Vectren 2010 Annual Report Download - page 36

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34
Rate Design Strategies
Sales of natural gas and electricity to residential and commercial customers are seasonal and are impacted by weather. Trends
in average use among natural gas residential and commercial customers have tended to decline as more efficient appliances
and furnaces are installed, the Company’s utilities have implemented conservation programs, and the price of natural gas has
been volatile. In the Company’s two Indiana natural gas service territories, normal temperature adjustment (NTA) and lost
margin recovery mechanisms largely mitigate the effect that would otherwise be caused by variations in volumes sold to these
customers due to weather and changing consumption patterns. The Ohio natural gas service territory has a straight fixed
variable rate design. This rate design, which was fully implemented in February 2010, mitigates most of the Ohio service
territory’s weather risk and risk of decreasing consumption. Prior to the implementation of this rate design, the Ohio service
territory had a lost margin recovery mechanism. In all natural gas service territories, commissions have authorized bare steel
and cast iron replacement programs. SIGECO’s electric service territory currently recovers certain environmental investments
and other transmission investments outside of base rates. The electric service territory has neither an NTA nor a decoupling
mechanism; however, rate designs proposed in the current rate proceeding before the IURC and other related filings would limit
weather risk and provide for a decoupling and/or a lost margin recovery mechanism that works in tandem with conservation
initiatives.
Tracked Operating Expenses
Gas costs and fuel costs incurred to serve Indiana customers are two of the Company’s most significant operating expenses.
Rates charged to natural gas customers in Indiana contain a gas cost adjustment (GCA) clause. The GCA clause allows the
Company to timely charge for changes in the cost of purchased gas, inclusive of unaccounted for gas expense based on
historical experience. Electric rates contain a fuel adjustment clause (FAC) that allows for timely adjustment in charges for
electric energy to reflect changes in the cost of fuel. The net energy cost of purchased power, subject to an approved variable
benchmark based on NYMEX natural gas prices, is also timely recovered through the FAC.
GCA and FAC procedures involve periodic filings and IURC hearings to establish the amount of price adjustments for a
designated future period. The procedures also provide for inclusion in later periods of any variances between actual recoveries
representing the estimated costs and actual costs incurred.
The IURC has also applied the statute authorizing GCA and FAC procedures to reduce rates when necessary to limit net
operating income to a level authorized in its last general rate order through the application of an earnings test. These earnings
tests have not had any material impact to the Company’s recent operating results and are not expected to have any material
impact in the foreseeable future.
Prior to October 1, 2008, gas costs were recovered in Ohio through a gas cost recovery (GCR) mechanism. The GCR operated
similar to the GCA clause in Indiana; however, the GCR was subject to a periodic audit rather than a quarterly hearing process.
The PUCO has completed all audits of periods prior to October 2008, and no issues or findings are outstanding. After October
1, 2008, the Company is no longer the supplier of natural gas to customers, and therefore no longer recovers natural gas costs
via the GCR.
In Indiana, gas pipeline integrity management costs, costs to fund energy efficiency programs, MISO costs, and the gas cost
component of uncollectible accounts expense based on historical experience are recovered by mechanisms outside of standard
base rate recovery. Certain operating costs, including depreciation, associated with operating environmental compliance
equipment at electric generation facilities and regional electric transmission investments are also recovered outside of base
rates. In Ohio expenses such as uncollectible accounts expense, costs associated with exiting the merchant function, and costs
associated with a distribution replacement program are subject to recovery outside of base rates. Revenues and margins are
also impacted by the collection of state mandated taxes, which primarily fluctuate with gas and fuel costs.
See the Rate and Regulatory Matters section of this discussion and analysis for more specific information on significant
proceedings involving the Company’s utilities over the last three years.