REGULATORY ENVIRONMENT

9 Months Ended

Sep. 30, 2019

2020 and 2021 Rates

March 2019 Rate Application

In March 2019, we filed an application with the PSCW to increase our retail electric, natural gas, and steam rates, effective January 1, 2020. Our application reflected the following proposals:



2020 Effective rate increase
Electric*	$	83	million	/	2.9%
Gas	$	15	million	/	3.9%
Steam	$	1	million	/	4.5%

2021 Effective rate increase
Electric *	$	83	million	/	2.9%

ROE	10.35%

Common equity component average on a financial basis	52.0%


*	Amounts are net of approximately $94 million and $17 million of previously deferred unprotected tax benefits from the Tax Legislation in 2020 and 2021, respectively.

We also proposed to continue having an earnings sharing mechanism through 2021. The earnings sharing mechanism proposed was modified from its current structure to one that is consistent with other Wisconsin investor-owned utilities. Under the proposed earnings sharing mechanism, if we earn above our authorized ROE: (i) we retain 100.0% of earnings for the first 25 basis points above the authorized ROE; (ii) 50.0% of the next 50 basis points is refunded to customers; and (iii) 100.0% of any remaining excess earnings is refunded to customers.

Our proposed increase in electric rates was driven by higher transmission charges, recovery of SSR revenues that were assumed in our 2015 rate order but were not received, and an increase in costs associated with a purchased power agreement previously approved by the PSCW. We also requested approval to continue collecting the carrying value of the Pleasant Prairie power plant and the PIPP using the current approved composite depreciation rates, in addition to a return on the remaining carrying value of the plants.

Our proposed increase in natural gas rates was driven by continued investment in our natural gas distribution system.

August 2019 Settlement Agreement

On August 30, 2019, we filed an application with the PSCW for approval of a settlement agreement entered into with certain intervenors to resolve several outstanding issues in our rate case. The settlement agreement reflects the following:



2020 Effective rate increase
Electric ⁽¹⁾	$	37	million	/	1.3%
Gas ⁽²⁾	$	10	million	/	2.8%
Steam	$	2	million	/	10.0%

ROE	10.0%

Common equity component average on a financial basis	52.5%

⁽¹⁾

Amount is net of previously deferred unprotected tax benefits from the Tax Legislation. The settlement agreement reflects the majority of the unprotected deferred tax benefits from the Tax Legislation being amortized over 2 years. Approximately $65 million of tax benefits would be amortized in each of 2020 and 2021. The unprotected deferred tax benefits related to the unrecovered balances of our recently retired plants and the SSR regulatory asset would be used to reduce the related regulatory asset. The initial application filed in March 2019 proposed that these tax benefits be refunded to customers over a period of 40 years with a significant portion being refunded in the first 2 years.

⁽²⁾

Amount includes previously deferred unprotected tax expense from the Tax Legislation. The settlement agreement reflects all of the unprotected deferred tax expense from the Tax Legislation being amortized evenly over 4 years, which would result in approximately $5 million of previously deferred tax expense being amortized each year. The initial application filed in March 2019 proposed that this tax expense would be collected from customers over a period of 40 years.

The change in the rate increases between the initial application filed in March 2019 and the settlement agreement was driven by various adjustments, including:


•	decreasing our proposed ROE (see table above);


•	increasing the common equity component in our capital structure (see table above);


•	extending amortizations as recommended in the PSCW Staff’s audit;


•	extending the period of recovery for the SSR escrow balance beyond what the PSCW Staff’s audit recommended; and


•	securitizing $100 million of Pleasant Prairie power plant’s book value.

Under the terms of the settlement agreement, we would seek a financing order from the PSCW to securitize $100 million of Pleasant Prairie power plant's book value as of January 1, 2020, plus the carrying costs accrued on the $100 million during the securitization process and related fees. The securitization would reduce the carrying costs for the $100 million, benefiting customers.

The settlement agreement includes the same earnings sharing mechanism that was proposed in the initial application filed in March 2019. The settlement agreement also requires us to maintain residential and small commercial electric and natural gas customer fixed charges at currently authorized rates through 2021 and to support maintaining our electric market-based rates for large industrial customers in their current form.

At its meeting on October 31, 2019, the PSCW approved the settlement agreement without any known material modifications. The terms of the approval are subject to our receipt and review of the final written order from the PSCW, which we expect to receive by the end of 2019. The PSCW is scheduled to address outstanding issues from the initial application that were not included in the settlement agreement in a subsequent meeting. We expect the new rates to be effective January 1, 2020.

2018 and 2019 Rates

During April 2017, we, along with WG and Wisconsin Public Service Corporation, filed an application with the PSCW for approval of a settlement agreement we made with several of our commercial and industrial customers regarding 2018 and 2019 base rates. In September 2017, the PSCW issued an order that approved the settlement agreement, which freezes base rates through 2019 for our electric, natural gas, and steam customers. Based on the PSCW order, our authorized ROE remains at 10.2%, and our current capital cost structure will remain unchanged through 2019.

In addition to freezing base rates, the settlement agreement extends and expands the electric real-time market pricing program options for large commercial and industrial customers and mitigates the continued growth of certain escrowed costs during the base rate freeze period by accelerating the recognition of certain tax benefits. We are flowing through the tax benefit of our repair-related deferred tax liabilities in 2018 and 2019, to maintain certain regulatory asset balances at their December 31, 2017 levels. While we would typically follow the normalization accounting method and utilize the tax benefits of the deferred tax liabilities in rate making as an offset to rate base, benefiting customers over time, the federal tax code does allow for passing these tax repair-related benefits to ratepayers much sooner using the flow through accounting method. The flow through treatment of the repair-related deferred tax liabilities offsets the negative income statement impact of holding the regulatory assets level, resulting in no change to net income.

Pursuant to the settlement agreement, we also agreed to keep our earnings sharing mechanism in place through 2019. Under this earnings sharing mechanism, if we earn above our authorized ROE, 50% of the first 50 basis points of additional utility earnings must be refunded to customers. All utility earnings above the first 50 basis points must also be refunded to customers.

Liquefied Natural Gas Facility

On November 1, 2019, we filed an application with the PSCW requesting approval to construct a LNG facility. If approved, the facility would provide us with 1.0 billion cubic feet of natural gas supply to meet peak demand without requiring the construction of additional interstate pipeline capacity. This facility is expected to reduce the likelihood of constraints on our natural gas system during the highest demand days of winter. The project is estimated to cost approximately $185 million. Commercial operation for the LNG facility is targeted for the end of 2023.

Solar Generation Project

On August 1, 2019, we, along with an unaffiliated utility, filed an application with the PSCW for approval to acquire an ownership interest in a proposed solar project, Badger Hollow II, that will be located in Iowa County, Wisconsin. Subject to PSCW approval, we will own 100 MW of the output of this project. Our share of the cost of this project is estimated to be $130 million. Commercial operation for Badger Hollow II is targeted for the end of 2021.