Michigan Staff: AEP Capacity Charge Approach "Reasonable," Recommends Minor Adjustment

Indiana Michigan Power's (AEP) approach to establish a state compensation mechanism for capacity provided to retail suppliers under the Fixed Resource Requirement is "reasonable," Michigan PSC Staff said in testimony, though Staff did recommend a minor reduction in the nonbypassable capacity costs.

Staff noted that the PSC had directed I&M to file a state compensation mechanism, "based upon Michigan-specific ratemaking principles."

"Based on Staff's review of the proposed mechanism, it believes that I&M's proposal follows Michigan ratemaking principles," Staff said, calling AEP's approach "reasonable."

Staff did make an adjustment lowering the total nonbypassable capacity cost by $244,000.

The reduction in the specific nonbypassable capacity charges for each rate class (and accompanying increase in bypassable non-capacity charges) can be found here:

Staff's proposed nonbypassable capacity charges and bypassable non-capacity charges.

Due to the voluminous nature of the charges, which differ not only by rate class but also by voltage level, the entirety of Staff's recommendations will not be excerpted here.

As an example, however, Staff recommends for MGS-Secondary customers a nonbypassable capacity charge of $1.18/kW for demand and $0.04053/kWh for energy. For MGS-Secondary, Staff recommends a bypassable non-capacity charge of $0.23/kW for demand and $0.02562/kWh for energy

For comparison, I&M's proposed MGS-Secondary nonbypassable capacity charge is $1.18/kW for demand and $0.04062/kWh for energy. I&M's proposed MGS-Secondary bypassable non-capacity charge is $0.23/kW for demand and $0.02553/kWh for energy

A full breakdown of AEP's sought rates can be found here

FirstEnergy Solutions presented testimony arguing that I&M's proposed capacity charges are "artificially high," which have the effect of creating bypassable non-capacity supply prices that are below the average PJM spot market prices for energy.

"Thus, I&M is proposing to charge capacity rates that provide it with an anticompetitive cross-subsidy between capacity and energy," FirstEnergy Solutions said.

FirstEnergy Solutions said that I&M proposes to charge an overall average capacity rate of $692.69/MW-day, which 75% higher than the $394.16/MW-day "embedded cost" capacity rate I&M filed at FERC (which FES also notes is above-market).

Furthermore, FirstEnergy Solutions noted that I&M's proposed allocation of capacity costs among customer classes, "results in the highest overall capacity rates for commercial and industrial customers, who are the customers most likely to switch to AESs [alternative electric suppliers], given the 'skewed' rate design."

For example, FES testified that the average capacity charge for Large General Service customers is $1,081.00/MW-day, and the average for Large Power (LP) customers is $1,330.97/MW-day.

"Moreover, within each of those classes, there is a huge disparity in capacity charges. For example, I&M proposes to charge Large General Service – Primary customers a capacity rate of $8,174.29/MW-day, about 2,000% higher than the 'embedded cost' capacity rate I&M filed at FERC. However, I&M's implicit capacity rate for Large General Service – Secondary customers is $593.90/MW-day," FES said.

"[U]nder I&M's cost allocation, its energy (non-capacity) cost is 51% less than the equivalent market energy cost. On the other hand, I&M's capacity cost is 528% greater than the equivalent market capacity cost," FES said.

Energy Michigan presented testimony faulting I&M's cost-of-service model used to derive the capacity rates.

"I&M merely goes through a formalistic cost-of-service study, assumes erroneously that it provides capacity service directly to retail Electric Choice customers, assumes erroneously that only I&M capacity is used by all I&M's distribution customers, fails to correctly apply cost-of-service principles, does not give fair credits for off-system sales to Electric Choice customers and for other savings created by Electric Choice, and allocates unreasonable and excessive amounts of power plant costs under the caption of capacity costs," Energy Michigan said.

"The 'capacity' cost that I&M has calculated contains much more than the cost of pure capacity as a separate product," Energy Michigan continued. "It contains additional investment costs that gain the ability to generate low-cost energy from coal and nuclear fuel over a long time – decades. It also contains expenses of actually operating the plant to produce such low-cost energy, and does not properly credit fuel savings. And, it contains some specific costs of purchased power that may be erroneously categorized as capacity costs," Energy Michigan said.

Energy Michigan noted that Sec. 11. (6) of PA 286 states: "If, in the judgment of the commission, the impact of imposing cost of service rates on customers of a utility would have a material impact, the commission may approve an order that implements those rates over a suitable number of years."

"The Commission does not appear to be obligated to approve only rates stemming from I&M's cost-of-service model, if there are other requirements that must be met, such as opportunity for competition," Energy Michigan said.

Energy Michigan noted that Sec. 10a. (1) of PA 286 states: "The commission shall issue orders establishing the rates, terms, and conditions of service that allow all retail customers of an electric utility or provider to choose an alternative electric supplier."

Energy Michigan and FES both support the use of the RPM price for I&M capacity, with the charge applied to retail suppliers rather than customers directly.