AEP Files Complaint at FERC Over Compensation Rate for Capacity Assigned to Ohio Retail Suppliers

April 5, 2011
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AEP has filed a section 206 complaint at FERC seeking changes to the capacity cost compensation mechanism for utilities using the Fixed Resource Requirement (FRR), after the Commission rejected the AEP Ohio companies' earlier attempt, through a section 205 filing, to raise the capacity costs charged to competitive retail suppliers for capacity under the FRR plan.

See 1/21 story for background on FERC's prior order regarding compensation under the FRR. Under the original pro forma rates, AEP sought to increase capacity costs from $208.20/MW-day to $310.04/MW-day at Columbus Southern Power, and from $208.20/MW-day to $401.01/MW-day at Ohio Power

AEP said that it was seeking "limited and discrete" changes to Schedule 8.1, Section D.8 of the PJM Interconnection Reliability Assurance Agreement (RAA); however, the changes would fundamentally alter how the capacity compensation mechanism works.

Much of AEP's complaint was spent rehashing its previously filed rehearing request, rather than constructing a case that the current RAA is unjust and unreasonable. Indeed, AEP's complaint is that FERC's interpretation of Section D.8 renders the provision "unjust and unreasonable," though AEP claims it is not making a collateral attack on FERC's prior order.

As previously reported, FERC has ruled that where a state regulator establishes a price to be paid for capacity under the FRR plan, that price shall prevail, and a utility may not seek a different cost from FERC.

AEP essentially argues that while a state compensation mechanism paid by retail customers may appropriately trump a FERC cost of service filing, Ohio has not set a retail capacity rate to be paid by migrated retail customers. Instead, AEP argued, the Ohio Commission held that alternative suppliers (not customers) shall compensate AEP for capacity at the PJM clearing price.

AEP contended that this rate, since it is charged to competitive suppliers and not retail customers, is a wholesale rate, which is the exclusive jurisdiction of FERC.

Though not explicit, AEP essentially argues that the compensation paid by competitive suppliers to AEP for capacity is a purchase made for resale. However, it is not entirely clear, under the FRR, that "title" to the capacity actually passes from AEP to the competitive supplier, and then onto the end use retail customer, as it would for the sale of wholesale, and then retail, generation supply. Rather, under the FRR, it would appear that capacity costs are "assessed" or "taxed" on retail suppliers by AEP in return for AEP meeting all of the PJM capacity obligations itself on behalf of all of the load in its service area which does not choose to opt out. In this case, AEP is not engaging in a sale for resale (e.g. a wholesale rate set by FERC), but is rather simply allocating capacity costs reflecting its own assumed obligations, which under the FRR include its native load and migrated load. Since no actual sale of capacity to retail suppliers occurs, there is no jurisdictional issue in having a state regulator assign capacity costs.

Indeed, this is exactly what is contemplated by the current Section D.8, though AEP strains to paint the language as only allowing state regulators to set a compensation rate to be paid by retail customers, and that, in the absence of a retail rate (which AEP says Ohio has not adopted), utilities shall be allowed to seek FERC cost recovery.

An affidavit from an AEP witness claimed that the phrase "state compensation mechanism" was, "intended to apply to state retail programs that provided for capacity compensation made through retail charges."

However, the RAA language clearly states, "In the case of load reflected in the FRR Capacity Plan that switches to an alternative retail LSE, where the state regulatory jurisdiction requires switching customers or the LSE to compensate the FRR Entity for its FRR capacity obligations, such state compensation mechanism will prevail" (emphasis added).

In other words, the plain language of the RAA provides that the state compensation mechanism may be charged to either the customer or the LSE.

Indeed, AEP proposed modified language for the RAA that would explicitly remove the phrase "or the LSE" from the RAA. Under AEP's modifications, the state compensation mechanism would only apply if a state imposes a charge directly on migrated retail customers for capacity provided by the FRR entity. In the absence of such a charge, the capacity costs would be paid by the competitive supplier, at either the PJM clearing price, or a rate established by FERC.

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