DP&L is the principal subsidiary of DPL providing approximately 98% of DPL’s total consolidated revenue and approximately 95% of DPL’s total consolidated asset base. Throughout this report, the terms “we,” us,” “our” and “ours” are used to refer to both DPL and DP&L, respectively and altogether, unless the context indicates otherwise. Discussions or areas of this report that apply only to DPL or DP&L will clearly be noted in the section.
WEBSITE ACCESS TO REPORTS
DPL and DP&L file current, annual and quarterly reports and other information required by the Securities Exchange Act of 1934, as amended, with the SEC. You may read and copy any document we file at the SEC’s public reference room located at 100 F Street N.E., Washington, D.C. 20549, USA. Please call the SEC at (800) SEC-0330 for further information on the public reference rooms. Our SEC filings are also available to the public from the SEC’s website at http://www.sec.gov.
Our public internet site is http://www.dplinc.com. We make available, free of charge, through our internet site, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and Forms 3, 4 and 5 filed on behalf of our directors and executive officers and amendments to those reports filed or furnished pursuant to the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC.
In addition, our public internet site includes other items related to corporate governance matters, including, among other things, our governance guidelines, charters of various committees of the Board of Directors and our code of business conduct and ethics applicable to all employees, officers and directors. You may obtain copies of these documents, free of charge, by sending a request, in writing, to DPL Investor Relations, 1065 Woodman Drive, Dayton, Ohio 45432.
Forward-looking Statements: Certain statements contained in this report are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Please see page 38 for more information about forward-looking statements contained in this report.
DPL is a regional energy company organized in 1985 under the laws of Ohio. Our executive offices are located at 1065 Woodman Drive, Dayton, Ohio 45432 – telephone (937) 224-6000.
DPL’s principal subsidiary is DP&L. DP&L is a public utility incorporated in 1911 under the laws of Ohio. DP&L sells electricity to residential, commercial, industrial and governmental customers in a 6,000 square mile area of West Central Ohio. Electricity for DP&L’s 24 county service area is primarily generated at eight coal-fired power plants and is distributed to more than 500,000 retail customers. Principal industries served include automotive, food processing, paper, plastic, manufacturing and defense. DP&L’s sales reflect the general economic conditions and seasonal weather patterns of the area. DP&L sells any excess energy and capacity into the wholesale market. DP&L also sells electricity to DPLER, an affiliate, to satisfy the electric requirements of its retail customers.
DPL’s other significant subsidiaries (all of which are wholly-owned) include: DPLE, which engages in the operation of peaking generating facilities and sells power in wholesale markets; DPLER, which sells retail electric energy under contract to major industrial and commercial customers in West Central Ohio; and MVIC, which is our captive insurance company that provides insurance to us and our subsidiaries.
DPL also has a wholly-owned business trust, DPL Capital Trust II, formed for the purpose of issuing trust capital securities to investors.
DPL and DP&L conduct their principal business in one business segment — Electric. DP&L’s electric transmission and distribution businesses are subject to rate regulation by federal and state regulators while its generation business is not subject to such regulation. Accordingly, DP&L applies the accounting standards for regulated operations to its electric transmission and distribution businesses and records regulatory assets when incurred costs are expected to be recovered in future customer rates, and regulatory liabilities when current recoveries in customer rates relate to expected future costs.
DPL and its subsidiaries employed 1,581 persons as of January 31, 2010, of which 1,403 were full-time employees and 178 were part-time employees. At that date, 1,396 of these full-time employees and all of the part-time employees were employed by DP&L. Approximately 55% of the employees are under a collective bargaining agreement.
The following table outlines the debt credit ratings and outlook of each company, along with the effective dates of each rating and outlook for DPL and DP&L.
Long-Term Debt Redemption
On March 31, 2009, DPL paid $175 million of the 8.00% Senior Notes when the notes became due. In addition, on December 21, 2009, DPL paid down $52.4 million of the $195 million 8.125% Note to DPL Capital Trust II which is due 2031.
