Solar Plant Information Memorandum - DOC

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					                                                    MEMORANDUM

        TO:         Rick Sites, Case No. 11-346-EL-SSO, et al., Steering Committee

        FROM: Tom O’Brien, Lisa McAlister and Matt Warnock

        DATE:       January 31, 2011

        RE:         AEP-Ohio’s Electric Security Plan (“ESP”) Case No. 11-346-EL-SSO et al.


        I.      INTRODUCTION

                Under Ohio law, the default electric pricing structure, or standard service offer (“SSO”), is
        set by the Public Utilities Commission of Ohio (“PUCO”) in one of two ways: through an electric
        security plan (“ESP”), which is a hybrid cost of service, market-based option; or through a market
        rate offer (“MRO”), which is a market-based approach that uses a competitive bidding process
        (“CBP”). The current SSO for Ohio Power Company (“OP”) and Columbus Southern Power
        Company (“CSP”, collectively “AEP-Ohio”) is an ESP that was approved by the PUCO in March
        2009 that extends through the end of 2011. Ohio law requires the PUCO to issue an order either
        denying, approving, or modifying and approving an electric distribution utility’s (“EDU”) ESP
        application within 275 days of the day the EDU files the application.1 Given this statutory timeline
        and the end date of AEP-Ohio’s current ESP, AEP-Ohio filed its application for a three-year ESP
        beginning in January 2012 on January 28, 2011.

                Simultaneously, AEP-Ohio filed a prefiling notice of an application for approval of a
        distribution rate case. Although AEP-Ohio has received increases in various distribution
        components through its last ESP and rate stabilization plan cases, among others, this would be the
        first comprehensive distribution rate case for OP since 1994 and CSP since 1991.

                The purpose of this memorandum is to summarize AEP-Ohio’s ESP application and its
        prefiling notice of its distribution rate case and to provide recommendations going forward for the
        OMA Energy Group.

        II.     GENERAL BACKGROUND

               For many years, AEP-Ohio has had low cost generation provided by, in large part, its coal-
        fired generation fleet. However, AEP-Ohio has reached the point in time that it must either


        1
         The statutory timeframe for an MRO is significantly shorter. The PUCO must issue an order on an MRO within 90
        days of its filing date. AEP-Ohio’s proposal threatens to file an MRO within 90 days from the end of 2011 if the ESP is
        not adopted.




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        significantly invest in its fleet to bring it up to environmental standards or retire and replace it. Both
        options are costly and will result in AEP-Ohio’s rates increasing.

                Increasing AEP-Ohio’s historically low rates makes them more susceptible to competition
        from competitive retail electric service (“CRES”) providers. Accordingly, for the first time, AEP-
        Ohio is at risk of losing its native generation load to CRES providers and, in fact, AEP-Ohio
        customers are starting to shop, particularly in CSP’s service territory. The majority of shopping has
        been from the commercial class,2 which has historically provided the greatest subsidy to other rate
        classes and, thus, had the highest relative rates.

                Additionally, AEP-Ohio has been deferring various costs for future recovery for some time
        now on the rationale that customers needed protection from increases so large that they would
        produce rate shock. In other words, customers have been living on AEP-Ohio’s credit card and the
        bills are now due. Accordingly, AEP-Ohio is seeking to recover the deferred amounts in its ESP
        proposal.

                Given this background, it is reasonable to assume that AEP-Ohio is looking for ways to
        recover the costs required to invest in new generating assets or to retrofit its existing generation
        fleet, without increasing rates to a level that will lose too much of its native generation load. AEP-
        Ohio has also stated that it wants rates to better reflect cost of service, which happens to have the
        effect of reducing rates for the commercial class -- the class that has shopped the most. AEP-Ohio
        must accomplish these goals without being anticompetitive and in such a way that allows it to
        demonstrate that its plan is more favorable in the aggregate than a market rate offer would provide.

                The following summary illustrates how these goals may have shaped the ESP application
        filed by AEP-Ohio.

