American Electric Power (NYSE: AEP) and the Public Utility District No. 1 of Snohomish County, Wash. (Snohomish), announced a settlement in a dispute over a long-term contract signed in January 2001.
According to the terms of the settlement, Snohomish and AEP have agreed to terminate the contract effective today. Snohomish has agreed to pay AEP $59 million. Because the contract was accounted for by AEP on a mark-to-market basis, the negative impact on AEP’s 2003 after-tax earnings will be approximately $6.5 million. Snohomish also will withdraw its complaint before the Federal Regulatory Energy Commission (FERC) regarding the contract.
Snohomish and AEP entered into a contract Jan. 25, 2001, in which Snohomish agreed to purchase 25 MW of baseload power from AEP for $150 per MWh for five years beginning Feb. 1, 2001. At the time the agreement was signed, market prices for baseload power in the Northwest were approximately $325 per MWh for the balance of 2001.
In late December 2001, Snohomish notified AEP that they believed the length of the contract and its terms had become unjust and unreasonable. In June 2002, Snohomish filed a formal complaint with the FERC alleging that the contract violated the Federal Power Act. AEP and Snohomish have been engaged in settlement discussions since January 2002 to address Snohomish’s concerns.
“We are gratified to have reached a reasonable resolution to this dispute and avoid a drawn out, expensive proceeding,” said Holly Koeppel, AEP’s executive vice president—energy services. “The settlement also enables AEP to accelerate cash realization from its portfolio of trading activity in a region where the company does not own assets.”
In October 2002, AEP announced that it would reduce its trading activity and focus its market activity in those regions where it owns assets including the Midwest, Texas, the Gulf Coast and the United Kingdom.
American Electric Power owns and operates more than 42,000 MW of generating capacity in the United States and select international markets and is the largest electricity generator in the U.S. AEP is also one of the largest electric utilities in the United States, with almost 5 million customers linked to AEP’s 11-state electricity transmission and distribution grid.