Utility Rate Regulation

9 Months Ended

Sep. 30, 2019

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, 2019		December 31, 2018		September 30, 2019		December 31, 2018
Current Regulatory Assets:
Gas supply clause	$	10	$	12	$	—	$	—
Smart meter rider	13		11		13		11
Plant outage costs	17		10		—		—
Transmission service charge	8		—		8		—
Other	1		3		1		—
Total current regulatory assets (a)	$	49	$	36	$	22	$	11



	PPL				PPL Electric
	September 30, 2019		December 31, 2018		September 30, 2019		December 31, 2018
Noncurrent Regulatory Assets:
Defined benefit plans	$	937	$	963	$	553	$	558
Storm costs	42		56		16		22
Unamortized loss on debt	41		45		17		22
Interest rate swaps	25		20		—		—
Terminated interest rate swaps	83		87		—		—
Accumulated cost of removal of utility plant	211		200		211		200
AROs	304		273		—		—
Act 129 compliance rider	10		19		10		19
Other	5		10		—		3
Total noncurrent regulatory assets	$	1,658	$	1,673	$	807	$	824



	PPL				PPL Electric
	September 30, 2019		December 31, 2018		September 30, 2019		December 31, 2018
Current Regulatory Liabilities:
Generation supply charge	$	22	$	33	$	22	$	33
Environmental cost recovery	12		16		—		—
Universal service rider	12		27		12		27
Fuel adjustment clause	13		—		—		—
TCJA customer refund	8		20		7		3
Storm damage expense rider	7		5		7		5
Generation formula rate	—		7		—		—
Other	5		14		—		6
Total current regulatory liabilities	$	79	$	122	$	48	$	74

Noncurrent Regulatory Liabilities:
Accumulated cost of removal of utility plant	$	674	$	674	$	—	$	—
Power purchase agreement - OVEC	53		59		—		—
Net deferred taxes	1,775		1,826		601		629
Defined benefit plans	54		37		10		5
Terminated interest rate swaps	69		72		—		—
TCJA customer refund (b)	43		41		43		41
Other	7		5		—		—
Total noncurrent regulatory liabilities	$	2,675	$	2,714	$	654	$	675



	LKE				LG&E				KU
	September 30, 2019		December 31, 2018		September 30, 2019		December 31, 2018		September 30, 2019		December 31, 2018
Current Regulatory Assets:
Plant outage costs	$	17	$	10	$	11	$	7	$	6	$	3
Gas supply clause	10		12		10		12		—		—
Other	—		3		—		2		—		1
Total current regulatory assets	$	27	$	25	$	21	$	21	$	6	$	4



	LKE				LG&E				KU
	September 30, 2019		December 31, 2018		September 30, 2019		December 31, 2018		September 30, 2019		December 31, 2018
Noncurrent Regulatory Assets:
Defined benefit plans	$	384	$	405	$	233	$	249	$	151	$	156
Storm costs	26		34		16		20		10		14
Unamortized loss on debt	24		23		14		15		10		8
Interest rate swaps	25		20		25		20		—		—
Terminated interest rate swaps	83		87		48		51		35		36
AROs	304		273		87		75		217		198
Other	5		7		2		1		3		6
Total noncurrent regulatory assets	$	851	$	849	$	425	$	431	$	426	$	418



	LKE				LG&E				KU
	September 30, 2019		December 31, 2018		September 30, 2019		December 31, 2018		September 30, 2019		December 31, 2018
Current Regulatory Liabilities:
Environmental cost recovery	$	12	$	16	$	7	$	6	$	5	$	10
Fuel adjustment clause	13		—		3		—		10		—
TCJA customer refund	1		17		—		7		1		10
Generation formula rate	—		7		—		—		—		7
Other	5		8		2		4		3		4
Total current regulatory liabilities	$	31	$	48	$	12	$	17	$	19	$	31

Noncurrent Regulatory Liabilities:
Accumulated cost of removal of utility plant	$	674	$	674	$	279	$	279	$	395	$	395
Power purchase agreement - OVEC	53		59		37		41		16		18
Net deferred taxes	1,174		1,197		548		557		626		640
Defined benefit plans	44		32		1		—		43		32
Terminated interest rate swaps	69		72		34		36		35		36
Other	7		5		4		2		3		3
Total noncurrent regulatory liabilities	$	2,021	$	2,039	$	903	$	915	$	1,118	$	1,124


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

(b)

Relates to amounts owed to PPL Electric customers as a result of the reduced U.S. federal corporate income tax rate as enacted by the TCJA, for the period of January 1, 2018 through June 30, 2018 which is not yet reflected in distribution customer rates. The initial liability was recorded during the second quarter of 2018. A petition for the distribution method back to customers of this liability was proposed to the PUC on October 4, 2019. The petition is currently under review by the PUC and contingent upon PUC approval.

Regulatory Matters

Kentucky Activities

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

In September 2018, LG&E and KU filed requests with the KPSC for an increase in annual base electricity rates of approximately $112 million at KU and increases in annual base electricity and gas rates of approximately $35 million and $25 million at LG&E. LG&E’s and KU’s applications also sought to include changes associated with the TCJA and state tax reform in the calculation of the proposed base rates and to terminate the TCJA bill credit mechanism when new base rates go into effect. The elimination of the TCJA bill credit mechanism will result in an estimated annual electricity revenue increase of approximately $58 million at KU and increases in electricity and gas revenues of approximately $40 million and $12 million at LG&E. The applications were based on a forecasted test year of May 1, 2019 through April 30, 2020 with a requested return-on-equity of 10.42%.

