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Court Approves AEP’s 2012 Rate Plan and Charge for Ensuring Reliability of Electricity in Competitive Marketplace

Image of the AEP building located in downtown Columbus, Ohio

Two Court decisions give partial approval to AEP rate plans.

Image of the AEP building located in downtown Columbus, Ohio

Two Court decisions give partial approval to AEP rate plans.

The Ohio Supreme Court today released opinions addressing two separate orders of the Public Utilities Commission of Ohio (PUCO) involving proposals by Columbus Southern Power Company and Ohio Power Company, both of which are owned by American Electric Power (AEP.) The opinions are authored by Justice Sharon L. Kennedy.

In the first case, the Court partially affirmed and partially reversed the PUCO order approving a cost-based capacity charge proposed by AEP. In the second case the Court partially affirmed and partially reversed the PUCO order approving a three-year Electric Security Plan (ESP) proposed by (AEP.)

The Capacity Charge Case
The first of two opinions issued by the Court focused on AEP’s proposed charge for “capacity.” The Federal Energy Regulatory Commission (FERC) regulates capacity markets, and in order to ensure the reliability of the power grid, electricity generators need to produce more power than the anticipated demand plus a reserve margin to protect against unforeseen events. As part of a multi-state compact, AEP provides capacity for both its own generation customers and also for competitive retail electric service (CRES) providers who sell generation service in AEP’s service territory. AEP can charge for making its capacity resources available to maintain reliability in the power grid.  Since competition began in the electric generation market, AEP relied on a FERC-approved auction process to price CRES capacity.

In 2010, AEP sought a different approach to how it was compensated for providing capacity to CRES providers operating in its service territory. Specifically, AEP wanted to charge a cost-based capacity charge and it pursued a method allowed by FERC to have the PUCO set the capacity rate. AEP proposed a plan that would allow it to collect $355 per megawatt-day, which AEP claimed was its actual cost to provide capacity to CRES providers. Providers and consumer advocates challenged whether the commission had authority to establish a cost-based capacity charge, and also whether AEP’s proposed rate of $355 per megawatt-day was reasonable.

The commission found that it had authority to establish a cost-based capacity charge but that AEP’s proposed cost-based charge was too high. The commission found instead that AEP could recover its actual costs to provide capacity and earn a reasonable return with a capacity rate set at $188.88 per megawatt-day. The commission was concerned, however, that CRES providers would have difficulty competing for retail customers if they were charged a capacity charge of $188.88 per megawatt-day. To remedy this concern, the commission directed AEP to reduce the capacity rate charged to the CRES providers to match the market rate. To ensure that it was paid for its actual cost to provide capacity, AEP was authorized to defer for later collection the difference between the market price it was charging CRES providers and the $188.88 rate. The PUCO also stated that it would establish a mechanism for AEP to recover the deferred capacity costs, plus finance charges, in AEP’s second electric-security plan case.

The Office of the Ohio Consumers’ Counsel (OCC) and AEP filed an appeal challenging the PUCO capacity case order. OCC raised various challenges to the commission’s authority to approve the capacity charge and to defer the recovery of capacity costs. AEP objected to the $188.88 rate, arguing that it is too low to recover its actual costs to provide capacity.

In a decision authored by Justice Kennedy, the Court upheld AEP’s cost-based capacity charge. Specifically, the Court found that OCC had failed to demonstrate that the commission erred when it approved (1) a cost-based capacity charge, (2) set the amount of the capacity charge, and (3) allow for the deferral of capacity costs.

The Court did find merit with one argument that AEP had raised. The Court agreed with AEP that the commission acted unlawfully when it failed to explain its decision regarding certain input data and assumptions that were used to calculate the capacity charge rate. AEP had argued that the commission relied on flawed data and assumptions and that resulted in too low of a capacity charge.

Justice Kennedy wrote that the commission committed an error when it failed to specifically address any of AEP’s challenges to the inputs and failed to cite evidence to support its decision.  The Court remanded this issue to the PUCO in order to address AEP’s arguments.

The Electric Security Plan Case and Retail Stability Rider
In 2012, the commission issued an order that modified and approved AEP’s proposed three-year ESP. As part of the ESP, the commission approved a mechanism called the “Retail Stability Rider” (RSR) that was to be used by AEP to recover the deferred capacity costs from the Capacity Case. The commission instructed AEP to file an application after the ESP ends that, if approved, would allow it to recover the remaining deferred capacity costs starting in June 2015 and continuing over the following 32 months.

