PUCO: AEP Cost Recovery Application

On March 18, 2005, Columbus Southern Power Company and Ohio Power Company (collectively AEP) filed an application, Case No. 05-376-EL-UNC, for authority to recover costs associated with the construction and operation of a 600 MW integrated gasification combined cycle (IGCC) electric generation facility. Basically, AEP is requesting authority to implement a three-phase mechanism to guarantee cost recovery associated with the construction and operation of a generation plant that it intends to treat as a regulated asset, although Ohio Revised Code Section 492817(E) appears to prevent the PUCO from enforcing AEP’s intentions.

AEP requested that Phase II begin with the billing cycle in January 2007 and continue through the last billing cycle before the power plant is put into commercial operation (estimated for mid-2010). They also requested that it collect an annually levelized carrying charge on the cumulative construction costs, including carrying costs deferred after the Engineering, Procurement and Construction contract is executed and through the end of 2006.

For Phase III, AEP proposed to file an application for an IGCC recovery factor hat would be based upon a return of the investment in the plant as well as operating expenses, including fuels and consumables. AEP requested authority to treat this plant as if it were a single asset regulated utility.

On April 10, 2006, the PUCO issued an order finding that the IGCC generation plant is considered to be part of the wires distribution system, and allowable as a regulated asset because the utility will remain the provider of last resort (POLR). The PUCO reached this decision by tortuous reasoning claiming that because it labeled the POLR service “ancillary” and therefore it was not competitive, it was a regulated service. In reaching this conclusion, the PUCO implied that an electric distribution utility could own and operate a generating station in order to provide POLR service. Therefore, the PUCO authorized AEP to recover $23.7 million in pre-construction costs associated with the IGCC generation plant (Phase I). The PUCO deferred ruling upon AEP’s request to recover costs associated with Phase II and Phase III, and instead directed AEP to address the level of cost recovery, rate design, how the plant would benefit customers, how Ohio coal would be used, what byproducts would be sold, how many federal tax incentives the plant would be eligible for and how AEP plans to present the project to outside investors.

Applications for rehearing were filed by several interveners, and on June 6, 2006, the PUCO deferred its decision on rehearing.

PUCO: FirstEnergy Competitive Bid Process

In December 2004, the first competitive bid process auction for FirstEnergy took place. Based upon the auction results as compared to the rate stabilization plan, the PUCO found that the final auction price of 5.45 cents per kWh should be rejected. However, the PUCO noted “the auction showed that there are bidders available to supply the load of FirstEnergy territory. The indicative offers sufficiently covered the retail load being bid and the auction cleared the first round successfully.” The PUCO “will analyze the process, procedure and substance of the auction, and will consider another auction next year for the remaining two years of the RSP.”

On July 22, 2005, FirstEnergy filed an application for approval of the 2005 competitive bid process for its 2007-2008 retail electric load. The filing consisted of an Application, Supplier Master Agreement, Auction Rules, Price Matrix and Reconciliation Mechanism, Communications Protocol, and Schedule. The PUCO approved the application with modification and directed FirstEnergy to refile the Supplier Master Agreement.

On February 24, 2006, Constellation Energy Commodities Group (Constellation) and the Office of the Consumers’ Counsel (OCC) filed applications for rehearing of the PUCO’s January 25, 2006 entry. Constellation sought rehearing on the starting price, while OCC argued that the Commission erred when it failed to establish an appropriate starting price and failed to adequately modify the CBP to improve its potential success. In the meantime, the Auction Manager notified the PUCO on February 23, 2006, that there was insufficient interest to proceed with the auction, and consequently the competitive bid process was not able to proceed to the next stage. On March 20, 2006, the PUCO issued an entry on rehearing; denying the applications for rehearing filed by Constellation and OCC.

PUCO: FirstEnergy’s Rate Stabilization Plan

FirstEnergy Service Company, on behalf of Ohio Edison Company (OE), The Cleveland Electric Illuminating Company (CEI), and The Toledo Edison Company (TE) (collectively, FirstEnergy) filed an application on October 21, 2003, for authority to continue and to modify certain regulatory accounting practices and procedures, and to establish regulatory transition charges following the market development period (MDP). FirstEnergy proposed to either (a) establish a competitive bidding process to determine standard offer generation service rates commencing as of January 1, 2006, under which the price for generation services would be determined by then current market prices, or (b) implement a rate stabilization plan at the current tariffed levels (with some adjustments), to be effective through December 31, 2008, which FirstEnergy contends that it would provide stable long-term competitive pricing of energy services for their customers, assure electricity and enhance economic development within the companies’ service areas.

