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Arkansas Public Service Commission has approved an order with a general rate increase of $8.8 million for OGE Energy Corporation’s (OGE - Analyst Report) subsidiary OG&E. The rate hikes will be implemented from July 1, 2011.

For an Arkansas residential customer using 1,000 kilowatt-hours per month, the increase will be $2.32 per month. However, per the company even after the new rates take effect, OG&E's Arkansas residential rates will be 35% below the national average and 13% below the regional average.

The rate hike will help the company to recover the cost incurred for significant electric system expansions and upgrades. The rate order gives the company the much-needed confidence to invest in electric infrastructure including high-voltage transmission lines and wind energy.

Such investments in turn are targeted towards keeping the cost in check over the long term as OG&E wants to avoid building a new power plant until at least 2020. Such initiatives could provide significant savings for customers in future.

OGE Energy is the largest electric utility in Oklahoma, and its well positioned regulated utility and unregulated midstream gas businesses carry lower risk. The company is pursuing an aggressive energy efficiency program, investing in renewable energy technologies and upgrading its infrastructure. The company is also focused on developing renewable energy projects and upgrading its distribution system.

Recent investments (Redbud, wind development) have positioned the company in good stead to comply with environmental regulations and meet its 5% - 7% long-term EPS growth target. Also, OGE Energy has been able to make the best use of Oklahoma’s topography and develop some precious wind energy assets. Looking forward, lower-than-average electricity rates provide the company with significant scope for growth.

However, OGE Energy’s utility operations are subject to federal, state and local legislative requirements, as well as extensive environmental regulations. Changes in the regulatory landscape could also impact the company’s earnings.

Inability to comply with various laws and regulations and hindrances in obtaining fair and timely rate relief and requisite regulatory approvals could have an adverse impact upon its future earnings and growth. Thus, we reiterate our Neutral recommendation on the Zacks #3 Rank (Hold) stock. In the near-term the stock will trade in line with its Zacks #3 Rank peers like El Paso Electric Company (EE - Snapshot Report) and American Electric Power Co. Inc. (AEP - Analyst Report).

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