American Electric Power (AEP) last week denied charges itcapitalized on the turbulence in the Midwest electricity markets inlate June by allegedly engaging, along with other power marketersin the region, in “abusive price gouging” that contributed topower prices soaring into the thousands of dollars per MWh.

In the complaint filed at FERC, Steel Dynamics Inc., asteelmaker in Indiana, charged that AEP, via subsidiary IndianaMichigan Power, and other undisclosed marketers in the ECAR regionthat have authority to sell power at market-based rates took”unfair advantage with abusive prices” during the Junesupply-demand crisis in the electricity markets.

Specifically, Steel Dynamics has asked the Commission toinvestigate the power supply situation that existed in the Midwestin the waning days of June; to probe the reasons for the”extraordinary high” prices; to determine whether customer refundsare warranted; to suspend all grants of authority to sellelectricity and capacity at market-based rates; to set an emergencyelectricity price ceiling of $100/MWh; and to impose harshpenalties on those failing to comply with a FERC order in the case.It has requested that the Commission issue an interim decisionuntil it completes its investigation. FERC has set Aug. 7th as thedeadline for receiving industry protests and comments on thecomplaint [EL98-54].

Columbus-OH-based AEP acknowledged that Steel Dynamics wasparticularly vulnerable to the market upheaval because it, likesome 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 wehad available for industrial customers. They wanted us to be morecreative. And so we came back…with an even lower interruptiblerate,” AEP spokesman Pat Hemlepp told NGI last Monday.

“Their energy consultants told them at the time that that was agood deal and to go with it. They got the lowest tariff that we hadfor any of our customers in Indiana and Michigan, and in so doing,they understood that they were taking on the additional risk ofinterruption,” he noted. “They’ve saved millions of dollars overthe years in electricity because of this contract.” But when “theother portion of the contract about being interrupted comes intoplay [as it did in June], then they want the same protection thatcustomers that are paying the higher, firm rates get. And that’snot fair to the other customers.”

“That’s true” that Steel Dynamics was vulnerable because of itsIT power contract, agreed Frederick H. Ritts, a Washington D.C.attorney for the steel producer. “But that does not explain thehigh prices. Prices last summer were maybe $100 a MWh, but not 3 to4 to 5 to $6,000…When the price is 100 times the cost to produceenergy that raises a red flag,” he said. “I don’t think it wastheir [AEP’s] own energy that was priced at that level. Theyprobably bought some from some marketers at that price” in the wakeof the contract defaults by power marketers in late June, whichultimately triggered a “chain reaction” in the market and forced upprices.

AEP, the sole supplier to the Steel Dynamics, interruptedservice to the company’s Indiana steel plant in late June,according to Hemlepp. Steel Dynamics had the option to “buythrough” at the high market rates then, he said, but decidedagainst that and instead had their operations curtailed. SteelDynamics reportedly was offered power at $1,000 MWh after its powerwas interrupted by AEP.

Other steelmakers – Timken Co. and LTV Corp., both of Ohio -announced last week they are planning to conduct a coordinatedaudit of their IT power contracts to determine if AEP andFirstEnergy Corp. unfairly curtailed their power loads during theturmoil in the power market last month. The audit is seen by someas a first step by the Ohio industrial customers toward filing acomplaint at the state or federal level, or both, against theutilities, 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 theMidwest, according to AEP’s Hemlepp. “There were more than 20nuclear plants in the Midwest and Ontario…that [have been]unavailable this summer. At the same time, we had some fossil-fuelgeneration that got knocked off line for a variety of reasons thatwere unexpected. A tornado hit the Davis-Besse nuclear plant thatFirstEnergy had, and knocked another 900 MWs off the grid also.”

On top of this, “we had a heat wave that stretched pretty muchfrom the Canadian border to Florida. Typically when there’s a heatwave it’s more regional in nature,” which allows utilities in theunaffected areas to sell their surplus power supply into themarketplace, Hemlepp said. But since the heat affected much of theMidwest and nearly the entire East Coast, “that wasn’t possiblethis time around.”

Susan Parker

©Copyright 1998 Intelligence Press, Inc. All rightsreserved. The preceding news report may not be republished orredistributed in whole or in part without prior written consent ofIntelligence Press, Inc.