West Virginia puts hold on merger of two AEP units due to power issues

The West Virginia Public Service Commission has put a hold on a proceeding looking at the possible merger of Wheeling Power Co. and Appalachian Power Co., both subsidiaries of American Electric Power (NYSE: AEP), while parties to the case look at issues like future power supply to the combined companies.

Wheeling Power is strictly a wires utility in northern West Virginia, while APCo has both transmission and generation assets in a broader area of the state. The utilities applied in December 2011 with the commission for a possible merger.

APCo supplies its West Virginia retail customers through a combination of its own generation resources and power supplied under the AEP Interconnection (AEP Pool) Agreement. Wheeling has no generation resources and has relied on a full-requirements wholesale interconnection agreement with another affiliated AEP company, Ohio Power Co. (OPCo) for all its power supply needs.

The December 2011 petition did not seek final approval of a merger and noted that events during the past two years had caused APCo and Wheeling (WPCo) to question whether or not the merger is in the best interests of the companies and the ratepayers, the commission noted in an April 2 order. Specifically, the companies were uncertain whether they could meet the statutory requirement that the merger will not adversely affect the public in West Virginia.

The petition stated that several significant events are affecting or will affect the future operations of the companies. Those include the weak economy, possible elimination and/or major reconfiguration of the AEP Pool Agreement, developments in Ohio regarding the corporate separation of generation assets within Ohio subsidiaries, and emerging environmental requirements and the impacts on existing and future generation resources. The petition further stated that one or more AEP companies would soon file with the FERC for approval of a reconfiguration of the AEP Pool Agreement, probably within the first quarter of 2012. The petition stated that the filing at FERC would seek approval of an APCo/Wheeling merger.

On Jan. 20, commission staff recommended that the commission direct APCo and Wheeling to file both a copy of the FERC filing and revised direct testimony in this case on the same date that they made the referenced AEP Pool Agreement filing at the FERC.

Staff also provided information regarding a FERC order issued Jan. 8, 2010, accepting OPCo’s filing of an Amended and Restated Interconnection Agreement between OPCo and Wheeling effective Jan. 1, 2010. The Amended Agreement provided for a $24m increase in annual non-fuel generation rates to be paid by Wheeling and for Wheeling to pay for transmission service under the PJM Interconnection LLC Open Access Transmission tariff. Staff noted that the term of the Amended Agreement was from January 2010 through December 2011, continuing for successive one-year terms unless terminated in accordance with Article 19 of the Amended Agreement.

On Feb. 10, AEP filed with the FERC an Application for Authorization to Transfer Jurisdictional Facilities of Wheeling to APCo under Section 203 of the Federal Power Act. Also on Feb. 10, AEP made other filings at the FERC relating to asset transfers, a corporate reorganization of OPCo, termination of the AEP Pool Agreement, and replacement of that AEP Pool Agreement with a new power sharing arrangement with new agreements. On Feb. 21, the West Virginia commission intervened in each of the FERC docketed proceedings.

AEP withdraws FERC approval requests

On Feb. 28, AEP filed with the FERC a Notice of Withdrawal of the AEP 2012 FERC filings. The filing stated that AEP is reconsidering the terms of the proposed corporate reorganization. AEP explained that the withdrawal stems from recent action of the Public Utilities Commission of Ohio (PUCO) which entered an order on rehearing in a case that revoked PUCO approval of the corporate reorganization. AEP said it intends to pursue the matters covered by the withdrawn filings at a later date and will make the necessary FERC filings at that time, the West Virginia commission noted.

The West Virginia Consumer Advocate Division (CAD) has stated in this case that APCo has a significant capacity deficiency. APCo’s December 2010 peak was 7,542 MW. CAD stated that APCo currently has only 6,975 MW of generation and purchase power contract capacity. CAD explained that because the AEP Pool members, including APCo, have elected Fixed Resource Requirement (FRR) status with PJM, APCo cannot procure energy or capacity from the PJM wholesale markets until it foregoes its FRR status.

The election to forego FRR status and enter the markets must be made 60 days before the PJM capacity market (Reliability Pricing Model or RPM) auction takes place (Base Residual Auction or BRA). The PJM wholesale market is a three-year forward market. CAD stated that this is particularly problematic because as of Jan. 1, 2014, APCo will be capacity deficient by about 2,300 MW (later amended to 1,700 MW).

