

Note 13 — Regulation and Rates

At December 31, 2018, Provision for rate refund on Cleco and Cleco Power’s Consolidated Balance Sheets consisted primarily of $31.6 million for the estimated refund for the tax-related benefits from the TCJA, $1.9 million for potential reductions to the transmission ROE, and $1.8 million for the cost of service savings refunds.

Transmission ROE

Two complaints were filed with FERC seeking to reduce the ROE component of the transmission rates that MISO transmission owners, including Cleco, may collect under the MISO tariff. As of December 31, 2018, Cleco Power had $1.9 million accrued for potential reductions to the ROE. For more information on the ROE complaint, see Note 16 — “Litigation, Other Commitments and Contingencies, and Disclosures about Guarantees — Litigation — Transmission ROE.”

FRP

Cleco Power’s annual retail earnings are subject to an FRP that was approved by the LPSC in June 2014. Under the terms of the FRP, Cleco Power is allowed to earn a target ROE of 10.0%, while providing the opportunity to earn up to 10.9%. Additionally, 60% of retail earnings between 10.9% and 11.75%, and all retail earnings over 11.75% are required to be refunded to customers. The amount of credits due to customers, if any, is determined by Cleco Power and the LPSC annually. Credits are typically included on customers’ bills the following summer, but the amount and timing of the refunds are ultimately subject to LPSC approval. Cleco Power will file an application with the LPSC for a new FRP by July 1, 2019, with anticipated new rates being effective July 1, 2020.

Cleco Power must file annual monitoring reports no later than October 31 for the 12-month period ending June 30. On October 31, 2017, Cleco Power filed its monitoring report for the 12-month period ended June 30, 2017, which indicated that no refund was due as a result of the FRP, and $1.2 million was due as a result of the cost of service savings from the 2016 Merger Commitments. Cleco Power expects the LPSC to approve the 2017 FRP monitoring report in the first half of 2019. The $1.2 million cost of service savings from the 2016 Merger Commitments were refunded in September 2018.

On October 31, 2018, Cleco Power filed its monitoring report for the 12-month period ended June 30, 2018, which indicated that no refund was due as a result of the FRP and $1.2 million of cost of service savings refunds are due to be returned to eligible customers. On December 21, 2018, Cleco Power responded to the first set of data requests for the 2018 monitoring report. At December 31, 2018, Cleco Power had $1.8 million accrued for the cost of service savings refund.

TCJA

On February 21, 2018, the LPSC directed utilities, including Cleco Power, to provide considerations of the appropriate manner to flowthrough to ratepayers the benefits of the reduction in corporate income taxes as a result of the TCJA. As a result of the tax rate reduction, Cleco Power began accruing an estimated reserve on January 1, 2018. At December 31, 2018, Cleco Power had $31.6 million accrued for the estimated tax-related benefits from the TCJA.

On October 26, 2018, the LPSC Staff approved a final rule that would require utilities to adjust formula rates the earlier of January 31, 2019, or the next date required for implementation of compliance rate changes under the normal operation of the FRP. Cleco Power filed its report with the LPSC on December 3, 2018, describing its methodology for TCJA refunds and related items, including the allocation of such refunds among jurisdictional customers. On January 31, 2019, Cleco Power filed an application with the LPSC requesting the implementation of rate reductions and modifications of certain tariffs resulting from TCJA to be effective July 1, 2019. Cleco Power also requested to reduce the annual FRP rate, effective July 1, 2019, by the amount accrued for the change in tax rates at June 30, 2019. Cleco Power recommended a rate redesign, allowing the change in the statutory corporate tax rate to be applied only to residential customers in order to reduce customer bills. Cleco Power also requested to address the regulatory liability for excess ADIT resulting from the enactment of the TCJA in Cleco Power’s application for its next FRP, which will be filed by July 1, 2019, with anticipated new rates being effective July 1, 2020. All items requested in the January 31, 2019, application are subject to LPSC review and approval.

