Regulatory Update – Energy and Utility Developments 3_11_09

Rate Increases and Decreases

• The Arizona Corporation Commission has granted $65 million in emergency rate relief (out of $115 million requested) to Arizona Public Service Co., to prevent possible downgrades in credit ratings and other financing and cash flow problems.  (12/08)
• The Idaho Public Utilities Commission (PUC) approved changes in the way its electric utility annual power cost adjustment is calculated, with a goal of reducing volatility to the utility in the rate adjustment. To address this volatility, the PUC changed the sharing mechanism to require customers to pay 95 percent of above-normal power supply expense, instead of the 90/10 split previously in effect.  (01/09) 
• The Kansas State Corporation Commission has approved a settlement agreement authorizing Westar Energy to increase rates for its two operating utilities in the state by $130 million (approximately 11 percent). A large portion of the rate increase is for recovery of costs associated with unprecedented damage to the company's system from a 2007 ice storm, plus investment in wind generation facilities. The Commission also approved a contested request by wholesale cooperative utility customers to allocate a pro rata portion of Westar's asset-based off-system sales profits to its wholesale full requirements customers, instead of allocating 100 percent of such profits as a credit to retail customer rates.  (01/09)
• The Missouri Public Service Commission (PSC) has authorized Union Electric Co. (Ameren UE) to increase its electric rates by $162 million, reflecting a 10.76 percent ROE, and to implement a fuel-adjustment clause with a 95 percent pass through of fuel expense as an incentive to keep fuel costs down. The PSC rejected, however, the utility's request to include nuclear construction and operating license application costs in rates, because the company had recorded those amounts as CWIP (and Missouri statutes explicitly prohibit the inclusion of CWIP in rates before a project is in service and used and useful).  (01/09)
• The Ohio PUCO has granted FirstEnergy operating utilities a rate increase of nearly $137 million, with an ROE in the range of 10 to 11 percent.  (01/09)
• The Oklahoma Corporation Commission has authorized the Public Service Co. of Oklahoma to increase electric rates by $81 million, reflecting an ROE of 10.5 percent.  Contrary to the company's position on ROE, the Commission concluded that the current economic market uncertainty for the  near term may have a negative impact on the expectations of investors, and thereby support a reduced return rather than an increased return. Among other things, the rate increase provides for programs, such as line burial, to harden infrastructure against severe weather.   (01/09)
• The Arizona Corporation Commission has authorized Southwest Gas Corp. to increase rates by $33.5 million, reflecting an ROE of 10 percent.  The Commission rejected a proposal by the company for a revenue-decoupling mechanism, expressing concern that such a mechanism could be a disincentive for customers to engage in conservation efforts.  (01/09)
• The Connecticut Department of Public Utility Control has authorized United Illuminating Company to increase its electric distribution rates by $6.13 million in 2009, reflecting an authorized ROE of 8.75 percent. In authorizing a much smaller increase than the $51 million the company had requested, the Department emphasized the nation's current economic recession as a reason to restrain rate increases as much as possible. The Department also emphasized several risk-reducing mechanisms it was approving:  a cost-of-debt reconciliation true-up, a pension (asset value) tracker, and a revenue-decoupling mechanism.  (01/09)
• The Massachusetts Department of Public Utilities (DPU) has authorized New England Gas Co. to increase base rates by $3.7 million, including an authorized ROE of 10.05 percent.  In determining the ROE, the DPU considered several risk reducing mechanisms, such as a pass-through mechanism for pension expense, residential assistance and bad debt costs. And, the DPU considered the utility's customer service deficiencies in determining the ROE. The DPU also rejected a proposal for a hypothetical capital structure, instead employing a "debt heavy" actual capital structure of the utility's corporate parent.  (02/09)
• Progress Energy said its Progress Energy Florida subsidiary will file a base rate increase request in March, for an increase of between $475 and $550 million, to be effective in January 2010.  The rate increase request is necessary to reflect power plant and other capital investments in rates. The company also indicated that it may seek interim rate relief during 2009.  (02/09)
• The Kentucky PSC approved a settlement authorizing modest rate increases for Kentucky Utilities and Louisville Gas & Electric.  (02/09)
• Southwestern Electric Power filed an application with the Arkansas PSC to increase the utility's base rates for the first time in over 20 years. According to SWEPCo, a subsidiary of AEP, the proposed $54 million rate increase (approx. 17 percent for a typical residential customer) includes approximately $25 million to reflect higher operating costs, and approximately $29 million in financing costs associated with SWEPCo's ongoing plant construction program.  (02/09)
• The Indiana Commission approved a settlement agreement in Indiana Michigan Power Co's retail rate case, authorizing a $41.6 million (approx. 4.5 percent rate increase), reflecting a 10.5 percent ROE. The IURC made a few modifications to the unanimous settlement agreement, such as:  eliminating from base rates an amount for DSM programs (but approving the agreed-upon tracker for DSM program costs) and requiring a further more rigorous review of proposed DSM programs; modifying the off-system sales profit-sharing mechanism to 50/50 for amounts above $37.5 million built into base rates (instead of the settlement agreement's 50/50 sharing between $37.5 million and $90 million, and 60/40 sharing above $90 million); requiring I&M to file a proceeding to address the continued effectiveness, costs and benefits of the AEP Interconnection Agreement; requiring additional reporting on nuclear decommission trust issues; and requiring I&M to initiate a new base rate case within five years.  (03/09)