New Revolving Credit Facility
On April 21, 2009, DP&L entered into a $100 million unsecured revolving credit agreement with a syndicated bank group. The agreement is for a 364-day term expiring on April 20, 2010. The facility contains one financial covenant: DP&L’s total debt to total capitalization ratio is not to exceed 0.65 to 1.00. As of December 31, 2009, this covenant is met with a ratio of 0.40 to 1.00. As of December 31, 2009, there were no borrowings outstanding under this facility.
Warrants Repurchased and Exercised
During the year ended December 31, 2009, DPL repurchased a total of 8.6 million of its warrants at an average price of $2.94 each. The repurchased warrants were cancelled by DPL on the dates they were repurchased. Also during this period, warrant holders exercised a total of 9.2 million warrants, of which 5.5 million were exercised under cashless transactions and 3.7 million were exercised for cash. As a result of these warrant exercise transactions, DPL issued a total of 5.0 million shares of common stock from treasury stock and in turn received total cash proceeds of $77.7 million.
Stock Repurchase Program
On October 28, 2009, the DPL Board of Directors approved a Stock Repurchase Program under which DPL may use proceeds from the exercise of warrants (discussed above) to repurchase common stock and warrants from time to time in the open market, through private transactions or otherwise. The Stock Repurchase Program will run through June 30, 2012, which is approximately three months after the end of the warrant exercise period. Through December 31, 2009, DPL repurchased approximately 2.4 million shares of common stock under the Stock Repurchase Program at an average price per share of $26.96.
Approval of Stipulation
In compliance with SB 221, DP&L filed its ESP at the PUCO on October 10, 2008. Subsequently on February 24, 2009, DP&L filed the Stipulation signed by the Staff of the PUCO, the Office of the OCC and various intervening parties. On June 24, 2009, the PUCO issued an order granting approval of the Stipulation.
Transmission, Ancillary and Other PJM-related Costs
On February 19, 2009, the PUCO approved DP&L’s request to defer costs related to transmission, capacity, ancillary service and other costs incurred since July 31, 2008 consistent with the provisions of SB 221. Subsequently, the PUCO approved two separate riders in November 2009, one for the recovery of RPM capacity costs and another rider for the recovery of transmission, ancillary and other PJM-related costs (TCRR). Accordingly, during the period ended December 31, 2009, DP&L deferred net RTO and other costs in the amount of $25.5 million. Of this amount, approximately $9.8 million relates to the period August 1, 2008 through December 31, 2008, and $15.7 million relates to the twelve month period ended December 31, 2009. The deferral of these costs resulted in a favorable impact to our results of operations.
Increase in Dividends on DPL’s Common Stock
On December 9, 2009, DPL’s Board of Directors authorized a quarterly dividend rate increase of approximately 6%, increasing the quarterly dividend per DPL common share from $.2850 to $.3025. If this dividend rate is maintained, the annualized dividend would increase from $1.14 per share to $1.21 per share.
ELECTRIC SALES AND REVENUES
(a) DP&L sells power to DPLER (a subsidiary of DPL). The revenues associated with these sales are classified as wholesale sales on DP&L’s financial statements and retail sales for DPL. The kWh volumes contain all volumes distributed on the DP&L system which include the retail sales by DPLER. The sales for resale volumes are omitted from DP&L to avoid duplicate reporting.
ELECTRIC OPERATIONS AND FUEL SUPPLY
DPL’s present summer generating capacity, including peaking units, is approximately 3,794 MW. Of this capacity, approximately 2,827 MW, or 75%, is derived from coal-fired steam generating stations and the balance of approximately 967 MW, or 25%, consists of combustion turbine and diesel peaking units.
DP&L’s present summer generating capacity, including peaking units, is approximately 3,249 MW. Of this capacity, approximately 2,827 MW, or 87%, is derived from coal-fired steam generating stations and the balance of approximately 422 MW, or 13%, consists of combustion turbine and diesel peaking units.
Our all-time net peak load was 3,270 MW, occurring August 8, 2007.
