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IN THE SUPREME COURT OF OHIO

Colunibus Southern Company Case No. 09-2298

Appellant, Appeal from Public V. Utilities Commission of Ohio

The Public Utilities Commission of Ohio, Public Utilities Commission of Ohio Appellee. Case No. 08-917-EL-SSO

MERIT BR1EF AND APPENDIX OF APPELLANT COLUMBUS SOUTIIERN POWER COMPANY

Matvin I. Resnik (0005695) Ricliard Cordray (0038034) Counsel of Record Attonrey General of Ohio Kevin F. Duffy (0005867) Duane W. Luckey (0023557) Steven "T. Nonrse (0046705) Chief, Public Utilities Section Matthew J.Satterwhite (0071972) Werner L. Margard 111 (0024858) Anrerican Electric Power Service Thomas G. Lindgren (0039210) Corporation John H.Jones(0051913) I Riverside Plaza, 29Floor Assistant Attorneys General Colutnbus, Ohio 43215-2373 180 East Broad Street Telephone: (614) 716-1606 Columbus, Ohio 43215-3793 Facsimile: (614) 716-2950 Teleplione: (614) 644-8698 miresnikr),aep.com Facsunile: (614) 644-8764 kfduffy^c^aep.com duane.luckey a yuc.statc.oh.us stnourseL^,aepeont. [email protected] m'tsatterwlute kaep^con thonras.lin Lrennpuc. state. oli.us l'o lm.iones(^pue.state.oh.us

Daniel R. Conway (0023058) Counsel for Appellee, Porter Wright Morris & Arthur LLP Public Utilities Cotnniission of Ohio 41 South lligh Street Columbus, Ohio 43215 Telephone: (614) 227-2270 Facsimilc: (614) 227-2100 dconwa cJ orterwright.com

Counsel for Appellant, Colutnbus Southern Power Company Samuel C. Randazzo (0016386) Janine L. Migden-Ostrander (0002310) (Counsel oCRecord) Consuniers' Counsel Lisa G. McAlister (0075043) Terry Etter (0067445) Joseph M. Clark (0080711) Counsel of Record McNees Wallace & Nuriclc LLC Maw•een R. Grady (0020847) 21 East State Street, 17"' Floor Assistant Consumers' Counsel Columbus, Ohio 43215 Offiee of the Ohio Consumers' Counsel Telephone: 614-469-8000 10 West Broad Street, Suite 1800 Facs imil e: 614-469-4633 Columbas, Ohio 43215-3485 sarn c^mwncmh.com Telephone: 614-466-8574 [email protected] Facsimile: 614-466-9475 iclark(c)mwncmh.com etter(a)occ.statc.oh.us pady_r @occ.state.oh.us Counsel for Intervening Appellee, Industrial Energy Users-Ohio Counsel for Intervening Appellee, Office of the Ohio Consrnners' Counsel

David F. Boehm Michael L. Kurtz Boelun Kurtz & Lowry 36 East Seventh Street, Suite 1510 Cincimlati, Ohio 45202 Tel ephone: 513 -421-22 5 5 Facsimile: 513-421-2764 dboefin(cJ,BKLlawftrm.com mkurtz(ci)BKLlawfirm. com

Counsel for Intervening Appellee, Oliio Energy Group TABLE OF CONTENETS

Page

TABLE OF AUTHORITIF,S ...... ii

STATEMENT OF FACTS AND OF THE CASE ...... 1

STANDARD OF REVIEW ...... 7

ARGU MENT ...... 8

Proposition of Law No. 1

When the Public Utilities Commissiou of Ohio considers an application for approval to sell or transfer generating assets which never have been included in the electric distribution atility's plant-in-service for rate making purposes at the same time it considers the utility's Electric Security Plan application, it is unlawfid for the Commission to deny the authority to sell or transfer those assets and at the same time refuse to allow, as part of the Electric Security Plan, an adjustment for costs associated with maintaining and operating those same assets ...... 8

CONCLUSI ON ...... 15

APPENDIX

PROOF OF SERVICE TABLE OF AUTHORITIES

CASES

AT&T Comn2unications of Ohio, Inc. v. Piub. Util. Comm. (2000), 88 Ohio St. 3d 549, 555 ...... 7

Constellation IVewF,nergy, Inc. v. Pub, Util. Comm. (2004), 104 Ohio St.3d 530 ...... 7

Discoaent Cellular, Inc. v. Pub. Util. Comm., 112 Ohio St. 3d 360, 2007-Ohio-53, ¶51 ...... 13

Monongahela Power Co. v. Pub. Util. Comm. (2004), 104 Ohio St.3d 571 ...... 7

Myer.s v. Pub. Util. Comna., (1992), 64 Ohio St.3d 299, 302 ...... 7

Ohio Consumers' Counsel v. Pub. UtiC. Contrn. (2009), 121 Ohio St. 3d 362, 365...... 7

O&io F,dison Co. v. Pub. Util. Contm. (1997), 78 Ohio St. 3d 466, 469 ...... 7

Tongren v. Pub. Util. Comm. (1999), 85 Ohio St. 3d 87, 88 ...... 13

OHIO REVISED CODE SECTIONS

R.C. 4903.13 ...... 7 R.C. 4909.05 ...... 9 R.C. 4909.15 ...... 9, 12 R.C. 4909.19 ...... :...... 9 R. C. 4928.141 ...... 1,8 R.C. 4928J 42 ...... 1, 8 R.C. 4928.143 ...... 1, 7, 9, 10, 13 R.C. 4928.17 ...... 2, 3, 5, 6, 8,9 OHIO ADMINISTRATIVE CODE

Sec. 4901:1-37-09, Ohio Admin. Code ...... 4

MISCELLANEOUS

Ponner R.C. 4928.17 ...... 2

ii IN TIIE SUPREME COURT OF OHIO

Columbus Southern Company Case No. 09-2298

Appellant, Appeal from Public V. Utilities Commission of Ohio

The Public Utilities Commission of Ohio, Public Utilities Commission of Ohio Appellee. Case No. 08-917-EL-SSO

MERIT BRIEF AND APPENDIX OF APPELLANT COLUMBUS SOUTHERN POWER COMPANY

STATEMF,NT OF FACTS AND OF THE CASE

With the enactrnent of Am. Sub. S. B. 221 (SB 221) by Ohio's 127"' General

Assembly, Ohio's electric distribution companies were required by R.C. 4928.141 (A) to

"apply to the public utilities coinmission to establish the standard service offer in accordance with section 4928.142 or 4928.143 of the Revised Code. ..." Appellant

Columbus Southern Power Company (CSP) and its affiliate Ohio Power Company, both of which are electric utility operating company subsidiaries of

Company, lnc., each filed applications with the Public Utilities Connnission of Ohio

(Commission) for approval of Electric Security Plans (ESP) under R.C. 4928.143. These applications were filed on July 31, 2008, fne effective date of 5B 221. (CSP App. p. 37).

In addition to seeking approval of its proposed ESP, CSP sought approval for the sale or transfer of certain of its generating assets. Commission appi-oval of the sale or transfer was nceessitated by an amendment made by SB 221 to the veision of R.C. 4928.17 (E) enacted as part of Am. Sub. S.B. 3 (SB 3). Prior to this particular amendment, R.C. 4928.17 (E) provided that:

Notwithstauding section 4905.20, 4905.21, 4905.46, or 4905.48 of the Revised Code, an electric utility may divest itself of auy generating asset at any timc without commission approval, subject to the provisions of Title XLIX of the Revised Code relating to the transfer of transmission, distribution, or ancillary service provided by such generating asset. (emphasis added).

Former R.C. 4928.17 (E); CSP App. p. 23 (Enrphasis added).

Division (E) was an appropriate complement to the remainder of R.C. 4928.17 wliich was enacted in 1999 as part of Am. Sub. S. B. 3, (SB 3), and which was an integral part of the General Assembly's restructuring the regulation of Ohio's electric utilities, particularly the newly effective competitive electric generation function of those utilities.

This Section required, and continues to require, a cotporate separation plan that at a minimum:

"[provides for] competitive retail electric service ... t1u•ough a fully separated affiliate of the utility;" "satisfies the public interest in preventing unfair competitive advantage;" and "is sufficient to ensure that the utility will not extend any undue preference or advantage to any affiliate, division, or part of its own business engaged in the business of supplying the competitive retail electric service ... and to ensure that any such affrliate, division, or part will not receive undue preference or advantage from any affiliate, division, or part of the business engaged in [the] business of supplying the noncompetitive retail electric service."

R.C. 4928.17 (A) (1) (2) and (3); CSP App. p. 20.

While SB 221 did not make any changes to the underlying requirement for corporate separation of the generation funetion from the utiiity's noncompetitive fiinctions, division (E) was amended to read as follows:

2 No electric distribution utility shall sell or transfer any generaling asset it wholly or partly owns at airy time without obtaining prior conunission approval.

R.C. 4928.17 (E); CSP App. p. 21.

In the intervening years between the enactment of' SB 3 and SB 221, CSP

acquired two generating facilities. The Waterford Energy Center (Waterford) was purchased on September 28, 2005 and the Darby Electric Generating Station (Darby) was

purchased on Apri125, 2007. (Cos. Ex. 2A, p. 42; CSP Supp. p. 4).

At the time Waterford and Darby were purchased, CSP's expectation under the

then-cunrent lcgal structure of regulation in Ohio was that generation service would be

priced at market rates staiting at the end of 2008 and that electric utilities could continue

to be perniitted to freely transfer gencrating units to and from the distribution utility

without approval of the Commission. In other words, CSP purchased Waterford and

Darby as "merchant plants" and undertook the attendant risk that market rates for

generation service would produce i-evemre below the level needed to support the

investments, either during a given time period or overall during the i-eniaining life of tlie

plants. This situation stands in stark contrast to a regulated utility's investment in the

purchase or constniction of similar generating units, where the regulated utility would be

guaranteed not only the return of the investment but also the opporCunity to eaan a

reasonable return on that investment.

As referenced above, CSP sought authority to sell or transfer these units in

aonjrmctioti with its ESP application. CSP set out in its testimony why it was appropriate

to pennit CSP to sell or transfer these facilities. Chief among these reasons was that

CSP's rates, currentiy and in the past, have never included recovery for CSP's return on

3 or of its investments in Waterfoi-d and Darby. (1d.). Tnstead, these facilities were acquired as "merehant" plants. As alluded to above, CSP took the risk that in the cornpetitivc retail generation niarket provided for under SB 3, these plants would succeed in an enviromnent based on market pricing as opposed to rates set by Conimission regulation. (Tr. X, pp. 229, 230; CSP Supp. pp. 1-2). Further, the amendment to division

(E) :

could not have been more of a reversal of state law. Upto July 30, 2008, a utility could divest generating assets without Cominission approval. As of July 31, 2008, prior Commission approval of such a sale or transfer is required. Many argued during the legislative debates over S.B. 221 that this represents an appropriate change in public policy with respect to generating assets that liad been the basis for rates that customers have been paying, i.e., used and useful for rate base purposes. While I do not agree with these arguments that same argument camiot be made regarding the Darby and Waterford facilities. Therefore, I believe it is appropriate for the Cornuiission to grant CSP, as part of the ESP, the authority to sell or transfer those generating assets.

(Cos. Ex. 2 A, pp. 42, 43; CSP Supp. pp. 4-5.)

In its March 18, 2009 Opinion and Order addressing CSP's application for

approval of its ESP and for approval of authority to sell or transfer the Waterford and

Darby facilities, the Commission denicd the authority to sell or transfer those facilities

and directed CSP to "file a separate application, in accordance with the Commission's

rules, at the time that it wishes to sell or transfer these generating facilities." (Opinion

and Order, p. 52; CSP App. p. 83). The specific rule to which the Commission referred

(Sec. 4901:1-37-09, Ohio Admin. Code), was not adopted by the Commission until

Septernber 17, 2008 and then was modified on rehearing on February 11, 2009, obviously

well after CSP's July 31, 2008 application had been filed for authority to sell or transfor

4 under R.C. 4928.17 (E). Moreover, the rules did not become effective until April 2,

2009, afler the March 18, 2009' Opinion and Order.

In any event, CSP was not left without sonic relief. The Commission went on to provide the following:

The Comniission, however, recognizes that these generaling assets have not and are izot included in rate base and, thus, [CSP] caimot collect any expenses related thereto, even if the facilities... have been used for the benefit of Ohio customers. If the Coimnission is going to require that [CSP] retain these generating assets, then the Commission should also allow [CSP] to recover Ohio customers' jurisdictional share of any costs associated with maintaining and operating such facilities. Aceordingly, we find that while [CSP] still own[s] the generating facilities [it] should be allowed to obtain recovery for the Ohio customers' jurisdictional share of any costs associated therewith. Tlrus, we believe that any expense related to these generating facilities ... that are not recovered in the FAC [Fuel Adjustinent Clause] shall be recoverable in the non-FAC portion of the gencration rate as proposed by [CSP]."

(Opinion and Order, p. 52; CSP App. p. 83.) In light of the revenue recovery associated

with the Waterford and Darby facilities that the Commission authorized in its Opinion

and Order, CSP did not seek rehearing of the Commission's denial of the requested

authority to sell or transfer these facilities.' Intervening Appellee, Industrial Energy

Users-Ohio (IEU), however, sought rehearing of, among other issues, "the Conmiission's

authorization of a rate increase for recovcry of costs of ownership and otlier interests in

generating assets...." (tEU April 16, 2009 Application for Rehearing, p, ii; CSP App. p.

184). CSP opposed lEUs' request for rehearing on this issue at pages I1 and 12 of its

Memorandum Contra Intervenors' Application for Rchearing. (CSP App. pp. 306-307).

ln its July 23, 2009 Entry on Rehearing the Commission revcrsed its prior ruling

on this issue. The Commission held:

` CSP witness, Mr. Baker, testified in support of the level of the ESP adjustinent for Darby and Waterford. (Cos. Ex. 2E, pp. 20, 21; CSP Supp. pp _7-8).

5 After further eonsideration, the Coinmission finds TEU's arguments persuasive and grants rehearing on the issue of recovery of costs associated with maintaining and operating the Waterford Energy Center and the Darby Electric Generating Station facilities through the non-FAC portion of the generation rate. The Colnpanies have not demonstrated that their curzent revenue is inadequate.to cover the costs associated with the generating facilities, and that those costs should be recoverable thi-ough the non-FAC portion of the generation rate from Ohio customers. We therefore, direct AEP-Ohio to modify its ESP and rernove the annual recovery of $51 million of expenses including associated carrying charges related to these generation facilities.

(Entry on Reheaiing; July 23, 2009, pp. 35, 36 CSP App. pp. 148-149).

Given the Commission's reversal, CSP filed an application foi- rehearing on July

31, 2009. (CSP App. pp. 350). CSP argued that since the Commission revoked CSP's authoiity to recover its customers' jurisdictional share of the costs associated with maintaining and operating the Waterford and Darby facilities, the Commission should coneu rently exercise its authority under R.C.4928.17 (E), to anthorize CSP to sell or transfer these two facilities. In its November 4, 2009 Second Entry on Rehearing the

Conunission repeated its position set fbrth in its July 23, 2009 Entry on Rehearing that

CSP had not demonstrated that the ESP revenue was inadequate to cover costs associated with the Waterford and Darby facilities. (CSP App. p. 175). On December 22, 2009,

CSP filed its Notice of Appeal with this Court, focusing on this single issue concerning the Commission's ruling on the authority to sell or transfer the Darby and Waterford facilities vis a vis CSP's recovery of costs associated with those facilities.2

'Notices of Appeal from the satne Commission orders are pending in Case No. 09-2022.

6 STANDARD OF REVIEW

This Court has "complete and independent power of review as to all questions of law" in appeals from the commission. Ohio Edison Co. v. Pub. Util. Comm. (1997), 78

Ohio St. 3d 466, 469. See also Ohio Consrtmers' Co-unsel v. Pub. Util. Conuu. (2009),

121 Ohio St. 3d 362, 365. Pursuant to B.C. 4903.13, a Cotnmission order will be reversed, vacated, or modified by this court when, upon consideration of the record, the coui-t finds the order to be unlawful or unreasonab'le. Ohio Consumers' Coainsel v. Pub.

Util. Comrn. (2009), 121 Ohio St. 3d 362, 365. See also Constellation NewEnergy, Inc. v.

