3. Regulatory

Tampa Electric Base Rates

On September 27, 2017, Tampa Electric filed with the FPSC an amended and restated settlement agreement that replaced the 2013 base rate settlement agreement and extended it four years through December 31, 2021. The FPSC approved the agreement on November 6, 2017.

The amended agreement provides for SoBRAs for TEC’s investments in solar generation. The solar investments are expected to go into service in tranches in the period from September 2018 through January 2021. In order for each tranche of SoBRAs to take effect, Tampa Electric must show that each tranche is cost-effective and each individual project has a cost cap of $1,500/kWac. Additionally, in order to receive a SoBRA for the last tranche of 50 MWs, the first two tranches of 400 MW must be constructed at or below $1,475/kWac. Tampa Electric plans to invest approximately $850 million in these solar projects.

The amended agreement further contains a provision whereby Tampa Electric agrees to quantify the impact of tax reform on net operating income and neutralize the impact of tax reform through a reduction in base revenues within 120 days of when tax reform becomes law. Additionally, any effects of tax reform between the effective date and the date the base rates are adjusted would be refunded through a one-time clause refund in 2019. See “Tampa Electric Tax Reform and Storm Settlement” below for information regarding the impact of tax reform.

On December 12, 2017, TEC filed its first petition regarding the SoBRAs along with supporting tariffs demonstrating the cost-effectiveness of the September 1, 2018 tranche representing 145 MW and $24 million annually in estimated revenue requirements. The FPSC approved the tariffs on the first SoBRA filing on May 8, 2018 and TEC began receiving these revenues in September 2018 as the assets for the first tranche were placed in service. On June 29, 2018, TEC filed its second SoBRA petition along with supporting tariffs demonstrating the cost-effectiveness of the January 1, 2019 tranche representing 260 MW and $46 million annually in estimated revenue requirements. The FPSC approved the tariffs on the second SoBRA filing on October 29, 2018.

Tampa Electric Storm Restoration Cost Recovery

As a result of Tampa Electric’s 2013 rate case settlement, in the event of a named storm that results in damage to its system, Tampa Electric can petition the FPSC to seek recovery of those costs over a 12-month period or longer as determined by the FPSC, as well as replenish its reserve to $56 million, the level of the reserve as of October 31, 2013. In the third quarter of 2017, Tampa Electric was impacted by Hurricane Irma and incurred storm restoration costs of approximately $102 million, of which $90 million was charged to the storm reserve, $3 million was charged to O&M expense and $9 million was charged to capital expenditures. At December 31, 2017, the amount of estimated costs charged to the storm reserve regulatory liability exceeded the balance in the storm reserve by $47 million, which was recorded as a regulatory asset on the balance sheet as allowed by an FPSC order. This regulatory asset amount was eliminated in 2018 to reflect the effective recovery as discussed in Tampa Electric Tax Reform and Storm Settlement below. Tampa Electric petitioned the FPSC on December 28, 2017 for recovery of estimated Hurricane Irma storm costs plus approximately $10 million in restoration costs from prior named storms and to replenish the balance in the reserve to the $56 million level that existed as of October 31, 2013. An amended petition was filed with the FPSC on January 30, 2018. See the Regulatory Assets and Liabilities table below.

Tampa Electric Tax Reform and Storm Settlement

On March 1, 2018, the FPSC approved a settlement agreement filed by Tampa Electric that addresses both the recovery of storm costs and the return of tax reform benefits to customers (see Note 4) while keeping customer rates stable in 2018. Beginning on April 1, 2018, the agreement authorizes Tampa Electric to net the estimated amount of storm cost recovery against Tampa Electric’s estimated 2018 tax reform benefits. As a result, in the first quarter of 2018, Tampa Electric recorded O&M expense and a regulatory liability of $19 million in order to offset tax reform benefits in the first quarter due to the agreement allowing the netting of the recovery of storm costs with tax reform benefits. This deferral was recorded as a result of deferring the impact of the first quarter as the effective date of the agreement is April 1, 2018. Beginning on April 1, 2018, the regulatory liability is being amortized over the remainder of 2018 as a credit against the recognition of storm expense. Amortization of $12 million was recorded as a reduction to O&M expense for the period April 1 to September 30, 2018. During the period April 1 to September 30, 2018, Tampa Electric recorded O&M expense and a reduction of the storm reserve regulatory asset of $47 million and O&M expense and an increase in the storm reserve regulatory liability of $25 million to reflect effective recovery of the storm costs due to the allowed netting of storm cost recovery with tax reform benefits. Tampa Electric’s final storm costs subject to netting and final impact of tax reform on Tampa Electric’s base rates pursuant to the 2017 base rates agreement will be determined in separate regulatory proceedings. Any difference will be trued up and returned to customers in 2020. On August 20, 2018, the FPSC approved lowering base rates by $103 million annually beginning on January 1, 2019 as a result of lower tax expense.