Approximately 87% of the existing steam generating capacity is provided by certain generating units owned as tenants in common with Duke Energy-Ohio (or its subsidiaries The Cincinnati Gas & Electric Company [CG&E], or Union Heat, Light & Power) and AEP (or its subsidiary Columbus Southern Power [CSP]). As tenants in common, each company owns a specified share of each of these units, is entitled to its share of capacity and energy output, and has a capital and operating cost responsibility proportionate to its ownership share. DP&L’s remaining steam generating capacity (approximately 365 MW) is derived from a generating station owned solely by DP&L. Additionally, DP&L, CG&E and CSP own, as tenants in common, 884 circuit miles of 345,000-volt transmission lines. DP&L has several interconnections with other companies for the purchase, sale and interchange of electricity.
In 2009, we generated 99.5% of our electric output from coal-fired units and 0.5% from oil and natural gas-fired units.
The following table sets forth DP&L’s and DPLE’s generating stations and, where indicated, those stations which DP&L owns as tenants in common.
In addition to the above, DP&L also owns a 4.9% equity ownership interest in OVEC, an electric generating company. OVEC has two plants in Cheshire, Ohio and Madison, Indiana with a combined generation capacity of approximately 2,265 MW. DP&L’s share of this generation capacity is approximately 111 MW.
DPL has substantially all of the total expected coal volume needed to meet its retail and firm wholesale sales requirements for 2010 under contract. The majority of the contracted coal is purchased at fixed prices. Some contracts provide for periodic adjustments and some are priced based on market indices. Fuel costs are impacted by changes in volume and price and are driven by a number of variables including weather, the wholesale market price of power, certain provisions in coal contracts related to government imposed costs, counterparty performance and credit, scheduled outages and generation plant mix. Our emission allowance consumption was reduced in 2008 and 2009 due to the installation of FGD equipment (scrubbers) at our jointly-owned electric generating stations. Due to the installation of this emission control equipment and barring any changes in the regulatory environment in which we operate, we expect to have emission allowance inventory in excess of our needs, which we plan to sell during 2010 and in future periods. We were a net seller of SO2 allowances and NOx allowances in 2009, and we expect to be a net seller in 2010.
The power generation and delivery business is seasonal and weather patterns have a material impact on operating performance. In the region we serve, demand for electricity is generally greater in the summer months associated with cooling and in the winter months associated with heating as compared to other times of the year. Unusually mild summers and winters could have an adverse effect on our results of operations, financial condition and cash flows.
RATE REGULATION AND GOVERNMENT LEGISLATION
DP&L’s sales to retail customers are subject to rate regulation by the PUCO. Beginning January 1, 2010, DP&L has a fuel rider in place for the collection of our prudently incurred fuel, purchased power, emission and other related costs. DP&L’s transmission rates and wholesale electric rates to municipal corporations, rural electric co-operatives and other distributors of electric energy are subject to regulation by the FERC under the Federal Power Act.
Ohio law establishes the process for determining retail rates charged by public utilities. Regulation of retail rates encompasses the timing of applications, the effective date of rate increases, the recoverable costs basis upon which the rates are based and other related matters. Ohio law also established the Office of the OCC, which has the authority to represent residential consumers in state and federal judicial and administrative rate proceedings.
Ohio legislation extends the jurisdiction of the PUCO to the records and accounts of certain public utility holding company systems, including DPL. The legislation extends the PUCO’s supervisory powers to a holding company system’s general condition and capitalization, among other matters, to the extent that such matters relate to the costs associated with the provision of public utility service. Based on existing PUCO and FERC authorization, regulatory assets and liabilities are recorded on the balance sheets. See Note 3 of Notes to Consolidated Financial Statements.
Since January 2001, DP&L’s electric customers have been permitted to choose their retail electric generation supplier. DP&L continues to have the exclusive right to provide delivery service in its state certified territory and the obligation to supply retail generation service to customers that do not choose an alternative supplier. The PUCO maintains jurisdiction over DP&L’s delivery of electricity, standard service offer and other retail electric services.