Pub. Util. Corntn. (2004), 104 Ohio St.3d 530. In order to reverse or modify a

Commission decision as to questions of fact, the Court must find that the record does not contain sufficient probative evidence or find that the Commission's decision was inanifestly against the weight of the evidence or so clearly unsuppoited by the record as to show misapprehension, mistake, or willful disregard of duty. Monongahela Power Co. v. Pub. Util, Comm. (2004), 104 Ohio St.3d 571 quoting AT&T Communications of Ohio,

Inc. v. Pub. Util. Conina. (2000), 88 Ohio St. 3d 549, 555. The appellant bears the burden of demonstrating that the Comtnission's decision is against the manifest weight of the evidence or is clearly unsupported by the record. Id. Furthermore, the Court will not reverse a Commission order absent a sliowing by the appellant that it has been or will be harmed or prejudiced by the order. Myers v. Pub. Util. Comm., (1992), 64 Ohio St.3d

299, 302.

7 ARGUMENT

PROPOSITION OF LAW NO. 1

When the Public Utilities Commission of Ohio considers an application for approval to sell or transfer generating assets which never have been included in the electric distribution utility's plant-in-service for rate making purposes at the same time it considers the utility's Electric Security Plan application, it is unlawful for the Commission to deny the authority to sell or transfer those assets and at the same tinie refuse to allow, as part of the Electric Security Plan, an adjustment for costs associated with maintaining and operating those same assets.

R.C. 4928.141 (A) required Electric Distribution Utilities (EDU) to apply to the

Commission to establish a Standard Service Offer (SSO) in accordance with either R.C.

4928.142 (for a Market Rate Offer - MRO) or R.C. 4928.143 (for an Electric Security

Plan -- ESP). While the EDU could file an MRO application and ESP application simultaneously, the first SSO application at a minimum had to include an application for an ESP. R.C. 4928.141 (A); CSP App. p. 10.

With the enactment of SB 221, however, the opportunity for market-based retail generation rates evaporated for CSP, absetlt being able to transfcr the Waterford and

Darby tmits out of the regulated utility. One alteiroative for establishing the SSO was through a Market Rate Offer (MRO) under R.C. 4928.142. For those electric utilities, such as CSP, that had Connnission authorization under R.C. 4928.17 (C), to remain functionally separated for an interim period, the MRO alternative fell far short of market- based rates. R.C. 4928.142 (D), provides that for a company that as of July 31, 2008 owned operating elect -ic generating facilities that had been used and useful in Ohio, the amount of the MRO that could actually reflect market prices would be phased in over at least five years.

8 Att ESP-based SSO under R.C. 4928.143, provides for the Conimission to set rates that are not deternuned under the traditional cost-of-serviceh-etm-n on investment

fornlula set out in R.C. 4909.15. The contents of an ESP are addressed in R.C. 4928.143

(B) (1) and (2). 'The ESP "shall include provisions relating to the supply and pricing of

electric generation service." Further, the ESP "may provide for or include, "without

lizzzitation (eniphasis added)," any of the following:.... The statute goes on to a non-

exclusive list of nine adjustments that may be included in the ESP.

CSP's ESP application addressed provisions relating to its supply ot'electric

generation service. As relevatit to this appeal, it invoked the Commission's jurisdiction

under R.C.4928.17 (E) to authorize the sale or transfer of the Waterford and Darby

facilities. If CSP was permitted to transfer the units out of the regulated utility, they

could sell power at markct rates - as was originally permitted by law at the time the

assets were pin-chased by CSP. 'I'his was a fair result, especially given that CSP's

ratepayers had never paid any of the costs relating to the purchases,

It is iniportant to understand that the Commission's decision-making process in

ESP proceedings is markedly differeut than its traditional rate maknig process under R.C.

Chapter 4909. There is no valuation of property under R.C. 4909.05 in an ESP

proceeding; nor is there a Staff Report of Investigation prepared in an ESP as it is for

compliance witli R.C.4909.19. An ESP proceeding has no date certain or test year, as

would be required in traditional rate making under R.C. 4909.15 (B). A "fair and

reasonable rate of return," which the Comniission "shall determine" in traditional rate

making is mentioned in R.C. 4928.143, but only in conjunction with an ESP provision

9 regarding the EDU's distribution infrastructlire modernization plan.3 Of great signiiicance to this appeal, an ESP does not involve the Commission's determination of the ovei-all cost to the utility of rendering service, or the gross amiual revenue to wliich the EDU is entitled by 1'ollowing the formula set out in R.C. 4909.15 - dollar amount of return on investment to whicli the utility is entitled plus the cost of rendering service.

Instead of the establishcd rate making formula in R.C. 4909.15, the General

Assemblydirccted the Commission to make but one detennination. R.C. 4928.143 (C)

directs that the Commission "by order shall approve or modify and approve an

application [for an ESP] if it finds that the electrie security plan so approved, including its

pricing and all other terms and conditions, including any deferrals and any future

recovery of defei-rals, is more favorable in the aggregate as eonipared to the expected

results that would otherwise apply under section 4928.142 of the Revised Code."

(Emphasis a(ided).

That's it. No rate base, no date certain, no test year, no cost of service, no formula

for the Conunission to follow. The simply-stated required determination for the

Comanission to make is whettier the ESP is better than the results expected under an

MRO. CSP does not minimize the expertise the Commission needs to bring to bear on

this deternlination. However, there is no place in the ESP versus MRO comparison for

reverting back to the traditional rate making formula as if SB 3 and SB 221 never had

been enacted.

Given the legislative reversal in SB 221 away froni the switch to mar-ket rates that

had been provided in SB 3, CSP's inlterest to retain the Waterfoi-d and Darby facilities as

j R.C. 4928.143 (B) (2) (h) provides for the recovery of costs related to the modernization plan, including ajust and reasonable rate of return on such infi-astructriire modernization.

10 merchant plants had become pointless. Not only could CSP not realize the market value of the electricity produced by these units, but, unless it could achieve au adjustment to its

ESP based on the costs associated with those plants, CSP's generation rates woiild not provide recovery of those plant costs.

'Tlierefore, CSP's ESP application includcd the request for authority to sell or transfer the Waterford and Daiby facilities. Related to that portion of its application,

CSP's witness, Mr. Baker, testified that: "[i]f the Cotnpanies through a Commissioit

order are prohibited from transferring these plants or entitlements then any expense not

recovered by the FAC [Fuel Adjustrnent Clause] should be recovered in the non-EAC

rate." (Cos. Ex. 2E. p. 21; CSP Supp. p. 8).

In the exercise of its statutory obligation to weigh the proposed ESP, "in the

aggregate" to deternnine whether it was more favorable than the results expected from an

MRO, the Commission held that CSP "should file a separate application, in accordance

with the Conmiission's rules, at the time that it wishes to sell or transfer these generation

facilities." (Opinion and Order, p. 52; CSP App. p. 83). The Commission went on,

however, to further modify CSP's proposed ESP. The Connnission ruled that if it were:

going to require that [CSP] retain these generating assets, then the Commission should also allow [CSP] to recover customers' jurisdictional share of any costs associated with maintaining and operating such facilities. Accordingly, we fnd that while [CSP] still own[s] the generating facilities, they should be allowed to obtain recovery for the Ohio customers' jurisdictional share of any costs associated therewith. Thus, we believe that any expense related to these generating facilities ... that are not recovered in the FAC [Fuel Adjustment Ciause] shall be recoverable in the non-FAC portion of the generation rate as proposed by [CSP].

(Id. ).

11 The Commission's further modification to the ESP to build in to the ESP an amount of revenue attributed to those facilities' service to CSP's customers was lawful and rebalanced the value of the ESP in the aggregate. It is important to note that the amount of revenue the Commission included in the ESP attributable to the Waterford and

Darby facilities was not the product on some overall "gross annual revenue to which the utility is entitled," as is the test under R.C. 4909.15 (B). There was no finding that absent these revenues being authorized as parf of the ESP CSP's revenues would be inadequate to cover costs associated witli Waterford and Darby. Instead, the Commission's grant of an additional revenue adjustment in the ESP associated with Waterford and Darby was based on the sinzple fairness that if CSP were required to retain these facilities, it should be able to realize some revemie stream fi•om the customers who benefit from the facilities. Moreover, even with this additional aniount of revenue iuclnded in the ESP, the Commission applied the proper statutory test and found "that the ESP, including its pricing and all other terms and conditions, including deferrals and future recovery of deferrals, as modified by this order, in more favorable in the aggregate as compared to the expected results that would otherwise apply under Section 4928.142, Rcvised Code."

(Opinion and Order, p. 72; CSP App p. 103).

On rehearing, however, the Commission inexplicably reverted to the traditional rate maldng concepts contained in R.C. Chapter 4909. The Commission faulted CSP for not demonstrating that which CSP was not required to demonstrate. As the Comniission stated, CSP has not "demonstrated that [its] current revenue is inadequate to cover the costs associated with the generating facilities, and that those costs should be recoverable through the non-FAC portion of the generation rate from Ohio customers." (July 23,

12 2009 Entry on Rehcaring, p. 35; CSP App. p. 148). The Coimnission's reference to the adequacy of current revenues is uniquely based in the traditional cost-of-service/rate of return on investment rate making concepts of R.C. Chapter 4909. It has no place in evaluating a proposed, or in this casc, Coimnission-modified ESP under R.C. 4928.143.

The proper standard under SB 221 for determining whether to revoke the previously

authorized recovcry of revenue related to these generating facilities would have been for

the Commission to decide whethcr, with the allowance of the revenue recovery, the ESP,

in the aggregate, was not more favorable than the result expected under an MRO at the

time the Conimission issued its original Opinion and Order. The Commission's

responsibility on rehearing was to determine if its initial order was in error. ln any event,

the Commission`s reversal on rehearing made no tnention of the statutory test.

The Commission is a creature of statute and has no authority to act beyond its

statutorypowers. Discount Cellular, Inc, v. Pub. Util. Cornin., 112 Ohio St. 3d 360,

2007-Ohio-53, ¶51; Tongren v. Pub. Cltil. Comun. (1999), 85 Ohio St. 3d 87, 88 ("Thc

Commissiou, as a creature of statute, has and can exercise only the authority conferred

upon it by the General Assembly.") Based on this well-established principle, the

Coinmission's reliance on traditional rate making concepts to reverse its earlier position

was unlawful.

The efPcet of these Conimission orders is that despite having denied CSP the

authority to sell or transfer the Waterford and Darby facilitics as part of CSP's proposed

ESP, the Commission unlawfully and unreasonably denied CSP the authority to recover,

as part of its ESP, costs associated with its ownership of those facilities. Withholding

authority to sell or transfer these facilities, whilc at the same time withholding authority

13 to recover the costs associated with these facilities, is unlawful and unreasonable. As the

Coimnission itself stated in its initial decision, if authority to sell or transfer the facilities were witliheld, "then the Commission should also allow [CSP] to recover Ohio customers' jurisdictional share of any costs associated with maintaining and operating

such facilities," (Opinion and Order, p. 52; CSP App. p. 83).

14 CONCLUSION

"t'he Court shotiild reverse this limited portion of the Commission's ESP order and rehearing entries and direct the Commission to eitlzer authorize the sale or transfer of the

Waterford and Darby facilities, or authoiize the revenue recovery associated with those facilities as the Commission originally authorized.

Resgctfull,^^subnOad,

A/\^ rvin T. Resnik (0005695) Counsel of Record Kevin F. Duffy (0005867) Steven T. Nourse (0046705) Matthew J.Satterwhite (0071972) Ameiican Electric Power Seivice Corporation I Riverside Plaza, 29'h Floor Columbus, Ohio 43215-2373 Telephone: (614) 716-1606 Facsimile: (614) 716-2950 miresnilc(a ae .comcom [email protected] stnourse(cdaep.com misattcrwhiteg.aep . oom

Daniel R. Conway (0023058) Porter Wright Morris & Arthur LLP 41 South High Street Columbus, Ohio 43215 Telephone: (614) 227-2270 Facsimile: (614) 227-2100 dconwavCa)norterwriWht.coui

Counsel for Appeilant, Columbus Southern Power Company

15 APPENDIX APPENDIX - TABLE OF CONTENTS

R. C. 4903.13 ...... 1

R.C. 4909.05 ...... 2

R.C. 4909.15 ...... 4

R. C. 4909.19 ...... 8

R. C. 4928.141 ...... 10

R.C. 4928.142 ...... 11

R.C. 4928.143 ...... 15

R.C. 4928.17 ...... 20

Former R. C. 4928.17 ...... 22

Notice of Appeal of Columbus Southern Power Conipany...... 24

Altachment A to Notice of Appeal: March 18, 2009 ...... 31 Opinion and Order in Case Nos. 08-917-EL-SSO and 08-918-EL-SSO ......

Attact meut B to Notice of Appeal: March 30, 2009 Entry Nacnc Pro Tunc in Case Nos. 08-917-EI-SSO atid 08-918-El-SSO ...... 109

Attaclnnent C to Notice of Appeal: July 23, 2009 Entry on Rehearing in Case Nos. 08-917-EL-SSO and 08-918-EL-SSO ...... 113

Attachment D to Notice of Appeal: August 26, 2009 Entry on Rehearing ...... 169

Attachinent E to Notice of Appeal: November 4, 2009 Second Entry on Rehearing ...... 173

Application for Rehearing and Memorandum in Support of Induslrial Energy Users-Ohio, April 16, 2009 ...... 182

Columbus Southern Power Company's atid Ohio Power Company's Application for Rchearing, April 17, 2009 ...... 245 Columbus Southern Power Coinpany'sand Ohio Power Company's Memoranduns Contra Intervenors' Application for Rehearing, April 27, 2009 ...... 293

Columbus Southern Power Company's and Ohio Power Company's Application for Rehearing, 7uly 31, 2009 ...... 350

Ohio Admin. Code 4901:1-37-09 ...... 355

PROOF OF SERVICE 4903.13 Reversal of final order - notice of appeal.

A final order made by the public utilities commission shall be reversed, vacated, or modified by the supreme court on appeal, if, upon consideration of the record, such court is of the opinion that such order was unlawfal or unreasonable. The proceeding to obtain such reversal, vacation, or modification shall be by notice of appeal, filed witli the public utilities coinmission by any party to the proceeding before it, against the commission, setting forth the order appealed froni and the errors complained of. The notice of appeal shall be served, unless waived, upon the cbairman of the connnission, or, in the event of his absenec, upon any public utilities commissioner, or by leaving a copy at the office of the eoniinission at Columbus. The court may permit any interested party to intervene by cross-appeal.

Effective Date: 10-01-1953 4909.05 Report of valuation of property.

As used in this section:

(A) A "lease purchase agreement" is an agreement pursuant to which a public utility leasing property is required to make rental paytnents for the term of the agreement and either the utility is granted the right to purchase the property upon the completion of the tenn of the agreement and upon the payment of an additional fixed sum of money or title to the property vests in the utility upon the making of the Final rental payinent.

(B) A "leaseback" is the sale or transfer of property by a public utility to another person contemporaneously followed by the leasing of the property to the public utility on a long- term basis. The public utilities connnission shall prescribe the fonn and details of the valuation report of the property of each public utility or railroad in the state. Such report shall include all the kinds and classes of property, with the value of each, owned or ccld by eacli public utility or railroad used and useful for the service and convenience of the public. Such report shall contain the following facts in detail:

(C) The original cost of each parcel of land owned in fee and in use at the date certain determined by the commission; and also a statement of the conditions of acquisition, whether by direct purchase, by donation, by exercise of the power of eminent domain, or otherwise;

(D) The actual acquisition cost, not including periodic rental fees, of rights-of-way, trailways, or otlier land rights held by virtue of easements, leases, or other forms of grants of rights as to usage;

(E) The original cost of all other kinds and classes of property used and useful in the rendition of service to the public. Such original costs of property, other than land owned in fee, shall be the cost, as determined to be reasonable by the commission, to the person that first dedicated the property to the public use and shall be set forth in property accounts and subaccounts as prescribed by the commission. To the extent that the costs of property comprising a coal research and development facility, as defined in section 1555.01 of the Revised Code, or a coal development project, as defined in section 1551.30 of the Revised Code, have been allowed for recovery as Ohio coal research and development costs under section 4905.304 of the Revised Code, none of those costs shall be included as a cost of property under this division.

