Regulatory Assets and Liabilities

12 Months Ended

Dec. 31, 2017

Regulatory Matters

In January 2017, DP&L filed a settlement in its 2017 ESP case and filed an amended stipulation on March 13, 2017, which was subject to approval by the PUCO. A final decision was issued by the PUCO on October 20, 2017, modifying and adopting the amended stipulation and recommendation. The 2017 ESP establishes DP&L's framework for providing retail service on a going forward basis including rate structures, non-bypassable charges and other specific rate recovery true-up mechanisms. The signatory parties agreed to a six-year settlement that provides a framework for energy rates and defines components which include, but are not limited to, the following:


•	Bypassable standard offer energy rates for DP&L’s customers based on competitive bid auctions;

•

The establishment of a three-year non-bypassable Distribution Modernization Rider (DMR) designed to collect $105.0 million in revenue per year to pay debt obligations at DPL and DP&L and position DP&L to modernize and/or maintain its transmission and distribution infrastructure with an option for DP&L to file for an extension of the rider for an additional two years in an amount subject to approval by the PUCO;


•	The establishment of a non-bypassable Distribution Investment Rider to recover incremental distribution capital investments, the amount of which is to be established in a separate DP&L distribution rate case;


•	A non-bypassable Reconciliation Rider permitting DP&L to defer, recover or credit the net proceeds from selling energy and capacity received as part of DP&L’s investment in OVEC and DP&L's OVEC related costs;


•	Implementation by DP&L of a Smart Grid Rider, Economic Development Rider, Economic Development Fund, Regulatory Compliance Rider and certain other new, or changes to existing, rates, riders and competitive retail market enhancements, with tariffs consistent with the order. These riders became effective November 1, 2017;


•	A commitment to commence a sale process to sell our ownership interests in the Miami Fort, Zimmer and Conesville coal-fired generation plants, with all sales proceeds used to pay debt of DPL and DP&L;


•	Restrictions on DPL making dividend or tax sharing payments and an obligation to convert then existing tax payments owed by DPL to AES into equity investments in DPL. See Note 9 – Income Taxes and Note 11 – Equity for more information on the tax sharing payment restrictions; and


•	Various other riders and competitive retail market enhancements.

In connection with any sale or closure of our generation plants, DPL expects to incur certain cash and non-cash charges, some or all of which could be material to the business and financial condition of DPL.

As part of the normal review and approval process, the PUCO‘s order approving the 2017 ESP settlement is subject to rehearing requests. Several parties, including DP&L, applied for a rehearing. Those rehearing applications are still pending.

DP&L is subject to a SEET threshold and is required to apply general rules for calculating earnings and comparing them to a comparable group to determine whether there were significantly excessive earnings during a given calendar year. The 2017 ESP maintains DP&L’s return on equity SEET threshold at 12% and provides that DMR amounts are excluded from the SEET calculation. A stipulation was reached with the PUCO staff agreeing that DP&L did not exceed the SEET threshold for 2015, which was approved by the PUCO on September 6, 2017. On May 15, 2017, DP&L filed its application to demonstrate that it did not have significantly excessive earnings for calendar year 2016. That case is still pending. In future years, the SEET could have a material effect on results of operations, financial condition and cash flows.

The DOE issued a Notice of Proposed Rule Making on September 29, 2017, which directed the FERC to exercise its authority to set just and reasonable rates that recognize the “resiliency” value provided by generation plants with certain characteristics, including having 90-days or more of on-site fuel and operating in markets where they do not receive rate base treatment through state ratemaking. Nuclear and coal-fired generation plants would have been most likely to be able to meet the requirements. As proposed, the DOE would value resiliency through rates that recover “compensable costs” that were defined to include the recovery of operating and fuel expenses, debt service and a fair return on equity. On January 8, 2018, the FERC issued an order terminating this docket stating that it failed to satisfy the legal requirements of Section 206 of the Federal Power Act of 1935. The FERC initiated a new docket to take additional steps to explore resilience issues in RTOs/ISOs. The goal of this new proceeding is to: (1) develop a common understanding among the FERC, State Commissions, RTOs, transmission owners, and others as to what resilience of the bulk power system means and requires; (2) understand how each RTO and ISO assesses resilience in its geographic footprint; and (3) use this information to evaluate whether additional action regarding resilience is appropriate at this time. We are not able at this time to predict the impact of this proceeding on our business, financial condition or results of operations.