New Generation and Environmental Compliance

• The Wisconsin PSC rejected a proposal by Wisconsin Power & Light to build a new 300-MW coal-fired generating plant, on the basis that the $1.26 billion project was too costly when compared to other alternatives (such as natural gas generation and power purchases). The PSC also cited the uncertainty over the costs of complying with future greenhouse gas legislation as a major factor in its decision.  (12/08)
• The California PUC directed Southern California Edison Co. to fund Phase 1 of a study to evaluate the feasibility of an IGCC facility to gasify non-conventional fuels such as pet coke and biomass. The PUC's decision allows Edison to utilize deferred accounting for the costs of the study, up to $30 million.  (02/09)
• According to the Nuclear Energy Institute (NEI), nuclear power plants last year continued as a leader in reliability among all types of power generators, with an industry-average capacity factor of more than 90 percent (based on preliminary 2008 data). The NEI also noted that, last year, ten reactors received approval from the NRC to implement a combined 726 MWs of power "uprates." Additionally, in 2008, the NRC received 13 new plant license applications for 19 reactors totaling almost 27,000 MWs of new capacity.  (01/09)
• Michigan's governor is attempting to create more roadblocks for new coal-fired power plants. In her February 3, 2009, state of the state address, Governor Granholm stated that she had directed the state Department of Environmental Quality to consider all feasible and prudent alternatives before approving any applications for the construction of new coal-fired plants.  (02/09)
• NV Energy has dropped plans to build a 1500 MW conventional coal plant in Nevada, and has said it will not consider any new coal projects, in large part due to the potential expense of federal regulation of greenhouse gas emissions.  (02/09)
• Xcel Energy is canceling or delaying power plant projects in Minnesota, due to the slowing economy and plans for expanded energy efficiency programs.  (02/09)
• The South Carolina PSC has approved SCE&G's and Santee Cooper's joint proposal to build two new 1117-MW nuclear units. The PSC also approved SCE&G's request to begin recovering some of the costs associated with the new units before they are completed through an increase in rates. The total cost of the two units is estimated at $9.8 billion.  (02/09)
• U.S. EPA Administrator Lisa Jackson has announced that the EPA will reconsider a Bush administration policy to disregard CO2 emissions when permitting new coal-fired plants.  (02/09)
• More NSR lawsuits are on their way. The EPA and DOJ have announced that they are "pursuing a national initiative, targeting electric utilities whose coal-fired power plants violate the law."  (02/09)