2016 Merger Commitments

On March 28, 2016, the LPSC approved the 2016 Merger. The LPSC’s written order approving the 2016 Merger was issued on April 7, 2016. Approval of the 2016 Merger was conditioned upon certain commitments, including $136.0 million of customer rate credits. On April 28, 2016, the LPSC voted to issue credits equally to eligible customers with service as of June 30, 2016, beginning in July 2016. As of December 31, 2018, Cleco Power had issued $135.1 million of customer rate credits. Also included in the 2016 Merger Commitments were $2.5 million of contributions for economic development for Louisiana state and local organizations to be disbursed over five years, an additional $7.0 million one-time contribution in 2016 for economic development in Cleco Power’s service territory to be administered by the LED, and $6.0 million of charitable contributions to be disbursed over five years.

In addition, the 2016 Merger Commitments included $1.2 million of annual estimated cost of service savings expected as a result of the 2016 Merger. The cost of service savings are not subject to the target ROE or any sharing mechanism in the current FRP and will continue until Cleco Power’s anticipated new rates begin on July 1, 2020. The cost of service savings are included in the annual monitoring reports and are refunded to customers annually. A report on the status of the 2016 Merger Commitments must be filed annually by October 31 for the 12-month period ended June 30. On October 31, 2018, Cleco Power filed the annual 2016 Merger Commitment status report for the period ended June 30, 2018. For more information on the cost of service savings, see “— FRP.”

SSR

In September 2016, Cleco Power filed an Attachment Y with MISO requesting retirement of Teche Unit 3 effective April 1, 2017. MISO conducted a study which determined the proposed retirement of Teche Unit 3 would result in violations of specific applicable reliability standards for which no mitigation is available. As a result, MISO designated Teche Unit 3 as an SSR unit until such time that an appropriate alternative solution can be implemented to mitigate reliability issues. One mitigating factor that has been identified is Cleco Power’s Terrebonne to Bayou Vista Transmission project. The Terrebonne to Bayou Vista project is expected to be completed in the second quarter of 2019. Cleco Power has operated Teche Unit 3 as an SSR unit since April 2017. The first SSR agreement was for the period April 2017 to March 2018, and the second SSR agreement is for the period April 2018 until March 2019; and in January 2019, MISO approved the SSR designation for the third SSR period April 2019, until the sooner of the in-service date of the Terrebonne to Bayou Vista Transmission project or July 2019.

In the second quarter of 2017, Cleco Power began receiving the monthly SSR payments from MISO, subject to refund, and MISO began allocating SSR costs to the load serving entities that require the operation of the SSR unit for reliability purposes, including Cleco Power. The SSR payments include recovering operations and maintenance expenses, administrative and general expenses, taxes, depreciation, capital expenditures, and carrying charges, all of which are related to Teche Unit 3 for the period of the SSR agreements. If Teche Unit 3 is not retired, at the end of the final SSR Cleco Power must refund any SSR payments received from MISO for capital expenditures paid by third parties.

Cleco Power filed with FERC for its approval to collect $20.3 million and $11.8 million annually in SSR payments from MISO for the first and second SSR agreements, respectively. On December 31, 2018, FERC issued an Order certifying the settlement of Cleco Power’s first two SSR agreements. The MISO settlement included a reduction to the expenses and capital Cleco Power was allowed to recover. For the year ended December 31, 2018, Cleco Power recorded a $1.6 million decrease in Other operations revenue for expected refunds to MISO for a reduction in SSR payments related to the operating costs and a $0.9 million decrease in Power purchased for utility customers for Cleco Power’s portion of allocated SSR operating costs.

At the end of the third SSR agreement, Cleco Power expects Teche Unit 3 to be available to run until the estimated 2021 in-service date of Bayou Vista to Segura Transmission project; at which time, Cleco Power does not expect to offer the unit into MISO, barring any grid or customer reliability issues or other similar reasons. At December 31, 2018, Cleco Power had $5.9 million accrued for the net capital refund. As part of the settlement, one of the load serving entities agreed to reimburse Cleco Power for their portion of the capital refund.