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AEP Ohio Seeks Call Option on Any Self-Supplied Capacity from Retail Suppliers

September  6, 2011
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AEP Ohio submitted testimony at the Public Utilities Commission of Ohio supporting its request to raise the capacity charges imposed on competitive retail suppliers under its Fixed Resource Requirement by up to 160% (10-2929-EL-UNC).

As previously reported (1/21), AEP Ohio initially sought to raise the charges for capacity provided to retail suppliers under its Fixed Resource Requirement at FERC, but in the interim, PUCO established the capacity compensation rate as the clearing price of the Reliability Pricing Model ($145.79/MW-day), pre-empting FERC action.

AEP Ohio continues to seek at PUCO a change in the capacity pricing mechanism, in order to use embedded costs to establish the compensation rate.

This would result a 125% increase (to $327.59/MW-day) in the capacity charge imposed on retail suppliers at Columbus Southern Power, and a 160% increase (to $379.23/MW-day) at Ohio Power.

Should the two operating companies be merged as proposed by AEP Ohio, the merged capacity rate would be $355.72/MW-day.

AEP Ohio also testified that the formula rates used to determine the embedded capacity cost would be adjusted to ensure that any capacity-related amounts collected through nonbypassable riders (which may be adopted under the AEP Ohio electric security plan) are removed from the capacity charges.

AEP Ohio is not proposing to credit to retail suppliers any energy associated with the assets they are supporting through the capacity charge since, "PJM has completely separated the markets for capacity and energy."

However, if PUCO ordered that retail suppliers are entitled to such an energy credit, AEP Ohio proposed that the energy credit should be capped at no more than 40% of the capacity rate without the credit.

AEP Ohio said that retail suppliers could self-supply capacity rather than rely on AEP Ohio's assets; however, this would be subject to several conditions.

Among other things, AEP Ohio proposes that each individual retail supplier shall be limited to supplying no more capacity for a given PJM Planning Year than twice the capacity that is required to serve the load that the retail supplier is actually serving on January 1 of the year in which the Fixed Resource Requirement Plan for that planning year is submitted to PJM.

For example, if a retail supplier is currently serving load that requires 100 MW of capacity on January 1, 2012, then that retail supplier may elect to self-supply up to 200 MW of capacity into the applicable FRR plan for the 2015/2016 Planning Year that will be submitted during the first quarter of 2012.

This limit would allow each retail supplier to self-supply approximately 25% more load each Planning Year, AEP Ohio said.

Additionally, to the extent a retail supplier commits excess capacity under its self-supply plan, and subsequently no longer serves the associated load (with that load returning to AEP Ohio), AEP Ohio said that the retail supplier should be required to sell the excess capacity to AEP Ohio at the lower of the final RPM price or the applicable capacity rate of the respective AEP Ohio operating company.

AEP Ohio would not be required to purchase such excess capacity if it could obtain capacity from a lower-cost source, however. In other words, AEP Ohio would receive a call option on the retail supplier's excess capacity.

AEP Ohio said that the call option and associated lower-of strike price are necessary so that retail suppliers do not have an incentive to (a) supply capacity with which they have no earnest interest in serving load but instead commit such capacity only to cause AEP Ohio to lower its own obligations and then (b) sell this capacity to AEP Ohio when AEP Ohio becomes short on capacity for reasons created by the same retail suppliers.

Such actions, "are not inconsistent with actions alleged years ago in the California energy market that generation owners purposely withheld generation from the spot market only until the market was higher and then sold it back into that market. Similarly, CRES [competitive] providers should not be given the incentive to purposely create a capacity shortage for AEP Ohio and then profit from it," AEP Ohio said.

 

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