AEP Texas

Source: Energy Digital

Date :01/06/2007 20:46:42

AEP Texas wires company wants to reform the way it, and its peers, can set electric power rates

Written and produced by James Buchanan & Glen White

During the 1990s and earlier in this decade several states believed that sanctioned monopolies were keeping electric rates high while not necessarily promoting improvements in the quality of service. Deregulation was seen as a means to break up the state sanctioned monopolies and bring competition and choice to the generation and sale of electricity to businesses and the public.

By and large, these efforts have been met with mixed results. In Texas, though, it is more widely believed that deregulation has been a relative success, albeit with a few lingering hangovers. One of these unresolved issues is regulatory proceedings for electric

transmission and distribution in Texas. And it is one that Charles Patton, president and COO of AEP Texas (a subsidiary of American Electric Power), believes is the most critical challenge his company faces.

“Over the long-term this one issue will dictate how successful the regional wires companies in the state will be,” he says, “AEP Texas is moving forward, but this is a very big issue for us.”

Unbundling…

To understand how traditional rate regulation affects electric transmission (the larger power lines that deliver power from generating source to substations) and distribution (delivers power to end-user) companies in Texas, and the innovative way AEP Texas is approaching the issue, it is important to take a brief look at electric deregulation.

Over the last ten years many state legislatures with either a single electric utility or vertically integrated regional utilities came to the conclusion that deregulating these companies would bring competition to the generation and retail sale of electricity. Rather than one monolithic company generating the electricity, transporting it over its own lines and then selling electric power to customers, these services would be unbundled.

Unbundling created markets for the generating and retail ends, but left the delivery of electricity regulated as it had been in the past.

Further, states allowed new companies to compete within the generating and retail service areas. Competition, it was believed, would impel the players in these newly created markets to provide high quality service at the lowest possible price.

In Texas, the services were unbundled and markets were created for electric generation and retail sales, but not for transmission/distribution. This latter service is commonly referred to as “Wires” and was kept by incumbent wires companies that retained responsibility for delivery regardless of the seller throughout their traditional service territories.

Because these regional wires companies have monopolies for the areas they operate in, they also remain the only service segment to be fully regulated by the state. In short, these companies can’t set the rates they charge retail electric providers (REPs) and generators for transmission and delivery of electricity. Instead, they must work via traditional rate cases with the Public Utility Commission of Texas (PUCT). The rate cases are a court-like, adversarial process where the company must make the case for a rate increase.

AEP Texas is one of these wires companies and provides transmission/distribution to west and south Texas through two units. The first, Texas North Company covers the western portion of the state, which includes Abilene, San Angelo, Alpine, and Marfa. Texas Central Company covers the southern portion of the state, which includes the communities of Corpus Christie, Victoria, McAllen and Laredo. Combined, the companies serve nearly 100,000 square miles.

According to Patton, the unbundling of services created a new paradigm for electric utilities in Texas. It changed the way planning occurs and services are provided, he says, but has also left wires companies in the traditional regulatory regime.

As a significantly smaller stand-alone company, wires companies must have the flexibility to respond to the infrastructure and quality of service needs of the state and its customers, Patton argues. Of critical importance to Patton, proposed policy changes being considered by the state could increase the investment needs of the company in the areas of capitol improvements, energy efficiency and new technologies.

In all, these new investments would improve service throughout Texas, but also would have an immediate impact on the bottom line of AEP Texas and other wires companies. “These are significant investments for us and would require this company to have to immediately go in and begin to recoup those investments,” Patton says.

“When we were a bigger company with generation, transmission/distribution, and retail integrated together, the company could absorb these investments better because if the wires side needed capitol improvements, the other two likely could offset those investments,” he adds.

Therefore, argues Patton, with more being asked of his company, “Should the regulatory system recognize these differences and address them? We believe it should.”

Recapture Mechanisms…

Initially, the Texas Legislature recognized that investments by wires companies would be needed. However, they only provided for half of the transmission/distribution duo. Transmission refers to the larger high-voltage wires that carry electrical current from the generating station to substations where it is divided out to smaller distribution wires that bring the current to customers.

On the transmission side of the business the legislature created a system known as Transmission Cost of Service, where certain improvements can be recouped through rates without going to a rate case if they are considered reasonable and useful.

This option, though, does not exist for distribution infrastructure.

One thing that everyone agrees on, says Patton, is that Texas is a growth state requiring more electric infrastructure to support existing and incoming businesses. This means more transmission/distribution infrastructure is needed.

“The delivery part of the equation is the only piece of the infrastructure that we haven’t contemplated a more effective way of regulating,” says Patton. “There is no streamline mechanism for this service sector, it is still tied up in the traditional rate making process.”

