Utility Rate Regulation

9 Months Ended

Sep. 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
	September 30, 2021		December 31, 2020		September 30, 2021		December 31, 2020
Current Regulatory Assets:


Plant outage costs	$	—	$	46	$	—	$	—
Gas supply clause	12		4		—		—
Smart meter rider	15		17		15		17

Storm damage expense rider	4		—		4		—
Transmission formula rate	11		15		11		15
Gas line tracker	7		4		—		—
Storm costs	2		7		2		7

Generation formula rate	3		2		—		—
Other	6		4		—		1
Total current regulatory assets	$	60	$	99	$	32	$	40

Noncurrent Regulatory Assets:
Defined benefit plans	$	555	$	570	$	274	$	290

Storm costs	12		17		—		—
Unamortized loss on debt	25		30		4		8
Interest rate swaps	19		23		—		—
Terminated interest rate swaps	71		75		—		—
Accumulated cost of removal of utility plant	232		240		232		240
AROs	312		300		—		—

Plant outage costs	55		—		—		—
Other	5		7		—		3
Total noncurrent regulatory assets	$	1,286	$	1,262	$	510	$	541


	PPL				PPL Electric
	September 30, 2021		December 31, 2020		September 30, 2021		December 31, 2020
Current Regulatory Liabilities:
Generation supply charge	$	11	$	21	$	11	$	21
Transmission service charge	26		1		26		1

Environmental cost recovery	—		4		—		—
Universal service rider	16		22		16		22

Fuel adjustment clause	—		5		—		—
TCJA customer refund	22		11		22		11
Storm damage expense rider	—		6		—		6
Act 129 compliance rider	7		7		7		7
Transmission formula rate return on equity reserve (a)	64		—		64		—
Economic relief billing credit (b)	38		—		—		—
Other	3		2		—		—
Total current regulatory liabilities	$	187	$	79	$	146	$	68



Noncurrent Regulatory Liabilities:
Accumulated cost of removal of utility plant	$	669	$	653	$	—	$	—
Power purchase agreement - OVEC	36		43		—		—
Net deferred taxes	1,609		1,690		539		560
Defined benefit plans	74		60		26		18
Terminated interest rate swaps	64		66		—		—
Other	—		18		—		—
Total noncurrent regulatory liabilities	$	2,452	$	2,530	$	565	$	578


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

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



Other	5		3		1		—
Total current regulatory assets	$	24	$	23	$	4	$	36

Noncurrent Regulatory Assets:
Defined benefit plans	$	175	$	174	$	106	$	106
Storm costs	8		11		4		6
Unamortized loss on debt	13		13		8		9
Interest rate swaps	19		23		—		—
Terminated interest rate swaps	42		44		29		31
AROs	87		85		225		215
Plant outage costs	15		—		40		—
Other	3		1		2		3
Total noncurrent regulatory assets	$	362	$	351	$	414	$	370


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


Fuel adjustment clause	—		—		—		5





Economic relief billing credit (b)	29		—		9		—
Other	1		—		2		2
Total current regulatory liabilities	$	30	$	—	$	11	$	11

Noncurrent Regulatory Liabilities:
Accumulated cost of removal of utility plant	$	277	$	274	$	392	$	379

Power purchase agreement - OVEC	25		30		11		13
Net deferred taxes	495		528		575		602
Defined benefit plans	1		—		47		42

Terminated interest rate swaps	32		33		32		33
Other	—		17		—		1
Total noncurrent regulatory liabilities	$	830	$	882	$	1,057	$	1,070

(a)See “Regulatory Matters - Federal Matters - PPL Electric Transmission Formula Rate Return on Equity” below for additional 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 "Regulatory Matters – Kentucky Activities – 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. 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. On August 12, 2021, the KPSC granted rehearing and clarification of the disallowed legal costs and certain other matters and denied rehearing and clarification of the return on equity. On September 24, 2021, the KPSC issued orders providing adjustments to previous net metering proposals. These adjustments did not impact the previously ordered annual revenue increases. PPL, LG&E and KU cannot predict the outcome of the remaining issues subject to partial rehearing and clarification.

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

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 was unjust and unreasonable.

On August 20, 2021, PPL Electric entered into a settlement agreement (the "Settlement") with PPLICA and all other parties, including intervenors, with respect to the complaint filed by PPLICA on May 21, 2020.

The key aspects of the Settlement include:

•changes to PPL Electric’s base ROE:

◦beginning as of May 21, 2020 and continuing through May 31, 2022, the ROE shall be 9.90%;

◦beginning on June 1, 2022 and continuing through May 31, 2023, the ROE shall be 9.95%;

◦beginning on June 1, 2023, the ROE shall be 10.00%, which shall continue in effect unless and until changed as permitted by the terms of the Settlement;

•changes the equity component of PPL Electric’s capital structure to be the lower of (i) PPL Electric’s actual equity component, calculated in accordance with the formula rate template, or (ii) 56.00%;

•allows modification of the current rate year of June 1 to May 31 to a calendar year of January 1 to December 31; and

•allows modification of the current formula rate based on a historic test year to a projected test year.

Refunds will be paid by PPL Electric based on the difference between charges that were calculated using the ROE in effect at the time and reduced charges calculated using the ROE provided for in the Settlement, plus interest at the FERC interest rate. In the three and nine months ended September 30, 2021, PPL Electric recorded a revenue reserve of $13 million ($10 million after-tax) and $64 million ($46 million after-tax) representing revenue subject to refund for the period May 21, 2020 through September 30, 2021. The reserve recorded in the nine months ended September 30, 2021, includes $28 million ($20 million after-tax) related to the period from May 21, 2020 to December 31, 2020.

The Settlement is subject to review and action by the FERC, including approval, denial or modification. PPL Electric cannot predict the outcome of the FERC’s review of the Settlement.

While the FERC's review of the settlement is pending, on October 15, 2021, PPL Electric filed a request to the FERC Chief Administrative Law Judge for authorization to implement interim rates to reflect the agreed-to base ROE in the Settlement effective December 1, 2021. The requested interim settlement rates were accepted on October 20, 2021.

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 nine months ended September 30, 2021, PPL Electric purchased $309 million and $883 million of accounts receivable from alternative suppliers. During the three and nine months ended September 30, 2020, PPL Electric purchased $303 million and $854 million of accounts receivable from alternative suppliers.