Gahanna, Ohio (Sept. 1, 2010) -- The AEP Ohio companies -- Columbus Southern Power (CSP) and Ohio Power (OPCo) -- today filed their Significantly Excessive Earnings Test (SEET) application with the Public Utilities Commission of Ohio (PUCO).
State law requires the PUCO to annually evaluate the earnings of each investor-owned electric utility. The evaluation, covering financial results from 2009, will determine whether PUCO adjustments to a utility’s standard service offer produced significantly excessive earnings.
"The Commission will evaluate the return on equity (ROE) for each company," said Selwyn Dias, AEP Ohio vice president – regulatory and finance. "The ROE is then compared with returns experienced by a ‘peer group’ of publicly-traded companies, including utilities, who face comparable business and financial risk."
CSP’s 2009 ROE totaled 20.84 percent, while OPCo’s ROE came in at 10.81 percent. (OPCo falls within a "safe harbor" ROE provision established by the PUCO that will likely exempt it from the proceeding.)
Based on the methodology AEP Ohio proposed in its SEET filing, significantly excessive earnings would be determined beyond a 22.51 percent ROE threshold.
In addition, the Company argues in its application that off-system (wholesale) sales, regulated by the Federal Energy Regulatory Commission, and deferrals, such as those for generation fuel, should not be considered in the SEET calculation. When those items are removed, CSP’s ROE stands at 15.99 percent.
"We believe that CSP’s return on equity falls safely within the range that will require no further action by the Commission," Dias said.
The Company expects that the Commission evaluation process will take several months and include a PUCO hearing.
SEET Questions And Answers
Q: What is SEET?
A. Ohio Revised Code Section 4928.14 requires Ohio electric utilities to provide consumers with a standard service offer consisting of either a market-rate offer (MRO) or an electric security plan (ESP). Pursuant to Ohio Revised Code Sections 4928.142(D)(4) and 4928.143(E) and (F), the Public Utilities Commission of Ohio (PUCO) is required to evaluate the earnings of each electric utility’s approved ESP or MRO to determine whether the plan or offer produces significantly excessive earnings for the electric utility.
According to a summary of O.R.C. Section 4928.143(F) that contains the Significantly Excessive Earnings Test (SEET): The PUCO annually will compare the AEP Ohio companies’ earnings with publicly-traded companies, including utilities, who face comparable business and financial risk.
Q: What peer group did you submit for the ROE comparison?
A. Instead of using a traditional comparison with other utilities, SEET requires that another peer group be defined based on "comparable" risk characteristics, irrespective of the industries from which these peer firms are drawn. For this procedure, using an objective market-based approach to measuring risk, 70 firms were identified in the comparable group, including natural gas utilities, electric utilities, telecommunication firms, pharmaceutical companies, office equipment firms and food processors, to name a few.
Q: What was the ROE earned, on average, during 2009 by publicly traded firms with business and financial risks comparable to those that AEP Ohio faces?
A. AEP Ohio has determined that the earned ROE during 2009 for publicly traded firms that face comparable risks to AEP Ohio, on average, was 11.04 percent.
Q: What is the level, above the average earned ROE of the comparable risk group of firms, where the earned ROE becomes significantly in excess of the average earned ROE?
A: Using standard statistical analysis, approved by the PUCO in AEP Ohio’s ESP, the Company has determined that the level at which CSP’s and OPCo’s earned ROE becomes significantly in excess of the average earned ROE of the comparable risk group of publicly traded firms is 22.51 percent.
Q: How does AEP Ohio’s earned ROE for 2009 compare to the SEET benchmark ROE?
A: Neither CSP’s nor OPCo’s earned ROE for 2009 exceeds the SEET benchmark ROE.
- CSP’s adjusted ROE is 15.99 percent; OPCo’s ROE is 10.81 percent.
Q: The Company has stated that certain ROE components should be excluded from the SEET calculation?
A: The Company understands the law specifically provides that earnings resulting from adjustments included in an electric utility’s ESP are subject to the SEET.
- Off-system sales margins, which result from wholesale, not retail, transactions, are not the result of a rate adjustment included in AEP Ohio’s ESP. They result from wholesale transactions approved by the Federal Energy Regulatory Commission (FERC).
- The Company also believes it would be unlawful to treat earnings that result from wholesale transactions and also that are not the result of any adjustment included in a provision of the electric utility’s ESP as significantly excessive.
- Earnings related to accounting deferrals (mostly fuel costs) should not be subject to refund in connection with the 2009 earnings. Accounting deferrals are comprised of funds which CSP is allowed to recover, such as generating plant fuel, purchased power and related expenses, but is required to defer that recovery in order to stay under the rate cap increases adopted under the company’s ESP. These deferrals have yet to be recovered in customer rates.
Q: Should the Commission consider future committed investments of AEP Ohio during the ESP term?
A: The Company believes that the statutory language provides the Commission with flexibility to consider the electric utility’s upcoming capital requirements when determining whether significantly excessive earnings exist.
Specifically, the statute gives the Commission the latitude to determine that if the electric utility has capital spending commitments that it must meet in the near future, its earnings should not be considered significantly excessive. That would allow the electric utility to retain earnings that might otherwise be considered to be significantly excessive, under the implied theory that the electric utility could use them to meet its capital spending requirements for the future committed investments.
Q: Please describe AEP Ohio’s capital budget for the ESP period, and its economic impact in Ohio.
A: AEP Ohio has committed capital investments of approximately $1.67 billion during the ESP term (2009-2011) alone.
In addition, AEP Ohio’s annual economic impact in Ohio well exceeded $2 billion in 2009. This amount included more than $730 million in Ohio payroll and over $161 million in property taxes, as well as state and local taxes, philanthropic contributions, and purchases of goods and services.
Sustaining the level of investment that underlies this significant impact depends in large part on the investment climate that is created by implementation of the significantly excessive earnings test.
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