Impact of tax reform

On January 10, 2018 the PUCO initiated a proceeding to consider the impacts of the TCJA to determine the appropriate course of action to pass benefits resulting from the legislation on to ratepayers. The PUCO also directed Ohio utilities to record deferred liabilities for the estimated reduction in federal income tax resulting from the TCJA beginning January 1, 2018. Under the terms of the ESP, DPL will not make tax sharing payments and if DP&L's rates are reduced as a result of the TCJA, our cash flows could be adversely affected. It is too early to determine whether this proceeding may have a material impact on DP&L's business, financial condition or results of operations.

Regulatory assets and liabilities

In accordance with FASC 980, we have recognized total regulatory assets of $187.1 million and $204.0 million at December 31, 2017 and 2016, respectively, and total regulatory liabilities of $236.0 million and $164.1 million at December 31, 2017 and 2016, respectively. Regulatory assets and liabilities are classified as current or non-current based on the term in which recovery is expected. See Note 1 – Overview and Summary of Significant Accounting Policies for accounting policies regarding Regulatory Assets and Liabilities.

The following table presents DPL’s Regulatory assets and liabilities:



	Type of Recovery	Amortization Through	December 31,
$ in millions	Type of Recovery	Amortization Through	2017		2016
Regulatory assets, current:
Undercollections to be collected through rate riders	A/B	2018	$	23.9	$	0.1
Total regulatory assets, current			23.9		0.1

Regulatory assets, non-current:
Pension benefits	B	Ongoing	92.4		97.6
Deferred recoverable income taxes	B/C	Ongoing	—		35.9
Unrecovered OVEC charges	D	Undetermined	27.8		21.0
Fuel costs	B	2020	9.3		15.4
Regulatory compliance costs	B	2020	9.2		12.4
Rate case costs	B	Undetermined	8.1		6.3
Smart grid and AMI costs	B	Undetermined	7.3		7.3
Unamortized loss on reacquired debt	B	Various	7.0		8.0
Deferred storm costs	A	Undetermined	2.1		—
Total regulatory assets, non-current			163.2		203.9

Total regulatory assets			$	187.1	$	204.0

Regulatory liabilities, current:
Overcollection of costs to be refunded through rate riders	A/B	2018	$	14.8	$	33.7
Total regulatory liabilities, current			14.8		33.7
Regulatory liabilities, non-current:
Estimated costs of removal - regulated property		Not Applicable	132.8		126.5
Deferred income taxes payable through rates		Various	83.4		—
Postretirement benefits	B	Ongoing	5.0		3.9
Total regulatory liabilities, non-current			221.2		130.4

Total regulatory liabilities			$	236.0	$	164.1

A – Recovery of incurred costs plus rate of return.

B – Recovery of incurred costs without a rate of return.

C – Balance has an offsetting liability resulting in no effect on rate base.

D – Recovery not yet determined, but recovery is probable of occurring in future rate proceedings.

Current regulatory assets and liabilities primarily represent costs that are being recovered per specific rate order; recovery for the remaining costs is probable, but not certain. DP&L is earning a return on $12.5 million of this deferral. These items include undercollection of: (i) Distribution Modernization Rider revenues, (ii) certain transmission related costs, and (iii) declines in net revenues resulting from implementation of energy efficiency programs. It also includes the current portion of the following deferred costs which are described in greater detail below: unbilled fuel, Regulatory Compliance Rider costs and deferred storm costs. As current liabilities, this includes overcollection of: (i) competitive bidding energy and auction costs, (ii) energy efficiency program costs, (iii) alternative energy rider, (iv) economic development rider and (v) uncollectible rider.

Pension benefits represent the qualifying FASC 715 “Compensation - Retirement Benefits” costs of our regulated operations that for ratemaking purposes are deferred for future recovery. We recognize an asset for a plan’s overfunded status or a liability for a plan’s underfunded status, and recognize, as a component of OCI, the changes in the funded status of the plan that arise during the year that are not recognized as a component of net periodic benefit cost. This regulatory asset represents the regulated portion that would otherwise be charged as a loss to OCI. As per PUCO and FERC precedents, these costs are probable of future rate recovery.

Unrecovered OVEC charges includes the portion of charges from OVEC that were not recoverable through DP&L’s fuel rider from October 2014 through October 2017. DP&L expects to recover these costs through a future rate proceeding. Beginning on November 1, 2017, such costs are being recovered through DP&L’s Reconciliation Rider which was authorized as part of the 2017 ESP.