(F) '1'he cost of property constituting ail or part of a project leased to or used by the utility under Chapter 165., 3706., 6121., or 6123. of the Revised Code and not included under division (E) of this section exclusive of any interest directly or indirectly paid by the utility with respect thereto whether or not capitalized;

(G) In the discretion of the commission, the cost to a utility, in an amount determined to be reasonable by the commission, of property constituting all or part of a project leased to the utility under a lease purchase agreement or a leaseback and not included under

2 division (E) of this section exclusive of any interest direet'ly or indirectly paid by the utility with respect thereto whether or not capitalized;

(H) The proper and adcqnate reserve for depreciation, as determined to be reasonable by the conlmission;

(1) Any stimis of money or property that the coinpany may have received as total or partial defrayal of the cost of its property;

(J) The valuation of the property of the conlpany, which shall be the sum of the amounts contained in the report pursuant to divisions (C), (D), (E), (F), and (G) of this section, less the sum of the amounts contained in the report pursLiant to divisions (H) and (I) of this section. The report shall show separately the property used and useful to such public utility or railroad in the furnishing of the service to the public, and the property held by such public utility or railroad for other purposes, and such other items as the commission considers proper. The coinmission may require an additional report showing the extent to which the property is used and useful. Such reports shall be filed in the office of the cominission for the infonnation of the governor and the general asseinbly.

Effective Date: 01-01-2001

3 4909.15 Fixation of reasonable rate.

(A) The public utilities commission, when fixing and determining just and reasonable rates, fares, tolls, rentals, and charges, shall detennine:

(1) The valuation as of the date certain of the property of the public utility used and useful in rendering the public utility service for which rates are to be fixed and detennined. 'Phe valuation so determinied shail be the total value as set forth in division (7) of section 4909.05 of the Revised Code, and a reasonable allowance for materials and supplies and cash working capital, as determined by the conlmission. The commission, in its discretion, may include in the valuarion a reasonable allowance for construction work in progress but, in no event, may such an allowance be made by the commission until it has deterniined that the particular construetion project is at least seventy-five per cent complete. In detennining the percentage coinpletion of a particular construction project, the commission shall consider, among other relevant criteria, the per cent of time elapsed in construction; the per cent of construction funds, excluding allowance for funds used during constcuction, expended, or obligated to such construction funds budgeted where all such funds are adjusted to reflect current purchasing power; and any physical inspection perfonned by or on behalf of any party, including the commission's staff: A reasonable allowance for constniction work in progress shall not exceed ten per cent of the total valuation as stated in this division, not including such allowance for construction work in progress. Wllere the commission permits an allowance for construction work in progress, the dollar value of the project or portion thereof included in the valuation as construction work in progress shall not be included in the valuation as plant in service until such time as the total revenue effect of the construction work in progress allowance is offset by the total revemie effect of the plant in service exclusion. Carrying charges calculated in a marmer similar to allowance for funds used during construction shall accrue on that portion of the project in service but not reflected in rates as plant in service, and suoh accrued carrying charges shall be included in the valuation of the property at the conclusion of the offset period for purposes of division (J) of section 4909.05 of the Revised Code. From and after April 10, 1985, no allowance for construction work in progress as it relates to a particular construction project shall be reflected in rates for a period exceeding forty-eight consecutive months commencing on the date the initial rates reflecting such allowance become effective, except as otherwise provided in this division. The applicable maximum period in rates for an allowance for construction work in progress as it relates to a particular constiucfion project shall be tolled if, and to the extent, a delay in the in-service date of the project is caused by the action or inaction of any federal, state, county, or municipal agency having jurisdiction, where such action or inaction relates to a change in a rule, standard, or approval of such ageney, and where such action or inaction is not the result of the failure of the utility to reasonably endeavor to comply with any rule, standard, or approval prior to such change. In the event that such period expires before the project goes into service, the conunission shall exclude, from the date of expiration, the allowance for the project as construction work in progress from rates, except that the cotmnission may extend the expiration date up to twelve months for good cause shown. In the event that a utility has peimanently canceled, abandoned, or terminated constniction of a project for which it was previously

4 pennitted a construction work in progress allowance, the commission immediately shall exclude the allowance for the project from the valuation. In the event that a construction work in progress project previously included in the valuation is removed froin the valuation pursuant to this division, any revenues collected by the utility from its customers after April 10, 1985, that resulted from such prior inclusion shall be offset against future revenues over the same period of time as the project was included in the valuation as construction work in progress. The total revenue effect of such offset shall not exceed the total revenues previously collected. In no event sball the total revcnue effect of any offset or offsets provided under division (A)(1) of this section exceed the total revenue effect of any construction work in progress allowance.

(2) A fair and reasonable rate of return to the utility on the valuation as determined in division (A)(1) of this section;

(3) The dollar annual reti.irn to which the utility is entitled by applying the fair and reasonable rate of return as determined under division (A)(2) of this section to the valuation of the utility detennined under division (A)(1) of this section;

(4) The cost to the utility of rendering the public utility service for the test period less the total of any interest on cash or credit refunds paid, pursuant to section 4909.42 of the Revised Code, by the utility during the test period.

(a) Federal, state, and local taxes iniposed on or measured by net income may, in the discretion of the commission, be computed by the normalization method of accountnig, provided the utility maintains accounting reserves that reflect differences between taxes actually payable and taxes on a normalized basis, provided that no determination as to the treatinent in the rate-making process of such taxes shall be made that will result in loss of any tax depreciation or other tax benefit to which the utility would otherwise be entitled, and further provided that such tax benefit as redounds to the utility as a result of such a computation may not be retained by the conipany, used to fund any dividend or distribution, or utilized for any pui-pose other than the defrayal of the operating expenses of the utility and the defrayal of the expenses of the utility in connection with construction work.

(b) The amount of any tax credits granted to an electric light company under section 5727.391 of the Revised Code for Ohio coal bunied prior to January 1, 2000, shall not be retained by the company, used to fund any dividend or distribution, or utilized for any purposes othcr than the defrayal of the allowable operating expenses of the company and the defrayal of the allowable expenses of the company in connection with the installation, acquisition, construction, or use of a compliance facility. The amount of the tax credits granted to an electric light company under that section for Ohio coal burned prior to January 1, 2000, shall be returned to its customers within three years after initially claiming the credit tluough an offset to the company's rates or fuel coniponent, as determined by the commission, as set forth in schedules filed by the company under section 4905.30 of the Revised Code. As used in division (A)(4)(c) of this section, "compliance facility" has the same meaning as in section 5727.391 of the Revised Code.

5 (B) The commission shall compute the gross amiual revenues to which the utility is entitled by adding the dollar ainount of return under division (A)(3) of this section to the cost of retidering the public utility service for the test period under division (A)(4) of this section.

(C) The test period, unless otherwise ordered by the commission, shall be the twelve- month period beginning six nionths prior to the date the application is filed and ending six months subsequent to that date. In no event shall the test period end more than nine months subsequent to the date the application is filed. The revenues and expenses of the utility shall be determined during the test period. The date certain shall be not later than the date of filing.

(D) When the comnrission is of the opinion, after hearing and after making the determinations under divisions (A) and (B) of this section, that any rate, fare, charge, toll, rental, schedule, classification, or service, or any joint rate, fare, charge, toll, rental, schedule, classification, or service rendered, charged, demanded, exacted, or proposed to be rendered, charged, demanded, or exacted, is, or will be, tmjust, unreasonable, unjustly discriininatory, unjustly preferential, or in violation of law, that the service is, or will be, inadequate, or that the maxiunum rates, charges, tolls, or rentals chargeable by any such public utility are insufficient to yield reasonable compensation for the service rendered, and are mijust and unreasonable, the commission shall:

(1) With due regard among other things to the value of all property of the public utility actually used and useful for the convenience of the public as determined under division (A)(1) of this section, excluding from such value the value of any franchise or right to own, operate, or enjoy the same in excess of the amount, exclusive of any tax or annual charge, actually paid to any political subdivision of the state or eomlty, as the consideration for the grant of such franchise or right, and excluding any value added to such property by reason of a monopoly or merger, with due regard in determining the dollar annual return under division (A)(3) of this section to the necessity of making reservation out of the income for surplus, depreciation, and contingencies, and;

(2) With due regard to all such other matters as are proper, according to the facts in each case,

(a) Including a faii- and reasonable rate of return detemained by the commission with reference to a cost of debt equal to the actual embedded cost of debt of such public utility,

(b) But not including the portion of any periodic rental or use payments representing that cost of property that is included in the valuation report under divisions (F) and (G) of section 4909.05 of the Revised Code, tix and determine the just and reasonable rate, fare, charge, toll, rental, or service to be rendered, charged, demanded, exacted, or collected for the performance or rendition of the service that will provide the public utility the allowable gross annual revenues under division (B) of this section, and order such just and reasonable rate, fare, charge, toll, rental, or service to be substituted for the existing one. After such determination and order no change in the rate, fare, toll, charge, rental,

6 schedule, classification, or service shall be made, rendered, charged, demanded, exacted, or changed by such public utility without the order of the comrnission, and any other rate, fare, toll, charge, rental, classification, or service is prohibited.

(E) Upon application of any person or any public utility, and after notice to the parties in interest and opportunity to be heard as provided in Chapters 4901., 4903., 4905., 4907., 4909., 4921., and 4923. of the Revised Code for other hearings, has been given, the comniission may rescind, alter, or amend an order fixing any rate, fare, toll, charge, rental, classification, or service, or any other order made by the commission. Certified copies of such orders shall be served and take effect as provided for original orders.

Effective Date: 11-24-1999

7 4909.19 Publication - investigation.

Upon the filing of any application for increase provided for by section 4909.18 of the Revised Code the public utility shall forthwith publish the substance and prayer of such application, in a form approved by the public utilities commission, oncc a week for three consecutive weeks in a newspaper published and in general circulation throughout the territory in which such public utility operates and affected by the matters referred to in said application, and the commission shall at once cause an investigation to be made of the facts set forth in said application and the exhibits attached thereto, and of the matters coimected therewith. Within a reasonable time as determined by the comniission after the filing of such application, a written report shall be made and filed with the commission, a copy of wliich shall be sent by certified mail to the applicant, the mayor of any inunicipal corporation affected by the application, and to such other persons as the commission deems interested. If no objection to such report is made by any party interested within tliirty days after such filing and the mailing of copies tliereof, the coimnission shall fix a date within ten days for the fmal hearing upon said application, giving notice thereof to all parties interested. At such hearing the commission shall consider the matters set forth in said application and make sueh order respecting the prayer thereof as to it seezns just and reasonable. If objections are filed witli the commission, the commission shall cause a pre-hearing conference to be held between all parties, intervenors, and the cominission staff in all cases involving more than one hundred thousand customers. If objections are filed with the commission within thirty days after the filing of such report, the application shall be promptly set down for hearing of testimony before the coinmission or be forthwith referred to an attorney examiner designated by the commission to take all the testimony with respect to the application and objections which may be offered by any interested party. The commission shall also fix the time and place to take testimony giving ten days' written notice of such time and place to all parties. Tlie taking of testimony shall commence on the date fixed in said notice and shall continue from day to day until completed. The attorney examiner may, upon good cause shown, grant continuances for not more than three days, excluding Saturdays, Sundays, and holidays. The eommission may grant continuances for a longer period than tln-ee days upon its order for good cause shown. At any hearing involving rates or charges sougbt to be increased, the burden of proof to show that the increascd rates or charges are just and reasonable shall be on the public utility. When the taking of testimony is completed, a full and complete record of such testimony noting all objections made and exceptions taken by any party or counscl, shall be made, signed by the attomey examiner, and filed with the coinmission. Prior to the fornlal consideration of the application by the conimission and the rendition of any order respecting the prayer of the application, a quorum of the comtnission shall consider the reconni eiided opinion and order of the attorney examiner, in an open, formal, public proceeding in which an overview and explanation is presented orally. Thereafter, the conlmission shall make such order respecting the prayer of such application as seeins just and reasonable to it. In all proceedings before the commission in which the taking of testimony is required, except when heard by the commission, attorney examiners shall be assigned by the commission to talce such testimony and fix the time and place therefor, and such testimony shall be taken in the manner prescribed in this section. All testimony shall be under oath oi-

8 affinnation and taken down and transcribed by a reporter and made a part of the record in the case. The commission may hear the testimony or any part thereof in any case without having the same referred to an attorney examiner and may take additional testimony. Testimony shall be taken and a record made in accordance with. such general rules as the commission prescribes and subject to such special instructions in any proceedings as it, by order, directs.

Effective Date: 01-11-1983

9 4928.141 Distribution utility to provide standard service offer.

(A) Begiuniing January 1, 2009, an electric distribution utility shall provide consumers, on a comparable and nondiscriminatory basis within its certified territory, a standard service offer of all competitive retail electric services necessary to maintain essential electric service to consumers, including a firm supply of electric generation service. To that end, the electric distribution utility shall apply to the public utilities conimission to establish the standard service offer in accordance with section 4928.142 or 4928.143 of the Rcvised Code and, at its discretion, may apply simultaneously under both sections, except that the utility's first standard service offer application at minimum shall include a filing under section 4928.143 of the Revised Code. Only a standard service offer authorized in accordance with section 4928.142 or 4928.143 of the Revised Code, shall serve as the utility's standard service offer for the purpose of compliance with this section; arid that standard service offer shall seive as the utility's default standard service offer for the purpose of section 4928.14 of the Revised Code. Notwithstanding the foregoing provisiou, the rate plan of an electric distribution utility shall continuc for the purpose of the utility's compliance with this division until a standard service offer is first authorized under section 4928.142 or 4928.143 of the Revised Code, and, as applicable, pursuant to division (D) of section 4928.143 of the Revised Code, any rate plan that extends beyond December 31, 2008, shall continue to be in effect for the subject electric distribution utility for the duration of the plan's term. A standard service offer under section 4928.142 or 4928.143 of the Revised Code shall exclude any previously authorized allowances for transition costs, with such exclusion being effective on and after the date that the allowance is scheduled to end under the utility's rate plan.

(B) The commission shall set the time for hearing of a filing under section 4928.142 or 4928.143 of the Revised Code, send written notice of the hearing to the electric distribution utility, and publish notice in a newspaper of general circulation in each county in the utility's certified territory. The eommission shall adopt rules regarding filings under those sections.

Effective Date: 2008 SB221 07-31-2008

10 4928.142 Standard generation service offer price - competitive bidding.

(A) For the puipose of complying with section 4928.141 of the Revised Code and subject to division (D) of this section and, as applicable, subject to the rate plan requirement of division (A) of section 4928.141 of the Revised Code, an electric distribution utility may establish a standard service offer price for retail electric generation service that is delivered to the utility undcr a market-rate offer.

(1) The market-rate offer shall be determined through a competitive bidding process that provides for all of the following:

(a) Open, fair, and transparent coinpetitive solicitation;

(b) Clear product definition;

(c) Standardized bid evaluation criteria;

(d) Oversight by an indepcndent third party that shall design the solicitation, administer the bidding, and ensure that the criteria specified in division (A)(1)(a) to (e) of this section are met;

(e) Evaluation of the submitted bids prior to the selection of the least-cost bid winner or winners. No generation supplier shall be prohibited from participating in the bidding process.

(2) The public utilities commission shall modify rules, or adopt new rules as necessary, concerning the conduct of the competitive bidding process and the qualifications of bidders, which rules shall foster supplier participation in the bidding process and shall be consistent with the requirements of division (A)(1) of this section.

(B) Prior to initiating a competitive bidding process for a markei-rate offer under division (A) of this section, the electric distribution utility shall file an application with the eoinmission. An electric distribution utility may file its applieation with the eomniission prior to the effcctive date of the commission rules rcquired under division (A)(2) of this section, and, as the commission detennines neeessary, the utility shall immediately conform its filing to the rules upon their taking effect. An application under this division shall detail the electric distribution utility's proposed compliance with the requirements of division (A)(1) of this section and with commission rules under division (A)(2) of this section and demonstrate that all of uie following requirements are met:

(1) The electric distiibution utility or its transmission service affiliate belongs to at least one regional transmission organization that has been approved by the federal energy regulatory conimission; or there otherwise is comparable and nondiscriminatory access to the electric transmission grid.

