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PUCO Strikes POLR Charges at AEP Ohio, Retains Bypassable Environmental Costs
October 4, 2011
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The Public Utilities Commission of Ohio will allow Columbus Southern Power and Ohio Power to continue charging bypassable costs of certain environmental investments, but ruled that the AEP Ohio utilities have not justified recovery of POLR charges at the level reflected in their existing rates.
In an order on remand regarding the current AEP Ohio electric security plan (which expires at the end of this year), PUCO ruled that AEP-Ohio shall back out from rates the amount of the POLR charges authorized in the original ESP Order, and file revised tariffs.
The POLR charges which will be eliminated are technically part of the bypassable generation rate and will thus reduce the bypassable price; however, customers bypassing the POLR charge were required to agree that any return to SSO service would be at a market-based rate. Additionally, there was dispute in the case regarding whether AEP Ohio properly notified customers of the bypassability of the POLR charges.
Furthermore, PUCO ordered the utilities to refund the amount of the POLR charges which have been collected subject to refund since the first billing cycle in June 2011 by applying this amount first to any deferrals in the Fuel Adjustment Clause accounts on the companies' books, with any remaining balance to be credited to customers on a per kilowatt-hour basis beginning with the first billing cycle in November 2011 and coinciding with the end of the current ESP period.
The Ohio Consumers' Counsel reported that the total refund shall equal $78 million.
Under the current ESP, the FAC charge is bypassable; however, deferrals were to become nonbypassable as of the start of 2012.
Given that AEP Ohio's rates under the current ESP are scheduled to be in place for only three more months (possibly extended if a new ESP is not approved for the start of 2012), the PUCO decision is more notable for precedence than an immediate impact on headroom.
Among other things, PUCO ruled that, "migration risk is more properly regarded as a business risk faced by all retail suppliers as a result of competition rather than a risk resulting from an EDU's POLR obligation," and thus shall not be compensated under POLR charges.
"[M]igration risk exists for any supplier, whether CRES [competitive] provider or EDU, that operates in the competitive generation market. Thus, compensation for migration risk by means of an EDU's POLR charge would provide an advantage over its CRES competitors. Although the Companies may suffer lost revenues as a result of customer switching, the same is true for all suppliers competing in the market. The risk of lost revenues due to customer migration is simply not a risk derived from an EDU's POLR obligation," PUCO said.
Rather, consistent with Ohio court interpretations, the POLR risk is the risk of customers returning to the utility, which must be ready to serve customers returning to SSO service from another supplier, pursuant to their statutory obligation.
PUCO ultimately found that evidence did not support AEP Ohio's costs for the POLR charges. Among other things, PUCO found that the unconstrained option model used by AEP Ohio fails to provide a reasonable measure of the companies' POLR costs, "but rather purports to measure the value of the POLR optionality provided to customers."
"The Court specifically determined that value to customers and cost to AEP-Ohio are not the same thing," PUCO noted. Although the Court invited PUCO to determine whether a non-cost-based POLR charge is appropriate, AEP Ohio did not pursue this avenue in presenting evidence on remand, PUCO noted, and thus PUCO only considered whether AEP Ohio's charges were justified by its costs.
"POLR costs may be determined in numerous ways, such as hedging, competitive bidding, or an after-the-fact calculation of any incremental energy and capacity costs incurred to serve returning customers. The Companies have pursued none of these options and instead have elected to present again the results of their unconstrained option model," PUCO noted.
PUCO noted that while shopping at CSP has increased, "the level of shopping is still sufficiently small enough to cast 'doubts about the proposition that [AEP-Ohio] would justifiably expend $500 million to bear the POLR risk.'"
As to environmental investment carrying charges, PUCO found that these bypassable costs were properly authorized and may continue. These include incremental capital carrying costs that are incurred after January 1, 2009, on past environmental investments (2001-2008) that were not previously reflected in the companies' existing rates prior to the ESP Order.
"[T]he carrying charges recover the ongoing costs of environmental investments that were necessary to continue operation of the Companies' generation units and extend the useful lives of those facilities. Customers benefit from the lower cost power that they receive as a result. The alternative to the investments in the Companies' generation assets would be increased use of purchased power to serve the Companies' SSO load. The record reflects that this cost of the environmental investments was below the market rate for purchased power at the time the Commission considered the ESP," PUCO said.
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