On May 1, 2008, substitute SB 221, an Ohio electric energy bill, was signed by the Governor and went into effect July 31, 2008. This law required that all Ohio distribution utilities file either an electric security plan or a market rate option that was to be in effect on January 1, 2009. Under the market rate option, a periodic competitive bid process will set the retail generation price after the utility demonstrates that it can meet certain market criteria and bid requirements set out in the bill. Also, under this option, utilities that still own generation in the state are required to phase in the market rate option over a period of not less than five years. An electric security plan may allow for adjustments to the standard service offer for costs associated with environmental compliance; fuel and purchased power; construction of new or investment in specified generating facilities; and the provision of standby and default service, operating, maintenance, or other costs including taxes. As part of its electric security plan, a utility is permitted to file an infrastructure improvement plan that will specify the initiatives the utility will take to rebuild, upgrade, or replace its electric distribution system, including cost recovery mechanisms. Both the market rate option and electric security plan option involve a “substantially excessive earnings” test based on the earnings of comparable companies with similar business and financial risks. The PUCO issued three sets of rules related to implementation of the law. These rules address topics such as the information that must be included in an electric security plan as well as a market rate option, the significantly excessive earnings test requirements, corporate separation revisions, rules relating to the recovery of transmission related costs, electric service and safety standards dealing with the statewide line extension policy, and rules relating to advanced energy portfolio standards, renewable energy, demand reduction and energy efficiency standards.
In compliance with SB 221, DP&L filed its ESP at the PUCO on October 10, 2008. This plan contained three parts: 1) a standard offer plan; 2) a CCEM plan; and 3) an alternative energy plan. The standard offer plan stated that DP&L intends to maintain its current rate plan through December 31, 2010, and addressed compliance issues related to the PUCO rules.
SB 221 and the implementation rules contain targets relating to advanced energy portfolio standards, renewable energy, demand reduction and energy efficiency standards. After several revisions, rulings on rehearing and reissuance that occurred throughout 2009, the rules relating to renewable energy, energy efficiency, demand reduction and integrated resource plans were made effective on December 10, 2009. The standards require that, by the year 2025, 25% of the total number of kWh of electricity sold by the utility to retail electric consumers must come from alternative energy resources, which include “advanced energy resources” such as distributed generation, clean coal, advanced nuclear, energy efficiency and fuel cell technology; and “renewable energy resources” such as solar, hydro, wind, geothermal and biomass. At least half of the 25% must be generated from renewable energy resources, including 0.5% from solar energy. The renewable energy portfolio, energy efficiency and demand reduction standards began in 2009 with increases in required percentages each year. The annual targets for energy efficiency are expected to save 22.3% by 2025 and peak demand reductions are expected to reach 7.75% by 2018 compared to baseline energy usage. If any targets are not met, compliance penalties will apply unless the PUCO makes certain findings that would excuse performance. In December 2009, DP&L and DPLER made several filings relating to their renewable energy and energy efficiency compliance plans. DP&L and DPLER were able to obtain Renewable Energy Certificates sufficient to meet their overall renewable energy targets, but DP&L and DPLER together obtained only 36% of the separate requirement for 2009 Ohio-based solar power. The companies asked for a waiver of any unmet 2009 Ohio solar requirements on grounds of force majeure because there are insufficient solar renewable energy credits available from Ohio resources. In two separate filings, DP&L requested the PUCO’s consent that DP&L had met the requirements for energy efficiency and for demand reduction based on DP&L’s interpretation of how those requirements should be applied. These filings also requested that if the PUCO disagreed with DP&L’s interpretation, the PUCO grant alternative relief and find that DP&L was unable to meet the targets due to reasons beyond its reasonable control, i.e. uncertainty throughout 2009 caused by delays in finalizing the rules and the lack of timely PUCO action on several of DP&L’s special contracts relating to demand response efforts which remain pending before the PUCO.