On March 1, 2019, LG&E and KU, along with substantially all intervening parties to the proceeding, filed stipulation and recommendation agreements (stipulations) with the KPSC resolving all material issues with the parties. In addition to

terminating the TCJA bill credit mechanism, the proposed stipulations provided for increases in annual revenue requirements associated with base electricity rates of approximately $58 million at KU and increases in annual base electricity and gas rates of approximately $4 million and $20 million at LG&E, based on a return-on-equity of 9.725%.

On April 30, 2019, the KPSC issued orders ruling on open issues and approving the proposed stipulations filed in March 2019. The orders provide for increases in the revenue requirements associated with base electricity rates of $56 million at KU and increases associated with base electricity and gas rates of $2 million and $19 million at LG&E. With the termination of the TCJA bill credit mechanism, this represents annual revenue increases of $187 million ($114 million at KU and $73 million at LG&E). The new base rates and all elements of the orders became effective on May 1, 2019.

Pennsylvania Activities

PUC Petition to Distribute TCJA Savings (PPL and PPL Electric)

PPL Electric submitted a petition for approval with the PUC on October 4, 2019 to distribute the tax savings of $43 million associated with the TCJA for the period between January 1, 2018 and June 30, 2018. As of September 30, 2019, these tax savings are classified as a noncurrent regulatory liability. PPL Electric has proposed that these amounts be distributed over the period of January 1, 2020 through December 31, 2020. The petition is contingent upon PUC approval.

Federal Matters

FERC Transmission Rate Filing

(PPL, LKE, LG&E and KU)

In August 2018, LG&E and KU submitted an application 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 mitigation for certain horizontal market power concerns arising out of the 1998 merger for certain transmission service between MISO and LG&E and KU. The affected transmission customers are a limited number of municipalities in Kentucky. The amounts at issue are generally waivers or credits granted to such customers for either LG&E and KU or MISO transmission charges incurred depending upon the direction of certain transmission service incurred by the municipalities. 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. On March 21, 2019, the FERC issued an Order granting LG&E's and KU's request to remove the on-going credits, conditioned upon the implementation by LG&E and KU of a transition mechanism for certain existing power supply arrangements, which transition mechanism will be subject to FERC review and approval. On July 12, 2019, LG&E and KU submitted their proposed transition mechanism to the FERC. On September 10, 2019, the FERC issued an order rejecting the proposed transition mechanism. On October 10, 2019, LG&E and KU filed a request for rehearing and clarification on the September order. LG&E and KU cannot predict the outcome of this proceeding. LG&E and KU currently receive recovery of waivers and credits provided through other rate mechanisms.

(PPL and PPL Electric)

In April 2019, PPL Electric filed its annual transmission formula rate update with the FERC, reflecting a revised revenue requirement, which includes the impact of the TCJA. The filing established the revenue requirement used to set rates that took effect in June 2019.

Transmission Customer Complaint (PPL, LKE, LG&E and KU)

In September 2018, a transmission customer filed a complaint with the FERC against LG&E and KU alleging LG&E and KU have violated and continue to violate their obligations under an existing rate schedule to credit this customer for certain transmission charges from MISO. On February 21, 2019, the FERC issued an Order concluding that the MISO transmission charges in question did qualify for credits under the rate schedule and required LG&E and KU to reimburse the customer for the eligible credits. The reimbursement was not significant and was completed by LG&E and KU in March 2019. LG&E and KU currently receive recovery for such credits through other rate mechanisms.

TCJA Impact on FERC Rates (All Registrants)

In November 2018, the FERC issued a Policy Statement stating that the appropriate ratemaking treatment for changes in accumulated deferred income taxes (ADIT) as a result of the TCJA would be addressed in a Notice of Proposed Rulemaking. Also in November 2018, the FERC issued the Notice of Proposed Rulemaking, which proposed that public utility transmission providers include mechanisms in their formula rates to deduct excess ADIT from, or add deficient ADIT to, rate base and adjust their income tax allowances by amortized excess or deficient ADIT. The Notice of Proposed Rulemaking did not prescribe the mechanism companies should use to adjust their formula rates.

LG&E and KU are currently assessing the Notice of Proposed Rulemaking and are continuing to monitor guidance issued by the FERC. On February 5, 2019, in connection with a separate element of federal and Kentucky state tax reform effects, LG&E and KU filed a request with the FERC to amend their transmission formula rates to incorporate reductions to corporate income tax rates as a result of the TCJA and HB 487. The FERC approved this request effective June 1, 2019. LG&E and KU do not anticipate the impact of the TCJA and HB 487 related to their FERC-jurisdictional rates to be significant.

On February 28, 2019, PPL Electric filed with the FERC proposed revisions to its transmission formula rate template pursuant to Section 205 of the Federal Power Act and Section 35.13 of the Rules and Regulations of the FERC. Specifically, PPL Electric proposed to modify its formula rate to permit the return or recovery of excess or deficient ADIT resulting from the TCJA and permit PPL Electric to prospectively account for the income tax expense associated with the depreciation of the equity component of the AFUDC. On April 29, 2019, the FERC accepted the proposed revisions to the formula rate template, which were effective June 1, 2019, as well as the proposed adjustments to ADIT, effective January 1, 2018.

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, 2019, PPL Electric purchased $308 million and $927 million of accounts receivable from alternate suppliers. During the three and nine months ended September 30, 2018, PPL Electric purchased $334 million and $1 billion of accounts receivable from alternate suppliers.