OG&E 2015 Annual Report Download - page 35

OGE Energy Corp. 67
Siemens Contract
On฀June฀15,฀2015฀OG&E฀entered฀into฀a฀contract฀with฀Siemens฀Energy฀
Inc.฀for฀the฀purchase,฀design฀and฀engineering฀of฀seven฀simple-cycle฀gas฀
turbine฀generators฀for฀$170.3฀million฀to฀be฀completed฀by฀June฀1,฀2018.฀
Other
In฀the฀normal฀course฀of฀business,฀the฀Company฀is฀confronted฀with฀
issues฀or฀events฀that฀may฀result฀in฀a฀contingent฀liability.฀These฀
generally฀relate฀to฀lawsuits฀or฀claims฀made฀by฀third฀parties,฀including฀
governmental฀agencies.฀When฀appropriate,฀management฀consults฀with฀
legal฀counsel฀and฀other฀experts฀to฀assess฀the฀claim.฀If,฀in฀management’s฀
opinion,฀the฀Company฀has฀incurred฀a฀probable฀loss฀as฀set฀forth฀by฀
GAAP,฀an฀estimate฀is฀made฀of฀the฀loss฀and฀the฀appropriate฀accounting฀
entries฀are฀reflected฀in฀the฀Compa y’s฀Consolidated฀Financial฀
Statements.฀At฀the฀present฀time,฀based฀on฀current฀available฀information,฀
the฀Company฀believes฀that฀any฀reasonably฀possible฀losses฀in฀excess฀
of฀accrued฀amounts฀arising฀out฀of฀pending฀or฀threatened฀lawsuits฀or฀
claims฀would฀not฀be฀quantitatively฀material฀to฀its฀financial฀statement ฀
and฀would฀not฀have฀a฀material฀adverse฀effect฀on฀the฀Company’s฀
consolidated฀financial฀position,฀results฀of฀ope ations฀or฀cash฀fl ws.฀
15. Rate Matters and Regulation
Regulation and Rates
OG&E’s฀retail฀electric฀tariffs฀are฀regulated฀by฀the฀OCC฀in฀Oklahoma฀
and฀by฀the฀APSC฀in฀Arkansas.฀The฀issuance฀of฀certain฀securities฀
by฀OG&E฀is฀also฀regulated฀by฀the฀OCC฀and฀the฀APSC.฀OG&E’s฀
wholesale฀electric฀tariffs,฀transmission฀activities,฀short-term฀borrowing฀
authorization฀and฀accounting฀practices฀are฀subject฀to฀the฀jurisdiction฀
of฀the฀FERC.฀The฀Secretary฀of฀the฀U.S.฀Department฀of฀Energy฀has฀
jurisdiction฀over฀some฀of฀OG&E’s฀facilities฀and฀operations.฀In฀2015,฀
86฀percent฀of฀OG&E’s฀electric฀revenue฀was฀subject฀to฀the฀jurisdiction฀฀
of฀the฀OCC,฀eight฀percent฀to฀the฀APSC฀and฀six฀percent฀to฀the฀FERC.
The฀OCC฀issued฀an฀order฀in฀1996฀authorizing฀OG&E฀to฀reorganize฀
into฀a฀subsidiary฀of฀the฀Company.฀The฀order฀required฀that,฀among฀other฀
things,฀(i)฀the฀Company฀permit฀the฀OCC฀access฀to฀the฀books฀and฀
records฀of฀the฀Company฀and฀its฀affiliates฀relating฀to฀t ansactions฀with฀
OG&E,฀(ii)฀the฀Company฀employ฀accounting฀and฀other฀procedures฀and฀
controls฀to฀protect฀against฀subsidization฀of฀non-utility฀activities฀by฀
OG&E’s฀customers฀and฀(iii)฀the฀Company฀refrain฀from฀pledging฀OG&E฀
assets฀or฀income฀for฀affiliate transactions.฀In฀addition,฀the฀Energy฀Policy฀
Act฀of฀2005฀enacted฀the฀Public฀Utility฀Holding฀Company฀Act฀of฀2005,฀
which฀in฀turn฀granted฀to฀the฀FERC฀access฀to฀the฀books฀and฀records฀of฀
the฀Company฀and฀its฀affiliates฀as฀the฀FERC฀deems฀rel vant฀to฀costs฀
incurred฀by฀OG&E฀or฀necessary฀or฀appropriate฀for฀the฀protection฀of฀
utility฀customers฀with฀respect฀to฀the฀FERC฀jurisdictional฀rates.