In addition to serving as the mechanism to recover deferred capacity costs, the RSR was also intended to provide AEP with sufficient revenue to maintain its financial integrity and ability to attract capital during the ESP. The RSR was also approved as a “nonbypassable” rider, meaning that it is paid by customers who receive generation from AEP and also by those who buy generation service from a CRES provider.

Several parties, including OCC, Kroger Co., and the Ohio Energy Group, challenged the commission’s ESP order. OCC argued that the PUCO allowed unlawful “transition revenues” to be included in the RSR. Transition revenues are a remnant of the General Assembly’s first attempt in 1999 to open the Ohio retail electric market to competition.

Transition revenue was intended to allow electric utilities to recover costs that would have been recovered through regulated rates before competition began, but were no longer recoverable from customers who switched to another generation provider. The period to recover transition revenue ended in 2010, and OCC argued that the commission could no longer allow AEP to recover transition revenue in the ESP.

In a separate decision also authored by Justice Kennedy, the Court ruled that the commission erred when it found the RSR did not include unlawful transition revenue. The Court rejected the commission’s definition of transition revenue as “overly narrow,” noting that the law bars the utility from receiving not only transition revenues but also “any equivalent revenues.”

Justice Kennedy wrote that the Court agreed with OCC that AEP was recovering the equivalent of unlawful transition revenues through the RSR in the form of capacity revenues that the company will lose under its ESP. The RSR provided AEP with $508 million in revenue in the three-year ESP, with a portion of this revenue going to reduce the amount of the deferred capacity cost to be collected after the ESP.

Justice Kennedy noted that AEP was entitled to recover only its actual costs of providing capacity, but that the commission allowed AEP to recover more than its actual capacity costs through the non-deferral part of the RSR. But because of the method used by the commission to calculate the RSR, the Court could not determine exactly how much of the revenue recovered through the non-deferral part of the RSR is allocable to CRES capacity revenues. The Court remanded the issue for further consideration.

AEP raised three issues on appeal. The Court agreed with one of AEP’s arguments. The law requires the commission to conduct a significantly excessive earnings test (SEET), which is an annual earnings review of utilities that elect to provide service under an ESP.  The review is designed to ensure that the ESP does not result in significantly excessive earnings for the utility. AEP complained that the commission erred in setting the SEET threshold, by failing to compare AEP’s earnings with earnings of comparable publicly traded companies during the same period. Justice Kennedy wrote that the commission erred when it failed to address AEP’s argument. The court remanded the issue for the commission to address AEP’s arguments.

Justices Terrence O’Donnell, Judith Ann Lanzinger, and Judith L. French joined Justice Kennedy’s opinion regarding the capacity charge.

Chief Justice Maureen O’Connor concurred in judgment only.

Justices O’Donnell and French joined part of Justice Kennedy’s opinion regarding the RSR. Chief Justice O’Connor and Justice Lanzinger joined part of Justice Kennedy’s opinion regarding the RSR rider and dissented in part.

Chief Justice O’Connor wrote that part of the statute authorizing the ESP is broadly worded including R.C. 4928.143(B). She noted that the wording of the law raises the possibility that AEP still might be able to recover the transition revenues, and that she was unaware of any case where the PUCO has clarified the meaning of the statute.

“I would remand the cause to the commission to consider and interpret the statutory language before rendering a decision on whether AEP is improperly recovering transition costs,” she wrote.

Dissent Claims Costs Not Recoverable
In a dissenting opinion, Justice Paul E. Pfeifer objected to allowing AEP to recover the capacity charges and the RSR. He maintained that AEP should only be able to charge the market rate for capacity. He wrote that by providing the discounts to the shopping customers, AEP is charging its remaining customers more to make up for the loss.

“No statutory authority enabled the PUCO to allow (AEP) to recoup from its retail customers the discount it grants to marketers,” he wrote. “The PUCO justifies the recapture of the discount by saying that it promotes stable electric service prices. Perhaps that is true, but it also results in artificially high retail utility costs.”

Justice William M. O’Neill joined both of Justice Pfeifer’s opinions.

2012-2098/2013-0228. In re Comm. Rev. of Capacity Charges of Ohio Power Co., Slip Opinion No. 2016-Ohio-1607.

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2013-0521. In re Application of Columbus S. Power Co., Slip Opinion No. 2016-Ohio-1608.

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Please note: Opinion summaries are prepared by the Office of Public Information for the general public and news media. Opinion summaries are not prepared for every opinion, but only for noteworthy cases. Opinion summaries are not to be considered as official headnotes or syllabi of court opinions. The full text of this and other court opinions are available online.

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