The Post-Recession Environment: A Regulatory Perspective

1. The Post-RecessionEnvironment:A Regulatory Perspective Olan W. “Butch” Reeves, Commissioner SURFA 43rd Financial Forum ● April 14, 2011 ● Washington, D.C.

2. OVERVIEW How Arkansas is addressing three key areas: • Energy Efficiency Initiatives and Renewables • Transmission Issues • Storm Restoration

3. Energy Efficiency Initiatives • Purpose of Rules for Conservation and Energy Efficiency Programs • Benefits and Objectives • LCFC • Incentives • EM&V • Self-Directed Option • Electric Vehicles and Natural Gas Vehicles

4. Energy Efficiency Initiatives Energy Efficiency Goals Default goals for individual utility energy efficiency program portfolio energy savings as a percentage of 2010 energy sales, during the following years: Electric IOUs 0.25% 0.50% 0.75% Natural Gas IOUs 0.20% 0.30% 0.40% (Docket No. 08-137-U, Order No. 15, issued December 10, 2010) 201120122013

5. Smart Grid • While not included in required EE programs, the Commission established a docket to consider Smart Grid, advanced metering infrastructure, and related demand response technologies. (Order No. 1 in Docket No. 10-102-U) • One distribution electric cooperative in Arkansas is in the process of deploying smart meter technology pursuant to a DOE grant. • Oklahoma Gas & Electric Company has requested approval to deploy Smart Grid technology in Arkansas. OG&E also received a DOE grant for deployment in its Oklahoma and Arkansas service territories. (Docket No. 10-109-U) The Company requested: • a rider to recover the associated annual revenue requirement until a subsequent rate case is filed and implemented, and • two regulatory assets for the Smart Grid operation and maintenance costs, and the stranded costs related to the retirement of standard meters. A hearing is scheduled for this summer.

6. Renewables • Legislation passed in 2007 requires electric utilities to consider clean energy and the use of renewable energy resources as part of any resource plan. (§ 23-18-701 et seq.) • If the Commission determines the resource is in the public interest, it may allow the electric utility to implement a temporary surcharge to recovery a portion of the costs of such a resource until implementation of new rates in a general rate case. • Earlier this year, the Commission granted Oklahoma Gas & Electric Company’s request for approval to acquire the OU Spirit Wind Farm and to recover the associated revenue requirement, with the fuel benefits flowing to ratepayers through the fuel adjustment. (Docket No. 10-073-U, Order No. 4)

7. Transmission Issues • SPP RTO • SPP RSC

8. Transmission Issues • Commission established a proceeding to investigate transmission cost recovery for members of the Southwest Power Pool. (Docket No. 09-074-U) • Commission found as a general principle that a transmission rider for the recovery of costs associated with regionally-allocated transmission costs for SPP RTO members was in the public interest as long as such a rider includes mechanisms that fairly balance the interests of Arkansas’ jurisdictional SPP members and their customers.

9. Transmission Issues • While providing timely recovery of costs for SPP members, ratepayers should in return receive the benefits of RTO membership through a transmission rider, energy cost recovery rider, or similar mechanism. • Two company-specific requests for such a rider are pending before the Commission in general rate case proceedings.

10. Storm Restoration • In Arkansas utilities are faced with ice storms, tornadoes, and the effects of hurricanes. • All four investor-owned electric utilities in Arkansas have experienced significant storm costs. • During 2008 and 2009 every investor-owned electric utility sought to defer extraordinary storm restoration expenses. Outages ranged from 40% to over 70% of utility customers. Costs were from three to more than twenty times the normal level of storm expense in base rates.

11. Storm Restoration • In January 2009, a devastating two-day ice storm struck the northern areas of the State. In response to these severe ice storms causing major electric outages and requiring round-the-clock restoration efforts, the Commission issued Order No. 1 in Docket No. 09-012-U which: 1) in order to facilitate and encourage restoration efforts, granted a temporary waiver for all public utilities unable to comply with certain meter reading and customer billing requirements of the Commission’s Rules due to ice storms; and 2) invited and encouraged all public utilities to file within the Docket specific proposals for the recovery of extraordinary storm restoration expenses associated with those recent ice storms.

12. Storm Restoration • Also in 2009, legislation was passed allowing approval by the Commission of reserve accounting for storm restoration costs. • Reserve accounting allows the utility to accumulate any variance in storm restoration costs from the level included in base rates and affords it the opportunity to recover those costs in a future proceeding.  This applies to all storm expenses whether normal, ongoing or extraordinary.  • The statute specifically states that it ”Does not prevent the commission from adjusting an electric utility’s rate of return associated with the increased certainty of recovery of the electric public utility’s storm restoration costs as a result of establishing a storm cost reserve account.”  (Ark. Code Ann. § 23-4-112)  • Reserve accounting approval was requested and granted for Arkansas’ largest electric utility the same year.   

13. Storm Restoration • Legislation also passed in 2009 allowing the securitization of storm costs to enable Arkansas electric utilities, if authorized by the Commission, to use securitization financing for storm recovery costs, which may lower the financing costs or mitigate the impact on rates in comparison with traditional utility financing or other traditional utility recovery methods thereby benefitting customers.  (Ark. Code Ann. § 23-18-901 et seq.) • In 2010, the Commission issued a financing order authorizing a major electric utility to issue $124.1 million in securitization bonds, which were AAA rated as compared to the utility’s corporate credit rating of BBB and were issued at a very favorable coupon rate of 2.3%.

14. Other ROE Adjustments in Conjunction with Approval of Riders The Commission has approved settlements which specifically provided for an ROE adjustment in conjunction with approval of a rider recognizing the resulting higher level of certainty with regard to revenue recovery for the utility. • 10 to 25 basis point reduction in ROE for Billing Determinant Adjustment (BDA) tariffs for each of the gas distribution utilities in 2006 and 2007 rate cases. The BDA permits the utility to recover revenue reduction due to declines in billing determinants between rate cases.

15. Other ROE Adjustments in Conjunction with Approval of Riders • the plant had been certificated by the Commission, • the plant would reduce fuel costs, • the plant would go into service within a few months of the implementation of rates from the rate case, • the rate case reflected updated, extended depreciation lives for the other generating plants, and • ratepayer protections were imposed including an explicit reservation of value until the next rate case and collections subject to refund with interest. 2) 25 basis point reduction within the rider for one generating plant where: