Utility Rate Regulation

6 Months Ended

Jun. 30, 2021

7. 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
	June 30, 2021		December 31, 2020		June 30, 2021		December 31, 2020
Current Regulatory Assets:


Plant outage costs	$	—	$	46	$	—	$	—
Gas supply clause	11		4		—		—
Smart meter rider	20		17		20		17


Transmission formula rate	21		15		21		15
Gas line tracker	7		4		—		—
Storm costs	4		7		4		7

Generation formula rate	3		2		—		—
Other	3		4		—		1
Total current regulatory assets	$	69	$	99	$	45	$	40

Noncurrent Regulatory Assets:
Defined benefit plans	$	550	$	570	$	283	$	290

Storm costs	12		17		—		—
Unamortized loss on debt	26		30		5		8
Interest rate swaps	20		23		—		—
Terminated interest rate swaps	73		75		—		—
Accumulated cost of removal of utility plant	234		240		234		240
AROs	307		300		—		—

Plant outage costs	57		—		—		—
Other	2		7		—		3
Total noncurrent regulatory assets	$	1,281	$	1,262	$	522	$	541


	PPL				PPL Electric
	June 30, 2021		December 31, 2020		June 30, 2021		December 31, 2020
Current Regulatory Liabilities:
Generation supply charge	$	17	$	21	$	17	$	21
Transmission service charge	27		1		27		1

Environmental cost recovery	4		4		—		—
Universal service rider	15		22		15		22

Fuel adjustment clause	5		5		—		—
TCJA customer refund	17		11		17		11
Storm damage expense rider	6		6		6		6
Act 129 compliance rider	5		7		5		7
Economic relief billing credit (b)	50		—		—		—
Challenge to transmission formula rate return on equity reserve (a)	51		—		51		—
Other	1		2		—		—
Total current regulatory liabilities	$	198	$	79	$	138	$	68



Noncurrent Regulatory Liabilities:
Accumulated cost of removal of utility plant	$	671	$	653	$	—	$	—
Power purchase agreement - OVEC	39		43		—		—
Net deferred taxes	1,624		1,690		545		560
Defined benefit plans	68		60		23		18
Terminated interest rate swaps	64		66		—		—
Other	2		18		—		—
Total noncurrent regulatory liabilities	$	2,468	$	2,530	$	568	$	578


	LG&E				KU
	June 30, 2021		December 31, 2020		June 30, 2021		December 31, 2020
Current Regulatory Assets:

Gas supply clause	$	11	$	4	$	—	$	—
Gas line tracker	7		4		—		—
Plant outage costs	—		12		—		34
Generation formula rate	—		—		3		2



Other	3		3		—		—
Total current regulatory assets	$	21	$	23	$	3	$	36

Noncurrent Regulatory Assets:
Defined benefit plans	$	167	$	174	$	100	$	106
Storm costs	8		11		4		6
Unamortized loss on debt	13		13		8		9
Interest rate swaps	20		23		—		—
Terminated interest rate swaps	43		44		30		31
AROs	86		85		221		215
Plant outage costs	16		—		41		—
Other	1		1		1		3
Total noncurrent regulatory assets	$	354	$	351	$	405	$	370


	LG&E				KU
	June 30, 2021		December 31, 2020		June 30, 2021		December 31, 2020
Current Regulatory Liabilities:
Environmental cost recovery	$	1	$	—	$	3	$	4


Fuel adjustment clause	1		—		4		5





Economic relief billing credit (b)	39		—		11		—
Other	—		—		1		2
Total current regulatory liabilities	$	41	$	—	$	19	$	11

Noncurrent Regulatory Liabilities:
Accumulated cost of removal of utility plant	$	282	$	274	$	389	$	379

Power purchase agreement - OVEC	27		30		12		13
Net deferred taxes	498		528		581		602
Defined benefit plans	1		—		45		42

Terminated interest rate swaps	32		33		32		33
Other	—		17		1		1
Total noncurrent regulatory liabilities	$	840	$	882	$	1,060	$	1,070

(a)See “Regulatory Matters - Federal Matters - Challenge to PPL Electric Transmission Formula Rate Return on Equity” below for further information.

(b)Represents regulatory liabilities to be returned to customers through June 30, 2022, as agreed to in the Kentucky rate case, in recognition of the economic impact of COVID-19. See "Rate Case Proceedings" below for additional information.

Regulatory Matters

Kentucky Activities (PPL, LG&E and KU)

Rate Case Proceedings

On November 25, 2020, LG&E and KU filed requests with the KPSC for an increase in annual electricity and gas revenues of approximately $331 million ($131 million and $170 million in electricity revenues at LG&E and KU and $30 million in gas revenues at LG&E). The revenue increases would be an increase of 11.6% and 10.4% in electricity revenues at LG&E and KU, and an increase of 8.3% in gas revenues at LG&E. In recognition of the economic impact of COVID-19, LG&E and KU requested approval of a one-year billing credit which will credit customers approximately $53 million ($41 million at LG&E and $12 million at KU). The billing credit represents the return to customers of certain regulatory liabilities on LG&E’s and KU’s Balance Sheets and serves to partially mitigate the rate increases during the first year in which the new rates are in effect.

LG&E’s and KU’s applications also included a request for a CPCN to deploy Advanced Metering Infrastructure across LG&E’s and KU’s service territories in Kentucky.

The applications were based on a forecasted test year of July 1, 2021 through June 30, 2022 and requested an authorized return on equity of 10.0%.

On April 19, 2021, LG&E and KU entered into an agreement with all intervening parties to the proceedings resolving all matters in their applications, with the explicit exception of LG&E's and KU's net metering proposals. The agreement proposed increases in annual revenues of $217 million ($77 million and $116 million in electricity revenues at LG&E and KU and $24 million in gas revenues at LG&E) based on an authorized return on equity of 9.55%. The proposal included an authorized 9.35% return on equity for the ECR and GLT mechanisms. The agreement did not modify the requested one-year billing credit. The agreement proposed that the KPSC should grant LG&E’s and KU’s request for a CPCN to deploy Advanced Metering Infrastructure and proposed the establishment of a Retired Asset Recovery rider (RAR) to provide for recovery of and return on the remaining investment in certain electric generating units upon their retirement over a ten-year period following retirement. In respect of the RAR rider, the agreement proposed that LG&E and KU will continue to use currently approved depreciation rates for Mill Creek Units 1 and 2 and Brown Unit 3. The agreement also proposed a four-year "stay-out" commitment from LG&E and KU to refrain from effective base rate increases before July 1, 2025, subject to certain exceptions.

On June 30, 2021, the KPSC issued orders approving the proposed agreement filed in April 2021, with certain modifications. The orders provide for increases in annual revenues of $199 million ($73 million and $106 million in electricity revenues at LG&E and KU and $20 million in gas revenues at LG&E) based on an authorized return on equity of 9.425%. The order grants the requested authorized 9.35% return on equity for the ECR and GLT mechanisms and does not modify the requested one-year billing credit. The orders approve the CPCN to deploy Advanced Metering Infrastructure and provide regulatory asset treatment for the remaining net book value of legacy meters upon full implementation of the Advanced Metering Infrastructure program. The orders also approve the establishment of the RAR rider and accepted the four-year "stay-out". The orders, however, disallowed certain legal costs that were included in the settlement. An order on the remaining net metering issues is expected by the end of September 2021. On July 23, 2021, LG&E and KU filed motions for partial rehearing and clarification of the return on equity, the disallowed legal costs and certain other matters related to the KPSC's orders. PPL, LG&E and KU cannot predict the outcome of the motions for partial rehearing and clarification or the remaining net metering issues.

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. PPL Electric filed with the PUC its Act 129 Phase IV Energy Efficiency and Conservation Plan (Phase IV Act 129 Plan) on November 30, 2020, for the five-year period starting June 1, 2021 and ending on May 31, 2026. PPL Electric's Phase IV Act 129 Plan was approved by the PUC at its March 25, 2021, public meeting.

Federal Matters

Challenge to PPL Electric Transmission Formula Rate Return on Equity (PPL and PPL Electric)

On May 21, 2020, PP&L Industrial Customer Alliance (PPLICA) filed a complaint with the FERC alleging that PPL Electric's base return on equity (ROE) of 11.18% used to determine PPL Electric's formula transmission rate is unjust and unreasonable, and proposing an alternative ROE of 8.0% based on its interpretation of FERC Opinion No. 569. However, also on May 21, 2020, the FERC issued Opinion No. 569-A in response to numerous requests for rehearing of Opinion No. 569, which revised the method for analyzing base ROE. On June 10, 2020, PPLICA filed a Motion to Supplement the May 21, 2020 complaint in which PPLICA continued to allege that PPL Electric’s base ROE is unjust and unreasonable, but revised its analysis of PPL Electric's base ROE to reflect the guidance provided in Opinion No. 569-A. The amended complaint proposed an updated alternative ROE of 8.5% and also requested that the FERC preserve the original refund effective date as established by the filing of the original complaint on May 21, 2020. Several parties filed motions to intervene, including one party who filed Comments in Support of the original complaint.