Energy Efficiency, Renewables, and Climate Change

• A national standard for electricity generated from renewable resources, favored by the Obama Administration and many in Congress, is anticipated to clear both chambers of Congress this year. But senators from states that are lacking in significant renewable resource capability continue to emphasize that a federal standard will transfer wealth from their region to those regions that have renewable resources. 
• The North Carolina Utilities Commission approved, in large part, Duke Energy Carolinas' utility-owned solar proposal, whereby Duke will install, own and operate new roof-mounted and ground-mounted solar facilities on customers' premises throughout the utility's North Carolina service territory. The proposal involves a total capacity of approximately 10 MWs, at an estimated cost of approximately $50 million. The Commission approved timely recovery of a portion of the program costs – essentially, a level of cost comparable to the cost of purchasing solar power from a third party – with the remaining costs potentially eligible for recovery in a rate case.  (12/08)
• The South Carolina Commission rejected Duke Energy Carolinas' proposed "save-a-watt" energy efficiency proposal (whereby the utility would have the opportunity to earn an incentive based on avoided costs for verified energy efficiency impacts achieved).  The Commission concluded the proposal could result in the utility earning an unreasonably high return on its energy efficiency investments. The Commission also expressed concerns about the complexity and transparency of the proposal.  (02/09)
• The Virginia State Corporation Commission has approved a natural gas conservation initiative and rate decoupling plan for Virginia Natural Gas.  (12/08)
• The Wisconsin PSC issued a final report on the feasibility, economic potential and environmental impacts of developing wind energy on the Great Lakes. Overall, the study concludes that off-shore wind projects in the Great Lakes are feasible and could play a part in meeting Wisconsin's future energy needs.  (01/09)
• The New York PSC approved a range of expedited utility-administered energy efficiency programs for customers who pay SBC (system benefits charges). This represents the first time in several years that electric utilities in the state are being authorized to directly deliver energy efficiency programs to customers.  (01/09)
• The Kentucky PSC issued new guidelines for net metering and interconnection of small renewable sources. In addition to expanding the types of electric generation eligible for net metering, the guidelines (following legislation enacted in 2008) also double the maximum capacity of such generators from 15 kW to 30 kW, raise the limit on the amount of such generation allowed on a single utility's system and extend the life of net metering credits to the life of the customer's account.  (01/09)
• The Missouri PSC has issued proposed new net metering rules that, if approved, will eliminate a requirement that customers generating 10 kws or less of electricity carry liability insurance. The PSC stated that this change is important to encourage more development of renewable energy, such as solar power generation.  (02/09)
• The Maine PSC has adopted provisional rules that amend the existing net metering rules to allow net metering for customers who share in the ownership of an eligible renewable facility that is 500 kW or less, and expands the capacity limit for net metering from 100 kW to 500 kW for individual net metering customers. The PSC noted the desire to promote the installation and use of small renewable generation facilities within the state, but also recognized that net metering is essentially a subsidy, because net metering customers receive the full value of the retail price of electricity for a wholesale power product, and thus do not pay the full cost of use of the T&D system.  (01/09)
• The New York PSC has approved changes to the tariffs of the six investor-owned utilities in New York to encourage installation of small-scale renewable energy systems in homes and businesses by expanding the availability of net-metering options. The new provisions increase the maximum size of residential systems eligible for net metering, and expand the availability of net metering to non-residential solar generation facilities.  (02/09)
• The Florida PSC has submitted a RPS draft rule to the legislature. The rule includes an overall standard of 20 percent renewable energy production by 2020, with a cap on compliance costs of two percent to protect customers from excessive rate increases. Compliance is to be achieved by the production and purchase of RECs, from both utility-owned and non-utility in-state renewable resources.  (01/09)
• AEP is close to reaching its objective of adding 1000 MWs of wind power to its portfolio by 2011.  The Company recently signed agreements to buy 250 MWs of wind power for its AEP Ohio, Indiana Michigan Power and Appalachian Power operating companies.  (02/09)
• Southern California Edison and BrightSource Energy have reached an agreement for BrightSource to supply 1300 MWs of solar thermal power to the utility through a variety of projects.  (02/09)
• Horizon Wind Energy announced that it is pushing ahead with plans for its Meadow Lake wind farm in Indiana, which could eventually reach 1000 MWs in capacity. Horizon intends to develop the project in five, 200-MW phases over the next five years.  (02/09)
• PSE&G filed a $773 million plan to add 120 MWs of solar power in New Jersey. The utility said its "Solar 4 All" program would include a broad pole-attached solar installation effort and use of underdeveloped properties for solar generation. The company plans to both collaborate with solar developers, as well as own and operate the grid-connected solar projects.  (02/09)
• Sun Energy Group, a waste-to-energy developer headquartered in New Orleans, plans to develop a plasma gasification facility that, in addition to handling 2500 tons of waste per day, will generate over 100 MWs of power. The facility plans to use approximately 25 percent of the power generated on-site, with the remainder available to be sold to a utility at wholesale.  (02/09)
• Consumers Energy has requested that the Michigan PSC approve its plan to invest almost $2 billion to add more than 900 MWs of renewable energy by 2017 and provide customer incentives for energy efficiency. Consumers plans to develop and build about half of the renewable projects itself, with the remainder to take the form of renewable energy power purchases from third parties.  (02/09)
• The West Virginia PSC has authorized the construction of a 186-MW wind farm proposed by Invenergy. Invenergy has contracted with AEP to sell the output of the wind farm for the life of the project. 