        III.      ESP SUMMARY

                AEP-Ohio has already filed applications before both the PUCO and the Federal Energy
        Regulatory Commission (“FERC”) to merge its two operating companies into one, with only OP
        remaining. AEP-Ohio’s ESP filing presumes that there is only one company and that the rate
        schedules of the two companies are merged. Additionally, to ensure that all of the distribution rate
        related issues are addressed in either the distribution rate case or the ESP, AEP-Ohio’s ESP


        2
          For September 2010, CSP had 2.2% of its commercial customers (or 25.1% of its MWH sales to that class) shopping
        with no residential shopping and only 1.1% of industrial customers (or 0.5% of MWH sales) shopping. OP also had no
        residential shopping; no industrial shopping and only 0.02% of commercial customers (or 0.9% of MWH sales)
        shopping. While it is likely that those percentages have increased over the last few months, they are low relative to
        other Ohio EDU’s shopping percentages. For example, over 86% of MWH sales to industrial customers and over 76%
        of MWH sales to commercial are now served by CRES providers. Collectively, AEP-Ohio still has less than 1%
        shopping while FirstEnergy has over 50%.




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        application reflects some of the distribution related issues that will also be in the distribution rate
        case.3

                  A.          Term

                The proposed term of the ESP is 29 months; from January 1, 2012 through May 31, 2014.
        AEP-Ohio chose the May 31, 2014 end date to align with the PJM planning year (which runs from
        June 1 through May 31) while keeping the plan under three years.4 The ESP does have the option
        for a longer term for nonresidential customers who elect it. The alternative option is described
        below.

                  B.          Rate Schedule Realignment

               As you’re most likely aware, AEP-Ohio’s current rate structure has different tariff schedules
        available for customers depending on the class, including a breakdown of nonresidential customers
        among GS1, GS2, GS3, and GS4 depending on usage characteristics. AEP-Ohio is proposing to
        dramatically change the rate schedule to eliminate the nonresidential classifications such that there
        are only demand metered and non-demand metered commercial and industrial customers. In other
        words, there would no longer be GS1, GS2, GS3, or GS4 classifications.

                Additionally, AEP-Ohio’s current rates have both an energy and a demand component for
        all customer classes. AEP-Ohio is proposing to largely eliminate the demand component to have
        energy only generation rates. However, AEP-Ohio will still use billing demand for distribution and
        transmission billing and will still have minimum billing demand provisions (i.e., 60% of the
        previous high demand in the last 11 months or 60% of contract capacity).

                The effect of this rate schedule realignment is to reduce the significance of load factor. In
        other words, currently, as a general principal, as load factor increases, the price per kWh decreases.
        However, under AEP-Ohio’s proposal, the price per kWh is much less impacted by load factor. The
        effect is that the price per kWh for customers with poor/low load factors will decrease while the
        price per kWh for customers with very good/high load factors will increase. In some specific
        customer cases, the overall rate increase would be dramatic.

                Accordingly, AEP-Ohio is proposing a “market transition plan rider” or “MTP.” This rider
        essentially charges commercial customers and credits industrial customers through a rider to
        mitigate what would otherwise be the most extreme rate decreases and increases, respectively. For

        3
          The issues are presented as going forward in either the ESP case or a distribution rate case – not both. Accordingly,
        they are not intended to be duplicative.
        4
          If an ESP is longer than three years, the PUCO has the opportunity to terminate the plan after the third year and
        require the EDU to demonstrate that the ESP will not give the EDU significantly excessive earnings prospectively in
        addition to the retroactive significantly excessive earnings test that applies each year of an ESP.




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        example, without the MTP Rider, some commercial customers could have received as much as a
        20% decrease on generation rates while some industrial customers could have received over a 12%
        increase on generation rates. The MTP Rider softens the maximum average generation rate
        decrease in 2012 to 6.4% for CSP GS1 customers and the maximum average generation rate
        increase in 2012 to 2.3% for CSP GS-4 customers.5 For all customers, AEP-Ohio proposes to
        introduce seasonal rates and time-of-use options.

                   C.         Fuel Adjustment Clause (“FAC”) Mechanism

                Under AEP-Ohio’s last ESP case, the PUCO imposed a cap on increases to customer rates.
        Any fuel cost recovery through the FAC mechanism that would have exceeded the total increase
        cap were deferred for future recovery in order to mitigate rate increases. The deferred costs are
        referred to as “regulatory assets.” AEP-Ohio will recover the deferred fuel regulatory assets
        through a nonbypassable rider on a per kWh basis from all customers. AEP-Ohio estimates that at
        the end of 2011, the deferred fuel cost for OP will be $643 million and there will be a zero balance
        for CSP. However, AEP-Ohio will not file the amount it seeks to recover until the third quarter of
        2011, when the actual amount will be closer to being known.

                Additionally, AEP-Ohio proposes to recover its actual fuel costs incurred on a going
        forward basis through the FAC without any deferrals. AEP-Ohio proposes to recover the fuel costs
        as a uniform charge to all customers across the new merged company.

