Ohio is moving rapidly toward deregulation in electricity. AEP owns a big chunk of the electricity business in the state, but its executives are having a hard time making the adjustment to competition.
Dan Gearino, a reporter at the Columbus Dispatch, has been doing a great job covering AEP’s adjustment problems. In this article last week, Gearino explained why AEP is so bent out of shape by the Public Utilities Commission of Ohio’s rejection of AEP’s plan to turn itself into a rich landlord.
When a state deregulates its utility markets, whether it is gas, electric or land line phone, there is always a requirement that all companies have access to all customers in the state. This means that formerly regulated companies, that have built distribution infrastructure in their past service area, must let other companies use their distribution system to reach their former customers. While “open access” is fundamental to this process, companies that built the infrastructure in a certain area are allowed to charge competitors a kind of rent for using their equipment to reach customers.
As the Dispatch’s Gearino, this is what AEP’s tantrum is about. AEP’s long term business strategy is to turn itself into a Big Daddy landlord. This is also the reasoning behind its big push into transmission projects under the wing of its new Transco. We covered this story over two years ago on The Power Line. AEP wants get out of the business of making and selling electricity to move into simply charging other people rent for using its equipment. The company still has a long way to go in this process, but the direction is clear enough from their promotion to investors of independent transmission as a new high profit opportunity for the company.
So what is the heart of the matter in Ohio? Here’s how Gearino explains it:
Under the rates that were revoked, AEP had the right to increase the amount it charges competitors to use its system. The capacity charge was to be $110 per megawatt-day for competitors that were already serving customers in AEP territory, and $255 per megawatt-day for just about any new customers who signed up with competitors.
This charge is paid by the electricity provider and passed on to the customer. At $255, it is equivalent to 1.6 cents per kilowatt-hour, which would be an increase of more than 5 percent in the overall rate for a typical household.
AEP has asked the PUCO to impose the $255 charge in the interim until the panel approves new rates. The company says the PUCO’s decision on its request — which could come as soon as next week — could help stave off the crisis of confidence created by the commission’s prior actions.
Without this, AEP worries that competitors will undercut its price and contribute to a potentially devastating loss of sales and a drop in its share price.
But competitors such as Akron-based FirstEnergy say that AEP wants to shut out competition and hold its customers captive to high rates.
This argument, with technical details that go beyond the understanding of most consumers, was one of the most bitterly contested points in the rate case.
So AEP’s big complaint is that they can’t charge their competitors high rents to use their equipment. New AEP CEO Nick Akins stamped his feet and threw a little snit over PUCO’s rejection of AEP’s rent plan.
Nick Akins, president and CEO of the Columbus-based utility, said he faces difficult choices because of the Public Utilities Commission of Ohio’s decision last week to throw out the company’s rate plan that went into effect last month.
He said all options are on the table, and he wouldn’t rule out moving the corporate headquarters.
Suddenly, all the happy talk Mr. Akins used just a few weeks ago on the AEP investor call has disappeared. And investors themselves responded accordingly:
The company lost about $1 billion in market value in a 24-hour period last week after the PUCO decision.
Yikes. That’s what happens when you don’t tell investors the truth about your real situation.
We have also learned that, as a result of this setback in Ohio, AEP has withdrawn all of its recent applications to FERC to merge Wheeling Power and Appalachian Power in WV, to have Ohio Power sell its interests in the John Amos Plant and the Mitchell Plant in WV to Appalachian Power, and restructuring the AEP power pool for sharing electricity among AEP subsidiaries.
We also learn from Mr. Gearino’s story that while AEP was putting its WV customers in the hole with overpriced coal contracts back in 2008, it was reaping big profits in Ohio’s regulated market:
For years, AEP’s low rates shielded it from incursions from competitors. That changed beginning in 2008 when the PUCO approved a big rate increase for AEP just as the wholesale price of electricity was about to decline.
Utilities want “the certainty of regulation, but when times are good in the market, they want the higher price of the market,” said Ken Rose, a Columbus economist who specializes in utility-rate design.
He said that AEP executives “weren’t complaining” when they were benefiting from the market.
If there is one thing that AEP managers are good at, it’s manipulating electricity regulators to generate high profits. Oh, and they are also good at whining.