Associates.

Paul Patterson - Glenrock Associates - Analyst

I'm trying to -- I guess I am -- what I -- because there seems to be clearly this is being -- shopping is driving a lot of this, can you give us a flavor for how much EPS contribution the Ohio generation and retail business is giving you guys right now?

You know, Paul, I would refer you to the guidance we have given around the Commercial Power segment. That is as much detail as we have given at this point. And as we disclosed in the third quarter, they're actually already at their full-year plan. We have also talked about 2011 having about $0.05 of downward pressure as a result of annualized switching. So that is what I would refer to you at this point.

Paul Patterson - Glenrock Associates - Analyst

Okay. That hasn't changed, okay. Then when we are talking about the retail load that you have in Ohio, I know that you guys are very aggressive in terms of signing up those contracts. Can you give us a feeling for what the tenor, the timeframe of those contracts are, when they might be repriced?

Yes, Paul, this is Keith. The tenor of the contracts for the most part have been tied to the term of the ESP. So they basically go through the end of '11. There are very, very few exceptions to that. But you should think of all of those contracts basically ending at '11. And also that is what we have seen from contracts relating to other suppliers as well.

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Operator

We will go next to Michael Lapides with Goldman Sachs.

Michael Lapides - Goldman Sachs - Analyst

Hi guys. How should we think about in terms of the impact of customer switching? I am just trying to think through the -- if you get an MRO, and the customers that are still under the ESP will still be pricing at a blended rate, but -- you know, a 10% in one year, 20% in the next year, so those that stay at that price -- and we know while lots of customers switch, many don't switch -- will still be priced at a level pretty far above market.

Does the MRO effectively enable you to continue to benefit from that for another few years until every customer effectively fully goes to market in year three?

You know, Michael, I think that is a fair assumption, recognizing that switching is always a variable. But the first 17 months that we have proposed would be at a 90/10 split, and then the remaining 12 months at an 80/20.

Operator

We will go next to Ali Agha with SunTrust Robinson Humphrey.

Ali Agha - SunTrust Robinson Humphrey - Analyst

You know, in the past, Jim, you have talked about when you look at Duke as a whole, you look at it as a regulated utility, not really a merchant company or a company with merchant exposure. Obviously, as you go towards the MRO and you get to that 100% level, the generating assets do become merchant-like.

Has your thinking changed? And if not, should we assume that if you are to get out of the merchant side of the business that would occur once the 100% switch change in the MRO has been reached. Is that the way to be thinking about this?

I think our focus today is really on the MRO. I think it is premature to discuss the strategic options with respect to that generation. But, as you know so well, our value proposition is really predicated on the dividend and the growth of that dividend, and having a stable earnings stream and with minimal volatility, is really the key to our value proposition. I don't see that changing. But importantly, we won't make that decision until much further along in the process.

But to be clear, your assumption is that the approval to move the generation assets to a separate entity would happen around the same time that you reached a 100% MRO time period, is that right?

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Okay. And second question, as you point out, the blending nature obviously protects you to some extent where the forward market curves are, which are obviously much lower. But the fact is, if they stay where they are there is downward pressure coming on the earnings side from the generation. Are you contemplating a filing a T&D rate case in Ohio, or should we assume there a way that Ohio ends up flat to perhaps up beyond '11, or should we assume the downward earnings pressure in '12, '13 given where the forward curves are?

Lynn Good - Duke Energy Corporation - CFO

Ali, this is Lynn. We do have a rate case planned for the electric T&D business that we would file in 2011. And consistent with what we talked about just a few moments ago, we do think the blending period gives us an opportunity to preserve earnings in the short term, recognizing that switching is always a variable.

Right. Just to be clear though, T&D rate case, coupled with the blending period, are you looking at Ohio as a whole relatively flat for a couple of years or could we assume some downward pressure net net?

You know, I don't look at Ohio in quite that way, Ali. And I don't really want to get in a position where we are giving guidance beyond what we have talked about here in 2011 and certainly for the rest of 2010.

I think it would be appropriate to explore this a little further as we see where the MRO, how that filing develops. And certainly we will give guidance more specifically on 2011 when we come -- at the February analyst meeting.

Fair enough, thank you.

Operator

Our next question comes from Reza Hatefi with Decade Capital.

Reza Hatefi - Decade Capital - Analyst

The existing shop load that your retail arm has gotten that you said essentially expires at the 2011, how should we think about the discount those customers are receiving relative to the current ESP price?

Reza, this is Keith, and for competitive reasons we don't get into specifics in terms of the amount of discount that we do have for customers that are on a plan that is a discount to the ESP. So I really can't give you specific guidance on that.

What I would say is that Duke Energy Retail will continue to be a very significant part of our strategy as we go out into 2012. It will continue to compete to hold onto customers, and to seek customers both within the traditional native customers from Duke Energy Ohio, as well as in other service territories in Ohio.

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Reza Hatefi - Decade Capital - Analyst

Okay, understood. And I guess your earnings CAGR guidance, 4% to 6%, I think it was off of a 2009 base. How should we think about that in relation to this MRO filing? I guess the MRO filing sort of codifies whatever your earnings are going to be if you get what you're asking for. How should we think about that relationship?

We will give, as I said a moment ago, fuller guidance on 2011 and also expectations around growth in February. Our growth rate is primarily underpinned by the FE&G business, as you know, and the significant capital that we are deploying.

And I think it is important for us to move through this MRO proceeding, getting to the point or approval, before we can give you more specifics on expectations.

Operator

(Operator Instructions). We will take a follow-up question from Daniel Eggers with Credit Suisse.

Jim, one thing I just didn't ask right away, but when you think about the transition of the generation assets out of the traditional utility design, will you guys prospectively take some sort of impairment or some sort of charge as you move those assets to market in a lower commodity price, lower earnings environment than you would have expected under a traditional cost of service design?

I'm not going to answer that. I am going to let Lynn do that, because she is our impairment expert.

Lynn is delighted to be, Dan, as you can imagine. You know, analysis --.

It is a fine title, Lynn.

I thought you would be pleased with that. You know, if we analyze the value of our assets, we look at a variety of scenarios about the future, particularly as it pertains to this business, it has been changing so dramatically.

We took an impairment charge during the second quarter related to assets that we saw under pressure from early retirements, etc. So this is something we evaluate on an ongoing basis. I am not anticipating something unique to this filing that would impact valuation.

Would you be able to request stranded cost recovery from Ohio as a result of the transition of those assets out of the ratebase?

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I think that is something we would have to evaluate in the future. Nothing contemplated at this point.

And there is nothing in the statute that would really, at this time, allow us to do that.

So you would need a change in SB 221 in order to facilitate something like that?

You know, Dan, I think there is an important point to note here about the composition of these assets. We have about 4,000 megawatts of generation, 850 of which is unscrubbed. Those are the assets that we took a write-down for in the second quarter just because of planned early retirement.

The other -- the remaining assets are very well positioned for the future. In a variety of scenarios we don't see a lot of environmental exposure on those. Those are fully scrubbed SCRs, etc. So I think it is important to keep the quality of the assets in mind as you think about how we are positioned for the future.

I would add one other thing to Lynn's answer, and that is that we are in the process of moving about 3,700 megawatts of combined cycle gas out of -- from under Duke Energy Ohio and put it into a separate entity.

Operator

At this time we have no further questions in the queue, so I would like to turn the call back to Mr. Stephen De May for any additional or closing remarks.

Stephen De May - Duke Energy Corporation - SVP, IR, Treasurer

Thank you, Jessica, and thank you everyone for joining us today. As always, the Investor Relations team is available for any questions that you have. Have a great day.

Operator