PUCO Staff Files Testimony Supporting Lower Capacity Charge at AEP Ohio

Staff of the Public Utilities Commission of Ohio has sponsored testimony supporting a reduced capacity charge applicable to capacity provided to retail suppliers from AEP Ohio under the AEP Ohio Fixed Resource Requirement plan.

Staff presented testimony from Energy Ventures Analysis and Larkin & Associates, PLLC that made several adjustments to the capacity charges as filed by AEP Ohio, with Staff's testimony finding that the capacity rate for AEP Ohio on a merged basis would be $144.58 per MW-day after the adjustments. AEP Ohio's sought capacity charge, on a merged basis, under current inputs to AEP Ohio's proposed formula rate is about $355/MW-day.

More specifically, Staff's testimony supports a capacity rate, on an unmerged basis, of $81.08 per MW-day at Ohio Power Company (OPCo) and $236.18 per MW-day at Columbus Southern Power (CSP).

Staff's adjustments reflected the removal of certain costs included in the rate filed by AEP Ohio, and the deduction of energy and ancillary service credits from the capacity rate.

Among other things, Staff's witnesses adjusted the rates of return included in the capacity rate calculation to 7.78% and 7.97% for CSP and OPCo, respectively, versus the rates of return used by AEP Ohio of 8.63% for CSP and 8.62% for OPCo.

Staff's witnesses also removed Construction Work in Progress (CWIP) from rate base, as well as Cash Working Capital, calculated by AEP Ohio using a one-eighth O&M formula method.

On a merged basis, Staff' witnesses supported deducting an energy credit of $154.24/MW-day and an ancillary services credit of $6.66/ MW-day from the capacity charge.

Staff's witnesses said that AEP Ohio's argument against the inclusion of an energy credit in calculating the capacity charge, "is without merit, and results in a capacity payment that overcompensates the Companies."

"The economically efficient capacity price is the smallest charge that makes it economic to maintain enough operational capacity to ensure market reliability. If the cost of maintaining a generating asset is less than the avoided opportunity cost of lost capacity payments, energy profits, and ancillary services profits, a rational owner will continue to keep the asset operational. [AEP Ohio] Witness Pearce provides an approximation of the costs incurred to keep AEP Ohio's generating assets operational, but neglects to account for profits earned through generating electricity and providing ancillary services. His calculation thus overstates the required capacity charge," Staff's witnesses said.

The energy credit proposed by Staff's witnesses includes all retained profits from off system sales (OSS).

"The argument for inclusion is both regulatory and economic. From an economic perspective, because the profits from OSS incentivize AEP Ohio to keep its generating assets operational, the economically efficient capacity price will reflect an offset equal to this benefit. More so, Competitive Retail Electric Service ('CRES') providers are currently captive customers. From a regulatory standpoint, profits from off system sales are generally required to be redistributed to captive customers when a capacity charge is being collected," Staff's witnesses said.