                In addition to eliminating the phase-in/deferral approach to recovery of FAC costs, AEP-
        Ohio is proposing to separate two types of costs that were previously embedded in the FAC and
        recover them through discrete riders. Specifically, AEP-Ohio proposes to move the cost recovery
        of renewable energy certificates (“RECs”) into an alternative energy rider that is bypassable for
        shopping customers. As you are aware, all Ohio generation service providers must now provide a
        certain portion of its generation sales from alternative energy sources. This rider would recover the
        costs of the alternative energy used to comply with that Ohio mandate.

                AEP-Ohio also proposes a new rider to recover the cost of generation plant, including
        renewable energy plant like solar and wind projects, that AEP-Ohio can demonstrate are necessary
        (through a separate integrated resource planning process), and are constructed and owned by AEP-
        Ohio. This new “Generation Resource Rider” is nonbypassable for shopping customers. AEP-
        Ohio notes that the first project it will seek cost recovery through the GRR will be the Turning Point
        Solar project. However, because AEP-Ohio has not finished negotiating the terms and conditions of
        the project yet, it will make a separate filing once the amounts are known.




        5
            CSP GS-4 customers will also see a 7.7% and 4.7% generation rate increase in 2013 and 2014, respectively.




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                  D.          Provider of Last Resort (“POLR”)

                 AEP-Ohio is proposing to maintain the POLR charge, which is intended to compensate
        AEP-Ohio for the risk of having to stand ready to serve customers who shop and return to AEP-
        Ohio’s service territory. However, AEP-Ohio has recalculated the POLR charge and determined
        that it should be slightly lower. It will still be nonbypassable unless customers shop and elect to
        return to a market-based rate if they return to the SSO. While the current POLR charge varies by
        operating company and customer class, the proposed POLR is a uniform charge. AEP-Ohio
        calculates that for a merged company using the prior methodology, the POLR charge would have
        been $3.20/MWh. However, using its revised methodology, AEP-Ohio calculates that the POLR
        charge will likely be $2.84/MWh. Nonetheless, the POLR will change depending on how the
        Commission modifies AEP-Ohio’s proposal, meaning the POLR charge will change. In other
        words, the final POLR amount has not been announced.

                  E.          Environmental Investment Carrying Cost Rider (“EICC”)

                AEP-Ohio is currently recovering the incremental environmental capital carrying costs it
        incurred after 2009 through the EICC Rider, which is bypassable for shopping customers. AEP-
        Ohio proposes to continue this rider with three significant changes. First, the rider would become
        nonbypassable. Second, rather than incurring the costs and seeking to recover the actual costs
        incurred after the fact, AEP-Ohio proposes to forecast the costs and subsequently true-up any over
        or under recoveries. Third, AEP-Ohio proposes to add certain operating and maintenance costs that
        are not currently being recovered to the EICC Rider.

                  F.          Interruptible Service Rates

                AEP-Ohio notes that today, interruptible service is more typically represented as an offset to
        firm service rates than as a separate and distinct rate. As such, AEP-Ohio proposes to eliminate its
        Interruptible Power-Discretionary (“IRP-D”), Emergency Curtailable Service (“ECS”) and Price
        Curtailable Service (“PCS”) offers. Instead, customers will have a new option pursuant to which
        AEP-Ohio’s proposed compensation to customers willing to interrupt is based upon the capacity
        rates charged to competitive retail electric service (“CRES”) providers for their use of AEP-Ohio’s
        capacity resources. The level of capacity charge to CRES providers is at issue in a currently
        pending case before the Commission.

                  G.          Economic Development Rider and Growth Fund

                AEP-Ohio proposes to maintain the Economic Development Rider, which recovers the costs
        of delta revenue from Commission-approved reasonable arrangements, as it is today with the
        exception of modifying it to reflect one rate for the merged company.




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                AEP-Ohio is also proposing a new Growth Fund to provide resources for attracting new
        businesses and helping existing businesses expand. The Growth Fund will be created in an amount
        of up to $25 million over the term of the ESP from shareholder funds.