Completed Regulatory Matters
Fuel฀Adjustment฀Clause฀Review฀for฀Calendar฀Year฀2013฀
The฀OCC฀routinely฀reviews฀the฀costs฀recovered฀from฀customers฀
through฀OG&E’s฀fuel฀adjustment฀clause.฀On฀July฀31,฀2014,฀the฀OCC฀
Staff฀filed฀an฀application฀to฀r view฀OG&E’s฀fuel฀adjustment฀clause฀for฀
calendar฀year฀2013,฀including฀the฀prudence฀of฀OG&E’s฀electric฀
generation,฀purchased฀power฀and฀fuel฀procurement฀costs.฀On฀May฀21,฀
2015,฀the฀ALJ฀recommended฀that฀the฀OCC฀find฀that฀OG&E s฀2013฀
electric฀generation,฀purchased฀power฀and฀fuel฀procurement฀processes฀
and฀costs฀were฀prudent,฀accurate฀and฀properly฀applied฀to฀customer฀
billing฀statements.฀OG&E฀received฀an฀order฀to฀that฀effect฀from฀the฀฀
OCC฀on฀June฀17,฀2015.฀
Oklahoma฀Demand฀Program฀Rider฀ ฀
On฀January฀6,฀2016,฀the฀OCC฀approved฀OG&E’s฀2016฀through฀2018฀
demand฀portfolio฀programs.฀The฀order฀stipulates฀recovery฀of฀program฀
costs,฀lost฀revenues฀and฀incentives฀resulting฀from฀those฀programs,฀
through฀the฀Demand฀Program฀Rider.฀
Pending Regulatory Matters
Set฀forth฀below฀is฀a฀list฀of฀various฀proceedings฀pending฀before฀state฀฀
or฀federal฀regulatory฀agencies.฀Unless฀stated฀otherwise,฀OG&E฀฀
cannot฀predict฀when฀the฀regulatory฀agency฀will฀act฀or฀what฀action฀the฀
regulatory฀agency฀will฀take.฀OG&E’s฀financial฀results฀are฀dependent฀in
part฀on฀timely฀and฀adequate฀decisions฀by฀the฀regulatory฀agencies฀that฀
set฀OG&E’s฀rates.
FERC฀Order฀No.฀1000,฀Final฀Rule฀on฀Transmission฀Planning฀and฀฀
Cost฀Allocation
On฀July฀21,฀2011,฀the฀FERC฀issued฀Order฀No.฀1000,฀which฀revised฀฀
the฀FERC’s฀existing฀regulations฀governing฀the฀process฀for฀planning฀
enhancements฀and฀expansions฀of฀the฀electric฀transmission฀grid฀along฀
with฀the฀corresponding฀process฀for฀allocating฀the฀costs฀of฀such฀
expansions.฀Order฀No.฀1000฀requires฀individual฀regions฀to฀determine฀
whether฀a฀previously-approved฀project฀is฀subject฀to฀reevaluation฀and฀฀
is฀therefore฀governed฀by฀the฀new฀rule.