In addition, the rules that became effective December 10, 2009 required that on January 1, 2010, DP&L file an extensive energy efficiency portfolio plan, outlining how DP&L plans to comply with the energy efficiency and demand reduction benchmarks. DP&L filed a separate request for a finding that it had already complied with this requirement in the form of DP&L’s portfolio plan that had been filed in 2008 as part of its electric security plan, which had been approved by the PUCO and is being implemented. We are unable to predict at this time how the PUCO will respond to these filings, but believe that the outcome will not be material to our financial condition. However, as the targets get increasingly larger over time, the costs of complying with the SB 221 targets and the PUCO’s implementing rules could have a material impact on our financial condition.
On February 24, 2009, DP&L filed the Stipulation with the PUCO which was signed by the Staff of the PUCO, the Office of the OCC and various intervening parties. The material terms agreed to under the Stipulation include the following:
DP&L will be permitted to implement a fuel and purchased power recovery mechanism beginning January 1, 2010 which will track and adjust fuel and purchased power costs on a quarterly basis.
The rate stabilization surcharge remains a non-bypassable provider of last resort charge at its current rate amount, but may be bypassable by customers served by a government aggregator beginning 2011. If a government aggregator elects to avoid this surcharge in 2011 and 2012, its customers can only return to DP&L at a market-based rate.
The last phase of the EIR increase will occur in 2010 as previously approved by the PUCO and thereafter will remain at that level through 2012.
DP&L’s base distribution and generation rates will be frozen through 2012.
DP&L may seek recovery of certain cost increases such as storm damage expenses, regulatory or tax changes, costs associated with new climate change or carbon regulations, certain costs associated with the operation of the Hutchings station, costs associated with TCRR and Regional Transmission Organization costs not covered by the TCRR.
The significantly excessive earnings test will not apply to DP&L until 2012.
DP&L will be permitted to begin its energy efficiency and demand response programs immediately with recovery scheduled to begin in 2009, with a two-year reconciliation. DP&L’s smart grid deployment initiative will be revised and resubmitted to the PUCO for approval by September 2009 with the anticipation that the plans and recovery will begin January 1, 2010 also with a two year reconciliation.
DP&L’s proposed alternative energy plans will be approved and recovery of these costs will begin in 2009 with an annual reconciliation.
Mercantile (large use) customers can obtain exemption from the energy efficiency rider if self-directed energy and demand programs generate reductions equal to or greater than DP&L’s energy and demand reduction benchmarks.
On June 24, 2009, the PUCO issued an order granting approval of the Stipulation as filed and authorized DP&L to implement rates associated with alternative energy and energy efficiency compliance costs, which DP&L implemented beginning on July 1, 2009.
Consistent with the Stipulation, DP&L filed its smart grid and advanced metering infrastructure business cases with the PUCO on August 4, 2009 seeking recovery of costs associated with a three-year plan to deploy smart meter; and a ten-year plan for distribution and substation automation, core telecommunications, supporting software and in-home technologies. On August 5, 2009, DP&L submitted an application for American Recovery and Reinvestment Act (ARRA) funding under the Integrated and/or Crosscutting Systems topic area for the Smart Grid Investment Grant Program, seeking $145.1 million of matching funds. On October 27, 2009, we were notified by the United States Department of Energy (DOE) that we will not receive funding under the ARRA. A technical conference was held at the PUCO in October 2009 for the smart grid case, and a subsequent PUCO entry established a comment and reply comment period. The PUCO Staff along with other interested parties provided comments and reply comments on DP&L’s plans. A hearing is not yet scheduled for this case.
The Stipulation provided for the establishment of a fuel and purchased power recovery rider beginning January 1, 2010. DP&L filed its proposed fuel rider on October 30, 2009. On December 16, 2009 the PUCO issued an order stating the rate was consistent with the Stipulation provisions, that it does not appear to be unjust or unreasonable, and approved the rate to be implemented on January 1, 2010. The fuel rider will fluctuate based on actual costs and recoveries and will be modified at the start of each seasonal quarter: March 1, June 1, September 1, and December 1 each year. Consistent with the Stipulation, an annual review and audit is scheduled to take place in the first quarter of 2011 for calendar year 2010.
