American Electric Power loses court decision in fuel case

The Ohio Power unit of American Electric Power (NYSE: AEP) lost a Sept. 5 decision at the Ohio Supreme Court on its appeal of decisions by the Public Utilities Commission of Ohio (PUCO) in a fuel cost review case.

The high court didn’t render a decision on the specifics of the appeal, just granted a PUCO motion to dismiss.

Ohio Power had appealed a commission decision of Jan. 23 and entries on rehearing entered on March 21, April 11, June 6 and July 2 in two fuel adjustment clause (FAC) cases from 2009. The cases involved the 2009 annual audit of the accounting of Ohio Power’s and fellow AEP subsidiary Columbus Southern Power‘s FAC costs, as required by AEP Ohio‘s approved electric security plan (ESP). Ohio Power and Columbus Southern Power are known collectively as AEP Ohio.

In its appeal to the high court, Ohio Power said the commission decisions are unlawful and unreasonable in multiple respects:

  • they engage in selective and unlawful retroactive ratemaking;
  • it was unreasonable and unlawful for the commission to retroactively modify its prior adjudicatory decision in a case called ESP I to establish annual FAC audits to examine fuel procurement practices and expenses for the audit period;
  • 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 in the ESP I Cases;
  • OPCo prudently entered into a 2008 Settlement Agreement and the commission has unreasonably and unlawfully impaired that agreement, especially given that the agreement was entered into by OPCo 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 commission unreasonably and unlawfully found that the 2008 production bonus agreement, which increased fuel expenses in 2008, should not offset any adjustments to the deferred fuel costs resulting from the 2008 Settlement Agreement;
  • the Jan. 23 decision unreasonably and unlawfully concluded that the value of a West Virginia coal reserve acquired as a result of the 2008 Settlement Agreement with an unnamed coal producer that was having coal delivery problems should be offset against FAC costs because it is an OPCo asset on which ratepayers have no claim;
  • the Jan. 23 decision is unreasonable to the extent that it does not include in the methodology to be used for the determination of the value of the coal reserve, as an alternative to valuation through appraisal, the sale of the property;
  • the Jan. 23 decision is unreasonable and unlawful to the extent that it concludes that the Delivery Shortfall Agreement and the Contract Support Agreement may be examined by a future audit;
  • the commission erred in determining on rehearing that OPCo should flow through to its customers a carrying charge component in applying a credit to its FAC under-recovery.

Ohio Power had said the case should be remanded to the commission with instructions to correct these alleged errors.

Disputed coal reserve was never permitted for mining

The main dispute in this proceeding stemmed 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. 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., near the company’s coal-fired Mountaineer and Amos power plants. An AEP subsidiary, AEP Kentucky Coal LLC, in 2008 got a permit from the state to do exploration drilling on the reserve. That reserve, by the way, has never been permitted for actual mining, according to West Virginia Department of Environmental Protection records.

Said the Jan. 23 PUCO decision: “Following a thorough review of the record and the arguments raised by the parties in this matter, the Commission determines that all of the realized value from the Settlement Agreement should be credited against OP’s FAC under-recovery namely the portion of the $30 million 2008 lump sum payment not already credited to OP ratepayers as well as the $41 million value of the West Virginia coal reserve that AEP booked when the Settlement Agreement was executed. Additionally, because the value of the West Virginia coal reserve is not clear and because AEP had planned to begin the permitting process at the time of the audit which should enhance the value of the coal reserve, we direct AEP to hire an auditor specifically to examine the value of the West Virginia coal reserve and to make a recommendation to the Commission as to whether the increased value, if any above the $41 million already required to be credited against OP’s under-recovery, should accrue to OP ratepayers beyond the value of the reserve that AEPSC booked under the Settlement Agreement. The Commission will issue by subsequent entry a Request for Proposal to hire the auditor discussed above.”

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.