3. Regulatory

Base Rates-Tampa Electric

Tampa Electric’s results reflect a stipulation and settlement agreement entered into on September 6, 2013, between Tampa Electric and the intervenors in its Tampa Electric division base rate proceeding, which resolved all matters in Tampa Electric’s 2013 base rate proceeding. On September 11, 2013, the FPSC unanimously voted to approve the stipulation and settlement agreement.

This agreement provided for the following revenue increases: $58 million effective November 1, 2013, an additional $8 million effective November 1, 2014, an additional $5 million effective November 1, 2015, and an additional $110 million effective the date that the expansion of Tampa Electric’s Polk Power Station went into service, which was January 16, 2017. The agreement also provides for Tampa Electric’s allowed regulatory ROE to be a mid-point of 10.25% with a range of plus or minus 1%, with a potential increase to 10.50% if U.S. Treasury bond yields exceed a specified threshold. The agreement provides that Tampa Electric cannot file for additional base rate increases to be effective sooner than January 1, 2018, unless its earned ROE were to fall below 9.25% (or 9.5% if the allowed ROE were increased as described above) before that time. If its earned ROE were to rise above 11.25% (or 11.5% if the allowed ROE were increased as described above) any party to the agreement other than Tampa Electric could seek a review of its base rates. Under the agreement, the allowed equity in the capital structure is 54% from investor sources of capital and Tampa Electric began using a 15-year amortization period for all computer software beginning on January 1, 2013.

Storm Damage Cost Recovery-Tampa Electric

As a result of several named storms including Tropical Storm Colin, Hurricane Hermine and Hurricane Matthew, Tampa Electric incurred $9 million of storm costs in 2016. On January 31, 2017, Tampa Electric petitioned the FPSC to seek full recovery of those costs as a surcharge to customers during the five-month period ended December 31, 2017. Subsequent communications with FPSC staff and signatories to the 2013 stipulation and settlement agreement resulted in a conclusion to withdraw the petition, apply the storm costs to the transmission and delivery storm reserve and seek recovery of storm costs once the reserve is fully depleted. See the table below for the regulatory liability.

Base Rates-PGS

On June 28, 2016, PGS filed its depreciation study with the FPSC seeking approval for new depreciation rates. After communications with the FPSC staff, on December 15, 2016, PGS and OPC filed a settlement with the FPSC agreeing to new depreciation rates that reduce annual depreciation expense by $16 million, accelerate the amortization of the regulatory asset associated with environmental remediation costs as described below, include obsolete plastic pipe replacements through the existing cast iron and bare steel replacement rider, and decrease the bottom of the ROE range from 9.75% to 9.25%. The new bottom of the ROE range will remain until the earlier of new base rates established in PGS’s next general base rate proceeding or December 31, 2020. The top of the ROE range will continue to be 11.75%, and the ROE of 10.75% will continue to be used for the calculation of return on investment for clauses and riders. On February 7, 2017, the FPSC approved the settlement agreement. No change in customer rates resulted from this agreement.

As part of the settlement, PGS and OPC agreed that at least $32 million of PGS’s regulatory asset associated with the environmental liability for current and future remediation costs related to former MGP sites, to the extent expenses are reasonably and prudently incurred, will be amortized over the period 2016 through 2020. At least $21 million will be amortized over a two-year recovery period beginning in 2016. In 2016, PGS recorded $16 million of this amortization expense. This additional amortization expense in 2016 was offset by the decrease in depreciation expense as discussed above with no impact to 2016 earnings. For the three months ended March 31, 2017, PGS recorded $1 million of amortization expense.

Regulatory Assets and Liabilities

Tampa Electric and PGS apply the accounting standards for regulated operations. Areas of applicability include: revenue recognition resulting from cost-recovery clauses that provide for monthly billing charges to reflect increases or decreases in fuel, purchased power, conservation and environmental costs; the deferral of costs as regulatory assets to the period in which the regulatory agency recognizes them when cost recovery is ordered over a period longer than a fiscal year; and the advance recovery of expenditures for approved costs such as future storm damage or the future removal of property. All regulatory assets are recovered through the regulatory process.

Details of the regulatory assets and liabilities are presented in the following table:

Regulatory Assets and Liabilities
(millions)	March 31, 2017		December 31, 2016
Regulatory assets:
Regulatory tax asset ⁽¹⁾	$	85	$	86
Cost-recovery clauses - deferred balances ⁽²⁾		10		8
Environmental remediation⁽³⁾		35		37
Postretirement benefits ⁽⁴⁾		269		272
Other		20		18
Total regulatory assets		419		421
Less: Current portion		29		28
Long-term regulatory assets	$	390	$	393
Regulatory liabilities:
Regulatory tax liability	$	12	$	6
Cost-recovery clauses - deferred balances ⁽²⁾		91		112
Cost-recovery clauses - offsets to derivative assets⁽²⁾		6		17
Transmission and delivery storm reserve		47		56
Accumulated reserve - cost of removal⁽⁵⁾		545		547
Other		7		7
Total regulatory liabilities		708		745
Less: Current portion		124		154
Long-term regulatory liabilities	$	584	$	591

(1)

The regulatory tax asset is primarily associated with the depreciation and recovery of AFUDC-equity. This asset does not earn a return but rather is included in the capital structure, which is used in the calculation of the weighted cost of capital used to determine revenue requirements. It will be recovered over the expected life of the related assets.

(2)

These assets and liabilities are related to FPSC clauses and riders. They are recovered or refunded through cost-recovery mechanisms approved by the FPSC on a dollar-for-dollar basis in the next year. In the case of the regulatory liability related to derivative assets, refund occurs in the year following the settlement of the derivative position.

(3)

This asset is related to costs associated with environmental remediation primarily at MGP sites. The balance is included in rate base, partially offsetting the related liability, and earns a rate of return as permitted by the FPSC. The timing of recovery is based on a settlement agreement approved by the FPSC.

(4)

This asset is related to the deferred costs of postretirement benefits and it is amortized over the remaining service life of plan participants. Deferred costs of postretirement benefits that are included in expense are recognized as cost of service for rate-making purposes as permitted by the FPSC.

(5)

This item represents the non-ARO cost of removal in the accumulated reserve for depreciation. AROs are costs for legally required removal of property, plant and equipment. Non-ARO cost of removal represent estimated funds received from customers through depreciation rates to cover future non-legally required cost of removal of property, plant and equipment, net of salvage value upon retirement, which reduces rate base for ratemaking purposes. This liability is reduced as costs of removal are incurred.