Vectren 2008 Annual Report Download - page 43

Download and view the complete annual report

Please find page 43 of the 2008 Vectren annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 123

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92
  • 93
  • 94
  • 95
  • 96
  • 97
  • 98
  • 99
  • 100
  • 101
  • 102
  • 103
  • 104
  • 105
  • 106
  • 107
  • 108
  • 109
  • 110
  • 111
  • 112
  • 113
  • 114
  • 115
  • 116
  • 117
  • 118
  • 119
  • 120
  • 121
  • 122
  • 123

41
will be entirely replaced with a fixed charge after one year. A straight fixed variable design mitigates some
weather risk as well as the effects of declining usage, similar to the Company’s lost margin recovery mechanism,
which expired when this new rate design went into effect in February 2009. In 2008, results include approximately
$4.3 million of revenue from the existing lost margin recovery mechanism that will not continue once this base rate
increase is in effect. The OCC has filed a request for rehearing on the rate design finding by the PUCO. The
rehearing request mirrors similar requests filed by the OCC in each case where the PUCO has approved similar rate
designs, and all such requests have been denied.
With this rate order the Company has in place for its Ohio gas territory rates that allow for the phased
implementation of a straight fixed variable rate design that mitigates both weather risk and lost margin; tracking of
bad debt and percent of income payment plan (PIPP) expenses; base rate recovery of pipeline integrity management
expense; timely recovery of costs associated with the accelerated replacement of bare steel and cast iron pipes, as
well as certain service risers; and expanded conservation programs now totaling up to $5 million in annual
expenditures.
Vectren Energy Delivery Ohio, Inc. Begins Process to Exit the Merchant Function
On August 20, 2008, the PUCO approved an auction selecting qualified wholesale suppliers to provide the gas
commodity to the Company for resale to its customers at auction-determined standard pricing. This standard
pricing is comprised of the monthly NYMEX settlement price plus a fixed adder. This auction, which is effective
from October 1, 2008 through March 31, 2010, is the initial step in exiting the merchant function in the Company’s
Ohio service territory. The approach eliminates the need for monthly gas cost recovery (GCR) filings and
prospective PUCO GCR audits. On October 1st, VEDO’s entire natural gas inventory was transferred, receiving
proceeds of approximately $107 million. The PUCO has also provided for an Exit Transition Cost rider, which
allows the Company to recover costs associated with the transition. As the cost of gas is currently passed through
to customers through a PUCO approved recovery mechanism, the impact of exiting the merchant function should
not have a material impact on Company earnings or financial condition.
Vectren North (Indiana Gas Company, Inc.) Gas Base Rate Order Received
On February 13, 2008, the Company received an order from the IURC which approved the settlement agreement
reached in its Vectren North gas rate case. The order provided for a base rate increase of $16.3 million and a return
on equity (ROE) of 10.2 percent, with an overall rate of return of 7.8 percent on rate base of approximately $793
million. The order also provides for the recovery of $10.6 million of costs through separate cost recovery
mechanisms rather than base rates.
Further, additional expenditures for a multi-year bare steel and cast iron capital replacement program will be
afforded certain accounting treatment that mitigates earnings attrition from the investment between rate cases. The
regulatory accounting treatment allows for the continuation of the accrual for allowance for funds used during
construction (AFUDC) and the deferral of depreciation expense after the projects go in service but before they are
included in base rates. To qualify for this treatment, the annual expenditures are limited to $20 million and the
treatment cannot extend beyond four years on each project.
With this order, the Company has in place for its North gas territory weather normalization, a conservation and lost
margin recovery tariff, tracking of gas cost expense related to a bad debt expense level based on historical
experience and unaccounted for gas through the existing gas cost adjustment mechanism, and tracking of pipeline
integrity management expense.
Vectren South (SIGECO) Electric Base Rate Order Received
On August 15, 2007, the Company received an order from the IURC which approved the settlement reached in
Vectren South’s electric rate case. The order provided for an approximate $60.8 million electric rate increase to
cover the Company’s cost of system growth, maintenance, safety and reliability. The order provided for, among
other things: recovery of ongoing costs and deferred costs associated with the MISO; operations and maintenance
(O&M) expense increases related to managing the aging workforce, including the development of expanded
apprenticeship programs and the creation of defined training programs to ensure proper knowledge transfer, safety
and system stability; increased O&M expense necessary to maintain and improve system reliability; benefit to