Order฀No.฀1000฀directs฀public฀utility฀transmission฀providers฀to฀remove฀
from฀the฀FERC-jurisdictional฀tariff฀and฀agreement฀provisions฀that฀
establish฀any฀Federal฀“right฀of฀first฀refusal ฀for฀the฀incumbent฀
transmission฀owner฀(such฀as฀OG&E)฀regarding฀transmission฀facilities฀
selected฀in฀a฀regional฀transmission฀planning฀process,฀subject฀to฀certain฀
limitations.฀However,฀Order฀No.฀1000฀is฀not฀intended฀to฀affect฀the฀right฀
of฀an฀incumbent฀transmission฀owner฀(such฀as฀OG&E)฀to฀build,฀own฀and฀
recover฀costs฀for฀upgrades฀to฀its฀own฀transmission฀facilities฀or฀to฀alter฀
an฀incumbent฀transmission฀owner’s฀use฀and฀control฀of฀existing฀rights฀of฀
way.฀Order฀No.฀1000฀also฀clarifies฀that฀incumbent฀t ansmission฀owners฀
may฀rely฀on฀regional฀transmission฀facilities฀to฀meet฀their฀reliability฀
needs฀or฀service฀obligations.฀The฀SPP’s฀pre-Order฀No.฀1000฀tariff฀
included฀a฀“right฀of฀first฀refusal ฀for฀incumbent฀transmission฀owners฀and฀
this฀provision฀has฀played฀a฀role฀in฀OG&E฀being฀selected฀by฀the฀SPP฀to฀
build฀previous฀transmission฀projects฀in฀Oklahoma.฀On฀May฀29,฀2013,฀
the฀Governor฀of฀Oklahoma฀signed฀House฀Bill฀1932฀into฀law฀which฀
establishes฀a฀right฀of฀first฀refusal฀ or฀Oklahoma฀incumbent฀transmission฀
owners,฀including฀OG&E,฀to฀build฀new฀transmission฀projects฀with฀
voltages฀under฀300฀kV฀that฀interconnect฀to฀those฀incumbent฀owners’฀
existing฀facilities.฀
The฀SPP฀has฀submitted฀compliance฀filings฀implementing฀Order
No.฀1000’s฀requirements.฀In฀response,฀the฀FERC฀issued฀an฀order฀on฀
the฀SPP฀filings฀that฀required฀the฀SPP฀to฀rem ve฀certain฀right฀of฀first
refusal฀language฀from฀the฀SPP฀Tariff฀and฀the฀SPP฀Membership฀
Agreement.฀On฀December฀15,฀2014,฀OG&E฀filed฀an฀appeal฀in฀the
District฀of฀Columbia฀Court฀of฀Appeals฀challenging฀the฀FERC’s฀order฀
requiring฀the฀removal฀of฀the฀right฀of฀first฀refusal฀language฀from฀the฀
SPP฀Membership฀Agreement.฀The฀court฀has฀not฀yet฀acted฀on฀฀
OG&E’s฀appeal.
The฀Company฀cannot,฀at฀this฀time,฀determine฀the฀precise฀impact฀of฀
Order฀No.฀1000฀on฀OG&E.฀The฀Company฀has฀no฀reason฀to฀believe฀that฀
the฀implementation฀of฀Order฀No.฀1000฀will฀impact฀those฀transmission฀
projects฀for฀which฀OG&E฀has฀received฀a฀notice฀to฀proceed฀from฀฀
the฀SPP.
66 OGE Energy Corp.
compliance฀with฀existing฀and฀proposed฀environmental฀legislation฀฀
and฀regulations฀and฀implement฀appropriate฀environmental฀programs฀in฀
a฀competitive฀market.
OG&E฀is฀managing฀several฀significant฀unce tainties฀about฀the฀scope฀
and฀timing฀for฀the฀acquisition,฀installation฀and฀operation฀of฀additional฀
pollution฀control฀equipment฀and฀compliance฀costs฀for฀a฀variety฀of฀the฀
EPA฀rules฀that฀are฀being฀challenged฀in฀court.฀OG&E฀is฀unable฀to฀
predict฀the฀financial฀impact฀of฀these฀matters฀with฀ce tainty฀at฀this฀time.฀
Federal฀Clean฀Air฀Act฀New฀Source฀Review฀Litigation฀
As฀previously฀reported,฀in฀July฀2008,฀OG&E฀received฀a฀request฀for฀
information฀from฀the฀EPA฀regarding฀Federal฀Clean฀Air฀Act฀compliance฀
at฀OG&E’s฀Muskogee฀and฀Sooner฀generating฀plants.฀
On฀July฀8,฀2013,฀the฀U.S.฀Department฀of฀Justice฀filed฀a฀complaint
against฀OG&E฀in฀United฀States฀District฀Court฀for฀the฀Western฀District฀of฀
Oklahoma฀alleging฀that฀OG&E฀did฀not฀follow฀the฀Federal฀Clean฀Air฀Act฀
procedures฀for฀projecting฀emission฀increases฀attributable฀to฀eight฀
projects฀that฀occurred฀between฀2003฀and฀2006.฀This฀complaint฀seeks฀
to฀have฀OG&E฀submit฀a฀new฀assessment฀of฀whether฀the฀projects฀were฀