11 (2) Any such regional transmission organization has a market-monitor function and the ability to take actions to identify and mitigate market power or the electric distribution utility's market conduct; or a similar market monitoring funetion exists with commensurate ability to identify and monitor market conditions and mitigate conduct associated witli the exercise of market power.

(3) A published source of infoimation is available publicly or through subscription that identifies pricing information for traded electricity on- and off-peak energy products that are contracts for delivery beginning at least two years from the date of the publication and is updated on a regular basis. The commission shall initiate a proceeding and, within ninety days after the application's filing date, shall detemiine by order whether the electric distribution utility and its market-rate offer meet all of the foregoing requirernents. If the finding is positive, the electric distribution utility may initiate its competitive bidding process. If the finding is negative as to one or more requirements, the conimission in the order shall direct the electric distiibution utility regarding how any deficiency may be remedied in a timely manner to the commission's satisfaction; otherwise, the electric distribution utility shall withdraw the application. However, if such remedy is made and the subsequent fmding is positive and also if the electric distribution utility made a simultaneous filing under this section and section 4928.143 of the Revised Code, the utility shall not initiate its competitive bid until at least one hundred fifty days afler the filing date of those applications.

(C) Upon the completion of the competitive bidding process authorized by divisions (A) and (B) of this section, including for the purpose of division (D) of this section, the commission shall select the least-cost bid winner or winners of that process, and such selected bid or bids, as prescribed as retail rates by the cormnission, shall be the electric distribution utility's standard service offer unless the commission, by order issued before the third calendar day following the conclusion of the competitive bidding process for the market rate offer, deterniines that one or more of the following criteria were not met:

(1) Each portion of the bidding process was oversubscribed, such that the amount of supply bid upon was greater than the amount of the load bid out.

(2) There were four or more bidders.

(3) At least twenty-five per cent of the load is bid upon by one or more persons other than the electric distribution utility. All costs incurred by the electric distribution utility as a result of or related to the competitive bidding process or to procnring generation service to provide the standard service offer, inchiding the costs of energy and capacity and the costs of all other products and services procured as a result of the competitive bidding process, shall be timely recovered through the standard service offer price, and, for that purpose, the commission shall approve a reconciliation mechanisrn, other recovery niechanism, or a combination of such mechanisins for the utility.

(D) The first application filed under this section by an electric distribution utility that, as orJuly 31, 2008, directly owns, in whole or in part, operating electric generating facilities

12 that had been used and useful in this state shall require that a portion of that utility's standard service offer load for the first five years of the market rate offer be competitively bid under division (A) of this section as follows: ten per cent of the load in year one, not more than twenty per cent in year two, thirty per cent in ycar three, forty per cent in year four, and fifty per cent in year five. Consistent with those percentages, the commission shall determine the actual percentages for each year of years one through fivc. The standard service offer price for retail electric generation service wider this first application shall be a proportionate blend of the bid price and the generation service price for the reinaining standard service offer load, which latter price shall be equal to the elcctric distribution utility's most recent standard service offer price, adjusted upward or downward as the comxnission determines reasonable, relative to the jurisdictional portion of any known and measurable changes from the level of any one or more of the following costs as reflected in that most recent standard service offer price:

(1) The electric distribution utility's prudently incurred cost of fiiel used to produce electricity;

(2) Its prudently incurred purchased power costs;

(3) Its prudently incun-ed costs of satisfying the supply and demand portfolio requirements of this state, including, but not limited to, renewable energy resource and energy efficiency requirenients;

(4) Its costs prudently incurred to comply with environmental laws and regulations, with consideration of the derating of any facility associated with those costs. In making any adjustment to the most recent standard service offer price on the basis of costs described in division (D) of this section, the commission shall inelude the benefits that may become available to the electric distribution utility as a result of or in connection with the costs included in the adjustment, including, but not limited to, the utility's receipt of emissions credits or its receipt of tax benefits or of other benefits, and, accordingly, the commission may irnpose such conditions on the adjustment to ensure that any such benefits are properly aligned with the associated cost responsibility. The commission shall also determine how such adjustments will affect the electric distribution utility's return on common equity that may be achieved by those adjustments. The commission shall not apply its consideration of the rettun on common equity to reduce any adjustments authorized under this division unless the adjustinents will cause the electric distribution utility to earn a return on connnon equity that is significantly in excess of the return on common equity that is eamed by publicly traded companies, including utilities, that face comparable business and financial risk, with such adjustments for capital structure as may be appropriate. The burden of proof for demonstrating that sigiuficantly excessive earnings will not occur shall be on the electric distribution utility. Additionally, the commission inay adjust the electric distribution utility's most recent standard service offer price by such just and reasonable amount that the commission determines necessary to addi-ess any emergency that threatens the utility's financial integrity or to ensure that the resulting revenue available to the utility for providing the standard seivice offer is not so inadequate as to result, directly or indirectly, in a taking of property without

13 compensation pursuant to Section 19 of Article I, Oliio Constitution. The electric distribution utility has the burden of demonstrating that any adjustment to its most recent standard service offer price is proper in accordance with this division.

(E) Beginning in the second year of a blended price under division (D) of this section and notwithstanding any other requirement of this section, the commission may alter prospectively the proportions specified in that division to mitigate any effect of an abrupt or significant change in the electric distribution utility's standard service offer price that would otherwise result in general or with respect to any rate group or rate schedule but for such alteration. Any such alteration shall be made not more often than annnally, and the commission shall not, by altering those proportions and in any event, including bccause of the length of time, as authorized under division (C) of this section, taken to approve the market rate offer, cause the duration of the blending period to exceed ten years as counted from the effective date of the approved market rate off'er. Additionally, any such alteration shall be limited to an alteration affecting the prospective proportions used during the blending period and shall not affect any blending proportion previously approved and applied by the cornmission under this division.

(F) An electric distribution utility that has received commission approval of its first application under division (C) of this section shall not, nor ever shall be authoiized or reqrtired by the commission to, file an application under section 4928.143 of the Revised Code.

Effective Date: 2008 SB221 07-31-2008; 2008 HB562 09-22-2008

14 4928.143 Application for approval of electric security plan - testing.

(A) For the purpose of complying with section 4928.141 of the Revised Code, an electric distribution utility may file an application for public utilitics commission approval of an electric security plan as prescribed under division (B) of this section. The utility may file that application prior to the effective date of any niles the conunission may adopt for the purpose of this section, and, as the commission determines necessary, the utility immediately slrall conform its filing to those rules upon their taking effect.

(B) Notwithstanding any other provision of Title XLIX of the Revised Code to the contrary except division (D) of this section, divisions (I), (7), and (K) of section 4928.20, division (E) of section 4928.64, and section 4928.69 of the Revised Code:

(1) An electric security plan shall include provisions relating to the supply and pricing of electric generation service. In addition, if the proposed electric security plan has a term longer than three years, it may include provisions in the plan to permit the commission to test the plan pursuant to division (E) of this section and any transitional conditions that should be adopted by the commission if the comnzission terminates the plan as authorized under that division.

(2) The plan may provide for or include, witlrout limitation, aiy of the following:

(a) Automatic recovery of any of the following costs of the cleetiic distribution utility, provided the cost is prudently incurred: the cost of fuel used to generate the electricity supplied under the offer; the cost of purchased power supplied under the offer, including the cost of energy and capacity, and including purchased power acquired from an affiliate; the cost of emission allowances; and the cost of federally mandated carbon or energy taxes;

(b) A reasonable allowance for construction work in progress for any of the electric distribution utility's cost of constructing an electric generating facility or for an environmental expenditure for any electric generating facility of the electric distribution utility, provided the cost is incun-ed or the expenditure occurs on or after 7anuary 1, 2009. Any such allowance shall be subject to the construction work in progress allowance limitations of division (A) of section 4909.15 of the Revised Code, except that the comrnission inay authorize such an allowance upon the incurrenee of the cost or occurrence of the expenditure. No such allowance for generating facility construction shall be authorized, however, unless the commission first determines in the proceeding that there is need for the facility based on resource planning projections submitied by the electric distribution utility. Further, no such allowance shall be authorized unless the facility's construction was sourced through a competitive bid process, regarding which process the commission may adopt rules. An allowance approved under division (B)(2)(b) of this section shall be established as a nonbypassable surcharge for the life of the facility.

15 (c) The establishment of a nonbypassable surcharge for the life of an electric generating facility that is owned or operated by the electric distribution utility, was soruced through a competitive bid process subject to any such rules as the conunission adopts under division (B)(2)(b) of this section, and is newly uscd and useful on or after January 1, 2009, which surcharge shall cover all costs of the utility specified in the application, excluding costs recovered through a surcharge under division (B)(2)(b) of this section. However, no surcharge shall be authorized unless the commission first determines in the proceeding that there is need for the facility based on resource planning projections snbmitted by the electric distribution utility. Additionally, if a surcharge is authorized for a facility pursuant to plan approval Lmder division (C) of this section and as a condition of the contimiation of the surcbarge, the electric distribution utifity shall dedicate to Ohio consiuners the capacity and energy and the rate associated with the cost of that facility. Before the commission authorizes any surcharge pursuant to this division, it may consider, as applicable, the effects of any decornmissioning, deratings, and retirements.

(d) Terms, conditions, or charges relating to limitations on customer shopping for rctail electhic generation service, bypassability, standby, back-up, or supplemental power service, default service, carrying costs, amorlization periods, and accounting or deferrals, including future recovery of such deferrals, as would have the effect of stabilizing or providing certainty regarding retail electric service;

(e) Automatic increases or decreases in any eomponent of the standard service offer price;

(f) Provisions for the electric distribution utility to securitize any phase-in, inclusive of carrying charges, of the utility's standard service offer price, which phase-in is authorized in accordance with section 4928.144 of the Revised Code; and provisions for the recovery of the utility's cost of securitization.

(g) Provisions relating to transmission, ancillary, congestion, or any related service required for the standard service offer, including provisions for the recovery of any cost of sueh service that the electric distribution utility incurs on or after that date pursuant to the standai-d service offer;

(h) Provisions regarding the utility's distribution service, including, without limitation and notwithstanding any provision of Title XLIX of the Revised Code to the contrary, provisions regarding single issue ratemaking, a revenue decoupling mechanism or any other incentive ratemaking, and provisions regarding distribution infrastructure and modernization incentives for the electric distribution utility. The latter may include a long-term energy delivery infrastructure modernization plan for that utility or any plan providing for the utility's recovery of costs, including lost revenue, shared savings, and avoided costs, and a just and reasonable ratc of return on such infrastructure modernization. As part of its determination as to whether to allow in an electric distribution utility's electric security plan inclusion of any provision described in division (B)(2)(h) of this section, the coinmission shall examine the reliability of the electric distribution utility's distribution system and ensure that customers' and the electric

16 distribution utility's expectations are aligned and that the electric distribution utility is placnrg sufficient emphasis on and dedicating sufficient resources to the reliability of its distribution system.

(i) Provisions under wliich the electric distribution utility may implement economic development, job retention, and energy efficiency programs, which provisions may allocate program costs across all classes of customers of the utility and those of electric distribution utilities in the same system.

(C)(1) The burden of proof in the proceeding shall be on the electric distribution utility. The commission shall issue an order under this division for an initial application under this section not later than one hundred fifty days after the application's filing date and, for any subsequent application by the utility imder this section, not later than two liundred seventy-five days after the application's filing date. Subject to division (D) of this section, the conunission by order shall approve or modify and approve an application filed under division (A) of this section if it finds that the electric security plan so approved, ineluding its pricing and all other terms and conditions, including any deferrals and any fiiture recovery of deferrals, is more favorable in the aggregate as conlpared to the expected results that would otherwise apply under section 4928.142 of the Revised Code. Additionally, if the commission so approves an application that contains a surcharge under division (13)(2)(b) or (c) of this section, the commission shall ensure that the benefits derived for any purpose for which the surcharge is established are reserved and made available to those that bear the surcharge. Otherwise, the commission by order shall disapprove the application.

(2)(a) If the commission modifies and approves an application rmder division (C)(1) of this section, the electric distribution utility may withdraw the application, thereby terininating it, and may file a new standard service offer under this section or a standard service offer under section 4928.142 of the Revised Code.

(b) If the utility terminates an application pursuant to division (C)(2)(a) of this section or if the comniission disapproves an application under division (C)(1) of this section, the conunission shall issue such order as is necessary to continue the provisions, terms, and conditions of the utility's most recent standard service offer, along with anyexpected increases or decreases in fuel costs from those contained in that offer, until a subsequent offer is authorized pursuant to this section or section 4928.142 of the Revised Code, respectively.

(D) Regarding the rate plan rc-quirernent of division (A) of section 4928.141 of the Revised Code, if an electric distribution utility that has a rate plan that extends beyond December 31, 2008, files an application under this section for the purpose of its conipliance with division (A) of section 4928.141 of the Revised Code, that rate plan and its terms and conditions are hereby incorporated into its proposed electric security plan and shalt continue in effect until the date scheduled under the rate plan for its expiration, and that portion of the electtic security plan shall not be subject to commission approval or disapproval under division (C) of this section, and the earnings test provided for in

17 division (F) of this section shall not apply until after the expiration of the rate plan. However, that utility may inelude in its electric security plan under this section, and the commission may approve, rnodify and approve, or disapprove subject to division (C) of this section, provisions for the inereinental recovery or the defeiral of any costs that are not being recovercd under the rate plan and that the utility incurs during that continuation period to comply with section 4928.141, division (B) of section 4928.64, or division (A) of section 4928.66 of the Revised Code.

(E) If an electric security plan approved under division (C) of this section, except one withdrawn by the utility as authorized under that division, has a term, exclusive of phase- ins or deferrals, that exceeds three years from the effective date of the plan, the commission shall test the plan in the fourth year, and if applicable, every fourth year therealter, to determine whether the plan, including its then-existing pricing and all other tenns and conditions, including any deferrals and any future recovery of deferrals, continues to be more favorable in the aggregate and during the remainnig term of the plan as compared to the expected results that would otherwise apply tmder section 4928.142 of the Revised Code. The commission shall also determine the prospective effect of the electric security plan to determine if that effect is substantially likely to provide the eleetric distribution utility with a return on common equity that is significantly in excess of the return on common equity that is likely to be eained by publicly traded companies, including utilities, that face comparable business and financial risk, with such adjustinents for capital structure as may be appropriate. The burden of proof for demonstrating that significantly excessive earnings will not occur shall be on the electric distribution utility. If the test results are in the negative or the commission finds that continuation of the electric security plan will result in a return on equity that is significantly in excess of the return on common equity that is likely to be earned by publicly traded companies, including utilities, that will face comparable business and financial risk, with such adjustments for capital structure as niay be appropriate, during the balance of the plan, the commission may tenninate the electric security plan, but not until it shall have provided interested parties with notice and an opportunity to be heard. The commission may impose such conditions on the plan's termination as it considers reasonable and necessary to accommodate the transition from an approved plan to the more advantageous alternative. In the event of an electric security plan's termination pursuant to this division, the commission shall pennit the continued deferral and phase-in of any amounts that occurred prior to that tennination and the recovery of thoseamounts as contemplated under that eleetric security plan.

(F) With regard to the provisions that are included in an electric securityplan under this section, the commission shall consider, following the end of each annual period of the plan, if any such adjustments resulted in excessive earnings as measured by whether the eam.ed return on comrnon equity of the electric distribution utility is significantly in excess of the return on common equity that was eamed during the same period by publicly traded companies, including utilities, that face comparable business and financial risk, with such adjustments for capital structure as may be appropriate. Corisideration also shall be given to the capital requirements of future committed investments in this state. The burden of proof for demonstrating that significantly excessive eainings did not occur

18 shall be on the electric distribution utility. If the commission finds that such adjustments, in the aggregate, did result in significantly excessive earnings, it shall require the electric distribution utility to rettirn to consumers the amount of the excess by prospective adjustments; provided that, upon making such prospective adjustments, the electric distribution utility shall have the right to terminate the plan and immediately file an application pursuant to section 4928.142 of the Revised Code. Upon tennination of a plan under this division, rates shall be set on the same basis as specified in division (C)(2)(b) of this section, and the conimission shall pelmit the continued deferral and pliasc-in of any amounts that occuiTed prior to ttlat termination and the recovery of those amounts as contemplated under that electric security plan. In making its detennination of significantly excessive earnings under this division, the commission shall not consider, directly or indirectly, the revenue, expenses, or earnings of any affiliate or parent company.