PGS Base Rates

PGS’s base rates were established in May 2009. An updated settlement agreement was approved by the FPSC on February 7, 2017. As part of the 2017 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 would be amortized over the period 2016 through 2020, of which $21 million was amortized in 2016 and 2017.

The 2017 PGS settlement agreement does not contain a provision for tax reform. The FPSC approved that tax reform benefits should be applied to customers beginning on February 6, 2018 for utilities in Florida without an existing tax reform settlement provision, including PGS. As a result, PGS deferred the estimated tax reform benefits to customers and recorded O&M expense and a regulatory tax liability of $5 million for the period February 6 to June 30, 2018. In the third quarter of 2018, the FPSC approved a settlement agreement filed between OPC, the Florida Industrial Power Users Group and PGS authorizing the utility to accelerate in 2018 the remaining amortization of PGS’s regulatory asset associated with the MGP environmental liability up to the $32 million to net it against the estimated 2018 tax reform benefits. Therefore, PGS reversed in the third quarter of 2018 the $5 million estimated tax reform benefits deferral included in O&M expense and regulatory liability and will record amortization expense and a regulatory asset reduction of $11 million in 2018, of which $10 million was recorded during the nine months ended September 30, 2018.

In January 2019, PGS will reduce its base rates by $12 million for the impact of tax reform and reduce depreciation rates by $10 million in accordance with the settlement agreement. Lastly, PGS is permitted to initiate a general base rate proceeding during 2020 provided rates established in such proceeding do not become effective before January 1, 2021.

Regulatory Assets and Liabilities

Tampa Electric and PGS apply the FASB’s accounting standards for regulated operations. Regulatory assets generally represent incurred costs that have been deferred, as their future recovery in customer rates is probable. Regulatory liabilities generally represent obligations to make refunds to customers from previous collections for costs that are not likely to be incurred or the advance recovery of expenditures for approved costs.

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

Regulatory Assets and Liabilities
(millions)	September 30, 2018		December 31, 2017
Regulatory assets:
Regulatory tax asset ⁽¹⁾	$	45	$	45
Cost-recovery clauses - deferred balances ⁽²⁾		36		13
Environmental remediation⁽³⁾		23		33
Postretirement benefits ⁽⁴⁾		259		272
Storm reserve ⁽⁵⁾		0		47
Other		23		23
Total regulatory assets		386		433
Less: Current portion		46		77
Long-term regulatory assets	$	340	$	356
Regulatory liabilities:
Regulatory tax liability⁽⁶⁾	$	722	$	730
Tax reform and storm agreement⁽⁷⁾		11		0
Cost-recovery clauses - deferred balances ⁽²⁾		25		32
Accumulated reserve - cost of removal⁽⁸⁾		511		518
Storm reserve ⁽⁹⁾		25		0
Other		4		5
Total regulatory liabilities		1,298		1,285
Less: Current portion		96		58
Long-term regulatory liabilities	$	1,202	$	1,227

(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. The regulatory tax asset balance reflects the impact of the federal tax rate reduction.

(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 asset related to derivative liability, recovery 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)	See Tampa Electric Storm Restoration Cost Recovery discussion above for information regarding this reserve. The regulatory asset was included in rate base and earned a rate of return as permitted by the FPSC. The asset was effectively recovered in 2018.

(6)

The regulatory tax liability is primarily related to the revaluation of TEC’s deferred income tax balances at the lower income tax rate recorded on December 31, 2017. The liability related to the revaluation of the deferred income tax balances will be amortized and returned to customers through rate reductions or other revenue offsets based on IRS regulations and a settlement agreement for tax reform benefits approved by the FPSC. See Note 4 to the TEC Consolidated Condensed Financial Statements for further information.

(7)	This regulatory liability represents the offset to tax reform benefits due to Tampa Electric’s settlement agreement allowing the netting of the recovery of storm costs with tax reform benefits. See Tampa Electric Tax Reform and Storm Settlement discussion above for further information.

(8)

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 represents 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.

(9)	See Tampa Electric Storm Restoration Cost Recovery discussion above for information regarding this reserve. The regulatory liability is being replenished to the FPSC-allowed storm reserve balance of $56 million.