FERC Rejects Formula Rate for AEP Ohio FRR Capacity Compensation

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January 21, 2011

FERC ruled yesterday that Columbus Southern Power and Ohio Power are not authorized to introduce a new formula rate to set the price paid for capacity by competitive retail suppliers under the AEP Ohio Fixed Resource Requirement (ER11-2183).

FERC agreed with protestors, such as industrial customers and retail suppliers, that the issue was cut-and-dried since the Public Utilities Commission of Ohio has already established a compensation rate -- the market price set by PJM (12/13).

Section D.8 of Schedule 8.1 of the PJM Reliability Assurance Agreement (RAA) provides that a "state compensation mechanism will prevail" in allocating capacity costs to retail suppliers.  "In this case, the Ohio Commission has adopted such a state mechanism and we therefore reject the AEP Ohio Companies' filing," FERC said.

"The AEP Ohio Companies recognized in their initial filing that the absence of a state mechanism was a prerequisite to their filing, stating 'Ohio has not established a compensation mechanism for capacity sales.'  It is uncontroverted that such a mechanism has now been adopted by the Ohio Commission, even if the parties disagree over whether such a mechanism existed on the date the AEP Ohio Companies submitted its filing," FERC added.

"The AEP Ohio Companies argue that the RAA expressly provides for making a section 205 filing to change the compensation mechanism.  However, when read in context, the provision for making a section 205 filing applies only when no state compensation mechanism exists; the adverbial phrase in Section D.8 of Schedule 8.1 of the RAA, 'in the absence of a state compensation mechanism,' qualifies the remainder of that sentence and therefore conditions the right to make a section 205 filing," FERC held.

As to the AEP Ohio companies' argument that relying on the existence of a state-established capacity price would deprive them of their section 205 rights under the Federal Power Act, by usurping FERC's exclusive jurisdiction over wholesale rates, FERC concluded that, "[t]he AEP Ohio Companies, however, voluntarily signed the RAA, and, therefore, in fact, they have voluntarily relinquished such rights under Atlantic City, and the AEP Ohio Companies made this filing pursuant to the PJM RAA.  Since the PJM RAA does not permit AEP to change a state imposed allocation mechanism, and AEP is a signatory to the RAA and does not have the right to change the PJM RAA unilaterally through a section 205 filing, this section 205 filing is not the appropriate vehicle for challenging the justness and reasonableness of Section D.8 of Schedule 8.1 of the PJM RAA."

FERC said that it need not, and did not, address whether the AEP Ohio companies may challenge the state-established capacity rate provision of the RAA under section 206 of the Federal Power Act, 16 U.S.C. § 824e (2006).

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