On June 9, 2004, the PUCO approved a modified version of FirstEnergy’s proposed rate stabilization plan, and further found that the price under the plan should be periodically compared with the prices submitted in a competitive bid process. On rehearing, the PUCO further modified the rate stabilization plan.

OCC and the Northwest Ohio Aggregation Coalition, which included the cities of Maumee, Northwood, Oregon, Perrysburg, Sylvania, the village of Holland and the Board of County Commissioners of Lucas County (NOAC) filed appeals to the Ohio Supreme Court. OCC and NOAC argued that the court should reverse the PUCO’s approval of the rate stabilization plan, the rate stabilization charge, shopping credits, allowance of interest on shopping credits and FirstEnergy’s financial-separation plan.

In a 5-2 decision, the Ohio Supreme Court reversed the PUCO’s approval of the rate stabilization plan finding that the PUCO failed to follow a statutory requirement for utilities to provide customers with both a market-based standard service offer and an option to buy service at a price to be determined through a competitive bidding process. However, the court upheld the PUCO’s approval of the rate stabilization charge, shopping credits, interest on shopping credits, and First Energy’s financial-separation plan.

PUCO: AEP Distribution Service Reliability

In December 2003, Columbus Southern Power and Ohio Power (collectively AEP) entered into a stipulation with staff, which addressed concerns of staff regarding AEP’s provision of electric distribution service to certain rural areas. AEP agreed to make improvements to its 25 percent worst performing circuits in order to reduce the average outage time by 40 percent, and to maintain three other circuit quartiles at levels that would not worsen from their 2002 levels.

On January 31, 2006, AEP filed its final report pursuant to the stipulation. While the performance goals for the 25 percent lowest performance circuits were exceeded, AEP stated that the baseline system average interruption duration index was not maintained for the remaining three circuit quartiles. AEP also filed an application requesting the PUCO to implement a process whereby AEP would present enhanced service reliability programs for PUCO approval, and if approved AEP would be authorized to recover those costs through an increase in distribution rates.

On February 6, 2006, the PUCO issued an entry directing staff to review and file a report on AEP’s performance during the course of the stipulation, recommend what consequences should be taken for it failure to fulfill the terms of the stipulation, and determine what areas of distribution service quality require improvement in order for AEP to provide reliable distribution service.

On April 17, 2006, Staff filed its report finding that for the years 2001 through 2005 that the system-wide reliability performance of both Columbus Southern Power and Ohio Power “has been getting worse on all measures, even after their efforts during the past two years.” Staff recommended that the PUCO order AEP to submit a comprehensive plan to improve its service reliability.

On May 3, 2006, the PUCO issued an entry directing AEP to begin developing a plan to enhance its service reliability, and to file a response to staff’s recommended consequences for its failure to maintain system-wide performance for the second, third and fourth quartiles.

AEP filed its response on May 23, 2006, arguing that the PUCO should not impose any consequences for its failure not to meet all the terms of the stipulation. AEP offered to commit $5 million to further improving its system reliability, and agreed not to request recovery from its customers any of the $5 million.

PUCO: Dayton Power & Light Company’s
Distribution Rate Increase

On September 3, 2003, the PUCO approved Dayton Power & Light Company’s (DP&L) rate stabilization plan (RSP), which established a rate stabilization period of January 1, 2006 through December 31, 2006, and allowed DP&L to assess a rate stabilization surcharge (RSS) rider of up to 11 percent of its generation charges over a three-year period. DP&L filed an application for authority to increase rates and to establish the RSS rider. The PUCO approved a partial stipulation.

The Ohio Consumers’ Counsel (OCC) filed an application for rehearing arguing in part that that the Commission erred by only considering generation costs without a proceeding pursuant to the statutory requirements of an increase in distribution rates. The Ohio Partners for Affordable energy (OPAE) also filed an application for rehearing, arguing that the stipulation failed to meet the goals of the rate stabilization plans. On February 22, 2006, the PUCO denied the applications for rehearing. On April 21, 2006, the OCC filed a notice of appeal with the Ohio Supreme Court setting forth the same arguments raised on rehearing.