AEP subsidiary files divestiture plan with PUCT proposing sale of generating plants in south Texas


COLUMBUS, Ohio, Dec. 17, 2002 — Central Power and Light (CPL), a subsidiary of American Electric Power (AEP), filed a plan of divestiture Tuesday with the Public Utility Commission of Texas (PUCT) proposing to sell all of its power generation assets.

CPL is selling these assets to accurately determine its level of stranded costs – the amount that the book value exceeds the market value of the assets. Senate Bill 7 on Electric Restructuring provides for recovery of stranded costs as part of the transition to the competitive market. CPL is filing the divestiture plan now preparing to seek stranded cost recovery in 2004.

According to the divestiture plan, the assets to be sold have a nameplate generation capacity of 4,241 megawatts and a net book value just under $1.9 billion. They include eight gas-fired generating plants, one coal-fired plant, CPL’s 7.8 percent ownership share in another coal-fired plant, a small hydro facility, and CPL’s 25.2 percent share of ownership in the South Texas Project Nuclear Plant.

CPL earlier announced that the eight gas-fired plants in the plan would be mothballed because operating costs at those plants significantly exceed wholesale electricity market prices. AEP has interim contracts with the Electric Reliability Council of Texas to continue operating four of those eight plants as “reliability must run” or “RMR” units until the end of 2002. The four other plants already have been mothballed.

The divestiture plan does not include power plants owned by other AEP subsidiaries in Texas – West Texas Utilities (WTU) or Southwestern Electric Power Company (SWEPCO) – as AEP is not seeking stranded cost recovery for those generating assets.

Texas restructuring legislation provides several options for determining stranded costs including sale of the assets, creating and issuing stock for a generating subsidiary, or using the statute’s ECOM (excess cost over market) administrative model to value nuclear assets. CPL has chosen to sell its plants because it believes it is the best method available to determine stranded costs.

“Of the methods available in the statute, sale of our generation assets is likely to establish the most accurate and fair valuation of those assets in the current marketplace,” explained Tom Shockley, AEP vice chairman and chief operating officer. “Creating a generating subsidiary and issuing stock to value the plants is not the preferred option due to the type of assets we are selling and the current state of the marketplace. We believe that the market prices used in the ECOM model are significantly overstated based on the current glut of generation in ERCOT.”

Senate Bill 7 provides for stranded cost recovery because electric utility companies made significant investments in generation to serve customers in the regulated environment in exchange for the opportunity to recover those investments through rates. Generation investments become “stranded” when the book value of the investments is higher than the current market value in a restructured market.

In Texas, stranded costs can be recovered through the distribution wires charge on customers’ bills. Senate Bill 7 allows CPL to issue securitization revenue bonds to recover its stranded costs. The principal and interest on the securitization revenue bonds would be recovered over approximately 15 years through an increased wires charge.

The divestiture timeline seeks to sell the assets by early 2004 and file for stranded cost recovery later that same year. The sale of AEP’s portion of the South Texas Project will include a right of first refusal period that could extend into the second quarter of 2004.
See the table below for a list of plants involved in the divestiture.

The 52 MW of capacity listed for the Oklaunion plant is CPL’s 7.8 percent share of the plant. The Brownsville Public Utilities Board, the Oklahoma Municipal Power Authority, and AEP subsidiaries Public Service Company of Oklahoma and West Texas Utilities jointly own the remainder. CPL owns 661 MW or 25.2 percent of the capacity of the South Texas Project. Other partial owners are City Public Service of San Antonio, the City of Austin, and CenterPoint Energy.

American Electric Power, an energy company with a balanced portfolio of energy assets, owns and operates more than 42,000 megawatts of generating capacity in the United States and select international markets and is the largest electricity generator in the U.S.

AEP is a wholesale marketer of energy commodities, utilizing its energy expertise and risk management skills to make optimal use of its generation, natural gas pipeline systems, natural gas storage, coal mines and inland barge fleet. 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. The company is based in Columbus, Ohio.

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The Clarion Energy Content Team is made up of editors from various publications, including POWERGRID International, Power Engineering, Renewable Energy World, Hydro Review, Smart Energy International, and Power Engineering International. Contact the content lead for this publication at Jennifer.Runyon@ClarionEvents.com.

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