Smart Grids

• The New York PSC has approved a set of minimum standards designed to facilitate future consideration of utility proposals for advanced metering infrastructure projects. These minimum functionality standards include:  AMI meters must meet AMSI standards; support net metering; provide the ability for a visual read; provide time-interval data; have sufficient memory storage; provide customers with direct, real-time access to electric-meter data; be able to be read remotely on-demand; utilize an open-standard-based communication protocol; have two-way communications capability; send signals to customer equipment to trigger demand-response functions; connect with a home area network to provide direct or customer-activated load control; identify, locate and determine the extent of an outage; be upgradable; and provide safe and secure transfer of data. A utility can seek a waiver of these standards if it believes it can achieve a similar result via a different route, or if it believes that adherence to a particular standard would not be cost-effective. The PSC also initiated a process for the development of a generic approach to the cost-benefit analysis of AMI. The PSC emphasized its desire to position the state and its utilities for federal stimulus money, noting that states that are ready to move forward will have an advantage over those that are not.  (02/09)
• Idaho Power Company will begin a three-year project to install automated meters throughout its southern Idaho service territory. Idaho Power submitted a cost estimate of $71 million for the project, and will absorb any costs above that. The PUC approved the company's request to utilize accelerated (three-year) depreciation for its existing meters.  (02/09)
• In its order approving a rate increase and a modified electric security plan for First Energy, the PUCO also emphasized the importance of advanced metering infrastructure, and established an AMI/Modern Grid rider. Additionally, the PUCO authorized the company to implement a new advanced metering infrastructure pilot program (500 customers, at a cost of between $500 and $1000 per customer) and a new peak pricing tariff.  (01/09)
• Google recently announced that it has developed prototype software, Google PowerMeter, to show consumers their electricity consumption patterns and ways to save power.  (02/09)

Energy Assistance

• The Idaho PUC has endorsed proposed legislation that would allow "preferential" treatment for low-income customers (programs to assist low-income customers in paying their energy bills).  (01/09)
• The Michigan Commission has instituted emergency rules that would put in place emergency shut-off protections for gas and electric customers.  (02/09)

Mergers and Acquisitions

• The New York PSC approved the sale of NYSEG, Rochester Gas & Electric, and Energy East Corporation to Iberdrola, conditioned on numerous requirements such as:  the utilities commit $200 million to new wind generation in New York over the next two years (or failing that, must allocate up to $25 million in shareholder funds to economic development projects in New York); the utilities must divest their fossil fuel generating units; implementation of protective measures related to financial structure, corporate governance and regulatory monitoring; accept additional oversight over the level of capital expenditures; a strengthened reliability, safety and service quality incentive/penalty program; and last but not least, $275 million for customers in "positive benefit adjustments." 
• The FERC approved Constellation Energy Group's proposal to sell 49.99 percent of its nuclear business to Electricite de France, finding the transaction to be in the public interest.  (02/09)
• A bill introduced in the Maryland legislature in February would make it clear under Maryland law that the Public Service Commission has the authority to approve or disapprove the proposed acquisition of Constellation Energy Group's nuclear operations by the French firm Electricite de France.  (02/09)
• The Maryland PSC has initiated an investigation into Constellation Energy Group's decision to terminate its proposed merger with MidAmerican Energy Holdings in favor of a different transaction with Electricite de France.  (01/09)

Regional Transmission Organizations / Transmission Issues

• The FERC has rejected a proposal by the Midwest ISO that would have created a new class of transmission owners who would have access to the MISO's energy and operating reserve markets, but would not have to become members of the MISO.  (02/09)
• The U.S. Court of Appeals for the 4^th Circuit has reversed the FERC's "expansive interpretation" of a 2005 Federal Power Act provision giving FERC jurisdiction to issue permits for the construction or modification of electric transmission facilities in areas designated as national interest corridors by the Secretary of Energy. The FPA provision at issue grants the FERC transmission line permitting jurisdiction when a state has "withheld approval" of a permit application for more than one year. Contrary to how the FERC had interpreted the provision, the Court concluded that the statutory phrase "withheld approval for more than one year" does not include a state's outright denial of an application within one year. Rather, the statutory provision comes into play only when a state is engaged in the continuous act of withholding approval for more than one year.  (Piedmont Environmental Council v. FERC)
• States have historically had jurisdiction over transmission siting, but Congress, the Administration and the FERC are all talking about a more centralized federal role for transmission siting. Acting FERC Chairman, Jon Wellinghoff, recently said he would push for more federal authority in this area, in a manner that is coordinated with state interests.  (02/09)