                    H.        Rate Security Rider

                In an effort to provide larger customers with longer-term certainty than a 29 month plan can
        provide, AEP-Ohio proposes the Rate Security Rider (“RSR”), which is a bypassable rider for
        customers who elect to take service from AEP-Ohio through May 31, 2017. Those customers will
        receive a discount off of the generation rate, but will be subject to all other SSO provisions and an
        early termination fee.6 AEP-Ohio proposes to administer this program as a reasonable arrangement;
        however, there would be no delta revenue (the difference between what customers would pay on the
        otherwise applicable tariff rate and the RSR rate) generated by customer participation in this
        program that AEP-Ohio would seek to recover from other customers. To be eligible for this
        program, customers must have annual peak demands greater than 200 kW and the program is
        limited to aggregate annual usage of 2,500 GWh. Customers must commit to this program between
        November 2011 and March 2012.

                   I.         Facility Closure Cost Recovery Rider

                  Due to the likelihood that some generation facilities will need to close during the ESP term,
        AEP-Ohio proposes the Facility Closure Cost Recovery Rider (“FCCRR”) as a nonbypassable rider.
        AEP-Ohio would recover the costs of materials and supplies unique to the facility, environmental
        liabilities, mitigation costs required by environmental regulations, legacy pension and benefits
        requirements and undepreciated balances. The closure costs would be offset by salvage or proceeds
        related to the facilities’ assets, materials, and supplies.

                AEP-Ohio has already filed an application to recover similar costs associated with the
        closure of its Sporn generating facility in Case No. 10-1454-EL-RDR. AEP-Ohio has indicated that
        it does not intend to roll the Sporn case into this filing but, rather, will use Sporn as a test case to
        determine the Commission’s position on other potential closures going forward.

                    J.        Carbon Capture and Sequestration Rider

                AEP-Ohio is proposing a Carbon Capture and Sequestration Rider (“CSSR”) to recover
        “Ohio’s share of Phase I of the front-end engineering and design (FEED) study” of a commercial
        scale carbon capture and sequestration project at its Mountaineer facility. AEP-Ohio states that the
        FEED study will cost approximately $47 million and AEP-Ohio’s share is approximately $10.9
        million.



        6
            It is not yet clear what AEP-Ohio considers its base generation rate to include.




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               As you may recall, Ohio customers have already paid approximately $24 million for a
        FEED study for a carbon capture and sequestration project that AEP-Ohio proposed in 2005 that
        never got off the ground.

                   K.         Green Power Portfolio Rider

                AEP-Ohio proposes an optional Green Power Portfolio Rider (“GPPR”) for customers that
        wish to purchase a larger proportion of their electricity from renewable resources than the levels
        mandated by Ohio law. Customers may purchase 25%, 50%, 75% or 100% of their energy usage
        from renewable resources, with the resulting RECs being used for AEP-Ohio's compliance with its
        renewable targets. Customers that elect this option would be exempt from the alternative energy
        rider (AER).

                  L.          Generation NERC Compliance Cost Recovery Rider

              AEP-Ohio proposes a Generation NERC Compliance Cost Recovery Rider (NERCR) as a
        nonbypassable rider to recover generation-related costs to comply with NERC requirements.

                  M.          Alternative Generation Rates for any “Bridge” period until Merger Closing

                AEP-Ohio is proposing alternative generation and POLR rates to be implemented during
        any period beginning January 2012 until after the merger is closed in the event that the merger is
        not closed by the fourth quarter of 2011.

                  N.          Pool Termination or Modification

                 As you may be aware, AEP-Ohio and its affiliates in the eastern United States are operated
        as AEP East pursuant to a series of pooling agreements such that costs and revenues are allocated to
        the various operating companies pursuant to formulas in the pooling agreements. AEP-Ohio has
        provided notice to its affiliates that it wants to terminate the pooling agreement on three years notice
        inasmuch as, at the very least, OP and CSP will be merging, requiring a modification to the
        agreement. AEP-Ohio argues that as it cannot predict the results of eliminating the pooling
        agreement, it must be prepared for a significant change to AEP-Ohio’s generation rates.
        Accordingly, AEP-Ohio is proposing a placeholder in the event that there are cost increases that
        result from the elimination of the pooling agreement.

        IV.       Distribution Rate Case Summary

                In addition to its ESP filing, AEP-Ohio submitted a pre-notification filing indicating its
        intent to file an application for an increase in distribution rates on February 28, 2011. This will be




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        CSP’s first full-blown rate case since 1994 and OP’s first rate case since 1991.7 Although separate
        filings were made for CSP and OP8 the filings presume that there is only one company and that the
        rate schedules of the two companies will be merged.

