IEU-Ohio: DP&L Self-Inflicted Any Impaired Financial Integrity from "Improper Business Relationship" with DPL Retail

Dayton Power & Light's, "claims of impaired financial integrity," for which it is seeking certain nonbypassable riders as part of its new electric security plan, "are self-inflicted and are the direct result of its improper business relationship with DPL Retail," Industrial Energy Users-Ohio alleged in testimony.

As previously reported, DP&L is seeking a nonbypassable Service Stability Rider, which includes a Switching Tracker, "to maintain its financial health" during the electric security plan, which would eventually transition SSO to fully auction-sourced supply.

"DP&L's claims of impaired financial integrity are self-inflicted and are the direct result of its improper business relationship with DPL Retail, which violates both the letter and spirit of Ohio's corporate separation requirements governing the business relationships between a regulated EDU and its non-regulated affiliates," IEU-Ohio alleged. DPL Retail refers to retail suppliers DPL Energy Resources (DPLER) and its wholly-owned subsidiary, MC Squared Energy Services, LLC.

Much of IEU-Ohio's testimony in support of this charge was redacted, as it was apparently based on interrogatory responses granted confidential status. However, from what is not redacted, IEU-Ohio's argument is centered on a change in the transfer price for supply provided from DP&L to DPLER.

As of August 30, 2012, approximately 62% of DP&L's retail load had switched to a CRES provider. IEU-Ohio noted, as previously reported, that the majority of the switched load has been retained by DPLER. Specifically, AES Corporation reported that DPL (the parent company of DPLER) had retailed 73% of switched load. "DPL has a business strategy to expand its retail customer base," IEU-Ohio said.

Though its specific supply strategy was marked confidential, DPLER apparently sources at least a portion of supply from DP&L. While specifics are confidential, IEU-Ohio raised concerns with the manner in which transfer pricing is established by DP&L for supply provided to DPLER.

According to DP&L, the transfer price reflects the market-based supply costs to meet the full supply requirements necessary for DPLER to satisfy a retail customer's bypassable generation and transmission service, IEU-Ohio said.

"Although DP&L's transfer price associated with generation and transmission sales to DPLER currently reflects market-based price, this is a change from prior business practices. As shown on Exhibit KMM-5, which is DP&L's response to the Office of the Ohio Consumers' Counsel's ('OCC') Interrogatory No. 339, in 2010 DP&L and DPLER implemented a new wholesale supply agreement that provided for transfer prices to be at market-based rates. Prior to 2010, the wholesale sales from DP&L to DPLER were at prices that approximated DPLER's sales prices to retail customers. DP&L and DPLER implemented the new wholesale supply agreement in 2010 to meet their 'business needs,'" IEU-Ohio said.

"As shown on Exhibit KMM-18, which is a copy of DPL's 2010 10-K filing at the Securities and Exchange Commission ('SEC'), prior to 2010 the transfer price between DP&L and DPLER was set at levels that approximated the DPLER retail selling price to the customer. As a result of this, the retail margin earned by DPLER was relatively low. In its 2010 10-K, DPL reported (as reflected on Page 50) that DPLER earned net income of $1.9 million in 2008 and lost $2.7 million in 2009. Following the change in transfer price methodology that was implemented in 2010, in which the transfer prices were prospectively market-based, DPL reported that DPLER earned $18.8 million in net income in 2010," IEU-Ohio said.

"As shown in Exhibit KMM-19, which is a copy of DPL's 2012 amended third quarter 10-Q report filed at the SEC, through the third quarter of 2012, DPL reported (as reflected on Page 61) that DPLER earned net income of $17.5 million," IEU-Ohio said.

IEU-Ohio further said that DP&L was not able to provide historical returns on equity for its distribution, transmission and generation business segments. DP&L also was not able to provide projected returns on equity by business segment for each year of the proposed ESP.

"[T]he inability of DP&L to provide return on equity values by business segment is the direct result of failing to maintain discrete accounting records by business segment and does not comply with Ohio's corporate separation requirements," IEU-Ohio alleged.