Duke Energy Ohio MBSSO Amendment
Case No. 06-986-EL-UNC

Duke Energy Ohio’s (formerly known as the Cincinnati Gas & Electric Company) (“DE-Ohio”) market-based standard service offer (“MBSSO”) was established in Case No. 03-93-EL-ATA. DE-Ohio filed an application seeking authority to amend its MBSSO to be effective January 1, 2009.

Under DE-Ohio’s proposal, DE-Ohio would charge consumers a price to compare and a market price for the provider of last resort (“POLR”) service. The price to compare would consist of 85% of DE-Ohio’s unbundled generation rate plus the by-passable portion of a rate stabilization charge (“RSC”) equal to 24% in 2009 and 25% in 2010 of DE-Ohio’s unbundled generation rate less DE-Ohio’s Regulatory Transition Charge (“little g”) plus any PUCO approved increases to the Annually Adjusted Component (“AAC”) made prior to December 31, 2008 including recovery of environmental reagents approved for 2009, plus the fuel cost component. The AAC would no longer be billed separately but would be combined with the updated RSC that would be adjustable based upon incremental environmental costs, taxes and homeland security cost incurred January 1, 2009 and thereafter. The updated RSC would continue to be by passable by 25% of residential load and 50% of non-residential load.

The POLR charge would consist of updated Infrastructure Maintenance Fund (“IMF”) charge, plus the System Reliability Tracker (“SRT”) set at a reserve margin of 15% of DE-Ohio’s total load in its certified territory. The POLR would also consist of the non-by-passable portion of the RSC. The IMF would be phased in over the two year MBSSO wherein the IMF would be initially set at 9% of the little g in 2009 and updated to 10% of the little g in 2010.

DE-Ohio proposes to eliminate the SRT and would seek annual price adjustments based upon the cost of maintaining a 15% revenue margin as part of the IMF. DE-Ohio would also eliminate the ability of non-residential consumers to by-pass the SRT component of the IMF. The Transmission Cost Recovery (“RTC”) tracker under the MBSSO would continue in which the first call on the legacy generating assets of Cincinnati Gas & Electric would be committed to the MBSSO load in exchange for the IMF charge. All the other conditions of the RSP would be maintained including by-pass-ability, charging the market price to returning customers and the competitive bid process. DE-Ohio proposes to amend its Corporate Separation Plan so as not to be required to transfer its generating assets to an Exempt Wholesale Generator in order to continue to provide generating service from its generating assets.

DE-Ohio has offered to enter into a settlement as attached to application with willing parties. In exchange DE-Ohio will agree not file an application for rehearing or notice of appeal of a PUCO order that would resolve all the issues raised in this application. The offer of settlement is contingent upon PUCO approval without modification.

Remand of Cincinnati Gas & Electric Company’s Rate Stabilization Plan
Case No. 03-93-EL-ATA

In 2003, Cincinnati Gas & Electric Company (“CG&E”) filed applications to modify its non-residential generation rates to provide for market-based standard service offer pricing and to establish an alternative competitive-bid process subsequent to the end of the market development period. OMA intervened in March 2004.

A settlement agreement was filed with the PUCO. The signatory parties to the stipulation include: CG&E, Staff, IEU-Ohio, Ohio Hospital Association, Dominion Retail, The Ohio Energy Group, Kroger Company, AK Steel Corporation, Green Mountain Energy, People Working Cooperatively, Inc., FirstEnergy Solutions Corp., Communities United for Action and Cognis Corporation. The Stipulation was not signed by the OMA, the Office of the Ohio Consumers’ Counsel (“OCC”), the City of Cincinnati, Ohio Partners for Affordable Energy, the National Marketers Association and a group of marketers. The issues that were most hotly contested were the various components of the Provider of Last Resort charges; the assessment upon customers who shopped for longer than one year; and the applicability of the competitive electric generation credit.

The PUCO approved the stipulation with substantial modifications. Applications for rehearing were filed by CG&E, OCC and a group of marketers. CG&E asked the Commission to either (1) reinstate the Stipulation; (2) adopted an alternative proposal; or (3) approve CG&E’s right implement it market-based standard service offer.