likely฀to฀result฀in฀a฀significant฀emissions฀increas .฀The฀Sierra฀Club฀
intervened฀in฀this฀proceeding.฀On฀August฀30,฀2013,฀the฀government฀
filed฀a฀Motion฀ or฀Summary฀Judgment฀and฀on฀September฀6,฀2013,฀
OG&E฀filed฀a฀Motion฀to฀Dismiss฀the฀cas .฀On฀January฀15,฀2015,฀U.S.฀
District฀Judge฀Timothy฀DeGuisti฀dismissed฀the฀complaints฀filed฀ y฀the฀
EPA฀and฀the฀Sierra฀Club.฀The฀Court฀held฀that฀it฀lacked฀subject฀matter฀
jurisdiction฀over฀plaintiffs’฀claims฀because฀plaintiffs฀failed฀to฀present฀an฀
actual฀“case฀or฀controversy”฀as฀required฀by฀Article฀III฀of฀the฀Constitution.฀
The฀court฀also฀ruled฀in฀the฀alternative฀that,฀even฀if฀plaintiffs฀had฀
presented฀a฀case฀or฀controversy,฀it฀would฀have฀nonetheless฀“decline[d]฀
to฀exercise฀jurisdiction.”฀The฀EPA฀and฀the฀Sierra฀Club฀did฀not฀file฀a ฀
appeal฀of฀the฀Court’s฀ruling.฀
On฀August฀12,฀2013,฀the฀Sierra฀Club฀filed฀a฀sepa ate฀complaint฀
against฀OG&E฀in฀the฀United฀States฀District฀Court฀for฀the฀Eastern฀District฀
of฀Oklahoma฀alleging฀that฀OG&E฀projects฀at฀Muskogee฀Unit฀6฀in฀2008฀
were฀made฀without฀obtaining฀a฀prevention฀of฀significant฀dete ioration฀
permit฀and฀that฀the฀plant฀had฀exceeded฀emissions฀limits฀for฀opacity฀฀
and฀particulate฀matter.฀The฀Sierra฀Club฀seeks฀a฀permanent฀injunction฀
preventing฀OG&E฀from฀operating฀the฀Muskogee฀generating฀plant.฀฀
On฀March฀4,฀2014,฀the฀Eastern฀District฀dismissed฀the฀prevention฀of฀
significant฀dete ioration฀permit฀claim฀based฀on฀the฀statute฀of฀limitations,฀
but฀allowed฀the฀opacity฀and฀particulate฀matter฀claims฀to฀proceed.฀To฀
obtain฀the฀right฀to฀appeal฀this฀decision,฀the฀Sierra฀Club฀subsequently฀
withdrew฀a฀Notice฀of฀Intent฀to฀Sue฀for฀additional฀Clean฀Air฀Act฀violations฀
and฀asked฀the฀Eastern฀District฀to฀dismiss฀its฀remaining฀claims฀with฀
prejudice.฀On฀August฀27,฀2014,฀the฀Eastern฀District฀granted฀the฀Sierra฀
Club’s฀request.฀The฀Sierra฀Club฀has฀filed฀a฀Notice฀of฀Appeal฀with฀the
10th฀Circuit฀where฀oral฀argument฀was฀held฀on฀March฀18,฀2015.฀
At฀this฀time,฀OG&E฀continues฀to฀believe฀that฀it฀has฀acted฀in฀
compliance฀with฀the฀Federal฀Clean฀Air฀Act,฀and฀OG&E฀expects฀to฀
vigorously฀defend฀against฀the฀claims฀that฀have฀been฀asserted.฀If฀OG&E฀
does฀not฀prevail฀in฀the฀remainder฀of฀the฀proceedings,฀the฀EPA฀and฀the฀
Sierra฀Club฀could฀seek฀to฀require฀OG&E฀to฀install฀additional฀pollution฀
control฀equipment,฀including฀dry฀scrubbers,฀baghouses฀and฀selective฀
catalytic฀reduction฀systems฀with฀capital฀costs฀in฀excess฀of฀$1.1฀billion฀
and฀pay฀fines฀and฀significant฀penalties฀as฀a฀result฀of฀the฀allegations฀i
the฀notice฀of฀violation.฀Section฀113฀of฀the฀Federal฀Clean฀Air฀Act฀(along฀
with฀the฀Federal฀Civil฀Penalties฀Inflation฀Adjustment฀Act฀of฀1996)
provides฀for฀civil฀penalties฀as฀much฀as฀$37,500฀per฀day฀for฀each฀
violation.฀Due฀to฀the฀uncertain฀and฀preliminary฀nature฀of฀this฀litigation,฀
OG&E฀cannot฀provide฀a฀range฀of฀reasonably฀possible฀loss฀in฀this฀case.฀
Air฀Quality฀Control฀System฀
On฀September฀10,฀2014,฀OG&E฀executed฀a฀contract฀for฀the฀design,฀
engineering฀and฀fabrication฀of฀two฀circulating฀dry฀scrubber฀systems฀to฀
be฀installed฀at฀Sooner฀Units฀1฀and฀2.฀OG&E฀entered฀into฀an฀agreement฀
on฀February฀9,฀2015,฀to฀install฀the฀dry฀scrubber฀systems.฀The฀dry฀
scrubbers฀are฀part฀of฀OG&E’s฀ECP฀and฀scheduled฀to฀be฀completed฀by฀
2019.฀More฀detail฀regarding฀the฀ECP฀can฀be฀found฀under฀the฀“Pending฀
Regulatory฀Matters”฀in฀Note฀15.
