Federal-state compromise necessary to resolve transmission organization issues in Midwest, AEP testifies

WASHINGTON, Sept. 29, 2003 — Issues blocking participation by American Electric Power in a regional transmission organization must be resolved through compromise by federal and state regulators, AEP officials said Monday.

AEP offered a compromise as a starting point for discussions among regulators in an attempt to advance the debate on its plan to join PJM Interconnect, a regional transmission organization (RTO).

AEP officials were among those testifying today on the first day of a two- day inquiry into Midwest regional transmission issues ordered by the Federal Energy Regulatory Commission (FERC).

AEP has committed to transfer operational control of its eastern transmission assets to PJM. Those assets are in Michigan, Indiana, Ohio, Kentucky, West Virginia, Virginia and Tennessee. The transfer to PJM has been blocked by legislators and regulators in Virginia and Kentucky who are concerned about the impact of RTO participation on utility customers in the states.

“There are two courses of action the commission could take,” said E. Linn Draper Jr., AEP’s chairman, president and chief executive officer. “One is a forced solution, which is not likely to be in anyone’s long-term interest. The other is to undertake the hard work and give-and-take necessary to find a workable compromise with our other regulators that doesn’t unfairly penalize our company to satisfy any particular set of regulators or stakeholders. I’m optimistic that the approach we outline will facilitate compromise and will not simply be a pretense for a forced solution that will harm my company.

“I think there is common ground upon which we can build a meaningful compromise,” Draper said. “All of our states seem to agree on certain aspects of RTOs — specifically the need for an independent entity to strengthen the reliability of the grid through a broad, regional approach. … Let’s at least compromise on those areas in which we have some level of agreement and then we can deal with the other issues later.”

AEP COMMITTED TO RTO PROGRESS

Draper noted that AEP is committed to meaningful progress on RTOs and has spent or committed $50 million and a tremendous amount of employee and management time in pursuit of RTO membership.

“I want to set the record straight, since there has been so much misinformation and plain untruths on the matters under consideration in this inquiry,” Draper said. “Some stakeholders have found it in their business interest to demonize AEP as some sort of bad actor on the transmission scene. But in my tenure, we’ve supported competition and embraced open access. No system remotely matches AEP in the amount of energy transmitted over our system. … Over at least the past 10 years, we have spent about $185 million per year on transmission capital investment, and $110 million on transmission operation and maintenance expense.”

Draper said there are fundamental disagreements about RTOs among various entities with regulatory authority over AEP and a separate set of disagreements among various stakeholders concerning AEP’s assets.

“AEP is in the middle of these disagreements, but there is no action we can take on our own to resolve them,” Draper said. “Much of the RTO debate is fueled by competition for use of assets that belong to AEP. We will continue to cooperate with regulatory processes and to the best of our ability seek solutions that achieve reasonable public policy objectives.

“But I want to be clear that we will not stand by while others make decisions about our transmission system to the detriment of our customers and our shareholders,” Draper said, noting that no other transmission provider faces potential lost revenue as great as AEP if the RTO model doesn’t insure revenue neutrality. “I would be neglecting my fiduciary duty to our customers and shareholders if I didn’t make sure that the decisions that are made about our transmission assets, including RTO participation, do not harm their interests in favor of another party’s self interests.”

SPLITTING AEP SYSTEM ‘NOT A SOLUTION’

Draper also addressed a proposal to split AEP’s eastern transmission assets, omitting transmission assets from RTO control if they are located in states opposed to RTO participation.

“Let me say emphatically that splitting the AEP system is not a solution,” Draper said.

An itemization of issues created by the potential split of AEP’s eastern transmission assets was provided in testimony by Susan Tomasky, AEP executive vice president and chief financial officer, and Craig Baker, AEP senior vice president – regulation and public policy.

“The split system scenario is a very bad idea,” Tomasky said. “Although perhaps technically feasible, it would increase AEP’s costs and raise a host of complex contractual, legal, regulatory and operational issues that totally negate the idea.”

The testimony listed a number of facts that argue against splitting the company’s transmission grid, including:

* Integrated planning and operation are fundamental to the AEP transmission system and have resulted in AEP being a very low-cost electricity provider.

* Holding company systems are required to provide system-wide transmission service under a single tariff. Splitting the system for RTO purposes would result in two tariffs.

* Unlike RTO creation, which reduces seams, and leaves only inter-RTO seams, splitting the system would create seams where none existed before.

* Splitting operating companies by state (for instance, AEP’s Appalachian Power subsidiary, which operates both in Virginia and West Virginia), if required, would create operational barriers where none exist today.

* The scenario presents complicated tariff administration questions regarding pricing and transaction protocols.

* Creating non-pancaked rates for a split system would create lost revenue and cost allocation issues among the operating companies.

* Changes to AEP’s pool agreements may be required. Past efforts at changing the agreements have resulted in complex, costly and time- consuming FERC proceedings.

NOT A ‘MIDWESTERN UTILITY’

Tomasky took issue with the contention that AEP is a “Midwestern utility” by parties arguing that there should be only one RTO in the Midwest or supporting the Midwest ISO, another independent transmission system organization.

“The fact is that approximately 36 percent of AEP’s load in its eastern zone is located in the states of Kentucky, Virginia, West Virginia and Tennessee,” Tomasky said. “Many a Kentucky Colonel, Virginia Squire, Tennessee Volunteer and West Virginia Mountaineer would be surprised to learn they are Midwesterners. AEP generation supplies load in the Midwest (ECAR and MAIN), but it also supplies load in the east, Mid Atlantic, the Carolinas, TVA and beyond. AEP has no single natural market unless it is with all 18 control areas with which we are interconnected.”

The company noted that Virginia Power, which serves side by side with AEP’s Appalachian Power subsidiary in Virginia, was not included in the FERC’s Midwest RTO inquiry because “it is not in the Midwest.”

AEP’S PROPOSED COMPROMISE

AEP offered its own compromise solution for the company’s RTO membership as a starting point for the dialogue between and among state regulators.

The company proposed transferring functional control of its eastern transmission facilities to PJM, but limiting PJM’s functions to those required by FERC Order No. 2000. PJM would have independent functional control of AEP’s transmission system, provide independent tariff administration, have independent control of transmission assets, continue to serve as reliability coordinator, assume market monitoring and regional transmission planning responsibilities, provide seams coordination with the Midwest ISO and insure non-pancaked rates for service throughout the combined PJM/Midwest ISO regions.

PJM would not provide administration of day-ahead and real-time energy and ancillary service markets, centralized economic dispatch or locational marginal price congestion management, addressing concerns raised by Virginia and Kentucky. This could evolve over time as those regulators determine the benefits of AEP’s participation in those markets.

“In other words, AEP would not become integrated into PJM’s voluntary markets,” Tomasky said. “AEP could certainly participate in PJM markets on a bilateral basis and PJM market participants could likewise trade with AEP on such a basis.”

American Electric Power 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 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.

The prepared testimony of Draper, Tomasky and Baker is available on the Internet at http://www.aep.com/go/ferc-rto .

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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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