Vectren 2012 Annual Report Download - page 38

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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 for its residential
customers. This rate design, which was fully implemented in February 2010, mitigates approximately 90 percent 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 decoupling 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 transmission investments outside
of base rates. The electric service territory has neither an NTA nor a decoupling mechanism; however, rate designs provide for
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 actual experience, subject to caps that are 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. Since April 2010, the Company has not been the supplier of natural
gas in its Ohio territory.
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. The FAC
earnings test had some impact on the Company’s 2012 operating results, as discussed below.
In Indiana, gas pipeline integrity management operating 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 regional electric transmission
assets not in base rates are also recovered by mechanisms outside of standard base rate recovery. In Ohio, expenses such as
uncollectible accounts expense, costs associated with exiting the merchant function, and costs associated with a distribution
riser 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.
In 2011, state 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
mechanisms will likely increase in the coming years.
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.
Utility Group Margin
Throughout this discussion, the terms Gas Utility margin and Electric Utility margin are used. Gas Utility margin is calculated as
Gas utility revenues less the Cost of gas sold. Electric Utility margin is calculated as Electric utility revenues less Cost of fuel &
purchased power. The Company believes Gas Utility and Electric Utility margins are better indicators of relative earnings
contribution than revenues since gas prices and fuel and purchased power costs can be volatile and are generally collected on a
dollar-for-dollar basis from customers. Following is a discussion and analysis of margin generated from regulated utility
operations.