Effective Date: 2008 SB221 07-31-2008

19 4928.17 Corporate separation plans.

(A) Except as otherwise provided in sections 4928.142 or 4928.143 or 4928.31 to 4928.40 of the Revised Code and begimiing on the starting date of competitive retail electric service, no electric utility shall engage in this state, either directly or through an affiliate, in the businesses of supplying a noncompetitive retail electric service and supplying a competitive retail electiic service, or in the businesses of supplying a noncompetitive retail electric service and supplying a product or service other than retail electric service, unless the utility inrplements and operates under a corporate separation plan that is approved by the public utilities eonimission under this sectioii, is consistent witli the policy specified in section 4928.02 of the Revised Code, and achieves all of the following:

(1) The plan provides, at minimuin, for the provision of the competitive retail electric service or the nonelectric product or service through a fully separated affliate of the utility, and the plan includes separate accounting requirements, the code of conduct as ordered by the coinmission pursuant to a ntle it shall adopt under division (A) of section 4928.06 of the Revised Code, and such other measur•es as are necessary to effectuate the policy specified in section 4928.02 of the Revised Code.

(2) The plan satisfies the public interest in preventing unfair competitive advantage and preventing the abuse of market power.

(3) The plan is sufficient to ensure that the utility will not extend any lmdue preference or advantage to any affiliate, division, or part of its own business engaged in the business of supplying the competitive retail electric service or nonelectric product or seivice, including, but not limited to, utility resources such as trucks, tools, office equipment, office space, supplies, customer and marketing information, advertising, billing and mailiiig systems, personnel, and training, without compensation based upon fully loaded embedded costs charged to the affiliate; and to ensure that any such affiliate, division, or part will not receive undue preference or advantage from any affiliate, division, or part of the business engaged in business of supplying the noncompetitive retail electric service. No such utility, affiliate, division, or part shall extend such undue preference. Notwithstanding any other division of this section, a utility's obligation under division (A)(3) of this section shall be effective January 1, 2000.

(B) The commission may approve, modify and approve, or disapprove a corporate separation plan filed with the commission under division (A) of this section. As part of the code of conduct required under division (A)(1) of this section, the commission shall adopt rules pursuant to division (A) of section 4928.06 of the Revised Code regarding coiporate separation and procedures for plan filing and approval. The rules shall include limitations on affiliate practices solcly for the purpose of maintaining a separation of the affiliate's business from the business of the utility to prevent unfair cornpetitive advantage by virtue of that relationship. The rules also shall include an opportunity for any person having a real and substantial interest in the corporate separation plan to file specific objections to the plan and propose specific responses to issues raised in the

20 objections, which objections and responses the commission shall address in its final order. Piior to commission approval of the plan, the conunission shall afford a hearing upon those aspects of the plan that the commission detennines reasonably require a hearing. The commission may reject and require refiling of a substantially inadequate plan under this section.

(C) The commission shall issue an order approving or modifying and approving a corporate separation plan under this section, to be effective on the date specified in the order, only upon findings that the plan reasonably complies with the requirements of division (A) of this section and will provide for ongoing compliance with the policy specified in section 4928.02 of the Revised Code. However, for good cause shown, the commission may issue an order approving or modifying and approving a corporate separation plan tinder this section that does not comply with division (A)(l) of tlris section but con7plies with such functional separation requirements as the commission authorizes to apply for an interim period prescribed in the order, upon a finding that such alteinative plan will provide for ongoing compliance with the policy specified in section 4928.02 of the Revised Code.

(D) Any party may seek an amendment to a corporate separation plan approved under this section, and the comniission, pursuant to a request from any party or on its own initiative, may order as it considers necessary the filing of an ainended corporate separation plan to reflect changed circumstances.

(E) No electric distribution utility shall sell or transfer any generating asset it wholly or partly owns at any time without obtaining prior commission approval.

Effective Date: 10-05-1999; 2008 SB221 07-31-2008

21 Former Sec. 4928.17 effective 10-05-1999 through 07-31-08

(A) Except as otherwise provided in sections 4928.31 to 4928.40 of the Revised Code and beginning on the starting date of competitive retail electric service, no electric utility shall engage in this state, either directly or through an affiliate, in the businesses of supplying a noncompetitive retail eleethic service and supplying a competitive retail clectric service, or in the businesses of supplying a noncompetitive retail electric service and supplying a product or service other than retail electric service, unless the utility irnplements and operates under a corporate separation plan that is approved by the public utilities commission under this section, is consistent with the policy specified in scction 4928.02 of the Revised Code, and achieves all of the following:

(1) The plan provides, at minimum, for the provision of the eoinpetitive retail electric service or the nonelectric product or seivice through a fully separated afPiliate of the utility, and the plan includes separate accounting requirernents, the code of conduct as ordered by the eonimission pursuant to a rule it shall adopt under division (A) of section 4928.06 of the Revised Code, and such other measures as are necessary to effectuate the policy specified in section 4928.02 of the Revised Code.

(2) The plan satisfies the public interest in preventing unfair competitive advantage and preventing the abuse of market power.

(3) The plan is sufficient to ensure that the utility will not extend any undue preference or advantage to any affiliate, division, or part of its own business engaged in the business of supplying the competitive retail electric service or nonelectric product or service, including, but not limited to; utility resources such as trucks, tools, office equipment, office space, supplies, customer and marketing information, advertising, billing and riiailing systems, persomiel, and training, witliout compensation based upon fully loaded embedded costs charged to the affiliate; and to ensure that any such affiliate, division, or part will not receive undue preference or advantage from any affiliate, division, or part of the business engaged in business of supplying the noncompetitive retail electric service. no such utility, altiliate, division, or part shall extend such undue preference. notwithstanding any other division of this section, a utility's obligation under division (A)(3) of this section shall be effective.lanuary 1, 2000.

(B) The commission may approve, modify and approve, or disapprove a corporate separation plan filed with the comrnission under division (A) of this section. As part of the code of conduct required under division (A)(1) of this section, the comrnission shall adopt rules pursuant to division (A) of section 4928.06 of the Revised Code regarding corporate separation and procedures for plan filing and approval. The rules shall inelude lirnitations on affiliate practices solely for the purpose of maintaining a separation of the affiliate's business from the business of the utility to prevent unfair competitivo advantage by virtue of that relationship. The iules also shall include an opporlmiity for any person having a real and substantial interest in the corporate separation plan to file specific objections to the plan and propose specific responses to issues raised in the objections, which objections and responses the commission shall address in its final

22 order: Prior to comrnission approval of the plan, the commission shall afford a hearing upon those aspects of the plan that the commission determines reasonably require a hearing. The conunission may reject and require refiling of a substantially inadequate plan under this section.

(C) The commission shall issue an order approving or modifying and approving a corporate separation plan under this section, to be effective on the date specified in the order, only upon findings that the plan reasonably complies with the requirements of division (A) of this section and will provide for ongoing compliance with the policy specified in section 4928.02 of the Revised Code. However, for good cause shown, the commission may issue an order approving or modifying and approving a corporate separation plan under this section that does not comply with division (a)(1) of this section but complies with such functional separation requirements as the comznission authorizes to apply for an interizn period prescribed in the order, upon a finding that such alternative plan will provide for ongoing coinplianee with the policy specified in section 4928.02 of the Revised Code.

(D) Any party may seelc an amendment to a corporate separation plan approved under this section, and the cominission, pursuant to a reqtiest fi-om any party or on its own initiative, may order as it considers necessary the filing of an amended corporate separation plan to reflect changed cireumstances.

(E) Nohvithstanding section 4905.20, 4905.21, 4905.46, or 4905.48 of the Rcvised Code, an electric utility may divest itself of any gencrating asset at any time without commission approval, subject to the provisions of Title XLIX of the Revised Code relating to the transfer of transmission, dish-ibution, or ancillary service provided by such generating asset.

23 IN TCIF SUPREME COURT OF OHIO

Columbus Southet•n Power Company Case No.

Appellant, Appeal from Public V. Utiiities Commission of Ohio

The Public Utilities Commissiott of Ohio, : Public Utilities Contmission of Ohio Appellee. Case No. 08-917-F,i SSO

NOTICE OF15iPPFAL OF COLUMBUS SOUTHERN POWER COMPANY

iVlarvin 1. Resnik (0005695) Richard Cordray (0038034) Cowisel of Record lAttorney General of Ohio Steven T. Nou.rse (0046705) Duane W. Luc[iey (0023557) Kevin F. Duffy (0005867) Clriet, Public (Jtilities Section Ameriean Electric Porver Service tiWerner L. Margard (0039210) Corporatiou John.H.7ones(0051913) I Riverside Plaza, 29°i Floor 'fhonias G. Lindgren (0039210) C:olumbus, Ohio 4321 5-23 73 Assistant Attorneys Gereral Telephone: (614) 716-1606 189 'Fast Broad Streot Facsimile: (614) 716-2950 Columbus, Ohio 43215-3793 ni i r^sli il^r^, aep_co^l Telephone: (614) 644-8698 stnotu-se a?ae ^.[ cc^ni Facsimilc: (614) 644-8764 cPdutF c .ae com T)uai2e.luclcey@j?uc stateoh-us Thocnaalind ren c puc.statc.oh.us Daniel R. Conway (0023058) Werncraiiaruard(r^),Puc.slate.oh.us Poiter Wriglit Morris & Atthur 7ohn..lanes rl puc.siatc.oh?us Huntington Centcr 41 South 1Iigli Street Connsel for Appellee, Cohitnbns, Ohio 42315 Public Utilities Comn3issiou of Ohio Fz:.Y: (614) 227-2100 cie oa;cv^ysr7^ ortenvrinhtcom

C:ourisel fot' Appellant, Colnmbus Southern Power Company

t3r ?;:[)tlR (' ;rwI b^{^i(°Nix: ;."Of,(i i, OF

24 NOTCCE OF APP.[:AL OF APPEi.LANT COLUR'

Appellant, Colrunbus Southern Power Company ("CSP" or "Appellant"), hereby gives notice of its appeal, pursuart to R.C. 4903.11 and 4903.13, and Supreme Court

Rule of Practice 11, Section 3(B), to the Supreme Court of' Oltio and Appellee, the Public

UtiIities Commission of Ohio (Y.omnussion"), from an Opinio3i and Order entered on

Nlarch 18, 2009 (Attachnient A), an Bntry Nunc Pro Tunc entored on March 30, 2009

(Attachment 13), an Fnt7y on Rehearing, entered on July 23, 2009 (Aitachment C), an

Entry on Rehearing entered mi August 26, 2009 (Attachinent D), and a Second Lntry on

Rehcaring entered on November 4, 2009 (Attachment E), in PUCO Case No. 08-917-EL-

SSO. That case involved an application fil.ed by CSP to establish att Electric Security

Plan pursuant to R.C. 4928.143 and for autltority to sell or transfer certain gene.rating assets pursuant to R.C. 4928.17.

Tn its .hily 23, 2009 Entry on Reltearing, the Commission granted reliearing rcgarding an issue raised on rehearing by an intervenor in the proceeding below. CSP actively opposed that intervenor's rcliearing request and the Commission's granting oP that rehcaring reciuest harmed CSP's interests. Appellant timely filed its Application for itehcaring ol' Appellee's Jtily 23, 2009 Entry on Rehearing in accordance with R-C_

4903.10. After consideration of CSP's application for rehearing, the Co nmission denied t.hat rehearing request on November 4, 2009. The assignments of error listed below were raised in Appellants' Application fi>r 12ehearing.

2

25 The Commission's Opinion and Ordcr and Entries on Rehearing are unlawfal and tmreasonable in multiple reslreels.

1. The C'otntnission utila.wfully and unreasonably denicd CSP the autliority

to sell or transfer certain genet'ating assets (Vtiraterford Lticrgy Center and Darby Electric

(icnerating Center) as part of CSP's proposed I;iectric Security Plan.

2. The Commission unlawfully and unreasonably denied CSP the authority

Lo recover, as part of its Electric Security Plan, costs associated «ith its ownership of the

Waterford Energy Center and Darby Electric Generating Station.

3. ff-the Corntnissio3i were going lo require CSP to retairt tlxe Waterford

Energy Center and Darby Electric Generating Statiun, "then the Cornmission should also

allow (CSPI to recover Ohio custorners' ,jurisdictional share of ziny costs associated with

maintaining and operai'u7g such facilities -" (Opinion and Order, p. 52). The

Connnission's failure to either atthorize the sale or transfer of those generating assets or

to authorize reeovety of costs from custorners is unlawful and unreasonable.

WITEREPORTi, Appellant respectfully subinits that Appellee's lyfarch 18, 2009 Opinion

and Order, as modified by its July 23, 2009 a^id Novembcr 4, 2009 Tntries on 7teheaiing

are unlawftil, unjust, and unreasonable and should be reversed. Cotmnissi.oti Case No.

08-917-E?T. SSO should be remancled to the Commission with instructions to correct the

errors complained of herein.

3

26 Respeetftd subniitted,

Marvin 1. Resnik (0005695) Counsel of R.ecord Steven T. Nourse (0046705) Kevin F. Duffy (0005867) Ainorican Efectric Power Co7l)oration 1 RivetsidePlaza, 29`" Floor ColumUus, Ohio 43215-2373 Teleplione:(6l4) 716-1606 Facsi711ile: (614) 716-2950 mixesnilc cz?acg,coiri sinourse r)aen_ootn l:filulT r,aet^.com

Daniel R. Conway Porter Rrright Morris & Arthur Huntington Center 41 South Iligh Stree[ Cotumbns, Ohio 42315 Fax: (614) 227-2100 dcanwa ^l orter^vii^l2t.com

Counsel for Appellant, Columbus Sottthern PowOf Conlpany

4

27 PROOF OF SERVICE'

i certify that Col3mibus So e-n Pov^=er Conipany's Notice of Appeal was served by First-Class U.S. Mail upon counsel for all parties to the proceecling before the Public

Utiliti Coinmission of C}hio identified below and pursuant to Seetion 4903.13 of the

Ohio Revised Code, this 22°`l day ot'Dccember, 2009. /.VI--^F 113-1-4 f, Marvin I. Resnik, Counsel for Alipellant

Janine L. Migden-Osirander Richard Cordray Consumers' Counsel Ol io Attorney General Maureen 1L Gt'ady Duane W. Luckey 1'erry L. Pitter Section Chief Michael E. ltlzkodvski Thomas l.indgren Richard C. Rcese Warner L. Margard Office oYthe Ohio Corisunters' Counsel John H.Jones 10 West I3road Street, Suite 1800 Assistant Attoniey Gencral Coluinbus, Ohio 43215-3485 180 F.ast Broad Street Columbus, Ohio 43215

C:l i Iton A. Vince Samuel C. ItanciaG.zo Douglas G. Bonner Lisa G. McAlister Daniel D. 13an1owski Joseph M. Clark Emma F. Hand McNees, Wallace & Nurick, L1.C Sonnenschein Nath & Rosenthal LLl' 21 East State Sti'eet, 17°i Floor 1301 K Strect NW Columbus, Ohio 43215-4228 Suite 600 East Tower Washington, DC 20005

David F. Boehm John W. Bentine Michael L, Ktntz Mark S. Yurick Boehni Kurtz & Lowry Matthew S. White 36 East Scventh Street, Suite 1510 Chester, Wilcox & Saxhe, LLP Cincinnati, Ohio 45202 65 Hast State Street Suite 1000 Coltnnbus, Ohio 43215-4213

28 David C. Rinebolt Barth Royer Collcon L. Mooncy Langdon D. Scli 231 West Lima Street Bel I &Royer 33 Sout.h Grant Avenuc PO Box 1793 Findlay, Ohio 45839-1793 Columbus, Ohio 43215-3927

M. Itoward Petricoff Gregory Dunn Stepben M. Howard Christopher L. Miller Nlike Settineri Andre T. Pottei- Schalfeistein, Zox & Dunn Co., LPA Betsy L. Elde' Vorys, Sater, Seymour & 1'ease 250 West Street 52 East Gay Street Columbus, Ohio 43215 Columbus, Ohio 43216-1008

Thomas J. O'IIricn Clrace C. Wang McDent?ott, Will & Etnery, I.I.P Sally W, Bloomfield 600 Thirteeuth Strcet, NW 13nokcr & Eckler 100 SouthThird Street Washington, DC 20005 Columbus, Ohio 43215-3620

Miohael R. Smalz Bobby Singli lose.ph E. Maskovyak Integry's Energy Ohio State Legal Serviee Association 300 West Wilson Bridge 1Zoad 555 Buttles Avcnue Wottliington, Ohio 43085 Columhus, Ohio 43215

Cynthia A. Fonner Kevin Schmidt Constellation Energy Cixoup, Tnc. Ohio Manufactures' Association 550 West Washington Blod., Suite 3000 33 North 11igh Street Columbus, Ohio 43215-3005 C:hicago, Ill.i 7ois 60661 Larry Crearhardt Richard L. Sites General Counsel Chief Logal Counsel Ohio I'arm Burcau Fcderation C>hio Hospital Association 155 East 13road Strcet, 15°i Floor 280 North High Street Columbus, Ohio 43215-3620 PC)13ox 182383 Columbus, Ohio 43218-2383

K. Lawrence Fleniy W. Eelchard Giegoty Will & Emery LLP Counsel of Recrnd McDermott 50 West Broatl Street #2117 28 State Street Columbus, Ohio 43215 Boston, MA 02109

Douglas M. Mancino McDermott Will & Emery, LLI' 2049 Century Park East, Suite 3800 Los Angeles, CA 90067

29 CEA'1TFICATL OF RILING

I hereby ccrtify that, in accordance with Supzem.e Court Rule of Pxsustice XIV,

Section. 2 (C)(2), Columbus Southern Power Conipany's Notice of Appeal has been ftlec€ with the docketing division of the Public Utilities Comnussioti of Ohio and w.itb the

Cliaii nan of the Public UtiliLies Cominission of Ohio by leaving a copy at tlre office of

tl,e Cl airtnan in Columbus, Ohio, in accordance with Rules 4901-1-02 (A) and 4901-1 -

36 of tbe Ohio Adininistrative Code, on December 22°a, 2009,

Marvin I. Resnik Couusel for Appellant, Columbus SouthemPower C,ompany

30 ATTACHMENT A A'I'TACTTIVIEN'P A

BEFORE

THE PLIBLIC LITII.ITIES COINM[S.SI{}N OF OHIa

Inthe Mafiter of the Application of Cplurnbua Southern.Power Company for Approval of an Flectrzc Security I'Ian; an Ainendment to Case TSo. 08-917-EGSSQ its Corporate Separation Plaii; and the Sale or 1'ransfer of Certain Gen.eratingAssets.

