Vectren 2012 Annual Report Download - page 105

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18. Rate & Regulatory Matters
Regulatory Treatment of Investments in Natural Gas Infrastructure Replacement
Vectren monitors and maintains its natural gas distribution system to ensure that natural gas is delivered in a safe and efficient
manner. Vectren's natural gas utilities are currently engaged in replacement programs in both Indiana and Ohio, the primary
purpose of which is preventive maintenance and continual renewal and operational improvement. In 2011, laws in both Indiana
and Ohio were passed that expand the ability of utilities to recover certain costs of federally mandated projects, and in Ohio
other capital investment projects, outside of a base rate proceeding. Utilization of these recovery mechanisms is discussed
below.
Ohio Recovery and Deferral Mechanisms
The PUCO order approving the Company's 2009 base rate case in the Ohio service territory authorized a distribution
replacement rider (DRR). The DRR's primary purpose is recovery of investments in utility plant and related operating expenses
associated with replacing bare steel and cast iron pipelines and certain other infrastructure. This rider is updated annually for
qualifying capital expenditures and allows for a return to be earned on those capital expenditures based upon the rate of return
approved in the 2009 base rate case. In addition, deferral of depreciation and the ability to accrue debt-related post in service
carrying costs is also allowed until the related capital expenditures are recovered through the DRR. To date, the Company has
made capital investments under this rider totaling $80 million. During 2012, 2011, and 2010 gas operating revenues associated
with the DRR were $6.5 million, $3.6 million, and $1.4 million, respectively. Other Income associated with the debt-related post
in service carrying costs totaled $1.8 million, $2.0 million, and $0.9 million for 2012, 2011, and 2010, respectively. Regulatory
assets associated with post in service carrying costs and depreciation deferrals were $6.5 million, $3.0 million, and $1.0 million
at December 31, 2012, 2011, and 2010, respectively.
In June 2011, Ohio House Bill 95 was signed into law. Outside of a base rate proceeding, this legislation permits a natural gas
company to apply for recovery of much of its capital expenditure program. Once such application is approved, the legislation
authorizes a deferral of costs, such as depreciation, property taxes, and debt-related carrying costs. On December 12, 2012, the
PUCO issued an order approving the Company's initial application using this law. The order provides for the deferral of
depreciation, debt-related post in service carrying costs, and property taxes for its $23.5 million capital expenditure program
covering the fifteen month period ending December 31, 2012. Such capital expenditures include infrastructure expansion and
improvements not covered by the DRR as well as expenditures necessary to comply with PUCO rules, regulations, orders, and
system expansion to some new customers. The order also established a prospective bill impact evaluation on the cumulative
deferrals, limiting the total deferrals at a level which would equal $1.50 per residential and general service customer per month.
The order created a regulatory asset as of December 31, 2012 of $1.5 million, of which $0.9 million is Other Income related to
the accrual of post in service carrying costs, and the remaining $0.6 million is the deferral of depreciation and property tax
expense. The Company expects to make a future request for similar accounting authority on its capital expenditure program for
the calendar year 2013.
Indiana Recovery and Deferral Mechanisms
The Company's Indiana natural gas utilities received orders in 2008 and 2007 associated with the most recent base rate cases.
These orders authorized the deferral of financial impacts associated with bare steel and cast iron replacement activities. The
orders provide for the deferral of depreciation and post in service carrying costs on qualifying projects totaling $20 million
annually at Vectren North and $3 million annually at Vectren South. For USGAAP accounting purposes only the debt-related
post in service carrying costs are recognized in the Consolidated Statements of Income currently. Such deferral is limited by
individual qualifying project to three years after being placed into service at Vectren South and four years after being placed into
service at Vectren North. The debt-related post in service rate used to calculate the deferral is based on a current cost of funds.
At December 31, 2012 and 2011, the Company has USGAAP regulatory assets totaling $8.5 million and $4.7 million,
respectively, associated with the deferral of depreciation and debt-related post in service carrying cost activities.
In April 2011, Senate Bill 251 was signed into Indiana law. The law provides a framework to recover 80 percent of federally
mandated costs through a periodic rate adjustment mechanism outside of a general rate case. Such costs include a return on
the federally mandated capital investment, along with recovery of depreciation and other operating costs associated with these
mandates. The remaining 20 percent of those costs are to be deferred for future recovery in the utility's next general rate case.