American Electric Power (NYSE: AEP) reported in its Nov. 2 quarterly Form 10-Q statement that its Public Service Co. of Oklahoma (PSO) subsidiary in April of this year retired the coal-fired Northeastern Unit 4.
In July 2015, PSO had filed a request with the Oklahoma Corporation Commission (OCC) to increase annual revenues by $137 million to recover costs associated with its compliance plan for the federal EPA’s Regional Haze Rule and Mercury and Air Toxics Standards, and to recover investments and other costs that have increased since the last base rate case.
The annual increase consists of: a base rate increase of $89 million, which includes $48 million in increased depreciation expense that reflects, among other things, recovery through June 2026 of the coal-fired Northeastern Units 3 and 4 (each unit at 450 MW nominal); a rider or base rate increase of $44 million to recover costs for the environmental controls being installed on Northeastern Unit 3 and the gas-fired Comanche Plant (225 MW); and a request to include environmental consumable costs in the fuel adjustment clause, estimated to be $4 million annually.
The proposed $44 million increase related to environmental investments was effective in March 2016, after the Northeastern Unit 3 environmental controls were placed in service. The total estimated cost of the environmental controls to be installed at Northeastern Unit 3 and the Comanche Plant is $219 million, excluding AFUDC. As of Sept. 30, 2016, PSO had incurred costs of $180 million and $43 million, including AFUDC, for Northeastern Unit 3 and Comanche Plant, respectively.
In addition, the filing also notified the OCC that the incremental replacement capacity and energy costs, including the first year effects of new power purchase agreements (PPAs), estimated to be $35 million, will be incurred related to the environmental compliance plan due to the closure of Northeastern Unit 4, which would be recovered through the fuel case. In April 2016, Northeastern Unit 4 was retired. Upon retirement, $87 million was reclassified as Regulatory Assets on the balance sheet related to the net book value of Northeastern Unit 4. These regulatory assets are pending regulatory approval.
In June 2016, an Administrative Law Judge (ALJ) issued a report related to PSO’s base rate case filing and subsequently provided an additional supplemental report in August 2016. The ALJ found that PSO’s environmental compliance plan is prudent and provided for cost recovery of the investment in this case with a recommended investment cap of $210 million on environmental controls installed at Northeastern Unit 3. Additionally, the ALJ recommendations included: a $14 million increase in depreciation expense; continued depreciation of Northeastern Units 3 and 4 through 2040 (no accelerated depreciation); return of, but no return on, the remaining net book value of Northeastern Unit 4; elimination of the rider to recover advanced metering starting in December 2016, without inclusion in base rates; and elimination of the system reliability rider through consolidation in base rates, without addressing a transition for recovery of rider costs, including deferred costs. The estimated annual revenue increase resulting from the ALJ recommendations is approximately $47 million.
In June and September 2016, PSO, the OCC staff, the Attorney General and intervenors filed exceptions to the ALJ reports. The OCC staff filed exceptions that supported the full recovery of Northeastern Unit 4, including a return, and recommended a $32 million increase in annual revenues. An order from the OCC is anticipated in the fourth quarter of 2016.
Notable is that Units 1 and 2 at Northeastern (total of 856 MW) are gas-fired and not affected by the air compliance plan.