Vectren 2013 Annual Report Download - page 24

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The Company participates in the MISO.
The Company is a member of the MISO, which serves the electric transmission needs of much of Midcontinent region and
maintains operational control over SIGECO’s electric transmission facilities, as well as that of other utilities in the region. As a
result of such control, SIGECO’s continued ability to import power, when necessary, and export power to the wholesale market
has been, and may continue to be, impacted.
The need to expend capital for improvements to the regional transmission system, both to SIGECO’s facilities as well as to
those facilities of adjacent utilities, over the next several years is expected to be significant. The Company timely recovers its
investment in certain new electric transmission projects that benefit the MISO infrastructure at a FERC approved rate of return,
which is currently under review based on a joint complaint filed under Section 206 against MISO and various MISO transmission
owners, including SIGECO. The FERC has yet to rule on the case and the Company is currently unable to predict the outcome
of the proceeding.
Also, the MISO allocates operating costs and the cost of multi-value projects throughout the region to its participating utilities
such as SIGECO, and such costs are significant. Adjustments to these operating costs, including adjustments that result from
participants entering or leaving the MISO, could cause increases or decreases to customer bills. The Company timely recovers
its portion of MISO operating expenses as tracked costs.
Wholesale power marketing activities may add volatility to earnings.
Vectren’s regulated electric utility engages in wholesale power marketing activities that primarily involve the offering of utility-
owned or contracted generation into the MISO hourly and real time markets. As part of these strategies, the Company may also
execute energy contracts that are integrated with portfolio requirements around power supply and delivery. Presently, margin
earned from these activities above or below $7.5 million per year is shared evenly with customers. These earnings from
wholesale marketing activities may vary based on fluctuating prices for electricity and the amount of electric generating capacity
or purchased power available beyond that needed to meet firm service requirements. In addition, this earnings sharing
approach may be modified in future regulatory proceedings.
Volatility in the wholesale price of natural gas, coal, and electricity could reduce earnings and working capital.
The Company’s regulated operations have limited exposure to commodity price risk for transactions involving purchases and
sales of natural gas, coal, and purchased power for the benefit of retail customers due to current state regulations, which subject
to compliance with those regulations, allow for recovery of the cost of such purchases through natural gas and fuel cost
adjustment mechanisms. However, significant volatility in the price of natural gas, coal, or purchased power may cause existing
customers to conserve or motivate them to switch to alternate sources of energy as well as cause new home developers,
builders, and new customers to select alternative sources of energy. Decreases in volumes sold could reduce earnings. The
decrease would be more significant in the absence of constructive regulatory orders, such as those authorizing revenue
decoupling, lost margin recovery, and other innovative rate designs. A decline in new customers could impede growth in future
earnings. In addition, during periods when commodity prices are higher than historical levels, working capital costs could
increase due to higher carrying costs of inventories and cost recovery mechanisms, and customers may have trouble paying
higher bills leading to increased bad debt expenses.
Increased conservation efforts and technology advances, which result in improved energy efficiency or the development
of alternative energy sources, may result in reduced demand for the Company’s energy products and services.
The trend toward increased conservation and technological advances, including installation of improved insulation and the
development of more efficient furnaces and other heating devices, may reduce the demand for energy products. Prices for
natural gas are subject to volatile fluctuations in response to changes in supply and other market conditions. During periods of
high energy commodity costs, the Company's prices generally increase which may lead to customer conservation. State and/or
federal regulation may require mandatory conservation measures, which would reduce the demand for energy products. In
addition, the Company's customers, especially large commercial and industrial customers, may choose to employ various
technological advances to develop alternative energy sources, such as the construction and development of wind power, solar