} In tlie Matter of the Application of Ohio Pawer Companp for Approval of itsBl.eclric } Case Np. 0$-918-EI.,,.S9O Security Plan; aztd an 1Smendment to its ) Corporate Separatinn E'Ian.

t7PINION AND C)RL}Ekt

4magcse appearing are axt T2tia is to aartify thtLt tTSe arYd eam^Z9te .r.e^.-GCueC3on at s case file a04^4rate burtiuaeag= dtid=Mnt delivered in i:He r6^'aIa.r course at M^rt^-I Techxsia3an^_,^^w _^_ 17ata Prnce^t^aed

32 t}8-417-F.L-.^'^.SC3 and Q8-918-SIr.SSO '2-

APPEARANCES : ...... 4 ...... -...... ,...... ,...... 6 OPINIOIV : ...... 6 l. HISTORY OF PROC.EEDINGS . A. Summay of the Local Public Hearings ...... 7 B. procedural lVfa#ers...... 7 ...... 7 1. Motion to Strike ...... 8 2. M+'stion for AEP-Ohio to Cease and Desist . Il. DISCIISSION ...... ---- ...... 9 A. Applicable Law...... 9 ...... 12 B. State I'olicy - Secti.on 4928.Q2, Revi9ed Code ... C. Application Overview...... 13 III. GENERA'CIoN ...... ,...... 13 A. Fuel Adjustment Qause (FAC) ...... 13 ...... 14 t. FAC Costs ...... 15 (a) Market Purchases .. (b) Off-System Sales (OSS) ...... 16 (c) Alternate Energy Portfolio Standards (including Renewable ...... 18 l;nergy Credit roP^ *ram)...... 2. FAC Saseline ...... 1$ 3. FAC Deferrals...... 20 13. Incremental Caxrying Cost for 2001-2008 Environmental Investment and the ...... 24 Carrying Cost Rate ...... 28 C. Annual Non-PAC Increases ...... 30 IV. DISTRIBU'1'lON ...... A. Annual Distribution Increases ...... 30 1. Enhanced Service Reliability Plan (ESRP) ...... 3d (a) Enhanced vegetation initiative ...... 31 (b) Enhanced underground cable i.nitiative ...... 31 ...... 31 (c) Distribution automation (DA) initiative (d) Enhanced overhead inspection and mitigat[on initiative.....,.. 31 2. GridSMART ...... :...... 34 B. Riders ...... :...... 38 1. Pravider of Last Resort (POLR) Rider ...... 3^ 2. Regalatory Asset Rider ...... 3. Energy Efficiency; Peak Demand Reduction, Demand Response, and ...... 41 Interraptible Capabilities (a) Energy Efficiency and Peak Dernand Reduction ...... 41 (b) Baselines and Benclunarks...... 41 (c) Energy Efficiency and Peak Demand Reduelion I'rograms.... 44 (d) Interruptible Capacity ...... 45

33 08-917-EL-SS0 and (}8-918-&I.-SSO r

4. Econon-ic Development Cost Recovery Rider and the Partnership with Ohio Fund ...... 47 C. I,ine Extensions ...... 48 . 49 V. T'RANSMISSION ...... ,....,...... ,...... V I. OTI-IE n ISS'[7PS ...... 50 A. Corporate Separation ...... :...... 50 1. Functional Separation ...... 50 2, Trarwffer of Generating Assets ...... 51 B. Possible Early Plant Clostares ...... 52 C. Pj.M Deinand Response Program.s ...... :...... :...... 53 D, Integrated Gasification Combined Cycle (IGCC')...... 58 E. Alternate Feed 6ervice ...... 59 F. Net Energy Metp.ring Service ...... 40 G. Green Pricing and I2enewable Energy Credit Purchase Programs ...... 62 H. Gavin Scrubber Lease...... 63 1. Section V.E (Interim Plan) ...... 64 VIl. SIGNIFICANTLY EXCESSIVE EAI2h1INGS'TFST (SEET) ...... 65 VIIl. MfiO V. ESP ...... »,...... I)C. CONCLUSION ...... 72 FINDINGS OF FACT AND CdNCLUSIOMS OF LAW :...... 73 ORDER :...... 74

34 48-917-HL-SSO and 013-918-EL-SSO -1-

The Comntission, considering the above-entitled applications and the record in these proceedings, hereby issues its opinion and order in this maties'.

APPEARANCPS: Marvin I. Resnik and Steven T. Nourse, American Electric Power Service Corporation, One Riverside Plaza, Cohzndras, CShio'3215, and Porter, Wright, Morris & Artliur, by Daniel R. Conway,'11 South High Street, Colurnbus, Olv.o 4S215, on behalf of Columbus Southern Power Company and Ohio Power Company.

Richard Cordray, Attortiey General of the State of Ohio, by Duane W. Luckey, Section Chief, and Warner L. Margard, John H. Jones, and `Ihomas G. Lindgren, Assistant Attorneys General,13D East tiroad Street, Columbus, Ohio 43215, on behalf of the Staff of the Public Utilities Commission of Ohio.

Janine L. Migden.-Ostrander, the Office of the Ohio Consumers' Counsel, by Maurcen R. Grady, "1'erry L. Etter, Jacqueline Lake Roberts, Michael E. Idzkowslti and Richard C. Reese, Assistant Consumers' Counse1,10 West Broad Street, Columbus, Ohio 43215-3485, on behalf of the residential utility consumers of Cotunibus Southern Company and Oluo Power Company.

Boelun,lCurtz & Lowry, by David B. Boehm and Michael L. ICurtz, 36 East Seventh Street, Suite 1510, Cincinnati, O1uo 45202, on behalf of Ohio Hnergy Group.

Citester, Wilcox & Saxbe, LL:P, by]olut W. Bentui.e, Mark S, Yurick, and Matthew S. White, 65 East State Street, Suite 1000, Columbus, {7hio 43215-4213, on behalf of The Kroger Contpany.

McNees, Wallace & Nurick, LLC, by Samuel C. Randazzo, Lisa G. McAlister, and Joseph M- Clark, 21 East State Stxeet,17th Floor, Columbus, Ohio 43215-4228, on behalf of Industrial Energy Users-O2uo.

David C, Ritiebolt and Colleen L. Mooney, 231 West Lima Street, P.O. Bdx 1793, Findlay, Ohio 45839-1793, on behalf of Uhio Partners for Affordable Finergy.

Bell & Royer Co., LPA, by Barth E. Royer, 33 South Grant Avenue, Columbus, Ohio 41215-3927, on belalf of Ohio -T^tvironmental Council and I7ominion Retail, Inc.

Vorys, Sater, Seymour & Pease, LLP, by M. Howard Petrfcoff, Mike Settinerl and Betsy L. Elder, 52 East Gay Street, Columbus, Ohio 43216-1008, and Bobby Singh, Tntegxys Energy, 300 West Wilson Bridge Road, Worthington, Ohio 430$5, on behalf of Integrys Energy.

35 -5- 08-917-ELSS0 and 08-918-EL,-SS0

Vorys, Sater, Seymour & Pease, LLP, by M. Howard Petricoff, Mike Settineri a*td Betsy L. Elder, 52 kast Gay Street, Columbus, Ohio 43216-1008, and Cynthia A. Ponner, Coiistetlation Energy Group, Inc., 550 West Washington Boulevard, Suite 3000, C.hif'ago, lllinois 60661, on behalf of Constellation NewEnergy, Inc., and Constellation Energy Cou-tmodities Group, Inc.

Vorys, Sater, Seymour & Pease, LLP, by M. Howard Petricoff, Mike Settineri and Betsy L. Elder, 52 East Gay Street, Columbus, Ohio 43216-1008, on belialf of EnerNoc, Inc. and Consumer Powerline, Inc.

Schottenstein, Zox & Du.rut Co., LPA, by Gregory H. Dunn, Christopher L. Miller, and Andre T. Porter, 250 tivest Street, Coluanbus, Ohio 43215, on behalf of the Association of Independent Collel;es and Uxuvexsities of Ohio.

I3ricker & Eckler, Thomas J. O'Brien, 100 South Tiurd Street, Columbus, Ohio, and Richard L. Sites, 155 East Broad Street, 15th Floor, Columbus, Ohio 43215-3620, on behalf of O1do Hospital Association.

Iell & Royer Co., LPA, by Langdon D. BetI, 33 South Grant Avenue, Columbus, ► {?hio 43215-3927, and Kevin Schmidt, 33 North High Sireet, Calumbus, Ohio 43215+3005, on behalf of Ohio Manufacturers' Association.

Vorys, Sater, Seymour & Pease, LLP, by M. Howard PetricofE and Stephen M. Iioward, 52 East Gay Street, Columbus, Ohio 43216-1008, on behalf of Direct Energy Services, I.LC.

McDermott, Will & Eniery, LLP, by Grace C. Wung, 600 Tlhirteenth Street, N.W., Washington, D.C.. 20005, on behalf of Wal-Mart Siores East, LP, and Sam's East, Tnc., Ll', Macy's, Inc., and BJ's Wholesale Club, Inc,

Vorys, Sater, Seymour & Pease, LLP, by M. Howard Petricoff and Stephen M. I Ioward, 52 East Gay Street, Columbus, Ohio 43216-1008, on behalf of C>hio Association of School Business Officials, Ohio School Boards Association, and Buckeye Association of School Administrators.

Nlichael R. Smalz and Joseph E. Ivfaskovyak, Ohio State Legal Services Association, 555 Buttles Avenue, Columbus, Ohio 43215, on behalf of Appalachian T'aopie's Ac6on Coalition.

36 -6- 08-917-EL-SSC) and 0&91S-I3LrSSO

{7FINION;

1. IiISTC7RX OF PROCEEDINGS

Ch, July 31, 2008, Columbus Southern Power Company (CSP) and Ohio Power Conrpany (OP) (joindy, AEF-Ohio or the Companies) filed an application for a standard service offer (55C)) pursuant to Section 4928.141, Revised Code. The application is for an electric secutity plan (E5P) in accordance with Section 4928.143, Revised Code.

By entries issued August 5, 2008, and September 5, 2008, the procedural schedule ul this matter was established, including the scheduling of a technical confexence and the evidentiary hearing. A technical conference was held regarding AEP-OhWs application on August 19, 2008. A prehearing conference was held on November 10, 2008, and the evidentiary hearinl; commenced on November 17, 2008, and concluded on Deceniber 10, 2008. The Commission also scheduled five local public hearings tliroughout the Companies' service area.

The following parties were granted intervention by entries dated September 19, 2008, and October 29, 2008: Ohio Energy Group (OEG); the Office of the Ohio Consumers' Counsel (OCC), Kroger Company (Kroger); Olvo xnvironmental Council (OEC); Industrial Energy C7sers-Ohio (fEU); Ohio Partners for Affordable Energy (OPAE); Appalachian People's Action Coalition (APAC); Ohio Hospital Association (OHA); Constellation NewFnergy, Inc. and Constellation Energy Commodities Group, Inc. (Constellation); 17ominion Retail, Inc. (Dominion); Natural Resources Defertse Council (NRDC); Slerra Club - Ohio Chapter (Sierra); National Energy Marketera Association (NEMA); Integrys Energy Serv4ce, Inc. (Integrys); Direct Energy Services, LLC (13irect Fnexggy); Ohio Manufacturers Association (OMA); tjhio Farm Bureau Federation (OFBF); American Wind Energy Association, Wind on Wires, and Ohio Advance Energy (Wind F^tergy); Ohio Association of School Business Officials, Ohio School Boards Association, and Buckeye Association of School Administrators (collectively, Schools); Ormet Primary Aluininum Corporation (Ormet); Consumer Powerlirne; Morgan Stanley Capital Group Inc.; Wal-Mart Stores East, LP and Sam's East, Inc., Macy's, Inc., and BJ's Wholesale Club, Inc. (collectively, Cornmercial Group); EnerNoc, Inc.; and the Association of Independent Colleges and Universities of Qhio.

At the hearing, AFP-Ohio offered the testimony of 11 witnesses in support of the Companies' application, 22 witnesses testified on behaif of various inte, venors, and 10 witnesses testified on behalf of Staff. At the local public hearings lield in thl.s matter, 124 witnesses testified. £riefs were filed on December 30,2008, and reply briefs were filed on January 14, 2009.

37 08-9I7-121L, 6SU and 08-918-5`LrSSO

A. Summarr of the Local T'ublic Hearin^s

Five local public hearings were held in order to aliow C.SI''s and OP's customere the opportunity to express their opuuons regarding the issues in this proceeding. The hearings were held in the evenings in Marietta, Canton, I.ima, and Columbus. Adclitionally, an afternoon hearing was lield in Colu.rxtbus, At those hearings, public testimony was heard from 21 customers in Marietta, 21 customers in Canton, 17 customers in Lima, 25 customers at the afternoon hearing in Columbus and 40 customers at the evening hearing in Columbus. In addition to the public testimony, numerous letters were flled in the docket by custc>m.ers stating coneern about the applications.

`i'he principal concern expressed by customers, both at the public hedring9 and in letters, was over the increases in customer rates that wotdd result from the approval of the bSi' applications. Witnes,aes stated that any increase in xates would negatively impact Iow-incoine customers, the elderly, and those on fixed incomes. Customers cited the recent downturn in the economy as the primary source of their apprehension. It was noted by many at the hearings that customers are also facing increases in other utility charges, gasoline, food., and medical expenses and that the proposed increases would cause undue hardsiup. On the other hand, some witnesses at the public hearings and in the letters filed in the docket acknowledged AEI'-Ohio as a good corporate partner in their respective conununit[es.

