Vectren 2008 Annual Report Download - page 44

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42
customers from the sale of wholesale power by Vectren sharing equally with customers any profit earned above or
below $10.5 million of wholesale power margin; recovery of and return on the investment in past demand side
management programs to help encourage conservation during peak load periods; timely recovery of the Company’s
investment in certain new electric transmission projects that benefit the MISO infrastructure; an overall rate of
return of 7.32 percent on rate base of approximately $1,044 million and an allowed ROE of 10.4 percent.
Vectren South Gas Base Rate Order Received
On August 1, 2007, the Company received an order from the IURC which approved the settlement reached in
Vectren South’s gas rate case. The order provided for a base rate increase of $5.1 million and a ROE of 10.15
percent, with an overall rate of return of 7.2 percent on rate base of approximately $122 million. The order also
provided for the recovery of $2.6 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 $3 million and the
treatment cannot extend beyond three years on each project.
With this order, the Company now has in place for its South 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.
MISO
Since February 2002 and with the IURC’s approval, the Company has been a member of the Midwest Independent
System Operator, Inc. (MISO), a FERC approved regional transmission organization. The MISO serves the
electrical transmission needs of much of the Midwest and maintains operational control over the Company’s
electric transmission facilities as well as that of other Midwest utilities. Since April 1, 2005, the Company has been
an active participant in the MISO energy markets, bidding its owned generation into the Day Ahead and Real Time
markets and procuring power for its retail customers at Locational Marginal Pricing (LMP) as determined by the
MISO market.
The Company is typically in a net sales position with MISO as generation capacity is in excess of that needed to
serve native load and is only occasionally in a net purchase position. When the Company is a net seller such net
revenues are included in Electric Utility revenues and when the Company is a net purchaser such net purchases are
included in Cost of fuel and purchased power. Net positions are determined on an hourly basis. Since the
Company became an active MISO member, its generation optimization strategies primarily involve the sale of
excess generation into the MISO day ahead and real-time markets. Net revenues from wholesale activities included
in Electric Utility revenues totaled $57.6 million in 2008, $39.8 million in 2007 and $29.8 million in 2006.
The Company also receives transmission revenue that results from other members’ use of the Company’s
transmission system. These revenues are also included in Electric Utility revenues. Generally, these transmission
revenues along with costs charged by the MISO are considered components of base rates and any variance from
that included in base rates is recovered/refunded through tracking mechanisms.
As a result of MISO’s operational control over much of the Midwestern electric transmission grid, including
SIGECO’s transmission facilities, SIGECO’s continued ability to import power, when necessary, and export power
to the wholesale market has been, and may continue to be, impacted. Given the nature of MISO’s policies
regarding use of transmission facilities, as well as ongoing FERC initiatives, and a Day 3 ancillary services market
(ASM), where MISO began providing a bid-based regulation and contingency operating reserve markets on January
6, 2009, it is difficult to predict near term operational impacts. The IURC has approved the Company’s
participation in the ASM and has granted authority to defer costs associated with ASM.