Vectren 2012 Annual Report Download - page 44

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expanded compliance requirements may grow by approximately $9 million annually, with $6 million attributable to the Indiana
operations. Related to the Indiana operations, the Company expects to seek recovery under Senate Bill 251, or such costs may
be recoverable through current tracking mechanisms. Capital investments, associated with the Pipeline Safety Law, are
expected to be significant. The Company expects to seek recovery of capital investments associated with complying with these
federal mandates in accordance with Senate Bill 251 in Indiana and House Bill 95 or other currently authorized recovery
mechanisms, such as the Distribution Replacement Rider, in Ohio.
Vectren South Electric Base Rate Filing
On December 11, 2009, Vectren South filed a request with the IURC to adjust its base electric rates. The requested increase in
base rates addressed capital investments, a modified electric rate design that would facilitate a partnership between Vectren
South and customers to pursue energy efficiency and conservation, and new energy efficiency programs to complement those
currently offered for natural gas customers. The IURC issued an order in the case on April 27, 2011. The order provided for a
revenue increase to recover costs associated with approximately $325 million in system upgrades that were completed in the
three years leading up to the December 2009 filing and modest increases in maintenance and operating expenses. The
approved revenue increase is based on rate base of $1,295.6 million, return on equity of 10.4 percent, and an overall rate of
return of 7.29 percent. The new rates were effective May 3, 2011. The IURC, in its order, provided for deferred accounting
treatment related to the Company's estimated $32 million investment in dense pack technology, of which approximately $25.5
million has been invested as of December 31, 2012. In addition, the IURC denied the Company’s request for implementation of
the decoupled rate design, which is discussed further below. Addressing issues raised in the case concerning coal supply
contracts and related costs, the IURC found that current coal contracts remain effective and that a prospective review process of
future procurement decisions would be initiated.
Coal Procurement Procedures
Vectren South submitted a request for proposal (RFP) in April 2011 regarding coal purchases for a four year period beginning in
2012. After negotiations with bidders, Vectren South reached an agreement in principle for multi-year purchases with two
suppliers, one of which is Vectren Fuels, Inc. Consistent with the IURC direction in the electric rate case, a sub docket
proceeding was established to review the Company’s prospective coal procurement procedures, and the Company submitted
evidence related to its 2011 RFP. In March 2012, the IURC issued its order in the sub docket which concluded that Vectren
South’s 2011 RFP process resulted in the lowest fuel cost reasonably possible. In late 2012, Vectren South terminated its
contract with one of the suppliers due to coal quality issues that were identified during test burns of the coal. In addition to coal
purchased under these contracts, Vectren South has also contracted with Vectren Fuels, Inc. to purchase lower priced spot coal.
This spot purchase was found to be reasonable in a recent FAC order. The IURC will continue to regularly monitor Vectren
South’s procurement process in future fuel adjustment proceedings.
Delivery to Vectren's power plants of lower-priced contract coal from the April 2011 RFP process began during 2012. On
December 5, 2011 within the quarterly FAC filing, Vectren South submitted a joint proposal with the OUCC to reduce its fuel
costs billed to customers by accelerating into 2012 the impact of lower cost coal under these new term contracts effective after
2012. The cost difference will be deferred to a regulatory asset and recovered over a six-year period without interest beginning
in 2014. The IURC approved this proposal on January 25, 2012, with the reduction to customer’s rates effective February 1,
2012. The deferred amount includes a reduction in the value of the coal inventory at December 31, 2011 of approximately $17.7
million to reflect existing coal inventory at the new, lower price. Deferrals related to coal purchases in 2012 have totaled
approximately $24.7 million, bringing the total deferred balance as of December 31, 2012, to the expected level of $42.4 million.
Vectren South Electric Demand Side Management Program Filing
On August 16, 2010, Vectren South filed a petition with the IURC, seeking approval of its proposed electric Demand Side
Management (DSM) Programs, recovery of the costs associated with these programs, recovery of lost margins as a result of
implementing these programs for large customers, and recovery of performance incentives linked with specific measurement
criteria on all programs. The DSM Programs proposed were consistent with a December 9, 2009 order issued by the IURC,
which, among other actions, defined long-term conservation objectives and goals of DSM programs for all Indiana electric
utilities under a consistent statewide approach. In order to meet these objectives, the IURC order divided the DSM programs
into Core and Core Plus programs. Core programs are joint programs required to be offered by all Indiana electric utilities to all
customers, and include some for large industrial customers. Core Plus programs are those programs not required specifically
by the IURC, but defined by each utility to meet the overall energy savings targets defined by the IURC.