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Keeping Electric Rates Competitive

Comparison of Average Electric RatesElectric rates and reliability remain the primary drivers of customer satisfaction. In 2007, our costs of service were below the national average and near or below statewide averages. However, the cost to produce energy is rising, and we are not immune to rising market prices. Worldwide demand for steel, cement, skilled labor and all other inputs to power plant construction, operation and maintenance have already forced us to raise cost estimates for major construction projects. We are working to stabilize prices and minimize impacts on customers through long-term contracts and other commitments with contractors and vendors.

In Kentucky, we received permission from the Public Service Commission to raise annual revenues by approximately 20 percent, effective January 1, 2007. This was the first rate increase for Kentucky customers in 16 years. In Ohio, we received permission from the Public Utilities Commission to increase our revenues by over 10 percent through periodic riders. We will continue efforts there to address long-term rate and generation supply uncertainties.

It is occasionally appropriate to reduce rates and still be fiducially responsible to investors. In North Carolina, we reached an agreement to reduce annual revenues by 5.4 percent beginning in 2008 and by 7.6 percent beginning in 2009. The reduction in rate revenue is offset by a reduction in expenses resulting in an immaterial impact to earnings.

There were no specific rate actions in Indiana or South Carolina in 2007 other than the annual adjustments for items like fuel costs.