Retail Restructuring

• The Ohio PUCO has clarified its rules for implementing parts of the state's new electricity restructuring law. Among the areas clarified:  supporting requirements for electric utilities that use a competitive bidding requirement to establish a market-rate offer; interventions in applications for recovery of transmission-related costs; use of customer lists by electric suppliers; applications for the sale or transfer of generating assets; and economic development or energy efficiency arrangements. The PUCO, however, rejected claims that it had exceeded its power by requiring an independent market monitor as a prerequisite to the use of a market-based competitive bidding procedure for utility power purchases.  (02/09)
• The Ohio PUCO has granted FirstEnergy operating utilities a rate increase of nearly $137 million, with an ROE in the range of 10 to 11 percent. The PUCO also approved a FirstEnergy modified electric security plan and standard-offer generation rates. 
• The FERC has approved a proposal by Duke Energy Ohio to transfer ownership of certain gas-fired generation assets (specifically, units acquired in connection with the 2006 Duke/Cinergy merger) to affiliated companies.  (02/09)

Other Developments

• President Obama named Jon Wellinghoff acting chairman of the FERC on January 23.  (01/09)
• Ohio Governor Strickland has appointed PUCO Chair Alan Schriber to an unprecedented third term.  (02/09)
• The cleanup for the December ash spill at TVA's Kingston coal plant is now estimated to range from $525 to $825 million, depending on the disposal method required.  (02/09)
• The Pennsylvania PUC has ordered all large utilities under its jurisdiction to provide information relating to the funding of defined-benefit pension plans.  (02/09)
• The Staff of the International Accounting Standards Board is recommending that international financial reporting standards allow regulatory asset accounting. Regulatory assets have long been a part of GAAP accounting in the U.S. With the SEC considering mandating the adoption of international financial reporting standards, the utility industry has been concerned with the potential for write-offs of hundreds of billions of dollars of existing regulatory assets.  (02/09)
• The International Accounting Standards Board current work plan calls for an "exposure draft" of proposed international financial reporting standards on "Rate Regulated Activities" in the second half of 2009.  (02/09) 
• NARUC Winter Meeting – at its winter meeting in February, NARUC passed several resolutions of interest to our industry:
  • ERE-1 Resolution Supporting DOE’s Energy Efficiency Standards
    The resolution urges DOE to promulgate new national standards for linear fluorescent lamps, incandescent reflector lamps, residential water heaters, refrigerators and freezers, residential central air conditioners and heat pumps, residential clothes washers, and residential furnace fans that achieve the greatest level of cost-effective energy savings, which will result in a net reduction of greenhouse gas emissions.
  • EL-2 Resolution on the NARUC/FERC Collaborative Study of Model State and Utility Practices for Competitive Procurement of Retail Electric Supply
    The resolution urges state public utility commissions to consider implementing the Study’s recommendations, where appropriate for the type of industry structure, market design and regulatory paradigm in which their utility companies operate.
  • EL-4 Resolution in Support of Ensuring the Federal Government Fulfills its Obligation to Remove Spent Nuclear Fuel from Present Temporary Reactor Storage Sites
    The resolution recognizes the perilous plight of the Yucca Mountain repository, yet urges Congress and the federal government to honor its obligations under existing law to safely dispose of spent nuclear fuel in a permanent repository at the earliest possible date consistent with laws and regulations. It also states that the open adjudicatory license application review process conducted by professionally-qualified technical personnel at the NRC is the legally responsible means for determination of whether there is reasonable assurance that the Yucca Mountain repository will meet safety and other regulatory requirements and that review process should be allowed to run its course. If, for whatever reason, there is additional delay, Congress and the federal government should suspend further fee payments and a return of the $22 billion balance in the Nuclear Waste Fund.
  • CA-1 Resolution Concerning LIHEAP Funding
    The resolution urges Congress to appropriate LIHEAP funding for Fiscal Year 2010 of no less than its fully authorized $5.1 billion dollars, and to appropriate advance funding for LIHEAP for Fiscal Year 2011 at no less than these fully authorized levels.
  • CA-2 Resolution Addressing Excessive Speculation in Natural Gas Markets
    The resolution supports legislation to adopt the recommendations of the June 2007 Staff Report of The Permanent Subcommittee on Investigations of the U.S. Senate; the CFTC’s efforts to completely eliminate the Enron Loophole; new legislation to address the flow of investment capital into financial markets. It tells the Working Group to develop recommendations to address natural gas index speculation and report back to the Committee on Gas.