American Electric Power on Thursday reported a slump in second-quarter revenues, largely due to load and revenue reductions for its investor-owned utilities that serve about 5 million customers across 11 states.
In an investor conference call, CEO Nick Akins attributed the company's "biggest economic headwind" as "the impact of the trade war on the businesses in AEP's service territory," noting the Trump administration's "increasing number of tariffs on goods beyond steel and aluminum [that] have impacted export manufacturers in our service territory."
But Akins also revealed more details on the company’s plans for 1,485 megawatts of wind power development in Oklahoma, including the lessons AEP has learned from its failed Wind Catcher project last year.
He also laid out the “positives” from House Bill 6, the nuclear bailout law passed this week in Ohio, which could open opportunities for "bilateral contracts with certain customers" in the state.
A plan designed to succeed where Wind Catcher failed
Last week, AEP utilities Public Service Co. of Oklahoma (PSO) and Southwestern Electric Power Co. (Swepco) asked state regulators to approve their selection of Invenergy to develop 1,486 megawatts of wind power across three sites in Oklahoma. The projects, selected through an RFP issued in January, have been given the unmemorable name of "North Central Wind Initiative" — perhaps to avoid association with the Wind Catcher project, AEP’s failed attempt last year to build what would have been the largest wind farm in the Americas.
Last year’s proposal by Swepco to purchase 70 percent of the 2-gigawatt Wind Catcher project, also to be developed by Invenergy, faced multiple political and regulatory challenges to its $3 billion price tag and its need for a new $1.6 billion transmission line.
In August, Texas regulators rejected the plan, citing concerns about risks to ratepayers. AEP announced it was pulling out of Wind Catcher a day later, saying further delays could jeopardize its ability to fully capture the value of the federal Production Tax Credit (PTC),which is set to start declining in 2021 and to disappear completely at the end of 2024.
The new proposed projects are designed to avoid the problems that snared Wind Catcher, Akins said in Thursday’s conference call. “We learned a lot from the experience of Wind Catcher. And these filings prove that.”
First, while only 200 megawatts of the projects will be acquired by 2020, in time to capture 100 percent of the PTC, the 80 percent credit that the rest of the project will receive when it’s delivered in 2021 still provides a hefty tax benefit. The credits will amount to approximately $1.4 billion and offset roughly 70 percent of total capital investment in the first 10 years of the project, Akins said. Over its 30-year life, AEP predicts customer benefits of about $3 billion.
Second, the North Central Wind Initiative is structured to go forward even if it’s denied by utility regulators in some of the states where Swepco and PSO operate, which include Texas, Oklahoma, Arkansas and Louisiana.
“We have the ability to take a minimum of 810 megawatts and then provide states the ability to take more megawatts should another state or states reject our applications,” he said — a capability provided by AEP’s massive generation and transmission business. "And we have designed enough flexibility into our applications to move forward under scenarios where only one, two, three or four states approve," he said.
Third, AEP’s new proposal is smaller than Wind Catcher and has a much lower risk profile for state regulators to consider.
“Because these projects were competitively bid, we recognized the clear breakpoint between the winning three projects, which happened to be Invenergy projects who we had worked with in the past, and others from a pricing perspective,” he said. "We wanted to position the best projects first...so that our commissions could clearly recognize the value for our customers."
If any gaps remain in resource-planning requirements after this process wraps up, the company can always request more bids in the future, he added.
"We went after Wind Catcher because it was a unique opportunity, and we certainly wanted to be able to perform that project," Akins said. But the new plan "is a very different proposition."
Unpacking House Bill 6
Akins also took time to congratulate Ohio Gov. Mike DeWine and the Republican legislators for passing House Bill 6 this week, noting that "as far as AEP is concerned, we see positives from this legislation.”
HB 6 will reduce monthly surcharges on utility customers’ bills by gutting Ohio’s energy efficiency and renewable portfolio standard (RPS) mandates, and add a smaller surcharge to direct up to $150 million per year to the two nuclear plants owned by FirstEnergy Solutions. The bankrupt subsidiary of Ohio-based FirstEnergy Corp. had threatened to close the Davis-Besse and Perry plants absent state financial support.
But beyond FirstEnergy's nuclear plants, HB 6 will also direct roughly $50 million per year through 2030 to support the two 1950s-era coal-fired power plants of the Ohio Valley Electric Corp., owned by a consortium of Ohio investor-owned utilities including AEP.
HB 6 cuts Ohio’s existing 2026 RPS target from its previous 12.5 percent to a relatively toothless 8.5 percent, and phases it out completely after 2026, providing utilities with little to no incentive to procure new resources.
However, the bill “still provides benefits for the recovery of existing renewable contracts until 2032,” and directs up to $20 million per year from its new funding stream toward solar projects that have already received siting approval, “which includes the 400 megawatts of solar that we have before” state regulators, he noted.
While HB 6 removes a ratepayer funding stream for utility renewable projects, it also opens up the “opportunity for AEP Ohio to enter into bilateral contracts with certain customers,” Akins added. “This one is an important issue for AEP, as we have had specific requests from various customers.”
Finally, Akins noted that the overall monthly bill reduction promised by HB 6 will “provide headroom to our ratepayers” to allow increases to “enable potential additional distribution investments to improve the customer experience and grid reliability.”
AEP Ohio has invested hundreds of millions of dollars in smart metering and distribution automation, and is investing in electric vehicle charging as part of the Columbus Smart City project in the state’s capitol.