PUCO Seeks Dismissal of AEP Ohio Capacity Cost Application at FERC

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December 13, 2010

The Public Utilities Commission of Ohio has asked FERC to dismiss the application of Columbus Southern Power and Ohio Power to institute a formula rate for capacity compensation from retail suppliers, given that PUCO action has made the issue moot (FERC Docket ER11-2183).

As only noted in Matters last week (12/9), PUCO expressly adopted the current capacity charges established by the three-year capacity auction conducted by PJM, Inc. as the as the state's capacity compensation mechanism for Columbus Southern Power and Ohio Power, during the pendency of a newly initiated review of the companies' capacity charges which are collected from retail suppliers under the Fixed Resource Requirement (PUCO case 10-2929-EL-UNC).

Prior to such actions, the AEP Ohio companies had sought approval from FERC to transition capacity payments under their Fixed Resource Requirement (FRR) plan from a market-based payment to a cost-based payment, which would result in retail suppliers paying millions of more dollars to the AEP Ohio companies for capacity (11/22).  FERC has the authority to set this rate if no state-established rate for capacity has been set.

"[T]he Ohio Commission maintains that there is no current need for FERC to advance its proceeding regarding this matter because the Ohio Commission has a rate for capacity charges to [retail] providers.  Consequently, the Ohio Commission respectfully requests that FERC dismiss the application and close this investigation, or, in the alternative, suspend its final decision in this proceeding until the Ohio Commission has concluded its state proceeding," PUCO said.

Several retail suppliers and other parties similarly moved for dismissal of the AEP companies' application as moot, and also argued that, even absent PUCO's recent order, PUCO had established a capacity compensation rate under the AEP companies' electric security plan when adopting a POLR charge.

Additionally, parties opposed the AEP companies' formula rate filing as unsupported, citing the lack of workpapers and other evidence.

"As AEP has offered no justification for its proposed cost-based capacity pricing method, let alone made a showing that the resulting, inflated capacity rates are just or reasonable, the Commission should reject AEP's Formula Rate Filing," the Ohio Consumers' Counsel said.

FirstEnergy Solutions offered that, "AEP apparently assumed that it could seek recovery of its full embedded costs at FERC, but the tariff does not say this.  It only says compensation may be 'based on costs' 'or such other basis shown to be just and reasonable.'"

"It seems unlikely that the tariff was ever intended to grant AEP the right to recover additional generation costs beyond those allowed in the RPM program or to file for more compensation at FERC than AEP is already getting in Ohio.  And any FERC capacity rate would obviously have to be offset against all of the other capacity charges and revenues that AEP already collects," FirstEnergy Solutions said.

The Industrial Energy Users-Ohio and Ohio Partners for Affordable Energy argued that the AEP companies' formula rate would result in a price squeeze prohibited by law.   

IEU and OPAE noted that, effective January 1, 2011 as proposed by AEP Ohio, capacity purchases by retail suppliers would effectively be re-pried from the base residual auction for the 2010-2011 delivery year to a much higher price that has been developed by AEP-Ohio based on the costs of its own generation assets.  However, retail suppliers could not exercise their ability to opt-out under the Fixed Resource Requirement given the late date, since an opt-out election was required by November 21, 2007

At the same time, AEP Ohio's retail generation rates are in effect in Ohio until December 31, 2011.

"AEP-Ohio's Application proposes cost-based wholesale rates that are significantly higher than the capacity-related components of AEP's current retail rates in Ohio and are significantly higher than the market-based clearing prices for capacity during the relevant time periods.  Because [retail] providers will be required to purchase capacity from AEP at the higher wholesale rate, it will be impossible for [retail] providers to compete with AEP's Standard Service Offer.  There can be no doubt that a cost-based formula rate that would subject potential competitors to capacity rates from 49% to 93% higher than prevailing market rates for capacity (as reflected in RPM clearing prices) would have a chilling effect on retail competition in Ohio and place [retail] providers at a distinct competitive disadvantage relative to AEP-Ohio's default service.  It is inevitable that a price squeeze will occur if the Commission approves AEP's Application," IEU and OPAE said.

Furthermore, "IEU-Ohio and OPAE suggest that the market chilling implications of the Application have already damaged emerging competition in the retail market," due to the uncertainty created by AEP Ohio's FERC application.

 

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