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FERC order prompts AEP to pursue re-regulation in Ohio, sale of PPA units

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FERC order prompts AEP to pursue re-regulation in Ohio, sale of PPA units

will begin another strategic review of generation assets and pursue re-regulationin Ohio in response to FERC's decisionto revoke waivers of affiliate power sales restrictions granted to AEP and 's Ohio subsidiaries.

As a result of FERC's April 27 decision, the controversial affiliatepower purchase agreements that are the centerpiece of an Ohio generation subsidy plan approved by the Public UtilitiesCommission of Ohio will have to be filed with FERC, and the agency will have toapprove them before they can be implemented.

"We have no interest in getting involved in a protractedFERC-state jurisdictional debate," AEP Chairman, President and CEO NicholasAkins said April 28 on the company's first-quarter earnings call. Akins said the company will pursue a "two-prongedapproach" as part of its plan to become a "premium regulated utility."This approach includes a strategic review of AEP Generation's interests in the involved in thePPA agreement, which total approximately 2,700 MW of generation. AEP already ispursuing the of more than 5,000 MW of Midwestcompetitive generation.

Another, perhaps unexpected, approach is Akins' announcementthat the company will push for re-regulation in the Ohio Legislature to "repealand replace" Senate Bill 221, which restructuredOhio's electric utility market in 2008, or enable the transfer and cost recoveryof certain resources in AEP Ohio's territory to eliminate the need for a PPA.

Akins later added that the company may be able to prevail atFERC but is "not waiting" to find out.

"In my book, the race is on," he said. "The raceis on between the option of the strategic evaluation versus our option to have somesort of re-regulation coverage. It may be a misnomer to call it re-regulation, butwe'll have to see what that means. I think AEP has reached the point where it'stime to get this resolved once and for all."

Sale vs. regulation

Akins indicated that it "may be challenging" to rollthe PPA units into the ongoing strategic review process and said AEP hopes to makean announcement in the third quarter related to the current review.

AEP spokeswoman Melissa McHenry said the sale would not includeAEP's interests in the Ohio ValleyElectric Corp.-operated KygerCreek and Clifty Creekcoal plants, which are part of the PPA agreement.

As far as re-regulation, Akins said it is an issue for the OhioGeneral Assembly to decide.

"Our concern is, and I think there has to be a broader concernby the state of Ohio, and that's represented by the Legislature … what do we doto enable Ohio to take a firm hold of the capacity and energy situation within thestate, the development of new resources, the jobs, taxes and all those things thatwe talked about earlier? It's not like you're starting at ground zero to do this.I think the issues in Ohio are well-known from an energy policy perspective."

Akins said discussions already have been taking place to addressenergy policy issues and the question is what steps need to be taken next.

"Is there a stopgap measure to basically allow the transferof certain assets within the state of Ohio, to AEP Ohio directly? And avoid anykind of affiliate transaction? Which … I would say is probably a better chance ofaccomplishing something like that than a full re-regulation," Akins said. "ButI wouldn't take that off the table because I think there are broader issues thatare involved here. For instance, I think if Ohio wants to move forward with renewablesand renewable implementation and balance out the portfolio and focus on naturalgas, those are clearly areas that can fall within some form of re-regulation."

Akins acknowledged a transfer of assets would require FERC approval,but said the agency has approved prior transactions. Akins did notaddress whether he's already been in talks with the Legislature about re-regulationprior to FERC's ruling.

AEP Ohio is the trade name for Ohio Power Co.

Initial reaction

A groupled by the Electric Power Supply Association had urged FERC in January to rescindthe waivers it previously granted to AEP and FirstEnergy subsidiaries tied to theaffiliate power sales restrictions, arguing the agreements will force captive customers"to fund a massive bailout"of AEP and FirstEnergy's competitive subsidiaries AEP Generation Resources and FirstEnergy Solutions Corp. (EL16-33 and EL16-34)

, a major opponent ofthe power purchase agreements, said it "applauds" FERC's ruling.

MorganStanley Research has held the view that FERC was "likely" to rescind the affiliate waivers, while FirstEnergysaid April 27 that they expected FERC to denythe complaint.

"We expect [FirstEnergy] shares to be weak on the news,particularly after yesterday's strong performance, and expect modest weakness inAEP shares, though the financial impact for AEP is much more limited in our view,"Morgan Stanley said in an April 28 research report.

FirstEnergy shares closed at $36.05 on April 27, the day of thecompany's earnings call, and up from $34.39 on April 26. Shares were down nearly10% at $32.49 shortly after 12:30 p.m. ET on April 28.

"We are disappointed with FERC's decision," FirstEnergyspokesman Doug Colafella said April 28. "Our affiliate FirstEnergy Solutionswas previously granted authorization to conduct transactions with our Ohio utilitiesin 2008, and the PPA will benefit our customers by protecting them against risingretail prices and volatility in future years. We also believe that the PPA complieswith existing FERC rules that promote retail shopping, and our Ohio customers willcontinue to have the ability to choose a competitive supplier. "

The spokesman said the company is "evaluating its optionswhich include seeking rehearing of FERC's order, as well as filing the PPA for FERC'sreview."