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AEP Refutes Charges of Gouging Power Customers

AEP Refutes Charges of Gouging Power Customers

American Electric Power (AEP) last week denied charges it capitalized on the turbulence in the Midwest electricity markets in late June by allegedly engaging, along with other power marketers in the region, in "abusive price gouging" that contributed to power prices soaring into the thousands of dollars per MWh.

In the complaint filed at FERC, Steel Dynamics Inc., a steelmaker in Indiana, charged that AEP, via subsidiary Indiana Michigan Power, and other undisclosed marketers in the ECAR region that have authority to sell power at market-based rates took "unfair advantage with abusive prices" during the June supply-demand crisis in the electricity markets.

Specifically, Steel Dynamics has asked the Commission to investigate the power supply situation that existed in the Midwest in the waning days of June; to probe the reasons for the "extraordinary high" prices; to determine whether customer refunds are warranted; to suspend all grants of authority to sell electricity and capacity at market-based rates; to set an emergency electricity price ceiling of $100/MWh; and to impose harsh penalties on those failing to comply with a FERC order in the case. It has requested that the Commission issue an interim decision until it completes its investigation. FERC has set Aug. 7th as the deadline for receiving industry protests and comments on the complaint [EL98-54].

Columbus-OH-based AEP acknowledged that Steel Dynamics was particularly vulnerable to the market upheaval because it, like some other industrial power customers, had opted for low-price, high-risk interruptible contracts. "As part of the negotiations [with Steel Dynamics], we offered them the standard tariffs that we had available for industrial customers. They wanted us to be more creative. And so we came back...with an even lower interruptible rate," AEP spokesman Pat Hemlepp told NGI last Monday.

"Their energy consultants told them at the time that that was a good deal and to go with it. They got the lowest tariff that we had for any of our customers in Indiana and Michigan, and in so doing, they understood that they were taking on the additional risk of interruption," he noted. "They've saved millions of dollars over the years in electricity because of this contract." But when "the other portion of the contract about being interrupted comes into play [as it did in June], then they want the same protection that customers that are paying the higher, firm rates get. And that's not fair to the other customers."

"That's true" that Steel Dynamics was vulnerable because of its IT power contract, agreed Frederick H. Ritts, a Washington D.C. attorney for the steel producer. "But that does not explain the high prices. Prices last summer were maybe $100 a MWh, but not 3 to 4 to 5 to $6,000...When the price is 100 times the cost to produce energy that raises a red flag," he said. "I don't think it was their [AEP's] own energy that was priced at that level. They probably bought some from some marketers at that price" in the wake of the contract defaults by power marketers in late June, which ultimately triggered a "chain reaction" in the market and forced up prices.

AEP, the sole supplier to the Steel Dynamics, interrupted service to the company's Indiana steel plant in late June, according to Hemlepp. Steel Dynamics had the option to "buy through" at the high market rates then, he said, but decided against that and instead had their operations curtailed. Steel Dynamics reportedly was offered power at $1,000 MWh after its power was interrupted by AEP.

Other steelmakers - Timken Co. and LTV Corp., both of Ohio - announced last week they are planning to conduct a coordinated audit of their IT power contracts to determine if AEP and FirstEnergy Corp. unfairly curtailed their power loads during the turmoil in the power market last month. The audit is seen by some as a first step by the Ohio industrial customers toward filing a complaint at the state or federal level, or both, against the utilities, similar to the one lodged by Steel Dynamics.

The key factor driving the high electricity rates in late June - $4,200/MWh has been the highest confirmed rate in the ECAR region, one source said - was the disruption to the power supply in the Midwest, according to AEP's Hemlepp. "There were more than 20 nuclear plants in the Midwest and Ontario...that [have been] unavailable this summer. At the same time, we had some fossil-fuel generation that got knocked off line for a variety of reasons that were unexpected. A tornado hit the Davis-Besse nuclear plant that FirstEnergy had, and knocked another 900 MWs off the grid also."

On top of this, "we had a heat wave that stretched pretty much from the Canadian border to Florida. Typically when there's a heat wave it's more regional in nature," which allows utilities in the unaffected areas to sell their surplus power supply into the marketplace, Hemlepp said. But since the heat affected much of the Midwest and nearly the entire East Coast, "that wasn't possible this time around."

Susan Parker

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