AEP wants Ohio commission to rehear decision on coal settlements

On Feb. 22, the Ohio Power unit of American Electric Power (NYSE:AEP) asked the Public Utilities Commission of Ohio (PUCO) for a rehearing of a Jan. 23 PUCO order in a fuel review case that, among other things, ordered that money related to a coal contract settlement should be returned to ratepayers.

The Jan. 23 PUCO order determined that all of the realized value from a January 2008 settlement agreement with an unnamed coal supplier that terminated a 20-year coal procurement contract effective at the end of 2008 should be credited against Ohio Power’s 2009 Fuel Adjustment Clause (FAC) under-recovery and, thus, flowed through to the benefit of OPCo’s retail customers that take standard service offer (SSO) generation service from OPCo. The “realized value” from the 2008 settlement agreement, according to PUCO, included both the portion of a 2008 lump sum payment from the coal supplier not already credited to OPCo’s retail SSO customers as well as the purported value of a coal reserve that the coal supplier transferred in 2008 to Ohio Power as part of the settlement.

In its Feb. 22 request for rehearing, Ohio Power said the commission should clarify that it did not intend to “unreasonably and unlawfully” flow through to the benefit of Ohio Power’s Ohio retail customers amounts allocable to the wholesale and non-Ohio retail jurisdictions. It also said the commission should clarify the methodology to be used for determination of the value of the coal reserve so that it can include, as an alternative to valuation through appraisal, the sale of the property after a final, non-appealable decision is reached in this case.

By reaching back into 2008 and using the results of fuel procurement activities in 2008 to offset fuel costs prudently incurred in 2009, the commission unreasonably and unlawfully modified the FAC baseline that was fully litigated and decided previously, said Ohio Power.

Ohio Power said it prudently entered into the 2008 settlement agreement, and that the Jan. 23 PUCO order unreasonably and unlawfully impaired that agreement, especially given that the agreement was entered into by Ohio Power prior to commencement of the ESP’s new FAC and before the 2009 audit period (i.e., during a period of unregulated fuel cost and when fuel contracts were not regulated).

The PUCO unreasonably and unlawfully concluded that the value of the coal reserve acquired as a result of the 2008 settlement should be offset against FAC costs because it is an Ohio Power asset on which ratepayers have no claim, Ohio Power stated.

Matters involved date back to deregulation period

A state law dating from 1999 had restructured regulation of electric utilities and introduced retail customer choice for electric generation service, largely deregulating generation service in Ohio. Rates for competitive generation service were established based on a market-based pricing. Under that legislation, SB 3, the AEP companies (Columbus Southern Power and Ohio Power) established a Rate Stabilization Plan (RSP) that was in effect from 2006 through 2008. Under the companies’ RSP, there was no fuel adjustment clause or comparable mechanism and there was no guarantee that the RSP’s generation rates would cover the companies’ fuel costs during the RSP term.

During this deregulated period, the companies were “on their own” with respect to recovery of fuel costs during the RSP period of 2006 through 2008, Ohio Power noted. During the RSP term, coal prices experienced unprecedented volatility and tripled between mid-2007 and mid-2008. During the period from 2001 through 2008 when no FAC was in effect, the companies’ shareholders bore the total risk of increased fuel costs. A PUCO-hired auditor, Energy Ventures Analysis, verified that during 2007-2008 period, coal prices in the United States reached all-time high prices.

“Material and volatile coal prices created ideal circumstances for having a FAC, but after AEP Ohio weathered this storm without one, the Commission now engages in ‘cherry picking’ certain upside results achieved by AEP Ohio under its prior rate plan,” Ohio Power wrote. “During this extraordinary historical period of coal procurement when fuel costs were not regulated, the Companies entered into several transactions to manage coal prices while maintaining a reliable supply. Included among the procurement transactions are four transactions that have been raised in this proceeding: (1) a January 2008 settlement agreement which terminated the 20-year contract with a coal supplier effective at the end of 2008 (2008 Buyout Agreement), (2) a November 2008 agreement with the same coal supplier for liquidated damages associated with a delivery shortfall occurring in 2008 (2008 Delivery Shortfall Agreement), (3) a 2008 agreement with a second coal supplier for contract support required to meet its financial covenants (2008 Contract Support Agreement), and (4) a February 2008 contract support agreement with a third coal supplier to help maintain the supplier’s solvency through a production bonus payment and a temporary increase in the per ton price for coal (2008 Production Bonus Agreement). None of these four transactions were found to be imprudent in the Audit Report or the [Jan. 23] Opinion and Order. In fact, the Auditor praised AEP management for its performance in managing this extraordinarily challenging period.”

Among other things, the commission should abandon the notion of doing an audit/appraisal to determine the hypothetical value of the coal reserve asset, Ohio Power stated. Instead, the company should simply conduct a sale after the decision becomes final and non-appealable. A sale is the only way to determine the true market value of the asset. The initial amount of $41.6m booked for the asset in 2008 was based on an October 2007 report done by an independent contractor and that was the only value known to American Electric Power Service, AEP’s fuel procurement arm, at the time the 2008 settlement agreement was entered into and accounted for.

“Consequently, there is no legal basis for the Opinion and Order’s seizure of value related to the coal reserve, which essentially converted it into a ratepayer-owned asset, and reducing 2009 (or future) fuel costs by the purported value of the asset,” said Ohio Power. “Nor is there any basis for concluding that the reserve could be liquidated and sold for $41.6 million, let alone a higher amount. Yet, the Opinion and Order unreasonably and unlawfully concludes that the reserve is worth at least $41.6 million and reduced the 2009 FAC costs by that amount. Thus, on top of illegally reaching back before the ESP/FAC period to extract value from transactions outside of and unrelated to the FAC audit period, the Opinion and Order fabricates value related to the coal reserve and then imposes on OPCo the obligation of guaranteeing that the coal reserve has a minimum value (of $41.6 million). There is no legal or record basis for such a decision and the Commission committed an unexplained departure from its own precedent in reaching this decision.”

The Ohio Power rehearing request didn’t say where this coal reserve is located, but sources have said it is in Mason County, W.Va., very near AEP’s Mountaineer power plant.

Consumer’s Counsel, industrial group have their own complaints

The Ohio Counsumers’ Counsel, in its own Feb. 22 request for rehearing, partially confirmed that by calling it the “West Virginia coal reserve.” The counsel said the commission erred in the Jan. 23 decsion in failing to require that the entire value of the West Virginia coal reserve (to be determined in a subsequent audit), along with interest, be credited to Ohio Power’s customers to reduce their payments for fuel, above and beyond the $41m already ordered to be credited to them.

The commission also erred in failing to order Ohio Power to credit customers for the interest accrued from 2009 until Jan. 23, 2012, on the $30m lump sum settlement payment received by AEP Ohio and the $41m booked value for the West Virginia coal reserve, said the Consumers’ Counsel. It said the commission also erred in failing to appoint an independent auditor to value the coal reserve and failing to order Ohio Power to credit customers for the increased price per ton that AEP Ohio agreed to pay for coal during 2009, as part of the Contract Support Agreement, and to account for the total cost increase as a deferred expense with no carrying costs.

Industrial Energy Users-Ohio also filed on Feb. 22 for rehearing, lodging some of the same complaints about the Jan. 23 order as the Consumers’ Counsel.

About Barry Cassell 20414 Articles
Barry Cassell is Chief Analyst for GenerationHub covering coal and emission controls issues, projects and policy. He has covered the coal and power generation industry for more than 24 years, beginning in November 2011 at GenerationHub and prior to that as editor of SNL Energy’s Coal Report. He was formerly with Coal Outlook for 15 years as the publication’s editor and contributing writer, and prior to that he was editor of Coal & Synfuels Technology and associate editor of The Energy Report. He has a bachelor’s degree from Central Michigan University.