Virginia SCC staff recommends transmission revenue requirement of about $152.5m for AEP subsidiary

In Jan. 30 prefiled testimony, Virginia State Corporation Commission (SCC) staff recommended a total transmission revenue requirement of about $152.5m, and an annual revenue requirement of about $134.5m for Appalachian Power Company (APCo).

In its Dec. 18, 2013, application filed with the SCC, the company sought approval of a transmission rate adjustment clause (T-RAC), noting that the transmission costs that would be recovered by the proposed T-RAC, in combination with transmission charges in base rates, are costs for transmission services provided by PJM Interconnection.

By a final order in October 2009, the SCC approved APCo’s initial request for a T-RAC to recover costs charged to the company by PJM, the company said, adding that in that case, the SCC accepted a stipulated T-RAC revenue requirement of about $91.1m, effective Dec. 12, 2009.

In 2010, APCo’s initial T-RAC produced revenues of about $92.7m, slightly higher than the stipulated annual revenue requirement approved in the 2009 final order. However, in 2011 and 2012, the revenue levels produced by the T-RAC fell to about $85.6m and $83.9m, respectively.

A T-RAC revenue level in the range of $85m is expected to continue for 2013 and beyond, the company added. APCo said it attributes the decline in T-RAC revenues to lower billing determinants due to a slower than expected recovery from the 2008 economic downturn in its service territory.

APCo also said it forecasts in its rate year – 12 months ending April 2015 – T-RAC costs, leading to a current annual – rate year – T-RAC revenue requirement of about $103.6m, compared to the $91.1m stipulated annual revenue requirement approved in the final order.

As a result of the lower revenue levels produced by the T-RAC approved in that order, including recognition of transmission costs deferred during 2009 before implementation of the previous T-RAC, APCo has experienced an under-recovery of about $45.6m for the period January 2009 through October 2013.

APCo also said that it projects an additional under-recovery of about $5.3m for the period November 2013 through April 2014. Therefore, APCo’s under-recovery totals about $50.9m.

APCo said it forecasts a T-RAC revenue requirement of about $154.5m for the rate year if both the current revenue requirement of $103.6m and the total under-recovery of $50.9m were to be recovered in a one-year period.

A one-year recovery plan would result in a revenue increase of about $68.6m over the company’s forecast of about $85.9m produced by continuing the current T-RAC revenue level in base rates. Such a one-year recovery plan would result in an increase in APCo’s revenues of about 5%.

“Recognizing that the under-recovery has accumulated over several years and in order to mitigate the impact of the proposed T-RAC on customers’ bills, the company proposes to recover the under-recovery portion of the T-RAC over an extended period of time – 19 months rather than one year,” the company said. “Under the company’s proposed recovery plan, it proposes an annual revenue requirement for the rate year of approximately $135.8 million, a revenue increase of approximately $49.9 million or 3.6%.”

APCo also said it seeks recovery of the annual T-RAC revenue requirement of $135.8m by a combination of continuing its transmission charges as combined in based rates, which the company submits will produce about $85.9m annually in revenues going-forward, and recovering the $49.9m remainder of its total transmission costs in the proposed T-RAC.

Staff filing 

In its testimony, SCC staff noted that before 2009, APCo had an opportunity to recover its Virginia-jurisdictional transmission costs through base rates. The SCC determined APCo’s transmission cost of service and set transmission rates as part of traditional base rate cases. In December 2009, the company’s unbundled transmission component of base rates was replaced with a separate T-RAC.

The company seeks to implement a new T-RAC to, essentially, recover the incremental difference between its transmission cost of service and the now-combined transmission component of base rates, as well as to recover previous under-recoveries of transmission costs.

For purpose of its testimony, staff noted it would refer to the company’s total transmission revenue requirement as the T-RAC revenue requirement.

The T-RAC revenue requirement in this case is composed of three pieces:

  • The actual accumulated under-recovery of transmission costs, or historical true-up component. That balance accumulated from Jan. 1, 2009 through Oct. 31, 2013.
  • The under-recovery projected to occur between Nov. 1, 2013 and April 30, 2014, or projected true-up component. It is primarily based on American Electric Power’s (NYSE:AEP) current transmission cost of service approved by FERC and the current combined transmission component of base rates. APCo is a wholly owned subsidiary of AEP.
  • The going-level revenue requirement for the rate year beginning May 1, which is also primarily based on AEP’s current FERC-approved transmission cost of service.

There are three primary drivers of the increase, staff added, including the under-recovery that occurred in 2009 before the December 2009 implementation of APCo’s first T-RAC. The under-recovery during that time amounted to about $23.9m. After that time, staff added, APCO’s T-RAC was generally sufficient to recover its transmission costs until about last May.

The second primary driver is the under-recovery that began last May due to escalating transmission costs and declining retail transmission revenue due to weak retail sales volumes. The escalation in costs, staff added, mainly resulted from a combination of higher network integration transmission service (NITS) charges and higher transmission enhancement charges. The under-recovery between last May and last October was about $21.1m, and coupled with a projected under-recovery, that grows to $26.3m.

The third driver is the increase in going-forward transmission costs, staff said, noting that the going-forward component in this case is proposed to be $103.6m, representing an increase of $12.5m, or 13.8%.

Staff said that the SCC is required to issue a final order in transmission RAC cases within 90 days of the application’s filing, adding that that timeframe did not afford staff the opportunity to adequately audit the under-recovery balance before filing its testimony. Staff proposes to audit that balance in the near future and report its findings and recommendations no later than in its testimony concerning APCo’s next T-RAC application, which is expected to be in August 2015.

 Staff also said that it has reviewed the company’s projected under-recovery and going-forward cost of service but has not audited them at this time. However, staff said it has received updated, actual under-recovery data for last November and December, noting that the actual under-recoveries for those months were about $2m lower than APCo had projected, largely because of stronger retail transmission revenues than had been forecast.

The use of actual information instead of APCo’s projections for those months should serve to minimize future true-ups of those months. That recommendation, staff added, reduces the total revenue requirement to about $152.5m and the annual revenue requirement to about $134.5m.

APCo has computed the going-forward revenue requirement in a manner consistent with the methodology approved in its previous T-RAC proceeding, staff said, adding that it has verified that the NITS component of the going-forward revenue requirement correctly incorporates APCo’s current FERC-approved NITS rates. That component represents $90.8m of the total $103.6m going-forward revenue requirement.

Staff added that it will examine the remaining components of that revenue requirement in greater detail as part of its audit and will make any resulting recommendations, if necessary.

Among other things, staff recommended that the SCC keep open the case or recognize that the results of staff’s audit may be reflected in APCo’s rates, as appropriate, in the future.

About Corina Rivera-Linares 2807 Articles
Corina Rivera-Linares, chief editor for TransmissionHub, has covered the U.S. power industry for the past 14 years. Before joining TransmissionHub, Corina covered renewable energy and environmental issues, as well as transmission, generation, regulation, legislation and ISO/RTO matters at SNL Financial. She has also covered such topics as health, politics, and education for weekly newspapers and national magazines. She can be reached at clinares@endeavorb2b.com.