OCC filed an appeal with the Ohio Supreme Court. On November 22, 2006, the Ohio Supreme Court rejected OCC’s contention that the PUCO failed to meet certain procedural requirements and that the plan did not provide for a competitive bidding process as statute requires. However, the Court agreed with the OCC that the PUCO erred when it did not permit the discovery of undisclosed agreements between CG&E and signatory parties that were not made part of the stipulation. While the PUCO argued that the possible existence of separate, undisclosed agreements was irrelevant to its evaluation of the reasonableness of the stipulation, the Court called for regular review of PUCO rules to aid full and reasonable discovery by all parties. The Court noted, “The commission cannot rely merely on the terms of the stipulation but, rather, must determine whether there exists sufficient evidence that the stipulation was the product of serious bargaining.” Furthermore, the Court stated “if there were special considerations, in the form of side agreements among the signatory parties, one or more parties may have gained an unfair advantage in the bargaining process.”

The case was remanded to the PUCO for further consideration.

Remand of American Electric Power’s Rate Stabilization Plan
Case No. 04-169-EL-UNC

Columbus Southern Power Company (“CSP”) and Ohio Power Company (collectively “AEP”) filed an application for approval of a post-Market Development Rate Stabilization Plan (“RSP”) (Case No. 04-169-EL-UNC). AEP proposed to substitute its plan for a post-market development period market-based standard service offer and to eliminate a competitive bidding process from 2006 through 2008. The PUCO approved the application, which resulted in a 3% generation rate increase for CSP worth $77 million annually by 2008, and a 7% increase for Ohio Power worth $194 million annually.

OCC filed a Notice of Appeal with the Ohio Supreme Court, in which OCC argued, among other things, that the PUCO order violated Ohio Revised Code Section 4928.14(A) and (B). Section 4928.14(A) requires that a market-based standard service offer be available to customers at the end of the Market Development Period, and Section 4928.14(B) requires that an option to purchase competitive retail electric service at a price determined through a competitive bidding process be made available to customers at the end of the Market Development Period.

Consistent with its decision in the appeal of the FirstEnergy RSP proceeding, the Ohio Supreme Court vacated and remanded the PUCO Order for further consideration. By entry issued in August 2006, the PUCO directed AEP to file a plan that would provide an option for customers to purchase electric service at a price determined through a competitive bid process, or through another means that would be readily available and accessible to customers. In the meantime, the PUCO found that AEP’s RSP should remain in effect.

Thereafter, AEP filed a plan (PUCO Case No. 06-1153-EL-UNC) for a competitive-bid power supply option. Under the plan, AEP would survey its customers to determine what price they would participate in a standard or “green” power option to offer the opportunity to participate in a specific option at a specific price. After review customer responses, an independent monitor would provide a price summary in a request for proposals seeking wholesale bids from other suppliers. After the bids are analyzed, the customers that committed in advance to a specific option would get notice of the winning bid and be enrolled in the program. The remaining customers would receive notice of the new power supply options and have 21 days to enroll.

AEP Distribution Service Reliability
PUCO Case No. 06-222-EL-SLF

In December of 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% worst performing circuits in order to reduce the average outage time by 40%, 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% lowest performance circuits were exceed, 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.

As a result of the final report, the PUCO directed 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. 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.

In the meantime, the PUCO directed 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.

In July 2006, the PUCO found that the $5 million proposed by AEP was not adequate to address its failure to meet the terms of the stipulation. Therefore, the PUCO fined AEP $10 million, and found that AEP would not be permitted to recover the fine from ratepayers. AEP was ordered to submit a plan that outlines future plans to ensure reliability and service quality, project costs to implement the service reliability programs and provide supporting documentation and testimony.

AEP filed its Enhanced Distribution Service Reliability Plan (“Plan) along with supporting testimony. The Plan covers a five-year period, and purports to be adjustable as circumstances arise. The Plan sets forth:

• Those have the greatest negative impact on service reliability, and which present practical opportunities for mitigation. The mitigation opportunities are found in programs aimed at vegetation management, equipment failures, circuit protection, fault indicators, power cables, underground residential distribution cables and stations.

