AEP Seeks Higher Capacity Charge from Retail Suppliers at Indiana Michigan Power

Indiana Michigan Power Company (I&M), an AEP company, has sought FERC approval to charge a capacity rate other than the Reliability Pricing Model clearing price for capacity it provides to retail suppliers as the Fixed Resource Requirement entity (ER12-1173).

Under I&M's proposed formula rate, the capacity charge to retail suppliers would be $394 per MW-day.

To date there is no retail shopping in the I&M Michigan jurisdiction. Additionally, Michigan has not established a compensation mechanism for capacity provided by the Fixed Resource Requirement entity.

The proposed capacity charge was protested by the Retail Energy Supply Association and FirstEnergy Solutions.

RESA said that the rate of $394 per MW-day, or $144,000 per MW-year, is "excessive," and said that I&M's own tariff demand rates in Michigan are approximately $4.50/kw-month, which translates to approximately $54,000 per MW-year

RESA noted that I&M seeks to include in the capacity charge 100% of construction work in progress (CWIP) costs associated with Pollution Control Facilities and Fuel Conversion facilities and 50% of all other CWIP costs.

"CWIP does not represent capacity that is currently used and so is not a category of costs includable in a capacity payment. The same is true for I&M's proposal to include in the formula arbitrary legacy costs associated with Post-Employment Benefits other than Pensions and Post Employment Benefits," RESA said.

FirstEnergy Solutions said that the PJM Reliability Assurance Agreement should be interpreted to require that capacity rates charged by FRR entities are subject to the same mitigation rules as suppliers who participate in capacity auctions. "That means prices should be capped at the Avoided Cost Rate ('ACR'), as defined in the PJM Tariff, Attachment DD," FirstEnergy Solutions said.

The ACR generally captures short-run marginal costs to keep a resource in operation for an additional year as compared to mothballing or retirement, less the net income or margins that the unit could earn from the energy markets.