SUCCESSFUL REGULATORY INITIATIVES
The earnings of our Regulated Business Unit and Commercial Business Unit (which includes the earnings from long-term purchased power agreements with our regulated utilities) are impacted significantly by regulatory decisions. In 2004, we successfully concluded two of the largest, most complex regulatory initiatives in our company’s history.
PSI Energy Rate Order: Last May, the Indiana Utility Regulatory Commission (IURC) approved a $140 million rate increase for our Indiana operating company, PSI Energy. The IURC’s approval reflects its commitment to ensure adequate generating capacity to meet the ongoing energy demands of our Indiana customers. The order authorized adding $1.3 billion to our Indiana rate base, which includes approximately $570 million for our investment in approximately 1,100 megawatts of additional gas-fired generation and $310 million for PSI’s environmental investments.
In addition to the PSI rate order, the IURC issued orders in an environmental compliance proceeding reflecting its commitment to keeping our low-cost, coal-fired generation viable even in the face of new environmental laws and regulations. The commission authorized PSI to recover through rates, ongoing financing, operating and depreciation costs related to further NOx reductions at our plants.
Cincinnati Gas & Electric Rate Stabilization Plan: In late November of last year, the Public Utilities Commission of Ohio (PUCO) issued an order that provides greater clarity to what had become an ambiguous and uncertain regulatory environment in Ohio. Concerned about possible rate shock caused by high and volatile market prices for electricity, the PUCO approved a rate stabilization plan that mitigates this impact for CG&E electric customers. At the same time, the plan compensates CG&E for committing its low-cost generation to serve its Ohio load through 2008.
Allow me to say a few more words about the significance of this order. When Ohio deregulated the electric industry effective January 1, 2001, CG&E was obligated to freeze its total electric rate as part of a legislatively mandated transition to market rates. This means that CG&E has had no opportunity to recover the approximately $242 million of net rate base additions we’ve made to our Ohio electric distribution system since 1992.
Even more important from the standpoint of our 2004 performance, the rate freeze meant that we had no opportunity to recover the substantially higher cost of fuel and emission allowances necessary to operate our Ohio generation fleet. By way of example, the market price of SO2 emission allowances rose more than 200 percent in 2004 when compared to 2003. The rate stabilization plan allows us to begin recovering these higher costs from our Ohio commercial and industrial customers in 2005, and from our Ohio residential customers in 2006.
The rate stabilization plan also allows us to recover environmental expenditures, purchased power costs to maintain adequate capacity and energy reserves, and transmission costs related to the operation of the Midwest grid by the Midwest Independent Transmission System Operator (Midwest ISO) through 2008.
Proactive Environmental Steps: The EPA has been developing new rules to further restrict emissions from coal-fired power plants. These rules should go into effect in 2005. They will require additional reductions of SO2 and NOx emissions over and above the significant reductions we have achieved since 1990. They will also mandate the reduction of mercury emissions from our plants for the first time.
In anticipation of these rules, we filed a plan with the IURC last fall seeking pre-approval of expenditures to add scrubbers on PSI’s larger power plants. The plan would allow us to recover and account for financing costs (even during the construction phase) as well as ongoing operating and depreciation expense. By planning ahead, we hope to line up the necessary labor, materials and equipment for these scrubbers at the lowest possible cost. We anticipate IURC approval of our environmental compliance plan and rate recovery proposals by the end of the third quarter of 2005.
We also plan to construct scrubbers on Miami Fort Station Units 7 and 8 owned by CG&E. The Ohio rate stabilization plan provides for the recovery of costs associated with this effort through 2008. We currently estimate that the total cost of environmental compliance for all of our facilities will be approximately $1.8 billion between 2005 and 2009.