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Separation of AEP Ohio Generation Provides New Wholesale, Retail Possibilities for Company
September 8, 2011
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The contemplated corporate separation of AEP Ohio's existing ratebased generation from its Ohio distribution companies opens up a whole new view for the company going forward, executives said during an investor call yesterday.
As first reported by Matters yesterday (9/7), a non-unanimous stipulation in AEP Ohio's electric security plan contemplates that the utilities' existing generation will be corporately separated and no longer dedicated to Ohio customers.
This huge tranche of unregulated generation, tied with AEP's existing wholesale and retail marketing operations, could "wind up being a pretty powerful combination," executives said.
In particular, executives cited the generation as a platform for growth in non-native service areas with high load growth, unlike AEP Ohio's slower load growth territory.
AEP's retail supply business is active in Ohio and Texas. As only reported by Matters, AEP intends to pursue a "multi-state" marketing strategy for its retail unit, including markets "throughout the east" (see 7/20 and 11/2).
Due to the expected retirements of significant generation due to environmental regulations, and associated pricing impacts, executives also said that the movement of the Ohio generation to the market should inure to the benefit of shareholders. Turning to the settlement's provisions, executives said that they expect the previously reported RPM "set aside" caps (under which a capped amount of migrated load has access to discounted capacity from AEP) will constrain the amount of shopping in the AEP Ohio territory to the level of the caps until the movement to market-based SSO service in 2015. As previously reported, the amount of discounted capacity made available to retail suppliers will be limited to 21% of AEP Ohio retail (kWh) sales in 2012, gradually rising to 41% in 2014 and the first five months of 2015. Additionally, during this morning's Barclays Capital conference, executives said that should PUCO alter, or remove, these caps in its final order on the contested stipulation, AEP Ohio would question the wisdom of proceeding with the stipulation's other provisions. As noted yesterday, FirstEnergy Solutions is among those contesting the stipulation. FirstEnergy Solutions said yesterday that under the stipulation, "With this settlement, customers will be denied the benefits of low prices from the competitive market and be illegally burdened with high electric prices for years to come – all to benefit AEP shareholders at the expense of customers. The plan also unfairly favors large industrial customers by providing them with cheaper electric rates at the expense of residential and low-income customers," said Donald Schneider, President of FirstEnergy Solutions. "This settlement will hold customers captive to AEP's monopoly by preventing suppliers from entering the market and denying customers the ability to shop for competitively-priced electricity – a right afforded to them under Ohio law," FirstEnergy Solutions added. However, the Retail Energy Supply Association, which signed the settlement, said that the, "agreement protects electric competition and customer choice in Ohio." "More and more customers in central Ohio have begun to switch to competitive suppliers, and this settlement would allow that growing trend to continue," said David Fein, president of RESA. "Most important, the settlement would provide a stable path to a fully competitive marketplace in AEP Ohio's service territory -- sending a clear message that Ohio is open for business," Fein said. RESA cited, in particular, elimination of nearly all nonbypassable surcharges under the settlement. "We applaud AEP Ohio, the PUCO Staff and the many other parties to this settlement for taking this important step toward a competitive market approach that will save customers money and preserve their right to choose from a variety of safe, reliable and competitively priced electric products," Fein said. Also notable is that during yesterday's investor call, an analyst asked AEP whether new, ratebased generation permitted under the settlement (including a 500 MW combined cycle facility to be recovered through nonbypassable surcharge) would run into problems with the Minimum Offer Price Rule in PJM's capacity auction, as AEP Ohio will no longer use a fixed resource requirement and will rely on the RPM auction for capacity after May 31, 2015. Executives said that the ratebased generation to be built in Ohio is not similar to the ratepayer-backed New Jersey generation which FERC has made subject to the Minimum Offer Price Rule; however, precise interaction of the new Ohio generation and RPM is not clear.
"[c]ustomers would be forced to pay more than $1 billion above what the competitive electricity market could offer them."
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