B. Procedural Mattees

1. Motion to 9trike

On January 7,2069, AEP-Qhio filed a motion to strike a section of the brief jointly filed by OCC and Sierra (collectively, tX:EA). More specificalty, ASP-Ohio filed to strike „ the sentence starting on line 2 of page 63 ( in fact,_' ] througli the first two lines of page 64, including footnotes 244 to 248. AEP-Ohio argues that the above-cited portioat of OCEA's brief, regarding the deferral of fuel expenses and the carrying eharges and the tax effect thereof, relies upon testirnony offered by OCCC witness Effron in ttxe PirstEnergy Distribution Case.i AEp-Ohio notes that W. Effron was not a witness in this ESP proceeding and, therefore, was not available for the Companies, or any other party, to croas-exaxnine. Accordingly, the Companias argue that consideration of Mr. Lffron`s testimony in this matter would be a denial of the Companies` due process rights, and request that the specified portion of C)CCpA's brief be stricKen. On )anuary 14, 2009, OCC filed a memorandum contra the motion to strilce, OCC agreed to withdraw the second and tliird sentences on page 63, the qupted testisnony of Mr. Effron on page 63, and footnotes 244 to 248 on pages 63 and 64. . However, OCC contends that AEPAhia's

Ede9on Computty, Case In re Ohio Edison Concpnny, The QeoelQnd EIec&7c Illuminating Company, atut To[edo No. 07-551=ELAiR et az?. (FirstEnergq Disuibution Case).

38 08-917-EIrSSO and 08-918-EL-5S4 ^- tnation is overly broad and the remaitiing portion of the brief that AUI'-Ohio seeks to strike is appropriate legal arguinent regarding deferrals on a net-of-tax basis and, therefore, should renAain, AEl'-CHiio filed a reply on January 16, 20(19. AR'-Oldo first notes that because the memorandum contra was filed by OCC only and Sierra did not respond to the motion, it is not clear whether Sierra is also willing to withdraw the portions of the brief listed in the memorandtnn contra. Al?P-Qhio also argues that the remaining portion of this particular argument in QCEA.'s brief should be stricken with the renioval of the footnotes. With this removal, AEP-Ohio then argues that there is no longer any support in the brief for such arguiua.tts. By letter docketed January 22,200, Sierra confirmed that it joins CCC in OCC's withdrawal of the Iimited portiow of the OCEA brief as stated by CJCC in its January 14,2009, reply.

The Commission gran.ts, in part, and denies, in part, AEP-C}hia"s motion to strike OCEA's brief. The Conamission agrees with AEP-Mo and OCC that the use of Mr; Effron's testimony filed in the Firstlinergy Distribution Case in this proceedfng was iriappropriate and, therefore, we accept OCC's and Sierra's withdrawal of that portion of their brief. As for the remaining portion of OCEA's brief that AEP-{)hio has requested to be stricken, we agree with CCC that the language that disru.sses the calculation of deferred fuel expenses on a net-of-tax basis could be construed to be legal argranent on brief, wfiich rationalized why the issue should be decided in OC.EA's favor. Moreover, we can surmise that if OCEA had recognized its error in the drafting stage of the brief, that OCEA would have drafted similar legal argcunents without referencing Mr. Efftori s testimony. Accord'angly, we will only strike the portions of OCEA's brief that t7CC and Sierra have agreed to withdraw.

2. Motion for AEP-Ohio to Cease and Desist

On February 25,2009, Integrys filed a motion with the Commission requesting that the Commission direct Af;f'-Uhio to cease and desist the Companies' refusal to process 5S0 retail customer applications to enroil in the Interruptible Load for Reliability (ILR.) Program of PJM Interconn.ection, LLC (PJIvt). Integrys also filed a request for an expedited ruling; however, Integrys represented that counsel for AEP-Ohio objected to the exped'ztcd ruling request. Integrys is a registered curtailme.nt service provider with P]M and as such receives notices from PJM and coordinates with retail customers to cttrtail load. Integrys argues that retail customer pax'ticipation in I.'JM demand resporuse progi.am,> wa5 raised in the Contpanies` ESP application and has not yet been decided by ttie Cbmmission. For this reason, 3ntegrys contends that AEP-Ohio lacks the authority to refuse to process the ILR applications and the denial of the application vioIates the Cornpanies' tariffs. Two other curtailment service providers in the AEP-OUio service

39 -9- U8-917-EL-SS0 and Q8-928-EL-5SO territory, Constellation and KQREnergy, Ltd., filed memoranda in support of Integrys' motion.2

On March 2, 2009, A.EP-Ohio filed a memorandam contra the motion to cease and desist. AEP-Ohio affirms the argixments nrade in this proceeding to prohibit retail customers from participating in PJM's demand response programs. Further, ?.EP-C)hio argues, among otlier things, that despite the claims of Integrys andConstellation, AIiP- Ohio is providing, in a timely m-mner, the load data required for customer enrollment in the PJM ILR program, infomis the customer that AEP-Ohio is not consenting to the customer's participation iu1 the program, and discloses that the matter is currentty pending before the Coinrnission.

On March 9, 2009, tntegiys and Coneteliation filed a withdrawal of the motion to direct AEP-Ohio to cease and desist. The inovants state that despite AF..P-Uhi.o's assertions that the applicants were not eligible to participate in PjM's demand response programs, P7M rejected AEP-Ohia's opposition to the ILR applications and processed the ILR applications. Integrys attd. Constellation further state that, except for two pending applications, all their castomers in the AEP-Ohio service terrmtory have been certified for participation in the PJM prograsns.

As the parties ackn.owledge, this matter was presented for the Comzaission's consideration as part of the FSF application. The Commission, therefore, spceifically addresses and discusses the issues raised concerning SSO retail customer Paittcipation in PJ'M demand respoiise progra.ms at Section VLC of this opinion atid order. Accordingly, we grant Integrys' and Constellation's reqi.rest to rvithdraw their motion to cease and desist.

it. DISCUSSION .

A, Aovlicable Lacv Chapter 4928 of the Revised Code provides an integrated system of regutation in which specific provisions were designed to advance state policies of ensuring access to adequate, reliable, and reasonably priced electric service in the context of significant economic and environmental challenges. In reviewing ABP-C3hio's application, the Cocn*n.ission is cogni't.an.t of the challenges facing Ohioarns and the electric industry and will be guided by the policies of the state as established by the General Assearterly in Section 4928.02, Revised Code, which was amended by Senate Bill 221(S8 221)-

Section 4928.02, Revised Code, states that it is the policy of the state, inter alia, to:

r KOREnergy, Ltd., has not filed to intervene in t]+is procc edin& and, therefore, its memoranda in support avilE not be corisidered.

40 -1a 0£3-917-E1,SSO and 08-418-EL-,SSO

t1) Ensure the availability to consumers of adequate, reliable, safe, efficient, nondiscriminatory, and reasonably priced retail electric service.

(2) F.nsure the availability of unbundled and comparable retail electric service, (3) Ensure diversity of electric supplies and suppliers.

(4) l:stcourage innovation and enarket aceess for cost effective supply- and demaztd-side retail electric s(rvice including, but not limited to, demand-side management (I)SM), tirne° differentiated pricing, and implementation of advanced metering infrastructure (AMf}. (5) Encourage cost-effective and efficient aecess to inforntatior+ regarding the operation of the transmission and distribution systems in order to promote both effective cu.stomer choice and the development of performance standards and targets for service quaiity.

(6) Ensure effective retail competition by avoiding anticompetitive subsidies. (7) En.sure retail consunters protection against unreasonable sales practices, market deficiencies, and market power.

(8) Provide a means of giving incentivea to technologies that can adapt to potential environmental mandates.

(9) Encourage implementation of distributed generation across customer classes by reviewing arid updating rules governing issues such as intercorutect3on, standby charges, and' net metering. (10) Protect at-risk populations ineluding, but not linuted to, syhen considering the implementation of any new advamed energy or renewable energy resource. which now provides In addition, SB 221 amended Sec,'tion 492$•14, Revised eode, that an January 1, 2009, electric utilities must provide consurners with an S5t], eorLqisting of eitlier a market rate offer (MRO) or an ESP. The SSJ is to sexve as the electric ufiility's default SSO. 'I7.le law provides that electric utilities may apply simultaneously for both an

41 0$-917-EL-SSC3 and 08-918-EL-9SC) ^l-

MR0 and an rSP; IZowever, at a rninunum, the first S'50 application must include an application for an ESP. Section 4928.142, Revised Code, specifically provides that an SSO shall exclude any previously authorized allowances for transition eosts, with such exclusion being effeetive on and after the date that the allowance is scheduled to end under the electric utility's rate plan. In the event an SSo is not authorized by January 1, 2009, 5ixtkon 4928.141, Revised Code, provides that the emient rate pian of an electric utility shall continue until an S90 is authorized under either Bection 4928•142 or 4928.143, Revised Code.

AEP-Uhia s application in this proceeding proposes an ESP, pursuant to Section 4928.143, Revised Code. Paragraph (B) of Sect-ian 4928.141, Revised Code, requ,ires the Commission to hold a hearing on an application filed under Section 4928.143, Revised Code, to send notice of the hearing to the electric utility, and to publish notice in a newspaper of general circulation in each county in the electric utility's certifred ttmitory.

Section 4928.143, Revised Code, sets out the requirements for an ESP. Under paragraph (B) of Section 4928.143, Revised Code, an &5P must include provisions reiatuig to the supply and pricing of generation service. The plan, according to paragraph (B)(2) of Section 4928.143, Revised Code, may also provide for the automatic recovery of certaln costs, a reasonable allowance for certain construction work in progress (C"I+ViI'), an unavoidable surcharge for the cost of certain new generation facilities, conditions or charges relating to customer shopping, automatic increases or decreases, provisions to allow securitization of any phase-in of the SSC) price, provisions relating to transmisssion- related costs, provisions related to distribution service, and provisions regarding economic development.

The statnte provides that the Commission is required to approve, or moeiffy and the ESI', if the ESP, including its pricing and all other terma and conditions, approve including deferrals and future recovery of deferxals, is mare favorable in the aggregate as corapared to the expected results that would otherwise apply un.der Secdon 4928.142, Revised Code. In addition, the Conurdssion must reject an PSP that contains a surcharge for which for CWIP or for new generation facilities if the benefits derived for any purpose the surcharge is established are not reserved or u7ade available to those that bear the surcharge. The Comnrission may, ufrder Section 4928.144, Revised Code, order any just and reasonable phase-in of any rate or price established under Section 4928.141, 4928.142, or 1926.143, Revised Code, including carrying charges. If the Comrnission does provide for assets by adu^ orczui$^the a phase-in, it nrust also provide for the creation of regulato asa deferral of iricurred costs equal to the amount not collected, plus n'y g g amount, and shall authorize the deferral's collection through an unavoidable surcharge.

42 Q8-917-EL-9SC) and 08-918-EL.-S,SO -12

By finding and order issued September 17, 2008, in Case No. 08-777:SL-C]RU (W Rules Case), the Corn.mission adopted new rules concerning SBO, corporate separation, and reasonable arrangements for electric utilities pursuant to Sections 4928•06, 4928.14, 4928:17, and 4905.31, Revised Code. The rules adopted in the 65O Rules Case were subsequently amended by the eniry ott rehearing issued Pebruary 11, 2009.

B. State 1'olicy `;eection 4928,0 2 Revl.sed Code

AE11-0hio submits that, contrary to the views of the intervenoxs, Section 4928.02, does not impose additional requirements on an ESP and the hSP sliould Revised Code, not be modifiecl or rejected because it does not satisf,y all of the policies of the state. According to the Comparties, "[tJhe public interest is served if the;ESP is mose favorable (Cos. Br. at 15). in the aggregate than the expected results of an MRO"

OI3A asserts that the Commission "must view the 'more favorable in the lens of the overriding 'public 'utterest; " and that the aggregate' standard through the public iztterest catmot be saved if the result is not reasonable (OHA Br. at 10). niust be more favorable in the aggregate and OPAE/ APAC seems to state that the Ml' comply with the state policy, but also t•ecoozes that state policies are to be used to guide Br. at 3). OEG agrees that the the Cormnission in its approval of an ESP (OPAE/APAC (OEG Br. at 1). policy objectives are required to be met prior to the approval of an ESP Group submits that costs must be properly allocated to ensure that the The Comatercial policies of the state are iitet, to improve price signals, and to ettsure effective retail competition (Convmeraal Gmup Br• at 5).

In its reply brief, AEP-Ohio maintains that its proposed F.SP is consistent with the (N), ltevised Code, and is policy of the state as delineated in Sections 4928.02(A) through (Ccas. Reply Br. a 7). According to the "worthy of approval, without modification" the ESP advances the general policy objectives of the policy of the atate (Id. at Campardes, 6-4 Furtherinore, the Companies argue that the concerns raised by some intecvenors ould have regarding the impact of AEP-Ohio's ESP on the difficult economie conditions w the Corsunission ignore the statutory sfiandat'd for approving an. ESP and, instead, establish rates based on the current economic conditions (Cos. Reply Br. at 7). Whi1e the (e.g., fuel Companies believe that aspects of the proposed ESP address these concerns deferrals), they argue that their SSO must be established in accordance with applicable ESP statutory provisiom (ld.). in our oplydon and order issued in the As explained above, and previously PirstEziergy ESP proceeding,3 the Cornmission believes ihat the state policy codified by Revised Code, sets forth importatlt objectives, the General Assembly in Chapter 4928,

Cornpmty, and the T'oteda Edfeon Cmfrpany, 8 In re Ohio E'disai Cnrnynnf The Clevatand Eteetric it?.umfnating ecember 19, 2DO8) (.FustEnergy MI' Cese). Case No. O£t-935-EL-SSC7, Opinion and Order nt'12 (D

43 13- 08-917-hL-S6C) and 08-918-EtrSSO which the Commission must keep in mind wl3en considering all Ca.^es filed pursuant to that chapter of the code. As noted in the FirstEnergy Es1' caSe, in deterzt3ining whether titie E5P meets the requirements of Section 4928.143, Revised Code, we take into consideration the policy pravisiotts of Section 4928.02, Revised Code, and we use these policies as a guide in our implementation of Section 4928.143, Revised Code. Accordingly, we agree with AEP-C3hio and will use these policies as a guide in our case, just as we did in the FirstEnergy ESP Case (Cos. TLeply'Br. at clecision-makhtg in this as well as 6)A The Conunission has reviewed the ESP proposal presented by AEP-Ohi4, the issues raised by the various intervenors, and xve believe that, with the m.odifications appropriately reached a conclusion advanclttg the putalic's set forth herc:in, we have interest.

C. _Ap_plieation Ctverview In their application, the Companies are recluesting authority to establish en SSO zn the fosm of an ESP pursuant to the provisions of Sections 4928.141 and 4928.143, Revised Code. 'i he proposed ESP is to be effective for a tliree-year periW comrnencing january 1, 2009. Accord'utg to the Companies, pursuant to the proposed FsSP, the overall, estimated increases in total customer rates, including generation, traztigmission, and distribution, would be an average of 13.41 percent for CSP and 73 percent for L?P in 2009, and 15 percent in 2010 and 2011 for both CSP and OF (Cos. Ex. 1, Exhibit DMR-1). The Companies also propose a 15 percent cap per year an the total allowable increases for each customer rate schedule should the actual costs be higher than expected, excluding trapsmission costs and costs associated witli new govcrnntent mandates (Cos. App. at 6).

III: GFNERATION A. Fuel Adu tMentCfause FAC

The Cotnpanies contend that Section 4928.143(B)(2)(a), Revised Code, authorizes the implementation of a FAC mecharsism to recover prudently incurred costs associated with fuel, including consumabl.es related to environniental compliance, purchased power costs, emission allowances, and costs associated with carbon-based taxes and other carbon-related regulations (Cos. Ex. 7 at 4-7).

the'F.SP must be used as a Euide to imptement 4 Some intervenors recog,nize that the state poticy objective provision (IEU Br, at 19; OPAE/Ai'AC Br. at 3).

