6. Utility Rate Regulation

(All Registrants)

The following table provides information about the regulatory assets and liabilities of cost-based rate-regulated utility operations.



	PPL				PPL Electric
	March 31, 2017		December 31, 2016		March 31, 2017		December 31, 2016
Current Regulatory Assets:
Environmental cost recovery	$	6	$	6	$	—	$	—
Generation formula rate	11		11		—		—
Transmission service charge	—		7		—		7
Smart meter rider	8		6		8		6
Storm costs	4		5		4		5
Other	7		4		1		1
Total current regulatory assets (a)	$	36	$	39	$	13	$	19

Noncurrent Regulatory Assets:
Defined benefit plans	$	936	$	947	$	543	$	549
Taxes recoverable through future rates	343		340		343		340
Storm costs	44		57		—		9
Unamortized loss on debt	58		61		34		36
Interest rate swaps	126		129		—		—
Accumulated cost of removal of utility plant	160		159		160		159
AROs	228		211		—		—
Other	13		14		—		1
Total noncurrent regulatory assets	$	1,908	$	1,918	$	1,080	$	1,094



Current Regulatory Liabilities:
Generation supply charge	$	19	$	23	$	19	$	23
Transmission service charge	5		—		5		—
Demand side management	2		3		—		—
Universal service rider	14		14		14		14
Transmission formula rate	6		15		6		15
Fuel adjustment clause	13		11		—		—
Act 129 compliance rider	16		17		16		17
Storm damage expense	5		13		5		13
Other	2		5		1		1
Total current regulatory liabilities	$	82	$	101	$	66	$	83



	PPL				PPL Electric
	March 31, 2017		December 31, 2016		March 31, 2017		December 31, 2016
Noncurrent Regulatory Liabilities:
Accumulated cost of removal of utility plant	$	701	$	700	$	—	$	—
Power purchase agreement - OVEC (b)	74		75		—		—
Net deferred tax assets	22		23		—		—
Defined benefit plans	23		23		—		—
Interest rate swaps	76		78		—		—
Other	1		—		—		—
Total noncurrent regulatory liabilities	$	897	$	899	$	—	$	—



	LKE				LG&E				KU
	March 31, 2017		December 31, 2016		March 31, 2017		December 31, 2016		March 31, 2017		December 31, 2016
Current Regulatory Assets:
Environmental cost recovery	$	6	$	6	$	6	$	6	$	—	$	—
Generation formula rate	11		11		—		—		11		11
Other	6		3		6		3		—		—
Total current regulatory assets	$	23	$	20	$	12	$	9	$	11	$	11

Noncurrent Regulatory Assets:
Defined benefit plans	$	393	$	398	$	242	$	246	$	151	$	152
Storm costs	44		48		24		26		20		22
Unamortized loss on debt	24		25		15		16		9		9
Interest rate swaps	126		129		86		88		40		41
AROs	228		211		77		70		151		141
Plant retirement costs	3		4		—		—		3		4
Other	10		9		4		4		6		5
Total noncurrent regulatory assets	$	828	$	824	$	448	$	450	$	380	$	374



Current Regulatory Liabilities:
Demand side management	$	2	$	3	$	1	$	2	$	1	$	1
Fuel adjustment clause	13		11		4		2		9		9
Other	1		4		—		1		1		3
Total current regulatory liabilities	$	16	$	18	$	5	$	5	$	11	$	13

Noncurrent Regulatory Liabilities:
Accumulated cost of removal of utility plant	$	701	$	700	$	308	$	305	$	393	$	395
Power purchase agreement - OVEC (b)	74		75		51		52		23		23
Net deferred tax assets	22		23		22		23		—		—
Defined benefit plans	23		23		—		—		23		23
Interest rate swaps	76		78		38		39		38		39
Other	1		—		—		—		1		—
Total noncurrent regulatory liabilities	$	897	$	899	$	419	$	419	$	478	$	480


(a)	For PPL, these amounts are included in "Other current assets" on the Balance Sheets.


(b)	This liability was recorded as an offset to an intangible asset that was recorded at fair value upon the acquisition of LKE by PPL.

Regulatory Matters

Kentucky Activities

Rate Case Proceedings (PPL, LKE, LG&E and KU)

On November 23, 2016, LG&E and KU filed requests with the KPSC for increases in annual base electricity rates of approximately $103 million at KU and an increase in annual base electricity and gas rates of approximately $94 million and $14 million at LG&E. The proposed base rate increases would result in an electricity rate increase of 6.4% at KU and electricity and gas rate increases of 8.5% and 4.2% at LG&E. LG&E's and KU's applications include requests for CPCNs for implementing an Advanced Metering System program and a Distribution Automation program. The applications are based on a forecasted test year of July 1, 2017 through June 30, 2018 and a requested return on equity of 10.23%.

