Business Context and Reporting Period
This Form 8-K, filed on March 24, 2009, reports on an event occurring on March 18, 2009, involving American Electric Power Company, Inc. (AEP), Columbus Southern Power Company (CSPCo), and Ohio Power Company (OPCo). The filing details an order issued by the Public Utilities Commission of Ohio (PUCO) modifying and approving the Electric Security Plans (ESPs) for CSPCo and OPCo, effective through 2011.
Key Financial Metrics and Regulatory Impacts
The PUCO order authorizes rate increases capped at specific percentages, projected to generate the following incremental revenues:
- CSPCo: Approximately $116 million (2009), $109 million (2010), and $116 million (2011).
- OPCo: Approximately $130 million (2009), $125 million (2010), and $153 million (2011).
Rate Caps: Overall bill increases are capped at 7% (2009), 6% (2010), and 6% (2011) for CSPCo, and 8% (2009), 7% (2010), and 8% (2011) for OPCo.
Shareholder Funding Obligation: The Companies must fund a minimum of $15 million for low-income customer programs over the ESP period. This will be recognized as a liability and an adjustment to reported earnings for the quarter ending March 31, 2009.
Deferred Assets: Regulatory assets totaling $56 million for CSPCo and $38 million for OPCo (as of February 28, 2009) were denied recovery in this order and deferred to a future distribution rate case.
Material Changes and Operational Adjustments
The order introduces a Fuel Adjustment Clause (FAC) allowing the pass-through of actual fuel costs, subject to annual caps. Unrecovered fuel expenses due to these caps may be deferred with carrying charges accrued at the weighted average cost of capital. Any remaining deferred balance at the end of the ESP period (2011) will be recovered via a non-bypassable surcharge from 2012 through 2018. The filing notes that quarterly deferred FAC balances for 2009 are expected to be material.
Additionally, the PUCO approved new distribution riders for vegetation management and gridSMART costs, ordered the Companies to seek matching funds under the American Recovery and Reinvestment Act of 2009 for gridSMART, and approved 90% of the requested Provider of Last Resort charge.
Outlook, Risks, and Contingencies
Rehearing: The Companies intend to file a motion for rehearing on certain elements of the Order, and intervenors are also expected to file motions.
Earnings Review: The PUCO will establish a proceeding to examine the Significantly Excessive Earnings Test (SEET) methodology. The review of the Companies' 2009 earnings is not expected until the third quarter of 2010. The SEET will exclude off-system sales margins and FAC deferrals.
Risk Factors: The filing lists numerous risks including economic climate volatility, fuel cost volatility, regulatory changes, litigation (including Enron-related matters), and the ability to recover costs for new capital projects and environmental compliance.
Investor Verification Checklist
- Verify the final status of the Companies' motion for rehearing and any subsequent PUCO rulings.
- Monitor the quarterly deferred FAC balances for 2009 to assess the materiality of deferred fuel expenses.
- Confirm the impact of the $15 million shareholder funding obligation on Q1 2009 earnings.
- Track the progress of seeking matching funds for gridSMART under the American Recovery and Reinvestment Act of 2009.
- Review the timeline for the next distribution rate case to determine when the $94 million in deferred regulatory assets may be recovered.