Rate Case Summary Q COMMENTARY

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1 Q Rate Case Summary HIGHLIGHTS Recent quarters seem to indicate a plateauing of the trend of rising rate case activity. However, we expect filings to remain elevated, reflecting the industry s ongoing construction cycle. The average awarded ROE for decided cases in Q1 was 10.23, the highest of the past year. Requested ROE in Q1 was Capital spending, typically the primary driver of rate case filings, was the main reason for Q1 filings. Concern about stagnant demand growth, ROEs and storm spending vied with O&M and rate mechanisms as secondary drivers. In Southwestern Public Service s case in New Mexico the commission included the company s entire prepaid pension asset (utility contribution to pension fund exceeding pension expense calculated under Statement of Financial Accounting Standards 87) in rate base. I. Number I. U.S. of Electric Rate Cases Output Filed (GWh) (Quarterly) II. Average Awarded ROE (Quarterly) COMMENTARY Investor-owned electric utilities filed nine rate cases in the first quarter of Recent quarters seem to indicate a plateauing of the trend of rising rate case activity since the late 1990s. However, we expect the number of filings to remain elevated, reflecting the industry s ongoing construction cycle driven by the need to replace and upgrade infrastructure and reduce the environmental impact of power generation. The average awarded ROE for decided cases in Q1 was 10.23, the highest of the past year, yet still very low compared to the awarded ROEs of the last few decades and consistent with a long-term declining trend resulting primarily from declining interest rates. Requested ROE in Q1 was 10.22, a record low also consistent with a trend over recent decades that matches that of average awarded ROEs and for similar reasons. Regulatory lag in Q1 averaged 11.3 months, slightly higher than the 10-month average typical in the industry. Average 1

2 2 RATE CASE SUMMARY III. Average Requested ROE (Quarterly) IV. Average Regulatory Lag (Quarterly) Months V. 10-Year Treasury Yield (1/1980 3/2014) Source: U.S. Federal Reserve lag was higher and more volatile at the end of the 1990s and early 2000s, when the industry was going through a period of restructuring, but has otherwise kept close to this 10-month average level. Filed Cases in Q1 The main drivers of rate case filings have historically been, in order of priority, capital expenditures for infrastructure, recovery of operation and maintenance (O&M) expenses, and the desire by utilities to implement rate mechanisms such as adjustment clauses and riders. The quarter s filings were no exception. However, while capital expenditures predominated, concern about stagnant demand growth, ROEs and storm spending vied with O&M and rate mechanisms as secondary drivers. In the capital expenditure category, Portland General Electric in Oregon filed to recover new gas and wind generation. The company would like to partially offset the rate increase with refunds related to spent nuclear fuel, pollution tax credits, and the proceeds of a settlement with the Bonneville Power Administration. Atlantic City Electric filed for reliability-related upgrades and infrastructure improvements. The company has invested $161.9 million in its distribution system since 2013 and plans to invest an additional $322 million over the next three years. In the rate mechanism category, Public Service Oklahoma wants to establish a rider to recover costs associated with a three-year plan to install automated metering infrastructure equipment. Appalachian Power in Virginia would like to enhance an economic development rider that provides rate assistance to certain new or expanding businesses. Appalachian Power in Virginia filed in compliance with its mandated biennial fair ROE formula plan. The formula defines fair ROE as up to 300 basis points above the threeyear average of ROEs reported to the SEC by a peer group of vertically integrated electric utilities in the southeastern U.S. with investment-grade or better bond ratings. The commission can adjust this ROE by up to 100 basis points based on operating performance. The commission also examines the company s earnings for the previous two calendar years to assess any variance from the ROE established in the prior review. Average ROE for the two years must fall within a dead band 70 basis points above and below the authorized return. The company must refund 60 of earnings associated with an earned ROE above this dead band. If the company over-earns the band two years in a row, the commission can order a rate reduction or refund all earnings associated with the overage. Miscellaneous In Q1, Black Hills Power in South Dakota filed in part to recover costs related to decommissioning coal-fired plants in response to EPA rules. In Virginia, Appalachian power would like to establish two energy efficiency programs; the first would reduce energy use for low-income customers. The second would reward residential customers for reducing peak demand.