To move a rate case forward requires a year of data collection to justify the rates being charged and the need to increase them, Patton adds. Then it can take two or more years for a decision to be reached, which means the decision is being made with stale data. For example, the cost for some of the materials used to make transformers, such as copper, has gone up by 100 percent in the past year or so. AEP Texas, says Patton, has rates based on cost data from four years ago.

Therefore, Patton argues a more efficient system needs to at least be considered.

Historically, he says, a company would look at its finances and if it is not bringing in enough revenue to cover costs and make a reasonable profit, it would go in for a rate review.

At the start of a rate case, the company is required to go to the communities it serves and request permission to raise rates. In the past, this has been something of a formality because the final decision usually rests with the commission. The company generally went to the communities and asked for a quick denial so they could get through the state review process more quickly.

This time around, AEP Texas is currently in the middle of a rate case, the company went to the communities well in advance of the filing to inform them of the company’s plans. Then the company continued to keep the communities updated as the plans evolved and more specifics became known. AEP Texas let the communities see into the company’s finances while asking each community what its electrical supply and services needs are. Then AEP Texas representatives explained why rates needed to be adjusted in order to maintain and upgrade service.

“Generally, people don’t notice the drivers behind why their bill goes up, but they notice the cost increase,” Says Patton.

The outreach effort is trying to find the point where economics and expected quality of service intersect. “We must find a way for everyone to agree on where that point of intersection is,” adds Patton.

In so far as this pertains to evolving the regulatory environment, it is an apt example of what should happen rather than what does happen. What Patton would like to see a process where performance of the company and actual investments are the basis for a more streamlined regulatory process. The intent is to refine rate increase requests so that irrelevant variables that often find their way in are not included in the discussion and deliberations.

“Prices should be established to protect financial viability of the company and for safe, quality service for customers,” he says. “We don’t have all the answers, nor do we want to unilaterally dictate utility regulations in Texas. We want a mutual discussion among stakeholders to find resolution.”

Asked what such a process would look like, Patton explains that Texas is a growth state in need of capitol improvements in transmission/distribution. Therefore, certain reliability and safety investments should be stipulated to be reasonable and useful and the company should be able to easily recoup those through rates.

Every five years, he adds, or some other reasonable time increment, utilities should open its books to regulators for an oversight audit, “At some point the utility should be brought in to make sure its other processes and investments are sound and efficient.

“Our goal here is not to singularly focus on returns on our investments, but making capitol investments that we all agree must be made to keep pace with Texas’ growth.”

So then, is the current regulatory regime unintentionally prohibiting needed investments?

“It’s not that we aren’t making investments, but the rate situation does affect the pace at which they are made,” Patton says. “Our reliability numbers are generally very good, but to improve on them and bring our services inline with the needs of our customers, we need to build more substations and more lines to communities and businesses. We could limp along as we have, but we can’t take a quantum leap forward to put together the system everybody wants and expects.”

Patton takes the long view toward making regulatory changes of this nature, as he says the company is more interested in beginning a discussion as opposed to seeing a bill introduced this year.

But that does not mean AEP Texas is not taking the initiative to begin to raise capitol for improvements. In particular, the company has formed a 50-50 equity partnership with MidAmerican Energy Holdings Company to build capacity in transmission. The company formed by the partnership will be a subsidiary with its own board and leadership team.

When complete, the partnership expects the new company to undertake up to $1 billion of projects over the next several years. Initially, AEP Texas will act as project manager and will develop, build and operate the transmission lines and facilities.

The intent, says Patton, is to fulfill the need for more capacity as more alternative energy facilities are brought online. “It’s attractive because transmission has a recovery tool [Transmission Cost of Service]. Investments can be recaptured in a more expeditious way with less regulatory lag time,” he says.

Company at a Glance…

AEP Texas is serves more than 900,000 customers in Texas and is headquartered in Corpus Christie.

The company serves a geographic region of nearly 100,000 sq. mi. and with its wires responsibilities it maintains and repairs (read: fixes power outages) its lines, reads electric meters, and handles connections and disconnections as directed by its Retail Electric Providers. The company owns and operates 41,300 miles of distribution lines and 9,368 miles of transmission lines.

AEP Texas employs more than 2,000 people in a number of communities and contributes more than $1 million annually to teach electrical safety, improve education, enhance the environment, and support community and economic vitality in the areas served.

AEP Texas is a subsidiary of American Electric Power based in Columbus, Ohio. AEP serves more than 5 million customers in 11 states and is the nation’s largest electricity generator with more than 36,000 megawatts of capacity.