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Indiana Utility Regulatory Commission Regulatory Flexibility Report to the Indiana General Assembly '08 Tradition. Innovation. Change. Executive Summary EXECUTIVE SUMMARY The Indiana Utility Regulatory Commission (Commission) is pleased to present its 2008 Report to the Regulatory Flexibility Committee of the Indiana General Assembly. This Report highlights key issues that confront Indiana Electric, Natural Gas, Communications and Water/Wastewater utility industries and discusses the role of the Commission in managing these issues. Over the course of the last year, many topics have been addressed including: energy efficiency, aging infrastructure, the rising cost of energy, access to broadband and economic development. The Commission has been monitoring statewide and national efforts to address these issues in addition to remaining at the forefront of discussion with legislators, other state regulators and commissions. The Report broaches many of these topics and provides updates on how they affect Indiana. While each industry has unique concerns, several discussed in this Report are common to more than one type of industry. This Executive Summary contains a brief overview of these cross-industry and industry-specific issues, which are more fully addressed in the body of the Report. By examining cross-industry concerns, certain trends emerge along with areas that may need more attention. Plus, they demonstrate how similar utilities are with regard to regulation and support. The Report contains, as an appendix, a copy of the External Client Survey undertaken by the Commission in 2007. Even though the results of the Survey were very positive, the Commission provided a response that addressed the issues identified in the Survey and continues to explore and undertake efforts to enhance overall performance. We have used this Report as an opportunity to engage in dialogue with the Regulatory Flexibility Committee and to shed light on policy issues affecting Indiana, an area we have given additional focus. The Commission has also augmented the Report by including a section that summarizes the number and type of consumer complaints received by the Commission’s Consumer Affairs Division. For your convenience, there is also a list of acronyms and a glossary in the back of the Report. CROSS-INDUSTRY ISSUES Typically, Indiana’s utility industries have rotated through maintenance and upgrade cycles. For example, the electric industry may spend several years repairing infrastructure only to be followed by the water industry once those changes are complete. However, this cycle has been broken, and we stand at a time where infrastructure must be addressed on a much broader scale across all industries. The need for immediate infrastructure attention is a response to significant technological advancements, environmental legislation and inevitable deterioration. The Electric, Natural Gas and Water/Wastewater sections of this Report specifically discuss aging infrastructure and the potential problems and costs associated with repairing or replacing old facilities. Coupled with aging facilities is increasing consumer demand for electric, natural gas and water services, which can accelerate the deterioration of equipment and limit periods in which facilities can be conveniently removed from service for maintenance or repair. Obsolescence is an additional concern for the telecommunications industry with many carriers replacing copper plant with fiber-optic and coaxial cable facilities. Depending on the industry, the cost of repairing or replacing infrastructure varies greatly, and the question of who should pay is always an issue. As the Commission, we are to balance the interests of both the utilities and the consumers. One way in which we accomplish this is by allowing partial to full cost recovery for projects that improve the overall efficiency and reliability of a given service but only after evidence of such need has been reviewed. The industry facing the highest costs for expansion and repair is the Water/Wastewater industry. To recover infrastructure investment, the industry has utilized Extensions and Replacements, System Development Charges (SDCs), Distribution System Improvement Charges (DSICs) and the Minimum Standard Filing Requirements (MSFRs). However, the industry still struggles to meet necessary expenditures each year for maintenance. In addition to the cost recovery options listed above, adjustable rate mechanisms or trackers are used across all industries in some form. In an effort to reduce costs, the Commission encourages utilities to explore and implement new efficiency measures that may reduce or delay the need for some 2 investments, particularly in the energy sector. For example, the Commission recently issued its Phase I order in an investigation into the level and overall effectiveness of demand side management (DSM) programs in the state. DSM means the planning, implementation and monitoring of a utility activity designed to influence customer use of electricity that produces a desired change in a utility’s load shape. By better managing demand during peak hours, less stress is imposed upon the electric utilities’ infrastructure. The Commission has also encouraged the construction of energy efficient buildings and for existing homes to take part in weatherization practices. Consequently, state and nationwide concerns about availability and access to vital natural resources and the potential environmental impact of new construction have increased interest in conservation and efficiency measures in the electric, natural gas and water industries. In the short-term, conservation and efficiency measures can reduce the demand for electricity, natural gas or water, thereby, reducing upward pressure on prices and lowering customer bills. In the long-term, conservation and efficiency measures can reduce or delay the need for investment in new resources and facilities. Deployment of broadband communications services can also result in environmental efficiencies by enabling more extensive use of teleconferencing, telecommuting and e-commerce. The Commission has a long-standing practice of encouraging utilities to investigate cost- effective and innovative conservation and efficiency measures. An emerging operations and cost factor is the increasing federal involvement in what previously were exclusive state decisions. Federal legislation mandates examination and determination of answers to federal questions about how Indiana utilities operate. The emergence of RTO’s brings with them the involvement of the Federal Energy Regulatory Commission which lessens Indiana’s control of its utility operations and complicates Indiana’s ability to evaluate utility costs. The federal government’s continuing expansion of its activities and oversight has created a new dimension of operating needs for the commission. Now, we must respond to directives, cope with new business models and represent Indiana’s interests in new forums. 3 NATURAL GAS During the 2007–2008 winter heating season, the demand for natural gas increased relative to the demand in the 2006-2007 heating season due mainly to colder weather. Despite the colder weather, the price for natural gas was less volatile due to growth in domestic natural gas production, record high liquefied natural gas (LNG) imports and storage volumes that exceeded the five-year average. This combination of increased production and storage contributed to lower overall gas prices. An additional moderating effect on the price of natural gas was the absence of significant hurricane activity or other disruptions to the production and shipment of natural gas. While the price of natural gas was less volatile during the winter heating season, a hotter than normal summer resulted in greater demand for gas-fired generation of electricity and use of natural gas at dual-fired power plants. Overall, natural gas consumption continues to increase across all sectors, residential, commercial and industrial. While new production technologies will increase supply, and conservation efforts will reduce demand, fundamental market conditions seem likely to result in increasing natural gas prices and price volatility. These underlying market conditions have prompted consideration of regulatory changes that are fully discussed in the Natural Gas Report. The Natural Gas Report focuses on a number of key issues in the gas industry. These issues include: • Energy Efficiency and Rate Decoupling – The Commission has implemented rate decoupling as a regulatory mechanism and continues to study the impact of decoupling and energy efficiency on utilities and customers; • Adjustable Rate Mechanisms – A variety of adjustable rate mechanisms (trackers) are available and being utilized by gas utilities; • Gas Pipeline Infrastructure – Indiana’s interstate gas pipeline infrastructure is expanding with construction of the Rockies Express Pipeline; and • Call-Before-You-Dig – The need to enhance Indiana’s program as outlined in the Pipeline Integrity, Protection, Enforcement and Safety Act of 2006. 4 ELECTRICITY Indiana has consistently ranked as one of the lowest cost states for providing electricity to its citizens. Moving from a ranking as the 11th lowest cost state in 2007, Indiana now ranks as the 14th lowest in 2008. This difference in ranking between 2007 and 2008 is likely due to the timing of rate and fuel cost adjustment increases in Indiana and other states. Neighboring states’ average residential rates for 2008 rank as follows: