AEP companies seek Dresden cost recovery in West Virginia

The Appalachian Power and Wheeling Power units of American Electric Power (NYSE:AEP) want to include costs for the recently-completed Dresden gas-fired plant within their Expanded Net Energy Cost (ENEC) rate recovery mechanism at the West Virginia Public Service Commission.

On March 30, APCo and Wheeling Power filed testimony at the commission to open their latest ENEC proceeding. Steven Ferguson, Director-Regulatory Services for West Virginia at APCo, outlined various parts of the ENEC case, including the part having to do with Dresden cost recovery.

APCo completed the acquisition of the 580-MW combined-cycle plant, located in Dresden, Ohio, in August 2011. Commercial operation of the Dresden plant began on Jan. 31. The original plant owner, Dresden Energy LLC, a subsidiary of Dominion Resources (NYSE:D), began construction of the plant in 2001, but suspended construction in 2003 with the plant approximately 45% constructed. AEP Generating Co., a subsidiary of AEP, purchased the facility as a distressed asset in 2007 for $85m and resumed construction work. The pace of this work slowed in 2008 with the economic downturn, and resumed in 2010 with a target to have the plant ready for commercial operation in the first quarter of 2012. APCo received approval in June 2010 from the West Virginia commission to purchase Dresden.

In the 2011 ENEC case, the commission authorized the AEP companies to defer non-ENEC costs, including a return component, related income taxes and base rate O&M costs from the in-service date. The companies are now proposing to establish a Dresden Surcharge to recover ongoing as well as the deferred post-commercial operating costs, with the understanding that all costs associated with the facility would be moved into base rates in the companies’ next base rate case.

The AEP companies have developed rates that reflect the continuation of a construction surcharge for the coal-fired Amos Unit 1 flue gas desulfurization (FGD) project along with a second set of rates that reflect the Dresden Surcharge. The companies propose that the effective date for the Dresden Surcharge be Aug. 1. The companies also propose the Dresden plant costs be subject to over/under recovery accounting until such time as they are rolled into base rates. This would be consistent with how APCo’s capacity equalization payments are treated under the ENEC mechanism. The total additional revenue to be recovered under the surcharges to become effective Aug. 1 is $34.3m.

The Amos Unit 1 FGD , by the way, was placed in service in January 2011. This was the last part of a phased addition of FGD on the three coal units of this massive, 2,900-MW plant that is, among other things, allowing the plant to burn high-sulfur coal and still meet emissions standards.

Benefits attributable to the Dresden plant have been included in the ENEC forecast used in this proceeding, Ferguson noted. It is expected that the addition of the Dresden plant will result in a net reduction in costs for West Virginia retail customers.

In the companies’ 2009 ENEC proceeding, the commission approved an ENEC increase of approximately $106.6m, which was equivalent to a 10.5% increase in overall rates. In the 2010 ENEC proceeding, the commission approved an increase of $85.9m or a 7.2% increase in overall rates. In last year’s ENEC proceeding, the commission approved an increase of $87m or a 7.3% increase. The companies’ ENEC under-recovery balance as of Dec. 31, 2011 was $329.4m. This balance excludes additional bonus coal payments and the phase-in of a new transmission agreement.

Key contributors to why the ENEC under-recovery balance did not decline as projected following last year’s ENEC rate increase are:

  • a continued increase in coal prices;
  • lower off-system sales margins; and
  • lower retail sales due to the economic downturn.

AEP companies grapple with big ENEC under-recovery

The AEP companies and their ratepayers are faced with a very large ENEC rate increase, given the existing ENEC under-recovery balance, Ferguson testified. The companies judge that it would be burdensome for customers to shoulder all of that increase over the course of a single year under the traditional ENEC mechanism. They are therefore proposing two alternative approaches.

  • The first, and the most advantageous for all concerned, is the use of a securitization mechanism whereby the ENEC under-recoveries involved in this case would be financed through the issuance of comparatively low-interest bonds, Ferguson said. Legislation authorizing the commission to consider securitization was enacted by the West Virginia Legislature during its 2012 regular session and signed by the governor on March 15. The companies will be filing an application with the commission under the new law and the commission will decide whether to issue a financing order permitting the issuance of bonds for the recovery of the deferred ENEC balance. Under this approach, if the bonds are authorized and issued, the companies do not think that there will need to be any ENEC rate increase in this case.
  • The second approach is the use of another phase-in mechanism, such as the commission approved in the companies’ 2009 ENEC case. If a two-year phase-in were adopted, the AEP companies would propose an ENEC rate increase of $174m, effective Jan. 1, 2013.

Fossil fuel use to fall in months ahead

Richard Riley, employed by American Electric Power Service Corp. as a Financial Forecasting Manager, testified that the Dresden gas plant is projected to contribute 3,091 GWH to meet load and incur $75.3m of fuel consumed during the twelve month period ending June 30, 2013.

Total fuel expense is projected to be $632.2m, on a total company basis, which is approximately $29.8m lower than the actual cost incurred in 2011. Fuel expense is projected to decrease in the forecasted twelve month period ending June 30, 2013, versus calendar year 2011 mainly because of a 2,150 GWH decrease in fossil generation, Riley noted APCo is projected to generate a total of 22,689 GWH during the forecast period. A partial offset to the volume decrease is an expected increase in the average cost of fossil fuel consumed, which was $26.62/MWH in 2011 and is projected to be $27.86/MWH in the forecast period.

Purchased power for APCo reflects the costs associated with planned purchases and APCo’s share of other purchases. In this forecast, the planned purchases are for energy purchased from Summersville hydro, Ohio Valley Electric Corp.’s coal-fired plants and various wind farms. During the twelve month period ending June 30, 2013, APCo is projected to receive energy from the Camp Grove, Fowler Ridge, Grand Ridge and Beech Ridge wind farms.

A projected increase in wind energy cost is primarily due to a 189 GWH increase in the amount of energy purchased during the twelve months ending June 30, 2013, over the 904 GWH purchased in calendar year 2011. APCo is projected to receive more energy from all four of the wind farms.

The largest increase is expected from Beech Ridge (94 GWH). The developer for Beech Ridge expects federal restrictions on the farm’s operations to be eased. These restrictions were imposed in 2009 because the wind farm developer did not have a federal “incidental take” permit to operate during the seasons when federally protected Indiana bats were active. Although a permit has not yet been obtained, the developer expects to receive approval to operate when the wind is too strong for the bats to fly, Riley noted.

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.