Tuesday, December 18, 2018

AEP Base ROE Complaints Ordered to Settlement

By Rory D. Sweeney and Tom Kleckner

FERC said last week it didn’t have enough information to decide on complaints that American Electric Power affiliates are raking in unreasonable returns for transmission projects in PJM and SPP, instead establishing hearing and settlement judge procedures.

In PJM, 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 filed complaints that AEP’s current 10.99% base return on equity is excessive. They requested a base ROE no higher than 8.32% and asked for refunds with interest. The change would save them $142 million annually in transmission costs, they said (EL17-13).

ferc aep return on equity

Yellow circles denote location of transmission projects pending approval; green denote location of approved transmission projects | AEP

The complainants hired a consultant to develop a peer-group analysis that included 25 utilities similar to AEP. That analysis found a “zone of reasonableness” of between 5.62 and 9.46% and that the median of the values, 8.32%, was more appropriate than the midpoint.

Multiple state agencies intervened to support the complaint, including the Indiana Office of Utility Consumer Counsel, the Office of the Ohio Consumers’ Counsel, the Virginia Division of Consumer Counsel, the Virginia State Corporation Commission and the Indiana Utility Regulatory Commission.

An ad hoc group of large commercial and industrial end-use customers also commissioned an analysis, which found an appropriate zone between 5.64 and 9.44%, recommending a base ROE of 8.22%.

AEP responded with its own analysis that found an appropriate zone between 6.41 and 11.71% and that using the midpoint of the upper half of the range, rather than the median, was consistent with FERC rulings.

FERC found the complaint compelling enough to explore further and called AEP’s argument that the current rate falls within the reasonable zone “unpersuasive.”

“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,” the order said, setting a refund effective date of Oct. 27, 2016.

SPP Complaint

FERC also established identical procedures for East Texas Electric Cooperative (ETEC) in its complaint against AEP subsidiaries Public Service Company of Oklahoma (PSO), Southwestern Electric Power Co. (SWEPCO), AEP Oklahoma Transmission and AEP Southwestern Transmission, setting a refund effective date of June 5, 2017 (EL17-76).

The cooperative in June asked the commission to reduce the companies’ 10.7% base ROE to 8.36% within SPP’s AEP West pricing zone. PSO and SWEPCO’s current base ROE derives from a transmission formula rate settlement agreement filed Feb. 23, 2009.

ETEC contends the base ROE is no longer just and reasonable and that its ratepayers are currently overcompensating the AEP West companies by $36.6 million annually.

aep ferc return on equity


The companies countered that the 9.53% upper end of an ETEC consultant’s zone of reasonableness falls more than 100 and 80 basis points below the ROE that FERC previously approved for ISO-NE and MISO, respectively.

The commission said it was “unpersuaded” by the argument, saying “the relief [ETEC] seeks here is an ROE that falls well below the current ROE, based on different facts, risks, proxy companies and time periods” than those in previous decisions.

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