                At this point in time, the distribution rate case filings shed little light on the proposed rate
        increase that will be filed next month. The limited information available in AEP-Ohio’s pre-
        notification filing includes a proposed test year running from June 1, 2010 through May 31, 2011,
        with a proposed date certain of August 31, 2010. In addition, AEP-Ohio requests several waivers of
        the PUCO’s standard filing requirements, including:

                  1) a waiver from providing certain information pertaining to generation and transmission
                  rates because the rate increase pertains solely to distribution rates;

                  2) a waiver of providing certain information pertaining to depreciation reserves, accruals,
                  retirements and transfers to the extent such information is not available for time periods
                  prior to 1999;

                  3) a waiver from providing construction work in progress (“CWIP”) date for the reason
                  that AEP-Ohio will not be including CWIP in its rate base; and

                  4) a waiver of the filing of a PUCO-approved integrated resource plan (“IRP”) on the
                  grounds that AEP-Ohio’s next IRP is not due for filing until April 2011, its supplemental
                  long-term forecast report is being fully litigated in PUCO Case Nos. 10-501-EL-FOR and
                  10-502-EL-FOR, and AEP-Ohio is not seeking recovery of IRP rate base, IRP project
                  dollars or IRP expense dollars as part of its distribution rate case.

               More specific information, including the amount of the proposed rate increase, will be
        provided once the application is filed on February 28th.

               Notwithstanding the lack of substantive information in the distribution prefiling notice,
        AEP-Ohio’s ESP application includes a number of distribution-related components that tie into (and
        possibly even overlap with) the issues in the distribution rate case. Specifically, AEP-Ohio’s ESP
        application includes the following distribution features:

                  A.          A new Distribution Investment Rider (“Rider DIR”)

               Rider DIR would provide AEP-Ohio with funds needed for new distribution assets
        necessary to support AEP-Ohio’s distribution asset management programs, distribution capacity,
        7
         It should be noted that AEP-Ohio received a base distribution rate increase in PUCO Case Nos. 05-842-EL-ATA and
        05-EL-ATA.
        8
         AEP-Ohio filed its application to increase its distribution rate for OP in Case No. 11-352-EL-AIR and CSP in Case
        No. 11-351-EL-AIR.




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        infrastructure additions, and advanced technology. Rider DIR would allow AEP-Ohio to recover
        carrying costs on incremental distribution plant using a pre-tax [weighted average annual cost] as
        well as an operations and maintenance (“O&M”) component. The funding of Rider DIR would be
        accomplished through an adjustment to the Carrying Charge Rate to include both the incremental
        capital investment costs as well as the corresponding O&M costs associated with the new
        distribution investments. Excluded from the costs would be the distribution revenue increases
        associated with Case Nos. 05-842-EL-ATA and 05-EL-ATA in which AEP-Ohio received an
        increase in its base distribution rates. This nonbypassable rider has been proposed in both AEP-
        Ohio’s ESP application and its distribution rate case filing. In the event a distribution rate increase
        is approved prior to January 1, 2012 (presumably including the approval of Rider DIR), then AEP-
        Ohio will not seek approval of Rider DIR as part of the ESP case.

                  B.          Storm Damage Recovery Mechanism

               This recovery mechanism is designed to establish a funding stream for capital costs
        associated with repair and restoration efforts following major storms. In other words, customers
        would prepay into a fund for storm damage repair. AEP-Ohio argues that this is necessary to
        preserve forecasted O&M for planned maintenance activities that gets disrupted if funds are
        diverted to cover the expense of major storms and system reliability is negatively impacted. It will
        be calculated against a major storm baseline cost with any incremental amounts recorded as a
        regulatory asset or liability.

                  C.          Continuation of the gridSMART Rider (Rider AEM)

                AEP-Ohio proposes to continue the gridSMART Rider (Rider AEM) that was approved in
        the last ESP case but will update it to recover the costs of all gridSMART Phase I assets already
        installed or planned to be installed as part of the completion of gridSMART – Phase I as well as the
        additional costs associated with AEP-Ohio’s Demonstration Project. The rider will include a single
        rate for all AEP-Ohio customers.

                  D.          Continuation of the Enhanced Service Reliability Rider (Rider ESRR)

                As part of AEP-Ohio’s previous ESP case, the PUCO approved AEP-Ohio’s decision to
        move its vegetation management program to a four-year cycle-based approach. Because the
        transition to a cycle-based approach was expected to take a number of years, the PUCO approved a
        five-year transition period with the corresponding costs to be recovered through Rider ESRR. As
        part of this filing, AEP-Ohio seeks to continue its Rider ESRR to fund the remainder of its five-year
        transition period (2012-2014) through a single rate equal to 4.58062% of base distribution revenues.

