Electricity Markets

FERC responds to complaints tied to AEP transmission ROE levels

In a series of recent orders, the Federal Energy Regulatory Commission responded to complaints made against subsidiaries of investor-owned American Electric Power by public power utilities and cooperatives alleging that transmission-related return on equity, or ROE, levels for the AEP utilities are too high.

In the orders, FERC directed hearings to be held on the ROE levels, but deferred those hearings so that the parties in the cases can engage in settlement discussions.

Two of the orders were issued by the Commission on Nov. 16 at its monthly open meeting, while the third was issued on Nov. 27.

One of the orders issued on Nov. 16 responded to a complaint filed by cooperative and public power utilities on Oct. 27, 2016 (Docket No. EL17-13).

Parties filing the complaint were American Municipal Power, Blue Ridge Power Agency, Craig-Botetourt Electric Cooperative, Indiana Michigan Municipal Distributors Association, Indiana Municipal Power Agency, Old Dominion Electric Cooperative, and Wabash Valley Power Association, Inc.

The complaint was filed against a large group of AEP subsidiaries collectively called the AEP East Companies.

The group of public power and cooperative entities argued in the complaint that the AEP East Companies’ current 10.99 percent base ROE is excessive.

Inclusive of a 50-basis point adder awarded for its participation in PJM, the AEP East Transcos currently have an overall ROE of 11.49 percent.

The parties that filed the complaint said that the Commission should find that the AEP East Companies’ current 10.99 percent ROE is no longer just and reasonable because relevant economic and capital market conditions have changed greatly and reduced the AEP East Companies’ cost of capital since the 10.99 percent figure was adopted in 2010. 

The complainants argued that the base ROE should be lowered to 8.32 percent, which is the median of a range of proxy company returns calculated using FERC’s two-step discounted cash flow (DCF) analysis.

The public power and cooperative entities estimate that reducing the base ROE included in the AEP East Companies’ formula transmission rates from the current 10.99 percent to 8.32 percent would reduce the AEP East Companies’ total collective annual transmission revenue requirements by a little over $142 million.

Second complaint filed by East Texas Electric Cooperative

In the second Nov. 16 order, FERC responded to a June 5, 2017 complaint (Docket No. EL17-76) filed by East Texas Electric Cooperative, or ETEC, against Public Service Company of Oklahoma, Southwestern Electric Power Company, AEP Oklahoma Transmission Company and AEP Southwestern Transmission Company.

ETEC owns transmission facilities, purchases transmission services and serves load within the Southwest Power Pool Pricing Zone 1, or AEP-West pricing zone.

ETEC is comprised of three generation and transmission cooperative members:  Northeast Texas Electric Cooperative, Inc., Sam Rayburn G&T Cooperative, Inc., and Tex-La Electric Cooperative of Texas, Inc.

Respondents are comprised of two operating companies (PSC Oklahoma and Southwestern Electric) and two transmission-only companies, or transcos (AEP Oklahoma and AEP Southwestern) – collectively, the AEP West companies and all subsidiaries of AEP. They provide regional transmission service under the SPP Open Access Transmission Tariff through cost-of-service formula rates that adjust annually.

The current base ROE for the AEP West companies is 10.7 percent.  Based on updated financial data and the two-step DCF methodology that the Commission adopted in Opinion Nos. 531, 531-A, 531-B and 551, ETEC argues that the AEP subsidiaries’ base ROE is no longer just and reasonable and should be no higher than 8.36 percent.

As a result, ETEC maintains that ratepayers are currently overcompensating the AEP West companies by $36.6 million annually.

ETEC, Northeast Texas Electric Cooperative file complaint

ETEC joined with Northeast Texas Electric Cooperative in filing a complaint against Southwestern Electric Power Company on Aug. 31, 2017 (Docket No. EL17-85). Southwestern is a unit of AEP and a member of SPP. FERC responded to this complaint in a Nov. 27 order.

ETEC and NTEC serve load in SPP. They buy power from Southwestern Electric under a revised power supply agreement between Southwestern Electric, ETEC, and NTEC.  Additionally, NTEC buys power from Southwestern Electric under an amended and restated power supply agreement between NTEC and Southwestern Electric.

ETEC and NTEC contend that the current 11.1 percent base ROE contained in their power supply agreements with Southwestern Electric is no longer just and reasonable and should be no higher than 8.41 percent.  As a result, they maintain that ratepayers are currently overcompensating Southwestern Electric by around $2.4 million annually.

FERC orders

FERC rejected arguments made by the AEP utilities that it should turn aside the complaints.

Among other things, FERC said it was not persuaded by assertions made by the AEP utilities that the Commission should dismiss the complaints because their current base ROEs fall within the “zone of reasonableness” established by the range of proxy company DCF results.

The Commission “has repeatedly rejected the assertion that every ROE within the zone of reasonableness must be treated as an equally just and reasonable ROE” in a Federal Power Act section 206 proceeding, FERC noted in all three orders.

The Commission set the complaints for hearing, but encouraged the parties “to make every effort to settle their disputes before hearing procedures are commenced.”

To assist the parties in their settlement efforts, FERC held the hearings in abeyance and directed that settlement judges be appointed in the relevant proceedings.

In the orders, the Commission also set refund effective dates pegged to the dates when the complaints were filed.