On July 10, 2020, PPL Electric filed its Answer and supporting Testimony to the PPLICA filings arguing that the FERC should deny the original and amended complaints as they are without merit and fail to demonstrate the existing base ROE is unjust and unreasonable. In addition, PPL Electric contended any refund effective date should be set for no earlier than June 10, 2020 and PPLICA's proposed replacement ROE should be rejected.

On October 15, 2020, the FERC issued an order on the PPLICA complaints which established hearing and settlement procedures, set a refund effective date of May 21, 2020 and granted the motions to intervene. On November 16, 2020, PPL Electric filed a request for rehearing of the portion of the October 15, 2020 Order that set the May 21, 2020 refund effective date. On December 17, 2020, the FERC issued a Notice of Denial of Rehearing by Operation of Law and Providing for Further Consideration. On February 16 and April 19, 2021, PPL Electric filed Petitions for Review with the United States Court of Appeals for the District of Columbia Circuit of the portion of the October 15, 2020 Order that set the May 21, 2020 refund effective date.

In the three and six months ended June 30, 2021, PPL Electric recorded a revenue reserve of $17 million and $36 million after-tax representing revenue subject to refund for the period May 21, 2020 through June 30, 2021. Of these amounts, $7 million for the three months ended June 30, 2021 and $20 million for the six months ended June 30, 2021, relates to the period from May 21, 2020 to December 31, 2020.

FERC Transmission Rate Filing (PPL, LG&E and KU)

In 2018, LG&E and KU applied to the FERC requesting elimination of certain on-going credits to a sub-set of transmission customers relating to the 1998 merger of LG&E's and KU's parent entities and the 2006 withdrawal of LG&E and KU from the Midcontinent Independent System Operator, Inc. (MISO), a regional transmission operator and energy market. The application sought termination of LG&E's and KU's commitment to provide certain Kentucky municipalities mitigation for certain horizontal market power concerns arising out of the 1998 LG&E and KU merger and 2006 MISO withdrawal. The amounts at issue are generally waivers or credits granted to a limited number of Kentucky municipalities for either certain LG&E and KU or MISO transmission charges incurred for transmission service received. Due to the development of robust, accessible energy markets over time, LG&E and KU believe the mitigation commitments are no longer relevant or appropriate. In March 2019, the FERC granted LG&E's and KU's request to remove the ongoing credits, conditioned upon the implementation by LG&E and KU of a transition mechanism for certain existing power supply arrangements, subject to FERC review and approval. In July 2019, LG&E and KU proposed their transition mechanism to the FERC and in September 2019, the FERC rejected the proposed transition mechanism. In September 2020, the FERC issued orders in the rehearing process that modified various aspects of the September 2019 orders which had approved future termination of the credits, including adjusting which customer arrangements are covered by the transition mechanism and respective future periods or dates for termination of credits. In November 2020, the FERC denied the parties' rehearing requests. In November 2020 and January 2021, LG&E and KU and other parties appealed the September 2020 and November 2020 orders at the D.C. Circuit Court of Appeals. The appellate proceedings are continuing, and also include certain additional prior pending petitions for review relating to the matter. On January 15, 2021, LG&E and KU made a filing seeking FERC acceptance of a new proposal for a transition mechanism. On March 16, 2021, the FERC accepted the filed transition mechanism agreements effective on March 17, 2021 but subject to refund, and established hearing and settlement procedures. LG&E and KU cannot predict the outcome of the respective appellate and FERC proceedings. LG&E and KU currently receive recovery of the waivers and credits provided through other rate mechanisms and such rate recovery would be anticipated to be adjusted consistent with potential changes or terminations of the waivers and credits, as such become effective.

Other

Purchase of Receivables Program (PPL and PPL Electric)

In accordance with a PUC-approved purchase of accounts receivable program, PPL Electric purchases certain accounts receivable from alternative electricity suppliers at a discount, which reflects a provision for uncollectible accounts. The alternative electricity suppliers have no continuing involvement or interest in the purchased accounts receivable. Accounts receivable that are acquired are initially recorded at fair value on the date of acquisition. During the three and six months ended June 30, 2021, PPL Electric purchased $250 million and $574 million of accounts receivable from alternative suppliers. During the three and six months ended June 30, 2020, PPL Electric purchased $240 million and $551 million of accounts receivable from alternative suppliers.