AEP Party Line on PJM Changes

Last Thursday, AEP CEO Nick Akin held his quarterly conference call with bankers to discuss AEP’s financial situation.  As CEOs often do when their companies (and their jobs) are under pressure, Mr. Akin spent a lot of time whining.

In particular, Mr. Akin whined about PJM’s May RPM capacity auction.  He complained that PJM is letting too many other businesses enter the market with too many different products.  Here’s what he said:

This version of socialism that equates [demand-side management resources] and non-firm transmission with reliable, capital-intensive, steel in the ground is really just capitalism in a sandbox, where the rules seem to penalize long-term investors  This has to change or we’ll eventually have a doughnut with PJM being the empty middle, and reliability will suffer. PJM is fully aware of our concerns and hopefully will react accordingly because change is desperately needed.”

The transcript of the call has not been published yet.  This quote comes from an account by SNL Financial, but I can’t link to it, because it is a licensed document.

What a difference a few years make.  Back in 2008, everything was going AEP’s way in PJM.  AEP’s pet PATH project was being touted as the reliability savior by PJM’s engineers, and it looked like AEP’s Ohio River Valley coal burners were destined to rule East Coast electricity markets.

It didn’t turn out that way, and now Nick Akins wears a frownie face, :-(.  Now PJM is the bad guy for not pushing “capital-intensive, steel in the ground” in its capacity market.  But isn’t that what the capacity market is designed to do?  Isn’t the RPM designed to send market signals to areas of high demand that more “steel in the ground” is needed?  Aren’t those signals designed to give investors the opportunity to build that new “steel” on the East Coast load centers where it is most needed?  For answers to some of these questions, see Comments for this post.

Well, that’s not the steel Mr. Akins is talking about.  Mr. Akins is talking about his steel, which is already in the ground, and is also obsolete and must have expensive new upgrades to keep from killing people.

Take a look at slide 8 on the slide show Mr. Akins presented with his phone conference.  That’s the real reason for Mr. Akins’ frownie face.  Industrial and commercial demand for Mr. Akins product is falling and residential demand is flat.

When CEOs start throwing around the word “socialism” in absurd contexts, you know there is deep psychological pain happening.  But Mr. Akin is well trained by his PR staff.  He pulled out his little drummer boy act to divert attention from his little tantrum.  When in doubt, go to the drummer boy routine:

“I’m CEO of AEP, but many of you may know I’m also a rock drummer, and one of the biggest challenges — I know that’s hard to believe — but one of the biggest challenges for a beginning drummer is to separate the movement of the right hand and the right foot.”

AEP misses the good old days when it was the single largest player in the PJM sandbox.  Now that FirstEnergy has swallowed Allegheny Energy, there is a new bully both in the Ohio electricity market and in the larger PJM arena.  And the sandbox is getting smaller and smaller.  Frownies all around.

The irony of Mr. Akin’s whining about PJM socialism is particularly delicious, because the only areas where AEP is making money right now, according to Mr. Akin’s own presentation, are the government regulated parts of their business, particularly the regulated states, like WV, where it sells electricity and its transmission business which benefits from rates of return guaranteed by FERC and the US Congress.

2 thoughts on “AEP Party Line on PJM Changes

  1. I agree that socialism is a bizarre term to use here.

    I disagree that the purpose of the RPM is to incentivize generation in PJM where it is needed. That may be its stated purpose, but it certainly hasn’t done that (prices have been consistently higher in eastern PJM and more generation has come online in western PJM). And I don’t think anyone would seriously design a market with a three-year ahead, highly variable price signal and expect it to incentivize long-term investment. I think Akins is right that the RPM rules penalize long-term investors (whether or not PJM needs his “steel in the ground” in western PJM is a separate question).

    Until natural gas prices tanked, the RPM seemed to be doing a good job of providing windfalls to depreciated coal plants and incentivizing some of them to keep running when they would have otherwise retired. Its not clear to me now who is benefiting from RPM – except the middlemen (financial traders, bankers, speculators, etc).

    • Cathy,

      Thanks for your comment. There is only so much background information I can cram into a new post without losing the thread that I am trying to communicate. You are exactly right. PJM’s claim that the RPM process encourages new generation where it is needed most has been proven to be completely wrong. Both the MD PSC and the NJ BPU have proven that in reports and their complaints to FERC about PJM. I have cited these reports in earlier posts.

      As you point out, PJM’s RPM actually promoted AEP’s obsolete existing coal burners at the expense of new, smaller generation in PJM’s eastern load zones. Now that demand resources have entered PJM’s markets they are substituting reduced demand for steel in the ground, and AEP doesn’t like that.

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