Clean฀Power฀Plan฀
On฀October฀23,฀2015,฀the฀EPA฀published฀the฀final฀Clean฀ ower฀Plan฀
that฀established฀standards฀of฀performance฀for฀CO2฀emissions฀from฀
existing฀fossil-fuel-fired฀p wer฀plants฀along฀with฀state-specific฀C 2฀
reduction฀standards฀expressed฀as฀both฀rate-based฀(lbs/MWh)฀and฀
mass-based฀(tons/yr)฀goals.฀The฀2030฀rate-based฀reduction฀
requirement฀for฀all฀existing฀generating฀units฀in฀Oklahoma฀has฀
decreased฀from฀a฀proposed฀43฀percent฀reduction฀to฀32฀percent฀in฀the฀
final฀ ule.฀The฀mass-based฀approach฀for฀existing฀units฀calls฀for฀a฀
24฀percent฀reduction฀by฀2030฀in฀Oklahoma.฀The฀Clean฀Power฀Plan฀
requires฀that฀states฀submit฀to฀the฀EPA฀plans฀for฀achieving฀the฀
state-specific฀C 2฀reduction฀goals฀by฀September฀6,฀2016฀or฀submit฀an฀
extension฀request฀for฀up฀to฀two฀years.฀The฀compliance฀period฀was฀to฀
begin฀in฀2022,฀and฀emission฀reductions฀were฀to฀be฀phased฀in฀by฀2030.฀
The฀EPA฀also฀proposed฀a฀federal฀compliance฀plan฀to฀implement฀the฀
Clean฀Power฀Plan฀in฀the฀event฀that฀an฀approvable฀state฀plan฀was฀not฀
submitted฀to฀the฀EPA฀by฀the฀required฀deadline.
A฀number฀of฀states฀have฀filed฀l wsuits฀against฀the฀Clean฀Power฀
Plan.฀On฀February฀9,฀2016,฀the฀U.S.฀Supreme฀Court฀issued฀orders฀
staying฀implementation฀of฀the฀Clean฀Power฀Plan฀pending฀resolution฀
of฀challenges฀to฀the฀rule.฀The฀company฀is฀unable฀to฀determine฀what฀
impact฀the฀lawsuits฀will฀ultimately฀have฀on฀the฀Clean฀Power฀Plan฀
or฀what฀impact฀the฀stay฀in฀implementation฀will฀have;฀however฀if฀the฀
Clean฀Power฀Plan฀survives฀judicial฀review฀and฀is฀implemented฀as฀
written,฀it฀could฀result฀in฀significant฀additional฀compliance฀costs฀that
would฀affect฀our฀future฀consolidated฀financial฀position,฀results฀of
operations฀and฀cash฀fl ws฀if฀such฀costs฀are฀not฀recovered฀through฀
regulated฀rates.฀Significant฀unce tainties฀would฀remain฀with฀regards฀
to฀potential฀implementation฀in฀Oklahoma฀(and฀the฀federal฀plan฀that฀
would฀be฀imposed฀by฀the฀EPA฀for฀states฀that฀do฀not฀submit฀approvable฀
plans),฀including฀whether฀states฀would฀elect฀an฀emissions฀standards฀
approach฀versus฀a฀state฀measures฀approach,฀whether฀and฀what฀type฀
of฀emissions฀trading฀would฀be฀allowed,฀and฀available฀cost฀mitigation฀
options.฀Due฀to฀the฀pending฀litigation฀and฀the฀uncertainties฀in฀the฀state฀
approaches,฀the฀ultimate฀timing฀and฀impact฀of฀these฀standards฀on฀our฀
operations฀cannot฀be฀determined฀with฀certainty฀at฀this฀time.