Ohio Adopts Final State Compensation Mechanism to be Charged to Retail Suppliers at AEP Ohio

The Public Utilities Commission of Ohio has adopted a final state compensation mechanism that AEP Ohio may charge to retail suppliers as compensation for a supplier's use of capacity under the AEP Fixed Resource Requirement (FRR).

While AEP Ohio will ultimately be entitled to a capacity charge of $188.88/MW-day based on its costs (discussed below), PUCO ruled that the charge initially applied to retail suppliers for their competitively served load shall be the otherwise applicable Reliability Pricing Model Price for capacity, with any under-collection by AEP Ohio deferred.

Specifically, PUCO ordered that AEP Ohio shall charge retail suppliers the, "final zonal PJM RPM rate in effect for the rest of the RTO region for the current PJM delivery year (as of today, approximately $20/MW-day), and with the rate changing annually on June 1, 2013, and June 1, 2014, to match the then current adjusted final zonal PJM RPM rate in the rest of the RTO region."

PUCO authorized AEP Ohio to defer incurred capacity costs not recovered from retail suppliers to the extent that the total incurred capacity costs do not exceed the cost-based capacity pricing adopted by PUCO, at $188.88/MW-day.

The Commission said that it would establish an, "appropriate recovery mechanism for such deferred costs and address any additional financial considerations in the [AEP Ohio electric security plan] 11-346 proceeding."

Therefore, depending on the design of that future cost recovery mechanism, capacity costs could still negatively impact retail suppliers (if the deferral is not recovered in a competitively neutral manner).

Notably, PUCO said that "Upon review of the considerable evidence in this proceeding, we find that the record supports compensation of $188.88/MW-day as an appropriate charge to enable AEP-Ohio to recover its capacity costs for its FRR obligations from CRES providers" [emphasis added]. This language could be cited in the future to suggest that any deferred costs are solely the responsibility of competitive suppliers (or their customers), and that any future recovery only apply to competitive suppliers (or their customers).

AEP Ohio is authorized to collect carrying costs on the deferral.

The RPM pricing for AEP Ohio FRR capacity will not commence until the earlier of August 8, 2012, or the issuance of an order in the AEP Ohio electric security plan proceeding. Until such time, the current two-tier, above-market interim capacity charges will continue to apply.

PUCO adopted RPM pricing for the charges applied to retail suppliers, "because the record in this proceeding demonstrates that RPM-based capacity pricing will promote retail electric competition."

"[W]e find it necessary to take appropriate measures to facilitate this important objective," PUCO said.

PUCO ruled that, pursuant to its regulatory authority under Chapter 4905, Revised Code, as well as Chapter 4909, Revised Code, "that it is necessary and appropriate to establish a cost-based state compensation mechanism for AEP-Ohio."

"Those chapters require that the Commission use traditional rate base/rate of return regulation to approve rates that are based on cost, with the ultimate objective of approving a charge that is just and reasonable consistent with Section 4905.22, Revised Code," PUCO said.

"The record further reflects that, if RPM-based capacity pricing is adopted, AEP-Ohio may earn an unusually low return on equity of 7.6 percent in 2012 and 2.4 percent in 2013, with a loss of $240 million between 2012 and 2013. In short, the record reveals that RPM-based capacity pricing would be insufficient to yield reasonable compensation for AEP-Ohio's provision of capacity to CRES providers in fulfillment of its FRR capacity obligations," PUCO said.

Therefore, PUCO ordered that, "the state compensation mechanism shall be based on the costs incurred by the FRR Entity for its FRR capacity obligations."

PUCO determined that, based on such costs, the authorized state compensation mechanism shall be $188.88/MW-day. This largely reflects Staff's recommendation, which started with AEP Ohio's filed formula rate but which adjusted the price for certain factors, most notably an energy credit. PUCO did reject certain discrete adjustments made by Staff, however.

The state compensation mechanism, once effective, shall remain in effect until AEP-Ohio's transition to full participation in the RPM market is complete and the company is no longer subject to its FRR capacity obligations, which is expected to occur on or before June 1, 2015, or until otherwise directed by the Commission.