On April 19, 2017 and May 1, 2017, LG&E and KU, along with all intervening parties to the proceeding, filed with the KPSC, stipulation and recommendation agreements (stipulations) resolving all issues with the parties. Among other things, the proposed stipulations provide for increases in annual revenue requirements associated with KU base electricity rates of $55 million, LG&E base electricity rates of $59 million and LG&E base gas rates of $8 million, reflecting a return on equity of 9.75%, and the withdrawal of LG&E's and KU's request for a CPCN for the Advanced Metering System. The proposed stipulations would result in a base electricity rate increase of 3.4% at KU and base electricity and gas rate increases of 5.4% and 2.3% at LG&E. The proposed stipulations remain subject to KPSC approval. If approved, new rates and all elements of the stipulations would be effective July 1, 2017. A public hearing on the applications is scheduled to commence on May 9, 2017. LG&E and KU cannot predict the outcome of these proceedings.

Gas Franchise (LKE and LG&E)

LG&E’s gas franchise agreement for the Louisville/Jefferson County service area expired in March 2016. In August 2016, LG&E and Louisville/Jefferson County entered into a revised franchise agreement with a 5-year term (with renewal options). The franchise fee may be modified at Louisville/Jefferson County's election upon 60 days' notice. However, any franchise fee is capped at 3% of gross receipts for natural gas service within the franchise area. The agreement further provides that if the KPSC determines that the franchise fee should be recovered from LG&E's customers, the franchise fee shall revert to zero. In August 2016, LG&E filed an application in a KPSC proceeding to review and rule upon the recoverability of the franchise fee.

In August 2016, Louisville/Jefferson County submitted a motion to dismiss the proceeding filed by LG&E, and, in November 2016 filed an amended complaint against LG&E relating to these issues. LG&E submitted KPSC filings to respond to, request dismissal of and consolidate certain claims or aspects of the proceedings. In January 2017, the KPSC issued an order denying Louisville/Jefferson County's motion to dismiss, consolidating the matter with LG&E's filed application and establishing a procedural schedule for the case. Until the KPSC issues a final order in this proceeding, LG&E cannot predict the ultimate outcome of this matter but does not anticipate that it will have a material effect on its financial condition or results of operation. LG&E continues to provide gas service to customers in this franchise area at existing rates, but without collecting or remitting a franchise fee.

Pennsylvania Activities (PPL and PPL Electric)

Act 129

Act 129 requires Pennsylvania Electric Distribution Companies (EDCs) to meet, by specified dates, specified goals for reduction in customer electricity usage and peak demand. EDCs not meeting the requirements of Act 129 are subject to significant penalties. In November 2015, PPL Electric filed with the PUC its Act 129 Phase III Energy Efficiency and Conservation Plan for the period June 1, 2016 through May 31, 2021. In January 2016, PPL Electric and the other parties to the case reached a settlement of all major issues and filed that settlement with the Administrative Law Judge. In June 2016, the PUC issued a final order approving PPL Electric's Phase III Plan as modified by the settlement, allowing PPL Electric to recover, through the Act 129 compliance rider, a maximum $313 million in program cost over the five-year period June 1, 2016 through May 31, 2021.

Act 129 also requires Default Service Providers (DSP) to provide electricity generation supply service to customers pursuant to a PUC-approved default service procurement plan through auctions, requests for proposal and bilateral contracts at the sole discretion of the DSP. Act 129 requires a mix of spot market purchases, short-term contracts and long-term contracts (4 to 20 years), with long-term contracts limited to 25% of load unless otherwise approved by the PUC. A DSP is able to recover the costs associated with its default service procurement plan.

PPL Electric has received PUC approval of its biannual DSP procurement plans for all prior periods required under Act 129. In January 2016, PPL Electric filed a Petition for Approval of a new DSP procurement plan with the PUC for the period June 1, 2017 through May 31, 2021. The parties to the proceeding reached a settlement on all but one issue and a partial settlement agreement and briefs on the open issue were submitted to the Administrative Law Judge (ALJ) in July 2016. In August 2016, the ALJ issued an initial decision, and certain parties filed exceptions and reply exceptions. In October 2016, the PUC issued an order approving the partial settlement agreement and adopting the initial decision with minor modifications.