        V.        Market Rate Offer Comparison to ESP

               For the Commission to be able to approve an ESP, AEP-Ohio must demonstrate that it is
        more favorable in the aggregate than the expected results of an MRO. Additionally, it is important



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        to note that for any EDU that owned its generating assets at the time that SB 221 was passed (in
        2008), which includes AEP-Ohio, if the EDU elects the MRO option, there is a mandatory period
        during which the standard service offer rate is a blended price of the previous SSO rate and the
        result of a competitive bidding process. In other words, when demonstrating that the proposed ESP
        rate is better than the expected results of an MRO, AEP-Ohio must account for the blending period.

                Additionally, if the PUCO approves an ESP that contains a surcharge for cost recovery
        associated with generation plant construction, the PUCO must ensure that the benefits derived for
        any purpose for which the surcharge is established are reserved and made available to those that
        bear the surcharge. Otherwise, the PUCO must deny the application.

                If the PUCO modifies and approves an ESP application, the EDU has the option to withdraw
        the application, thereby terminating it, and may file a new ESP application or an MRO application.
        If the EDU terminates the ESP application as a result of PUCO modification or denial, the PUCO
        must issue an order to continue the EDU’s most recent SSO, along with any expected increases or
        decreases in fuel costs, until a subsequent SSO is authorized.

               In order to meet this hurdle, AEP-Ohio provides testimony describing its expected results
        from an MRO. AEP-Ohio argues that a competitive bidding process would produce a weighted
        average price of $77.91/MWh for 2012 and $82.90/MWh for the period of 2013 through May 2014.
        AEP-Ohio asserts that, taking into account the blending period in an MRO, the proposed ESP price
        provides an overall benefit over the MRO of $1.41/MWh.

        VI.       Recommendation

                 While a significant portion of the rate increases proposed in AEP-Ohio’s ESP proposal
        result from the recovery of previously deferred amounts, there are many components of this
        proposal that arguably should be modified in order for the ESP to be reasonable and fair to
        customers and pass the “more favorable in the aggregate than an MRO” test. Without listing them
        all, the following is an initial list of components that should be addressed.

                  1.        The market price comparison is unrealistic. As a point of comparison, the new price
                            established through a competitive bidding process in FirstEnergy’s service territory is
                            $55.60/MWh. AEP-Ohio’s benchmark of $77.91/MWh is unreasonably high by
                            comparison. The benchmark price may be inflated due to AEP-Ohio’s reliance on the
                            capacity price embedded that reflects the drastic increase that was already rejected by
                            FERC. The capacity pricing issue is one that must be resolved whether in this case or
                            the PUCO’s investigation that is currently pending.

                  2.        Numerous riders that AEP-Ohio proposes to be nonbypassable should be bypassable.
                            For example, the EICC Rider is strictly a generation-related rider that is currently
                            bypassable. AEP-Ohio has not provided any real reasons why it should be
                            nonbypassable now. Similarly, the NERC Compliance Cost Recovery Rider is



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                            generation-related and should be bypassable. Also, the costs associated with the
                            Turning Point Solar project are clearly related to renewable energy that must be
                            bypassable.

                  3.        Some costs simply should not be borne by Ohio customers at all. For example, Ohio
                            customers should not pay for a FEED study for a carbon sequestration plant inasmuch
                            as they already paid $24 million for the same thing and have received zero benefit.
                            Similarly, the costs associated with retiring generation plant early must be closely
                            examined.

                  4.        AEP-Ohio seeks to capture the benefits of market-like pricing by moving to an energy
                            only price, while maintaining the safety net of cost-based pricing, by, for example,
                            keeping a demand ratchet in place through the minimum demand requirement. If AEP-
                            Ohio is moving towards market-like pricing, it must eliminate the demand ratchets and
                            other cost-based and anti-market provisions.

                CSP was just found to have excessive earnings. Additionally, a competitive bidding process
        just established reasonably low generation prices for FirstEnergy customers. Particularly with these
        issues so recent in time, it will be difficult to demonstrate that the increases AEP-Ohio is proposing
        over the three year period are warranted and produce a result that is more favorable in the aggregate
        than an MRO.

        We will continue reviewing the filing and workpapers. In the meantime, please do not hesitate to
        contact us if you have any questions regarding this matter. Thank you.




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