As a member of PJM, DP&L incurs costs and receives revenues from the RTO related to its transmission and generation assets, as well as its load obligations for retail customers. SB 221 included a provision that allows Ohio electric utilities to seek and obtain a reconcilable rider to recover RTO-related costs and credits. In early 2009, the PUCO approved DP&L’s request to defer costs associated with its transmission, capacity, ancillary service and other PJM-related charges incurred as a member of PJM consistent with the provisions of SB 221. DP&L subsequently filed to establish the TCRR that would incorporate all charges and credits from the RTO as well as the amounts approved for deferral. The TCRR was approved by the PUCO and on June 1, 2009 DP&L began recovery of these costs. In June 2009, an application for rehearing was filed claiming the PUCO’s order allowing for recovery of RPM costs through this rider was unlawful. On September 9, the PUCO granted rehearing, and issued an entry ordering DP&L to remove the RPM costs from the TCRR and refile its tariffs. On September 23, 2009, the Company filed two separate riders, a TCRR without RPM costs, and an RPM recovery rider, which were both subsequently approved per PUCO Finding and Order issued on November 18, 2009, and implemented December 1, 2009. There was no change to the level of recovery due to the rehearing process.
On September 9, 2009, the PUCO issued an entry establishing a significantly excessive earnings test (SEET) proceeding. A workshop was held at the PUCO offices on October 5, 2009 to allow interested parties to present concerns and discuss issues related to the methodology for determining whether an electric utility has significantly excessive earnings pursuant to the provisions contained in SB 221. On November 18, 2009, the PUCO Staff issued its recommendations to the PUCO. DP&L filed its comments and reply comments along with other interested parties. Although DP&L’s Stipulation provides that the SEET does not apply to it until 2013 based on 2012 earnings results, DP&L is actively participating in this proceeding.
On August 28, 2009, DP&L filed its application to establish reliability targets consistent with the most recent PUCO Electric Service and Safety Standards (ESSS). The PUCO issued a procedural schedule and held a technical conference on November 10, 2009. Comments and reply comments were filed. We expect this case will be set for hearing. According to the ESSS rules, DP&L will be subject to financial penalties if the established targets are not met for two consecutive years.
While the overall financial impact of SB 221 will not be known for some time, implementation of the bill and compliance with its requirements could have a material impact on our financial condition.
Ohio Competitive Considerations and Proceedings
As of December 31, 2009, six unaffiliated marketers were registered as CRES providers in DP&L’s service territory. While there has been some customer switching associated with unaffiliated marketers, it represented less than 0.11% of sales in 2009. DPLER, an affiliated company, is also a registered CRES provider and accounted for 99% of the total kWh supplied by CRES providers within DP&L’s service territory in 2009. During the first quarter of 2010, DPLER will begin providing CRES services to business customers who are currently not in DP&L’s service territory. At this time, we do not expect these incremental costs and revenues to have a material impact on our results of operations, financial position or cash flows. In 2003-2004, several communities in DP&L’s service area passed ordinances allowing the communities to become government aggregators for the purpose of offering alternative electric generation supplies to their citizens. To date, none of these communities have aggregated their generation load.
Like other electric utilities and energy marketers, DP&L and DPLE may sell or purchase electric products on the wholesale market. DP&L and DPLE compete with other generators, power marketers, privately and municipally-owned electric utilities and rural electric cooperatives when selling electricity. The ability of DP&L and DPLE to sell this electricity will depend on how DP&L’s and DPLE’s price, terms and conditions compare to those of other suppliers.
As part of Ohio’s electric deregulation law, all of the state’s investor-owned utilities are required to join a RTO. In October 2004, DP&L successfully integrated its 1,000 miles of high-voltage transmission into the PJM RTO. The role of the RTO is to administer a competitive wholesale market for electricity and ensure reliability of the transmission grid. PJM ensures the reliability of the high-voltage electric power system serving 51 million people in all or parts of Delaware, Illinois, Indiana, Kentucky, Maryland, Michigan, New Jersey, North Carolina, Ohio, Pennsylvania, Tennessee, Virginia, West Virginia and the District of Columbia. PJM coordinates and directs the operation of the region’s transmission grid, administers the world’s largest competitive wholesale electricity market and plans regional transmission expansion improvements to maintain grid reliability and relieve congestion.