Even though the AEP Pool Agreement terminates Jan. 1, 2014, APCo could not have gone to market to secure this deficiency until June 1, 2015, at the very earliest, if APCo had chosen to de-select FRR status on March 7, 2012, which it did not do, the commission added. Accordingly, APCo will not be permitted to participate in the PJM markets in 2015/2016. APCo may next de-select FRR status in March 2013, which will allow it to take market deliveries during the 2016/2017 year. The gap between the PJM 2013/2014 delivery year and the PJM 2016/2017 delivery year means APCo cannot go to market to secure its gap deficiency that will occur commencing Jan. 1, 2014.

CAD asked the commission to clarify that the scope of this proceeding must include an analysis of options available to the companies to meet the requirements of APCo’s and WPCo’s customers with or without the merger. CAD noted that there is currently uncertainty surrounding how and whether: the AEP Pool Agreement can be reconfigured; assets will ultimately be transferred from OPCo to APCo; and there will be a Bridge Pool Agreement.

“All of these are all important, but those uncertainties do not detract from the basic analyses of capacity and energy options APCo/WPCo face in light of the annual MW deficiency the companies are facing,” said the commission order. “Accordingly, CAD asked the commission to clarify that that the scope of this proceeding is not merely to evaluate the merger but will also include energy and capacity options available to APCo/WPCo given the companies’ clear intent to terminate the AEP Pool Agreement and their inability to participate in the PJM markets before the 2016/2017 delivery year.”

On March 6, CAD filed a correction letter stating that it failed to account for the new Dresden 580 MW gas facility when calculating the APCo generation and purchase power contract capacity. Inclusion of the Dresden facility reduces the capacity deficiency from about 2,300 MW to about 1,700 MW.

AEP admits this complicated matter is tough to analyze

On March 15, APCo and Wheeling filed a response to the CAD motion to clarify. The companies acknowledged that it is difficult to analyze meaningfully the merger petition due to the interrelated nature of the various measures that, until recently, were pending before the FERC.

On Feb. 23, however, PUCO rescinded its approval of a stipulation that had resolved approximately ten dockets pending before the PUCO. Elements of that stipulation were underlying assumptions for some of the AEP filings before the FERC that dealt with the OPCo corporate separation, the transfer of generating assets to APCo and AEP’s Kentucky Power Co., a new Power Cost Sharing Agreement to replace the AEP Pool Agreement, the proposed merger of APCo and WPCo, and other matters. With the PUCO’s Feb. 23 action, the AEP system now has to revisit these matters.

The AEP companies stated that on Feb. 28, AEP filed a notice of withdrawal without prejudice for the twelve FERC dockets. On March 5, OPCo filed with the PUCO a notice of intent to submit an application to establish a Standard Service Offer under Ohio law, in the form of a modified Electric Security Plan. OPCo plans to make this submission by March 30 and to request expedited consideration to enable the modified Electric Security Plan to go into effect by June 1. OPCo also intends to file a separate application with the PUCO with regard to generation divestiture and the ultimate disposition of generation assets.

In response to the CAD concern as to the alleged 1,700 MW APCo capacity deficiency, the companies note that in some of the withdrawn FERC dockets the parties had proposed that APCo acquire the coal-fired Amos Unit 3 capacity currently owned by OPCo (864 MWs) and 80% of the coal-fired capacity of the Mitchell plant (1,248 MWs). That total of 2,112 MWs would entirely eliminate the APCo capacity deficit.

AEP suggests hold on West Virginia case for 90 days

The AEP companies suggested to the commission that the most sensible course of action is to hold further action in abeyance for 90 days to enable filings before other forums to proceed. The companies said that once some of these essential matters have been clarified and compatible new FERC filings developed, the companies can assess the situation and provide updated information and testimony on the proposed APCo/WPCo merger.

On March 26, CAD stated that if the case is held in abeyance, CAD should be permitted full and fair discovery of the facts that underlie the companies’ decisions concerning satisfaction of the energy supply shortfall. CAD asked that the commission permit it to begin that discovery now.

“After reviewing the petition, the staff memorandum, the AEP 2012 FERC filings including the FERC merger filing, the AEP withdrawal of the AEP 2012 FERC filings, the CAD motion to clarify, and the companies’ response, it is apparent that considerable uncertainty exists with respect to a future merger and future power supply options to meet the needs of APCo and WPCo customers either with or without a merger,” the commission ruled. “It is therefore appropriate to hold further action in this proceeding in abeyance for ninety days as requested by the companies.”

The commission said CAD can begin discovery now, as it requested. The commission said the AEP companies must file a status report by June 26 that includes the status of the capacity and energy supply options under consideration and indicates whether the companies are ready to go forward to address their capacity and energy needs, either through merger or as separate entities.

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.