Ohio industrials dispute AEP allocation of coal contract buy-out

A fight over a coal contract settlement, and the accounting for a coal reserve that American Electric Power (NYSE: AEP) got in that settlement, has flared again at the Public Utilities Commission of Ohio (PUCO).

On May 11, Industrial Energy Users-Ohio, a group of major industrial power customers for AEP’s Columbus Southern Power and Ohio Power subsidiaries, asked the PUCO to reopen a case where those issues were previously dealt with. On Jan. 23, following an audit from consultant Energy Ventures Analysis of Columbus Southern Power’s and Ohio Power’s fuel adjustment clauses (FAC) for 2009, the commission issued an order directing Ohio Power to credit against the deferral balance all of the benefits it received from a settlement agreement with one of its coal suppliers. That coal supplier has never been named in publicly-available commission documents.

The commission’s order, however, did not specify the extent to which the deferral balance needs to be adjusted to account for carrying charges. Industrial Energy Users-Ohio (IEU-Ohio) filed an application for rehearing of the Jan. 23 decision, requesting that the commission clarify that the credit should contain a carrying cost component. The commission clarified the decision in an April 11 order, but IEU-Ohio says that April 11 order is flawed.

The main dispute in this proceeding stems from Ohio Power’s voluntary renegotiation of a below-market coal contract. In 2007, Ohio Power entered into a settlement agreement with the coal supplier which relieved the supplier from performing under the terms of the contract. Had Ohio Power not voluntarily renegotiated the contract, ratepayers would have received the benefits of the lower-priced coal through at least 2012, IEU-Ohio noted in the May 11 filing.

In return for agreeing to the buy-out, Ohio Power received $30m, paid in installments, and a coal reserve in West Virginia that Ohio Power booked as having a value of $41m. That coal reserve has not been described in the public filings, but sources have said it is the Putnam reserve in Mason County, W.Va., fairly near the company’s coal-fired Mountaineer and Amos power plants. An AEP subsidiary in 2008, right after the buy-out deal was worked out, got a permit from the state to do exploration drilling on the reserve.

The replacement coal was significantly more expensive than the tons that Ohio Power bought out, the industrial group said. Ohio Power passed the cost of the more expensive replacement coal onto customers through the FAC while retaining the benefits realized from the buy-out for shareholders, the group said.

Energy Ventures Analysis performed a management performance and financial audit of the FAC for the term of Jan. 1, 2009, to Dec. 31, 2009. EVA recommended that the commission consider whether Ohio Power should be required to credit the deferral balance for the entire value realized by Ohio Power as a result of the buy-out. In its post-hearing brief and reply brief, IEU-Ohio advocated that all of the benefits of the buy-out should flow to Ohio retail customers.

On Jan. 23, the commission adopted EVA’s recommendation and directed Ohio Power to credit the deferral balance so that customers received the benefits to which they are entitled under the buy-out. Despite determining that customers should receive all of the value realized from the buy-out, on rehearing the commission clarified that Ohio customers are only entitled to the portion of the benefits associated with the buy-out that are “allocable to Ohio’s retail jurisdictional customers,” the industrial group said.

“The Commission should clarify its Entry on Rehearing to state that 100% of the benefits associated with the Buy-Out should be allocated to Ohio customers,” the group added. “To the extent that the Commission does not make this clarification, the Entry on Rehearing is unlawful and unreasonable because [Ohio Power] must allocate its lowest cost fuel to Ohio customers.”

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.