• Certain technology enhancements that are intended to reduce the time needed to restore service including a discussion of these incremental activities and the interrelationship among many of the proposed programs. AEP suggested that the interrelationships should enable it to realize synergies.

• The costs for the incremental components (operation and maintenance and capital investments) for the five years of the Plan.

AEP requested that the PUCO approve the cost recovery of its Plan so that it can begin providing its “enhanced level of service reliability.”

The PUCO scheduled local public hearings in Lima, Reynoldsburg, Canton, Marietta, Zanesville, and Athens. An evidentiary hearing is scheduled to begin on February 27, 2007.

Notes from an October 10, 2006 Energy Roundtable

Jerry Solove, Chairman of the OCC Board, provided opening remarks to a Q&A format among the panelists, moderated by Attorney General Jim Petro.

The panel consisted of Tony Alexander, John Hagan, Janine Migden-Ostrander, Bob Schuler, Jack Partridge and Alan Schriber. The first question is posed at 2:50 p. and was directed to Tony Alexander.

Note: Q & A’s are paraphrased.

Q1: In light of the escalating prices of your primary fuel stocks, natural gas and coal, how do you foresee meeting the continued demand for coal and gas?

Alexander – The electric industry is very good about finding new and innovative ways to meet the demands of the marketplace. For instance, we have gained 300 MW through facility upgrades alone, and we anticipate adding an additional 350 MW through wind generation.

Follow-up Q1: But when will we see new baseload?

Alexander – The market must reflect the true cost of power. When we finally have a market that reflects the “true price” of generation, then you will see not only new baseload generation, but an appropriately shaped demand side load profile, as well. But accurate price signals are essential.

Migden-Ostrander – We need to expand our generation portfolio with renewables, as 20 states have already taken steps to achieve. We need to focus on wind and CHP. CHP represents efficiency, which is an essential part of the forward-looking solution to meeting our generation needs

Petro follow-up: Where does nuclear power fit in the mix?

Migden-Ostrander – I’m skeptical that we will see new nuclear generation, due to its costs.

Alexander – We’ve missed an opportunity with respect to nuclear power. We are way behind the other industrialized nations in using this power resource. We need all options in the mix.

Schuler – Costs of nuclear may be higher, but the alternatives that we are facing may be just as high.

Schriber – I’m confident that we’ll see new nuclear in the mix—likely in the Carolinas first, but it will come.

Hagan – Let’s let the markets decide the best generation mix.

Petro – we’ve dropped the ball as a nation with respect to nuclear power. There is the whole national security issue. We have to break our dependence on foreign sources of energy.

Q2 (directed to Partridge) Will the electric and gas infrastructure be able to handle future demand?

Partridge – Yes, so long as we continue to maintain it, but we need to get creative about how we will fund this.

Alexander – Infrastructure needs improvement over time. It’s no longer a declining cost business. Copper is three times the cost and poles are twice the costs. We need more cash.

Migden-Ostrander – We need to remain cognizant of the effect of these cost increases on consumers.

Q3 (directed to Migden-Ostrander) What should we be doing about affordability?

Migden-Ostrander – Well, the threshold for universal service funding, currently set at 140% of the national poverty level, needs to be moved to 200%. We need better payment plans from the utilities. For the long term, we need greater efficiency and greater reliance on renewables. (Janine made a point to Petro to distinguish “efficiency” from “conservation” – a very good point.)

Partridge – I agree with Janine. We need to be as efficient as possible and we need non-traditional sources of power. We also need customer education.

Alexander – There has been a fundamental change in the paradigm. We are now “pipes and wires” companies. Efficiency is generation-driven. Don’t put the distribution company in the position of working against its own financial interests. It raises the costs of operating its systems and raises prices to consumers for an effect that shows up on a different bill. Accurate price signals will take care of the problem.

Schuler – Large users need a business friendly state.

Schriber – The problem is that affordability is an “income” problem, not a “cost” problem.

Hagan – Consumption is affected by price. But we need to encourage industry and business to use energy—that in turn provides jobs, which in turn goes a long way to dealing with the income issue.