Fuel costs represent unrecovered fuel costs related to DP&L’s fuel rider from 2010 through 2015 resulting from a declining SSO customer base. DP&L was granted recovery of these costs without a return through the SSO as approved in the 2017 ESP. These costs are being recovered over the three-year period that began November 1, 2017.

Regulatory compliance costs represent the long-term portion of the regulatory compliance rider which was established by the 2017 ESP to recover the following costs: (i) Consumer Education Campaign, (ii) Retail Settlement System, (iii) Generation Separation, (iv) Bill Format Redesign, (v) Green Pricing Tariff and (vi) Supplier Consolidated Billing. All of these costs except for Generation Separation earn a return. The majority of these costs are being recovered over the three-years beginning November 1, 2017. Recovery of a small portion of the Generation Separation costs, including ongoing costs, will be sought in a future proceeding.

Rate case costs represents costs associated with preparing a distribution rate case and ESP. DP&L has requested recovery of these costs which do not earn a return, as part of its pending distribution rate case filing.

Smart Grid and AMI costs represent costs incurred as a result of studying and developing distribution system upgrades and implementation of AMI. On October 19, 2010, DP&L elected to withdraw its case pertaining to the Smart Grid and AMI programs. The PUCO accepted the withdrawal in an order issued on January 5, 2011. The PUCO also indicated that it expects DP&L to continue to monitor other utilities’ Smart Grid and AMI programs and to explore the potential benefits of investing in Smart Grid and AMI programs and that DP&L will, when appropriate, file new Smart Grid and/or AMI business cases in the future. This plan is currently under development and we plan to seek recovery of these deferred costs, which currently do not earn a return, in a regulatory rate proceeding in the near future. Based on PUCO precedent, we believe these costs are probable of future recovery in rates.

Unamortized loss on reacquired debt represents losses on long-term debt reacquired or redeemed in prior periods that have been deferred. These deferred losses are being amortized over the lives of the original issues in accordance with the rules of the FERC and the PUCO.

Deferred storm costs represent the long-term portion of deferred costs for major storms which occurred during 2016 and 2017. The 2017 ESP granted DP&L approval to establish a rider by which to seek recovery of these types of costs with a return. DP&L filed to recover 2016 storm costs on February 2, 2018 and expects to file to recover 2017 costs later in 2018. Recovery of these costs is probable by 2019, but not certain.

Estimated costs of removal - regulated property reflect an estimate of amounts collected in customer rates for costs that are expected to be incurred in the future to remove existing transmission and distribution property from service when the property is retired.

Deferred income taxes payable to customers represent deferred income tax assets recognized from the normalization of flow-through items as the result of taxes previously charged to customers. A deferred income tax asset or liability is created from a difference in income recognition between tax laws and accounting methods. As a regulated utility, DP&L includes in ratemaking the impacts of current income taxes and changes in deferred income tax liabilities or assets. The 2016 regulatory asset of $35.9 million represents the portion of DP&L’s deferred income tax asset that we believed would be recovered through future rates, without interest, based upon established regulatory practices. That 2016 asset was based upon an expected future federal income tax rate of 35%. On December 22, 2017, the TCJA was signed, which includes a provision to, among other things, reduce the federal corporate income tax rate to 21%, beginning January 1, 2018. As required by GAAP, on December 31, 2017, DP&L remeasured their deferred income tax assets and liabilities using the new expected tax rate. DP&L believes that the portion of the reduction in the net deferred tax liability which is related to deferred taxes considered in ratemaking will be used in future ratemaking to reduce jurisdictional retail rates. Accordingly, the related regulatory asset became a $83.4 million regulatory liability.

Postretirement benefits represent the qualifying FASC 715 “Compensation – Retirement Benefits” gains related to our regulated operations that, for ratemaking purposes, are probable of being reflected in future rates. We recognize an asset for a plan’s overfunded status or a liability for a plan’s underfunded status, and recognize, as a component of OCI, the changes in the funded status of the plan that arise during the year that are not recognized as a component of net periodic benefit cost. This regulatory liability represents the regulated portion that would otherwise be reflected as a gain to OCI.

THE DAYTON POWER AND LIGHT COMPANY [Member]

Regulatory Assets [Line Items]

Regulatory Assets and Liabilities