Pursuant to Ohio law, electric distribution utilities that are regulated by the PUCO, like AEP-Ohio, have an obligation to provide default service to any customer who does not elect to take generation service from a competitive generation service provider. AEP-Ohio filed an electric security plan (ESP) to set the prices, terms and conditions of default service through June 1, 2015. On August 8, 2012, the Public Utilities Commission of Ohio (PUCO) approved, with modifications, AEP-Ohio’s ESP plan. The PUCO’s August 8, 2012 order approving AEP-Ohio’s ESP presents an opportunity for customers in AEP-Ohio’s service territory to take advantage of electric shopping.

As background, there are three components to electric service: 1) generation, the price of which includes the costs of constructing, maintaining and operating generating plants, and the electrons that are generated by the plants; 2) transmission, the price of which covers the large towers and high voltage wires that transmit the electrons over large distances; and, 3) distribution, the price of which reflects the poles and wires running down streets to houses and buildings.

AEP-Ohio will remain the monopoly provider of distribution and transmission service. However, under Ohio law, generation is a competitive service that customers can shop for and have supplied by competitive generation service providers. Until the PUCO’s August 8, 2012 order, there were economic and other barriers to shopping in AEP-Ohio’s service territory. The order removed the barriers by providing incentives to shopping, removing caps on the percentage of customers that may shop, and pushing AEP-Ohio to price the default service through market mechanisms faster than otherwise achievable under Ohio law.

The market prices for electricity have hit historical lows. However, the market price for at least a portion of the generation rates, called capacity, is determined through an auction that takes place three years ahead of the delivery period. Thus, the capacity prices for a short forward period are already known, and they will begin to escalate in two years.

Since the PUCO’s August 8, 2012 order cleared the path for all AEP-Ohio customers to take advantage of the currently low market prices, AEP-Ohio customers now have real opportunities to shop for generation at competitive prices. As it is now a buyer’s market, it is worth investigating whether savings can be achieved through the competitive market. However, competitive generation providers’ offers can be confusing and may attempt to shift risk to customers in ways that can now be managed. Careful review of the terms and conditions of any competitive generation service offer is warranted.

AEP-Ohio’s ESP creates a new charge for the opportunity to shop that all customers will pay regardless of whether they shop or not. In other words, if customers do not avail themselves of the opportunity to shop, they will be paying AEP-Ohio higher rates than what is available in the current market and they will be subsidizing the customers who elect to shop. AEP-Ohio’s ESP also increases the charges on the distribution portion of bills, making the increases largely unavoidable. AEP-Ohio estimates that, for customers in the Ohio Power (OP) rate zone, a typical non-residential customer’s bill will increase between 4.3 percent and 5.7 percent. For customers in the Columbus Southern Power (CSP) rate zone, AEP-Ohio estimates that a typical non-residential customer’s bill will increase between 1 percent and 3.8 percent. The percentage increases are higher for residential customers (in the 6-7 percent range). Please note that, as these are averages, some bill impacts will be higher and some will be lower. A description of the rate increases and the riders that are driving the increases follows.

Three separate new charges will apply beginning with September 2012 bills that make up a majority of the overall rate increases. First, the PUCO authorized AEP-Ohio to collect $508 million over the ESP period through the retail stability rider (RSR).

For the first two years, the RSR rate will be $0.002966/kWh and on June 1, 2014, the RSR increases to $0.0033897/kWh for all non-residential customers. By way of example, for a mid-sized manufacturing customer using 5,000,000 kWhs per month, the RSR would produce a new annual charge of $178,000 for the first two years and $203,000 in the third year.

The RSR is recovering two separate charges. The majority of the rider is to provide AEP-Ohio with sufficient revenue to ensure it maintains its financial integrity as well as its ability to attract capital during its transition to market-based rates. It also provides certainty for customers inasmuch as the fixed default rate will remain available during the ESP period for all customers. The remaining portion of the RSR is to recover a portion of AEP-Ohio’s capacity costs (which recover the fixed costs of generating assets) that were deferred for future recovery by previous ruling of the PUCO.

Specifically, in order to stimulate shopping in AEP-Ohio’s service territory, the PUCO authorized AEP-Ohio to recover from competitive generation suppliers only the currently low market price for capacity and not AEP-Ohio’s fully embedded costs of capacity. The wholesale market price for capacity over the term of the ESP is significantly lower than the PUCO-determined cost of AEP-Ohio’s capacity. The wholesale rate is $20 per megawatt-day (MW-D) between now and June 1, 2013, $34/MW-D between June 1, 2013 and June 1, 2014, and $154 between June 1, 2014 and June 1, 2015. The price that the PUCO-determined cost of AEP-Ohio’s capacity is $189/MW-D. The difference between the market price in effect and $189/MW-D will be recovered by AEP-Ohio from all customers, whether they shop or not.

A portion of the capacity cost difference will be recovered through the RSR beginning with September 2012 bills. The balance is being deferred (and accruing interest) for future recovery from all customers. In other words, there is a fee for the opportunity to shop for generation service. If customers do not take advantage of the market prices that are below AEP-Ohio’s otherwise applicable default price, they will be paying both higher generation rates and the additional fee for the opportunity to shop.

Additionally, AEP-Ohio will begin recovering the phase in recovery rider (PIRR). In AEP-Ohio’s last ESP, in order to mitigate the rate impact associated with increases in the cost of fuel, the PUCO ordered AEP-Ohio to defer a portion of the increased fuel costs, plus interest, for future recovery. Like a credit card, the payments on the deferred fuel costs are now due. The PIRR amounts to a charge of roughly $0.0044 per kilowatt-hour (kWh) for customers in the Ohio Power (OP) rate zone and $0.000066 per kWh for customers in the Columbus Southern Power (CSP) rate zone. Using the same manufacturing customer, who uses 5,000,000 kWhs per month, the new PIRR charge results in a $22,000 per month increase for OP customers and $330 per month increase for CSP customers. The difference in the size of the PIRR between CSP and OP results from the variations in the fuel costs for the AEP-Ohio operating companies during the period 2008 through 2011.

Finally, AEP-Ohio’s modified ESP includes a Distribution Investment Rider (DIR) that will recover a maximum of $365.7 million over the ESP period (capped at $86 million in 2012, $104 million for 2013, $124 million for 2014 and $51.7 million for the period January 1 through May 31, 2015). The DIR provides capital funding, including carrying costs, to support customer demand and upgrade aging infrastructure, which, according to AEP-Ohio, is the primary cause of customer outages and reliability issues.

While there are other new riders and charges, these three make up the bulk of the immediate, unavoidable distribution rate increase.

The overall rate increases are neither as dramatic as expected nor as significant as they were when the PUCO approved the initial, settled attempt at an ESP. This is largely due to the fact that a significant portion of the charges that would otherwise immediately impact bills was pushed off to future periods by the PUCO. While the total amount of costs that are being deferred is not presently known or knowable, customers will be paying the costs of this ESP for some time even after the ESP period ends on June 1, 2015, which happens to be the period of time when market prices are anticipated to escalate. Thus, customers may experience significant and unavoidable rate increases in the near future caused by the combination of increasing market prices and repayment of costs deferred by the PUCO in this case. This reality provides yet another reason for customers to take advantage of the currently low market prices.