Migden-Ostrander – This goes well beyond conservation and efficiency. The long-term benefits of efficiency are incalculable. The programs of the distribution company will show benefits on the generation bill.

Alexander – But it’s a different bill, and that’s the point.

Q4 (addressed to Schriber) RTOs were supposed to produce efficiencies and savings. What happened?

Schriber – We have two RTOs in Ohio, PJM and MISO. PJM was a well-established power pool that morphed into an ISO, while MISO was specifically created for that role. Both have suffered growing pains. But I believe that a certain portion of these problems are due to the unfair delegation of responsibility over certain aspects of their operation by the FERC, which appears to have certain problems dealing with major issues such as congestion and pricing. Having two ISOs span Ohio is illogical and there are charges there that should not be.

Alexander – We are in the process of creating the most complex marketplace in the world. Keeping this fact in mind, the process is proceeding reasonably well. Migden-Ostrander – I agree with Alan. Consumers are not getting enough input into the process.

Q5 (addressed to Schuler) Should the General Assembly revisit Senate Bill3?

Schuler – Well, having lived through the passage of Senate Bill 3, my gut response is “no.” But things haven’t worked out the way we expected back in ’99, so we will be taking a look at this.

Petro follow-up question: Any idea of what would take its place?

Schuler – No specific proposal has been introduced by anyone, but we will be looking at this.

Alexander – Senate Bill 3 is working the way it was expected to work. The cost, hence the price, of generation is going up. Competitive markets will drive better options and prices for consumers.

Schriber – The market has not materialized. We do not have a competitive structure in place. Over the long run, Tony is right, but right now the RSPs, chosen by the EDUs, are a win-win proposition. Otherwise, there would be too much financial risk and no new generation would get built.

Alexander – The experience of 2000-2002 shows that not to be the case—plenty of generation was built.

Schriber – But no baseload.

Alexander – That’s because no baseload was needed! Had baseload been needed, it would have been built. Further, you had below market prices in place serving as a major market barrier.

Migden-Ostrander – I disagree that RSPs have been good for consumers. We need an integrated portfolio plan in place (she launches into a commercial for her proposal)

Petro follow-up question: How do you plan for 20 years into the future?

Migden-Ostrander – With the same forecasting process that the utilities used for years.

Alexander – A 15-year commitment will cost more than anyone can imagine. The OCC’s proposal combines the worst of two paradigms—the old RB-ROR central planning feature combined with the markets’ tendency to bid incrementally at the most expensive cost.

Q6 (directed at Partridge) DEO is exiting the GCR function. Do you see this as a trend?

Partridge – It’s too early to tell. DEO is off to a good start. Phase I went very well. But there are significant structural differences between DEO and COH. DEO has all that on-system storage. COH has many, many delivery points. The complexity of operation on COH is just different.

Migden-Ostrander – Ohio has always been the leader with respect to gas choice. Phase I of DEO’s pilot has been a good deal for consumers. But we still need to see how it goes.

Hagan – The Canadians are selling us gas drilled from Lake Erie. We need to take a closer look at this domestic source. We need to be careful about subsidized services. If you want to keep businesses in Ohio, you better not give them a reason not to be here.

Schriber – As far as large consumers are concerned, conservation has pretty much run its course. For the large, sophisticated users, it’s all about price. They need price certainty.

Partridge – We need diversity of supply. We were hit hard by last years’ gulf supply problems. We need that gas from the Rockies and Canada. Also, interstate pipelines are taxed at 80% of value in Ohio, as opposed to the 25% assessed on other kinds of businesses. This does not give pipelines the proper incentive to pass through Ohio.

Q7 (addressed to Alexander) What effect can the new governor have on the energy policy of the state?

Alexander – He can encourage business to come to the state through an absence of business taxes and socialized costs. Utilities are businesses and as you affect our costs, you affect the costs of our business customers.

One of the effects of Senate Bill 3 was to take away the ability of utilities to do special contracts for businesses.

Hagan – The Governor’s appointments can have a drastic effect on the energy landscape.