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Ohio High Court Upholds AEP Capacity Charges to Retailers, Deferred Collection

April 26, 2016 By Cheryl Kaften

The Ohio Supreme Court released opinions on April 21 (Slip Opinion Nos. 2016-Ohio-1607 and 2016-Ohio-1608) addressing two separate orders of the Public Utilities Commission of Ohio (PUCO) that, together, would enable AEP Ohio to collect cost-based capacity charges for the energy it sells to retail electric service providers. The court sided with a 2012 decision by the commission (Docket No. 10-2929-EL-UNC) to set the fee at $188.88 per megawatt-day.

 The court’s opinions were authored by Justice Sharon L. Kennedy.

 The Capacity Charge Case

As part of a multi-state compact, AEP provides capacity for both its own generation customers and for competitive retail electric service (CRES) providers who sell generation service in AEP’s service territory. AEP can charge for making its capacity resources available to maintain reliability in the power grid. Since competition began in the electric generation market, AEP has relied on an auction process approved by the Federal Energy Regulatory Commission (FERC) to price CRES capacity.

In 2010, however, AEP sought a different approach to compensating CRES providers. AEP proposed a plan that would allow it to collect $355 per megawatt-day, which the utility claimed was its actual cost to provide capacity to CRES providers. Providers and consumer advocates challenged whether the PUCO had authority to establish and approve a cost-based capacity charge – and also whether AEP’s proposed rate was reasonable.

The commission found that it had the authority – but that AEP’s proposed cost-based charge was too high. Instead, the commission set a price of $188.88 per megawatt-day. Still, the commission remained concerned that CRES providers would have difficulty competing for retail customers if they were charged a capacity charge of $188.88/MW-day. To remedy this concern, the commission directed AEP to reduce the capacity rate charged to the CRES providers to match the market rate (about $20/MW-day).

To ensure that it was paid for its actual cost to provide capacity, AEP was authorized to defer for later collection the difference between the market price it was charging CRES providers and the $188.88 rate.

The Ohio Consumers’ Counsel (OCC) and AEP filed an appeal challenging the PUCO capacity case order. OCC raised various challenges to the commission’s authority to approve the capacity charge and to defer the recovery of capacity costs. AEP objected to the $188.88 rate, arguing that it was too low to recover its actual costs to provide capacity.

In a decision authored by Justice Kennedy, the court upheld AEP’s cost-based capacity charge. Specifically, the Court found that OCC had failed to demonstrate that the commission erred when it approved (1) a cost-based capacity charge, (2) set the amount of the capacity charge, and (3) allowed for the deferral of capacity costs.

The court did find merit, however, in one argument that AEP had raised. The court agreed with AEP that the commission acted unlawfully when it failed to explain its decision regarding certain input data and assumptions that were used to calculate the capacity charge rate. Justice Kennedy wrote that the commission committed an error when it failed to specifically address any of AEP’s challenges to the inputs. The court then remanded this issue to the PUCO.

 The Retail Stability Rider 

In 2012, the commission issued an order that modified and approved AEP’s proposed three-year Electric Security Plan (ESP). As part of the ESP, the commission approved a mechanism called the Retail Stability Rider (RSR) that was to be used by AEP to recover the deferred capacity costs from the Capacity Case. The PUCO instructed AEP to file an application after the ESP ended that, if approved, would allow it to recover the remaining deferred capacity costs starting in June 2015 and continuing over the following 32 months.

The RSR also was approved as “nonbypassable,” meaning that it is paid for by customers who receive generation from AEP and also by those who buy generation service from a CRES provider.

However, Justice Kennedy found that the commission actually had allowed the utility to recover more than its real capacity costs through the non-deferred part of the RSR. Further, because of the method used by the commission to calculate the RSR, the court could not determine exactly how much of the revenue recovered through the non-deferred part of the RSR was allocable to CRES capacity revenues. The court remanded the issue for further consideration.

AEP’s Reaction

A little unexpectedly, AEP was copacetic with the court’s decision. “The full impact of these decisions will be determined after remand to the Public Utilities Commission of Ohio (PUCO), but the utility expects the net financial result will be minimal,” AEP Ohio said in a statement on April 21.

The utility noted that the Supreme Court decision rejecting a portion of AEP Ohio’s RSR requires the PUCO to decrease AEP Ohio’s capacity deferral balance. However, a separate decision also requires that the PUCO reconsider the energy credit used to reduce AEP Ohio’s capacity charges for that period.

“We’re pleased that the Ohio Supreme Court agreed with us and the PUCO that a cost-based price was appropriate to recover the value of our Ohio generation capacity. Although the Supreme Court’s decision rejected one part of the retail stability rider, the court found that the amount of the energy credit used to reduce our capacity costs was not appropriately determined,” said AEP CEO Nicholas K. Akins, adding, “We believe that when we present information about our actual capacity costs in the remand proceedings, “our cost-based price will increase and yield a small net impact when combined with the deferral reduction from the RSR decision.”

AEP Ohio expects the remand process to begin soon and a decision on the remand to be issued in the next several months.

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