AEP troubled by Turk cost cap ruling in Texas

American Electric Power (NYSE:AEP) believes that a decision by the Public Utility Commission of Texas (PUCT) to hold financing expenses against the cost cap of AEP’s John Turk supercritical coal plant in Fulton County, Ark., sends the wrong message to generation investors.

The roughly 600-MW plant also serves the Texas market and by counting allowance for funds used during construction (AFUDC) against AEP, it could make investors think twice before building new generation to serve Texas, AEP CEO Nicholas Akins said during an earnings conference call Oct. 23.

An AEP spokesperson subsequently said that AEP expects to file its request for rehearing Oct. 30.

The PUCT made the decision in its open meeting on Oct. 3. “This was the first time that it had been claimed that the cap imposed in an order issued six years ago would be changed from what we believed it contained,” the AEP spokesperson said Oct. 29. The commission’s final written order was issued Oct. 10.

“I think it is a pretty serious issue for the Texas commission to take up,” Akins said during the recent earnings call. Counting AFUDC against the cost cap was not something AEP had been expecting, Akins said.

The Texas decision prompted AEP to take a $111m charge against earnings.  “We were pleased the plant was found to be prudent,” but not with the AFUDC ruling, Akins said. 

Turk was developed by utility subsidiary Southwestern Electric Power Co. (SWEPCO).

Like other companies, AEP said the demand for electric generation still isn’t strong. “We’ve been assuming that load growth will be relatively flat. You can’t ignore what’s going on in the economy,” Akins said.

Average usage per customer has declined. The economy in AEP’s service areas have not fully recovered from recession, the company said.

Within the next month, AEP officials should be providing more details about the future of its realigned generation segment, Akins said.

It will be a relatively small part of AEP, but has sparked a lot of investor interest, company officials said during the webcast.

Bernstein Research Senior Analyst Hugh Wynne agreed in an Oct. 24 assessment of AEP. “Once AEP Ohio transitions to market-based generation pricing in 2015, we estimate that AEP’s competitive generation business could contribute up to 20% of its consolidated earnings,” Wynne said.

In October 2012, the Public Utilities Commission of Ohio (PUCO) approved AEP Ohio’s corporate separation plan. Under the plan, AEP Ohio will transfer its 12.2 GW of generating assets at their net book value to a newly formed, competitive generation affiliate, AEP Generation Resources (AEP GenCo). AEP Ohio will retain ownership of its transmission and distribution network. As a wholesale generator, AEP GenCo will be subject to regulation by FERC, while AEP Ohio will remain subject to regulation by PUCO, according to Bernstein.

“We are concerned that AEP’s persistently weak volume sales could limit revenue and earnings growth in 2013 and 2014,” Bernstein Research said in the analysis.

About Wayne Barber 4201 Articles
Wayne Barber, Chief Analyst for the GenerationHub, has been covering power generation, energy and natural resources issues at national publications for more than 20 years. Prior to joining PennWell he was editor of Generation Markets Week at SNL Financial for nine years. He has also worked as a business journalist at both McGraw-Hill and Financial Times Energy. Wayne also worked as a newspaper reporter for several years. During his career has visited nuclear reactors and coal mines as well as coal and natural gas power plants. Wayne can be reached at