Vectren 2010 Annual Report Download - page 104

102
program costs under a current tracking mechanism. In addition, Vectren South proposed a performance incentive mechanism
that is contingent upon the success of each of the DSM Programs in reducing energy usage to the levels defined by the IURC.
This performance incentive would also be recovered in the same tracking mechanism. Finally, the Company proposed lost
margin recovery associated with the implementation of DSM programs for large customers, and cited its decoupling proposal
applicable to residential and general service customers in the pending electric base rate case. On January 20, 2011, the OUCC
and Vectren South filed a settlement with the IURC reflecting agreement on the Company’s programs and lost margin recovery
from large customers. A hearing will be held on March 8, 2011 involving all parties to this proceeding.
VEDO Gas Base Rate Order Received
On January 7, 2009, the PUCO issued an order approving the stipulation reached in the VEDO rate case. The order provides
for a rate increase of nearly $14.8 million, an overall rate of return of 8.89 percent on rate base of about $235 million; an
opportunity to recover costs of a program to accelerate replacement of cast iron and bare steel pipes, as well as certain service
risers; and base rate recovery of an additional $2.9 million in conservation program spending.
The order also adjusted the rate design used to collect the agreed-upon revenue from VEDO's customers. The order allows for
the phased movement toward a straight fixed variable rate design for residential customers which places all of the fixed cost
recovery in the customer service charge. A straight fixed variable design mitigates most weather risk as well as the effects of
declining usage, similar to the Company’s decoupling mechanism, which expired when this new rate design went into effect on
February 22, 2009. In 2008, annual results include approximately $4.3 million of revenue from the decoupling mechanism that
did not continue once this base rate increase went into effect. Since the straight fixed variable rate design was fully
implemented in February 2010, nearly 90 percent of the combined residential and commercial base rate margins were
recovered through the customer service charge. The OCC appealed this rate order to the Ohio Supreme Court, which had
affirmed PUCO orders authorizing straight fixed variable rate design in two other cases. On December 23, 2010, the Ohio
Supreme Court affirmed the PUCO order authorizing straight fixed variable rate design in VEDO’s case.
With this rate order, the Company has in place for its Ohio gas territory rates that allow for a straight fixed variable rate design
that mitigates both weather risk and lost margin for residential customers; tracking of uncollectible accounts 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.
VEDO Continues the Process to Exit the Merchant Function
On August 20, 2008, the PUCO approved the results of 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 was
comprised of the monthly NYMEX settlement price plus a fixed adder. This standard pricing, which was effective from October
1, 2008 through March 31, 2010, was the initial step in exiting the merchant function in the Company’s Ohio service territory.
The approach eliminated the need for monthly gas cost recovery (GCR) filings and prospective PUCO GCR audits. In October
2008, VEDO’s entire natural gas inventory was transferred to the auction’s winning wholesale suppliers, resulting in proceeds to
VEDO of approximately $107 million.
The second phase of the exit process began on April 1, 2010. During this phase, the Company no longer sells natural gas
directly to customers. Rather, state-certified Competitive Retail Natural Gas Suppliers, that were successful bidders in a similar
regulatory-approved auction, sell the gas commodity to specific customers for a 12 month period at auction-determined
standard pricing. The first auction was conducted on January 12, 2010, and the auction results were approved by the PUCO on
January 13, 2010. The plan approved by the PUCO required that the Company conduct at least two annual auctions during this
phase. As such, the Company conducted another auction on January 18, 2011 in advance of the second 12-month term which
commences on April 1, 2011. The results of that auction were approved by the PUCO on January 19, 2011. Consistent with
current practice, customers will continue to receive a single bill for the commodity as well as the delivery component of natural
gas service from VEDO. Vectren Source, the Company’s wholly owned nonutility retail gas marketer, was a successful bidder
in both auctions.
The PUCO provided for an Exit Transition Cost rider, which allows the Company to recover costs associated with the transition
process. Exiting the merchant function should not have a material impact on earnings or financial condition. It, however, has
and will continue to reduce Gas utility revenues and have an equal and offsetting impact to Cost of gas sold as VEDO no longer
purchases gas for resale to these customers.