3 RATE CASE SUMMARY 3 VI. Rate Case Data: From Tables I-V Number of Average Average Average Average Quarter Rate Cases Filed Awarded ROE Requested ROE 10-Year Treasury Yield Regulatory Lag Q NA NA Q NA NA Q NA NA Q NA NA Q NA NA Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q NA Q Q NA Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q

4 4 RATE CASE SUMMARY VI. Rate Case Data: From Tables I-V (cont.) Number of Average Average Average Average Quarter Rate Cases Filed Awarded ROE Requested ROE 10-Year Treasury Yield Regulatory Lag Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q NA = Not available Decided Cases in Q1 Earnings Sharing Mechanisms Several settlements during Q1 established sharing mechanisms. These were established for Consolidated Edison in New York, Northern States Power (NSP) in North Dakota, and MidAmerican Energy in Iowa. NSP s mechanism requires the company to refund to customers any earnings associated with an earned return above the allowed ROE. ROE NSP s settlement in North Dakota authorized the company to implement a three-step rate increase over four years. The first step is based on a 9.75 ROE, the second and third are based on a 10 ROE. Although no increase was authorized for the fourth year of the plan, the authorized ROE for that year is

5 RATE CASE SUMMARY 5 In Potomac Electric Power s case in Washington, D.C., the commission relied primarily on a discounted cash flow (DCF) analysis to arrive at a 9.4 ROE, finding the DCF method produces results more reasonable than those of other calculation methods. The commission adopted a range of 9.1 to 9.6, rejecting the Office of Peoples Council s recommended ROE of 8.8 as the low end of the range, because it was based on a growth rate of that we think is low and not sufficiently forward-looking. The commission said that it leans toward the midpoint in selecting a rate of return on common equity unless there are additional factors that argue for selecting a cost of equity that is a different part of the range of reasonableness.... we will... authorize [an ROE] of 9.50 before considering the [bill stabilization (decoupling) adjustment mechanism]. This will allow Pepco to maintain its current bond rating and access the capital markets on reasonable terms as it moves forward with its reliability enhancements, which ultimately is in the best interest of the ratepayers at this time. The commission adopted a 10-basis-point ROE reduction to account for what it saw as the risk-reducing aspects of the decoupling mechanism. Consolidated Edison New York Consolidated Edison s settlement in Q1 allows the company to recover capital expenditures for storm hardening, specifically in relation to anticipated climate change and associated rising sea levels. The settlement allows the company to recover $247 million in costs related to Superstorm Sandy and $78 million in costs related to other storms. The settlement also increases the company s storm reserves from $5.6 million to $21.4 million per year. The settlement further requires the company to defer property taxes, pension and postemployment benefit expense, non-officer management variable pay, certain transmission revenue, brownfield environmental tax credits, nuclear insurance dividends, SO 2 allowance sales, pipeline integrity costs, and research and development expense, among other deferrals. Potomac Electric Power Washington, DC Along with the ROE-related decisions described above, in Pepco s case in Q1 the Washington, D.C. commission reduced revenue requirement by $5 million. According to the commission, Pepco reflected in rate base investment amounts that were budgeted and remained budgeted at the close of the record... Budgeted amounts cannot be counted as known, certain and measureable... Pepco has not made a credible argument that an exception is warranted... The commission also reduced the revenue requirement by $6 million largely by rejecting Pepco s proposal to use the straight-line depreciation (SLD) method for estimating the net salvage values cost component of depreciation rates as opposed to the present value method described in the Statement of Financial Accounting Standards 143 (SFAS 143). Pepco said that the SLD method had been the commission s preferred method and has been the preferred method of the vast majority of regulatory jurisdictions, that several states had recently reverted to SLD from SFAS 143, that SLD meets the Commission s directive to reduce inflation while ensuring intergenerational equity so that future customers are not paying rates for equipment that no longer serves them, and that the SFAS 143 depreciation method results in lower depreciation expense in the short term, but will result in higher total costs to ratepayers over the lives of the plant assets. However, the commission said that the SLD front-loads recovery and over-charges current customers. The commission also said we cannot ignore the fact that the states that made the change that Pepco cites... are not states in this region nor are they states in a totally restructured market.... Pepco has not carried its burden to show some changed circumstances or new regulatory development warranting a change in our policy selecting the SFAS 143 method... Southwestern Public Service New Mexico The decision in Southwestern Public Service s case in New Mexico in Q1 approves the company s proposed capital structure, adopting the hearing examiner s view that the company provided evidence that [it] needs more than 50 percent equity to maintain its financial metrics from degradation and to protect against possible credit downgrades during a period of high capital spending. The commission included the company s entire prepaid pension asset (utility contribution to pension fund exceeding pension expense calculated under Statement of Financial Accounting Standards 87) in rate base, saying earnings on a prepaid pension asset reduce the revenue requirement, which ultimately reduces the amount of revenue that the Commission will need to authorize a utility to collect from retail customers in rates. Including the entire prepaid asset in rate base recognizes that ratepayers benefit from the prepaid pension asset and that the utility should earn a return on the prepaid pension asset in order for the utility to recover its full cost of service. Miscellaneous MidAmerican Energy s settlement in Iowa allows the utility to implement an energy adjustment clause (EAC). The commission confirmed the EAC, saying it satisfies the statutory conditions that: 1) the utility incurs the covered costs in supplying energy, cannot directly control the costs, and readily, precisely and continuously segregates the costs in customer accounts, and 2) the costs can change suddenly in important ways and are an important factor in determining cost to serve customers.