The PJM RPM base residual auction for the 2012/13 period cleared at a per megawatt price of $16/day for our RTO area. Prior to this auction, the per megawatt price for the 2011/2012 period was $110/day. Future RPM auction results will be dependent not only on the overall supply and demand of generation and load, but may also be impacted by congestion as well as PJM’s business rules relating to bidding for Demand Response and Energy Efficiency resources in the RPM auctions. We cannot predict the outcome of future auctions but if the current auction price is sustained, our future results of operations, financial condition and cash flows could be adversely impacted.
As a member of PJM, DP&L is also subject to charges and costs associated with PJM operations as approved by the FERC. FERC Orders issued in 2007 regarding the allocation of costs of large transmission facilities within PJM, could result in additional costs being allocated to DP&L of approximately $12 million or more annually by 2012. DP&L filed a notice of appeal to the U.S. Court of Appeals, D.C. Circuit on March 18, 2008 challenging the allocation method. The appeal was consolidated with other appeals taken by other interested parties of the same FERC Orders and the consolidated cases were assigned to the 7th Circuit. On August 6, 2009, the 7th Circuit ruled that the FERC had failed to provide a reasoned basis for the allocation method it had approved. Rehearings were filed by other interested litigants and denied by the Court, which then remanded the matter to the FERC for further proceedings. On January 21, 2010, the FERC issued a procedural order on remand establishing a paper hearing process under which PJM will make an informational filing in late February. Subsequently PJM and other parties, including DP&L, will be able to file initial comments, testimony, and recommendations and reply comments. Absent future changes to the procedural schedule that may occur for a number of reasons including if settlement discussions are held, the paper hearing process should be complete and the case ready for FERC consideration in 2010. FERC did not establish a deadline for its issuance of a substantive order. DP&L cannot predict the timing or the likely outcome of the proceeding. Until such time as FERC may act to approve a change in methodology, PJM will continue to apply the allocation methodology that had been approved by FERC in 2007. Although we continue to maintain that these costs should be borne by the beneficiaries of these projects and that DP&L is not one of these beneficiaries, any new credits or additional costs resulting from the ultimate outcome of this proceeding will be reflected in DP&L’s TCRR rider which is already in place to pass through RTO-related costs and credits.
DP&L provides transmission and wholesale electric service to twelve municipal customers in its service territory, which in turn distribute electricity principally within their incorporated limits. DP&L also maintains an interconnection agreement with one municipality that has the capability to generate a portion of its own energy requirements. Approximately one percent of total electricity sales in 2009 represented sales to these municipalities.
In June 2009, the NERC, a FERC-certified electric reliability organization responsible for developing and enforcing mandatory reliability standards, commenced a routine audit of DP&L’s operations. The audit, which was for the period June 18, 2007 to June 25, 2009, evaluated DP&L’s compliance with 42 requirements in 18 NERC-reliability standards. DP&L is currently subject to a compliance audit at a minimum of once every three years as provided by the NERC Rules of Procedure. This audit was concluded in June 2009 and its findings revealed that DP&L had some Possible Alleged Violations (PAVs) associated with five NERC Reliability Standards. In response to the report, DP&L filed mitigation plans with NERC to address the PAVs. These mitigation plans have been accepted and DP&L is currently awaiting a proposal for settlement from NERC. While we are currently unable to determine the extent of penalties, if any, that may be imposed on DP&L, we do not believe such penalties will have a material impact on our results of operations.
DPL and DP&L’s facilities and operations are subject to a wide range of environmental regulations and laws by federal, state and local authorities. The environmental issues that may impact us include:
The Federal CAA and state laws and regulations (including State Implementation Plans) which require compliance, obtaining permits and reporting as to air emissions. Litigation with federal and certain state governments and certain special interest groups regarding whether modifications to or maintenance of certain coal-fired generating plants require additional permitting or pollution control technology, or whether emissions from coal-fired generating plants cause or contribute to global climate changes.