44 -14- Q8-917-EIrS.SC) and 08-918-EI,6SO

1. FAC Costs

The Companies proposed to include in the FAC mechanism types of costs recovered through the electric fuel component (EFC) previously used in C)tuo5 (Cos. Ex. 7 at 34). In addition to those types of costs, the Companies stated that Section chanis 4928,143(I3)(2)(a), Revised Code, provides for a broader cost-based adjustment We e r and that authorizes the inclusion of all prudently incurred fuel, p^chased po envixonmetrtai components (Id. at 4). Comganies' witness Nelson itemized and described the accounts that the Companies proposed to include in their PAC mechanism (Id, at 5-7),

Staff, CCC, and Sierra support the FAC mechanism that wil3 be updated and sA Br. at 47-48, 67i687 OCC Ex.11 at 4-5, 31-40). reconciled quarterly (Staff. Ex. 8 at 3-4; C)Cl' Specifically, Staff witness Strom testified that the costs proposed to be recovered through the PAC mechanism aze appropriate and recovery of those costs through a FAC mechanism is logical (Staff Fx. 8 at 3). {?CC and 5ierra also agree that Section 4928:143(B)(2)(a), Revised Code, authorizes the enactment of a PAC mechanism to automatically recover certain prudently incurred costs (OCEA Br. at 47),.and UCC does not seem to oppose the list of categories of accounts proposed to be included in the PAC by Conipanies witness Nelson (OC:C Ex, 1.1 at 18-20). Additionally, Staff recommended that annuai reviews of the prudency and appropriateness of the accounting of FAC costs be conducted (Staff Ex. 8 at 3-I), and C1CC recommended that an interest charge be paid to customers on any over-recovered fuel costs in a quarterly period until the subsequent reconciliation occurs, similar to the carrying charge for any under-recovery that she believed the Companies were proposing to collect6 (OCC Ex. 11 at 4). Kroger and IEU, however, seem to state that a PAC mechanism cannot be established until a cost-of-service or earnings test is completed (KToger Br. at 9-10; IEU Br. at 12-15). TfiCT also questioned the appropriate term of the proposed PAC mechanism (IEU Br. at 13; Tr. Vol. I7( at 143- 146).

Thx: Commiasion believes that the estabILshment of a FAC mechanism as part of an EESI' is authorized pursuant to Section 4928.143(B)(2)(a), Reviged Code, to recover prudently incurred costs associated with fue1, including consumables related to environmental compliance, purchased power costs, emission alIowances, and costs associated with carbon-based taxes and other carbon-related regulations. Given that the FAC mechanism is author.ized pursuant to the F•SP provision of 5B 221, we wfll limit our authorization., at this tinte, to the term of the'naI',

See Sect3ons 4905.01(G), 4905.66 through 4905.69, and 4909.159, Revised Code (repealed 7anuary 1, 200'I); Chapter 4901:211, Ohio Administrative Code (p.A.C.) (rescinded November 2,7, 2003). 6 In A^H:P's Brief, ths Companies clarified that they darl not p!opose to eoIlect a caazrying charge on any FAC under-recovesy in one quarterly period until a reconciliation in the subsequent period occnrred. The only carrying charge that they proposed was on the FAC deferrals that would not be collected untif 2012-2018 (Cos. Br. at 27).

45 -15- 48-917-Ei. SSO and 08-918-EtfSSd

With regard to interest charges assessed on any over- or under-xecoveries for xAC costs within the quarterly period untit the subsequent reconciliation occurs, we agree with pCC witness Medine that symmetry should exist if interest charges were assessed can any under-recoveries (Tr. Vai, VI at 210). However, we do not conclude that any intezest charges on either over- or under-recoveries are necessary as a deterrent to the creation of over- or under-recoveries as CCC witness Medine suggests (Id, at 220-211). As proposed by the Companies and supported by others, the FAC mechanism includes a quarterly for the reconcitiation to actual FAC costs incurred, which will establish the new charge subsequent quarter. These quarterly acljustments combined with the annual review proposed by Staff to review the appropriateness of the accounting of the FAC costs and the prudency of decisions made are sufficient to control the over- or under-recoveries that may ocvur within a particular quarter. Therefore, we find that the FAC mechanism with quarterly adjustmerits as proposed by the Companies, as well as an annual prudency and accounting review reconunended by Staff, is reasonable and should be approved and implemented as set foxth herein.

(a) Market Pumhases

As part of the FAC costs, the Companies proposed to purchase incremental power on a "slice of the system basis" equal to 5 percent of each company's load in 2009, 10 percent in 2010, and 75 percent in 2011 (Cos. Fx. 2-A at 21). The Companies argue that while these purchases will be included in the FAC mechanism, as the appropriate recovery nrechanism for these costs, the purchases are per}{ tted as a d'scrchonary component of an ESP filing aut.hQrized by SecGion ^#928.145^2), Revised Code, which states: "The plan may provide for or include, wi,thout linutation, any of the following." AEP-{]2uo states that the (emphasis added) (Cas. Sr. at 37). To support its proposal, purchases reflect the continued transition to market rates and represent an appropriate recognition of the Companies' incorporation of the loads of Ormet Primary Aluminum Company (Orznet) and the certified territory formerly served by Monongaheta Power Coinpany (MonPower) (Cos. Ex. 2-A at 21-22). The Companies further assert that, durtng the ESP, they should be able to continue to recover a market-based generation price for serving these loads, as was previously authorized by the Comn.;ission during the RSP period.

Staff supported market purchases suf€icient to meet the additional load responsibilities that the Companies assumed for the addition of the former MonPower cu.stomers and Ormet to the Companies' system, which equals approximately 7.5 percent of ilte Companies' total loads (Staff Ex. 10 at 5). However, based on the size of the additional load assumed by the Companies, Staff only recomtnended that the incremental power purchases equal, on average, 5 peTcent of each company's load in 2009, 7.5 percent in 2010, and 10 percent in 2011(Id.).

46 -16- 08-9I7-BL-5SC) and 0$-918-EL-4S0

Tiie Companies responded to Staff's reductian in the amount of market purchases by adding that the. Companies also intended to utilize their proposed levels of inarket purchases to encou.rage econantic development (Cos. Ex. 2-H at 7). power Various parties oppose the inclusion of incremental "slice of the system" purchases in AEP-Ohio's E5i'. OEG witness Kollen testified that the Commission should reject this provisian of AE['-Ohio's ESP because the Companies have not demonstrated a need for the excess generation pu.rcihased on the market to meet its existing load, and such "purchases are n`ot prLzdent because they witl uneconomically displace lower cost owned generation and cost-based purchased power that is available to meet Company their Iaads" (OEG Ex. 3 at 3,940). IBLI witness Sowser agrees that this portion of the OP should be rejected (IEU Ex. 10 at 9). Kroges witness Higgins also concurs, stating: "The only apparcnt purpose of these slice-of-systein purchases is to serve as a device for increasing prices charged to customers" (Kroger Ex. 1 at 9). OCEA concurs with the testimony offered by these intervenor witnesses (f3CFA Br. at 5.3-55). lntervenors also question this provision in light of the AEP Int.erconnoction Agreement (OEG Bx. 3 at 1(}- 14; OCEA Br. at 54-55). Given that AEP-Ohio has explicitly stated that the purchased power is not a prerequisite for adequately serving the additional load requirements assumed by AfiT°- Ohio when adding Ormet and the NfonPower customers to its systear (Cos. Tix. 2 I3 at 7), the Commission finds that Staff e rationale for the support of the proposal, as well as the recommendation for a reduction in the amount of purchased powex proposed to equal the additional load, fails. We strugg.le, along with the other parties, to find a rational basis to approve such a proposal in the absence of need. The Conunission notes that while we appxeciate A8I'-Ohio's willingness and cooperation with regard to the es have bee^ ab e and Monporver customers into its system, we believe that the Compa to prepare and plan for the additions to its system under the current regulatory scheme and have been conr.pensated durhig the transitional period. As for the reliance on the market purchases to promote economic development, the Conunission believes that this goal can be more appropriately adWeved throtzgh other mean.s as outlined in this opinion and order, the Conimission s recently adopted rules, and SB 221. Accordingly, we find that AEP-Ohio's FSP shall be rnodified to exclude this provision.

(b) Off ^ystemSalesi!C^i

1'soger and OEG contend that FAC costs must be offset by a credit for OSpi margins, stating that othex }urisdictions govenjing other operatin.g companies of A8P Corporation require such an OS5 offset to revenue requirements (Kroger Br- at 11-12; Kroger Ex. I at 3, 9, 10; OEG Br, at 10; OEG Ex. 3 at 14-15, 16-17). Kroger argues that i.t is incongruent to allow a rate increase based on certain costs without examining AE['-Ohio's

47 -17- 08-917-EL-5SO and o8-918-EL-950 net costs to determine that AEP^Ohio s costs have actually increased (1Croger Br. at 11-12). were $146.7 mi.ltlon OEG notes that the Companies` profits for 2007 from off-system sales for OP and $124.1 million for CSP (OBG Ex. 3 at 14). OEG reasons that because the cost of the power pJ.airts used tn generate off-system sales are included in rates, al3 revenue fram the power plants should be a rate credit (OEG Br. 10). OCEA raises similar arguments to those of OEG and Kroger in its brief (ECEA Tlr• at 57-59). More specifically, OCEA argues that the Cornpanies' proposal to eliminate off-system szles expenses from Ohio catepayers is not equivalent to providing customets the benefit of off-system sales margins, OCEA notes tltat, ut other cases, the Commission lias rrequired electric uOties to share the benefits of off-systeni sales revenue with jurisdictional customers (OCEA Br. at 58-59).

Staff did not take a posifion in regard to the intervenors' arguments to offset FAC costs by the (JSS margin. Staff, however, concluded that the costs sought to be recovered through the FAC are appropriate (Staff Ex.10 at 4; Staff Ex. 8 at 3; Staff Br..at 2).

The Companies argue that an QSS offset to FAC charges is not required by Section 4928.143(B)(2)(a), Revised Cotie, or any other provision in SB 221 (Cos. Ex. 2-E at 8-9; Cos. Reply Br. at 12). The Companies also state that the regulatory or. statutory regimes in other states have no bcaring on Ohio or Ohio's statutory requixements (Id.). As to the OEG ar+d OCEA, the Companies argue that the intervenars other arguments raised by arguments ignore the fact that the Companies' ESP reduces the FAC and environmenmi carr3,ing cost expenses for AE.P-Ohio customers t'ased on the calculation of the pool capacity payments in the FAC and use of the pool allocation factor (Cos. Ex. 7, Exbibits PJN-2, P)N-2, PJN-b and PJN-8).

Upon a review of the record in this case, the Commission is not pexsuaded by the intervenors' arguments. We do not belisve tha.t the testimony presented offered adequate justification for modifying the Companies' proposed ESP to offset OSS margins from the FAC costs. Section 4929.143($)(2)(a), Revised Code, specifically provides^ ^as^ed autamatic recovery, without limitation, of prudently incurred costs for fuel, p power, capacity cost and power acquired from an affiliate. . As recognized by the e Companies, the pertinent statutory provisions do not =n^that t^e>e be ang^f ^to ^e allowable fuel costs for any OSS margins. AdditioY Coxnpanies' ESP applicatlon, and thus, we are not persuaded by the arguments of Kroger regardtng how other jurisdictions handle OSS margins. Moreover, cons'istent with our discussion in 5ection VIt of our opinion and order, we do r.otbelieve that OSS should be a component of ehe Companies ESP, or factored into our decision in this proceeding. Tntervenors cannot have it both ways: they cannot request that 055 margins be ^a'edtted against the fuel costs (i.e., offset the expenses); and, at the same time, ask us to count the OSS margins as earnings for purposes of the significantly excessive earnings test (SEET) calculation

48 -18- 0$-917-EL.-SSO andll8-918-ELSSO

(c} Altr^nate Ener Portfolio Standards ir^t'lu i Renewable ner Credt ro ^

Sectioz-t 4928.64, Revised Code, establishes alternative energy portfolio standards which consist of requireznents for both renewable energy and advanced energy resources. Section 4928.64(B)(2), Revised Code, introduces specific arnnual benchmaxks for rene•rrable energy resources and solar energy resources beginning in 2009.

'1'luu Companies' FSP application included, as a part of the FAC costs, rec^erY ^ for renewable e.nergy purchases and renewable energy credits (RF^} F power reflected in Account 555 and RECs reflected in Account 557 (Cos. Ex l^d f 7,2009. ^a^ Tiie Companies stated that they plan to purchase almost all of the R.ECs requ 1'he Companies further state that they will enter iuito renewable energy p agreenents (RP1'As) to meet compliance requirements for the remainder of the ESP period, for wlvch they have already conducted a tequest for proposal (Cos. F.^c. 9 at 10-11}. 'I'he Companies also recognized that reeovery of such costs to comply with 5es'tion 4923.64(j3), Revised Code, is, as stated in the statute,avoidable. Therefore, the Companies explained that they intend to include alI of the renewable energy costa within the FAC mechanism and not as part of any FAC deferral. '['he Companies, however, recognized that their request for proposal and procurement practices for renewable energy wiIl be subject to a prudency review and the renewable purchases subject to a financial audit (Cos. Br. at 96-98). sa concern with the Coitrpanies' plan to include Staff and OPAE/Al'AC cxpre renewable energy purchases and REC.s as a coinponent of the FAC mechanism (Staff Ex. 4 at 6-7; Staff Br. at 4-5; OPAPs/ APAC Br. at 11).

The Comnvssion notes that the renewable energy purchases and RECs requirements are based on Section 4928.64(E), Revised Code, and any recovery of such costs is, as the statute provides, bypassable. With the Companies recognition that such costs must be accounted for separately from fuel costs, and is not to be deferred, the Commission finds that Staff s and UPAE/.i1PAC's issue is adequately addressed. Accordingly, with that clarificati.on, the C°rrunission finds that this aspect of the Companies' ESp application is reasanable and should be adopted.

2. pAC Baseline

The Companies proposed establislung a baseline FAC rate by identifying the FAC components of the current SSO. The Companie.s started with the $FC rates that were of unbundled as part of the electric transltion plan (EFP) proceedings (those in effect as October 5,19W) (step #1), and then added calendar year 1999 amounts for the additional fuel, purchased power, and environmental a.ccounts that are included In the requested

49 -]9- 08-917-E'L-SSd and Q8-918-Ei, SS(?

FAC mechanisrn for this proceeding (1999 data from FERC poriu 1 and other f'rnaneia.l records were used as the base period for the additional components that were not in the frozen EFC rates) (step #2) (Cos. Bu. 7 at 8). The Companies then adjusted the 1999 firozen EFC rates (step #I) and the 1999-level rates developed for the additional components (step #2) for subsequent rate changes (step #3) to get the base FAC cocnpon:eztt that is equal to the fuel-related costs presently embedded in the Companies' most recent SSC) (i.e., the RSP) (Id.). The subseguent rate changes that occurred during the RSP period and reflected in step #3 of the Companies' calculation included annual increases of 7 percent for OP and 3 percent for C.SP, an increase in CSP's generation rate.s for 2007 by approximately 4.43 percent tbrough the Power Acquisition Rider, and a reduction in C3P's base period xAC rate by the amount of the Gavin Cap and mine investment shutdown cost recovery component 4hat was in QP's 1999 EFC rate given that the Regulatory Asset Charge (RAC) established in the E'I'P case expired (Id. at 9).

Staff argued that the actual costs should be used in determining the FAC base.line arnd, therefore, recommended using 2007 actual data, escalated by 3 percent for CSP and 7 OF, as a reasonable proxy for 2008 (Staff fix. 10 at 3-4). Staff explained that percent for utilizing actual 2007 costs and updating them to 2009 is appropriate given that the m resulting amounts should be the costs that the Companies roduces a resultgthat fuel-related costs.(Id.). Additionally, Staff notes that thi.s P Posal p close to the result produced by utilizing the Companies' methodolog3' (Staff Br. at is very

the use of 2008 actual fuel costs to establish the FAC baseline, QCC recommeiided (OCC Tsc.10 at 21- will be reeonciled to actual costs in the future FAC proceeding which esta too itness testified that her concern is that if the FA^ob^ s^ I be established too 14). OCC's w ( low, the base portion of the generation rates the non-FACopposed thepo "Cornpanies') use of 7999 high ((7CC Px.10 at 13). In its Brief, OPAE/APAC rates as the baseline atd seems to snpport C}CC's recanune.ndation to use 2008 fuel costs Companies' responded by explaining that they did not (©PAE/APAC Br. at 11-12). The use 1999 rates as the baseline, rather the 1999 level was just the starting point to Cos. Reply ft at 21). The Companies also stated that a variable calculating the baseline ( baseline was not appropriate as it would result in a variable tton-FAC generation rate as well since the non-FAC component of the current generation SSO was detertnined to be the residual after subtracting out the FAC component (Id.). As noted by OCC's vitne5s, the 2008 actual fuel costs were not lcnown at the time of the hearing (()CC Ex. 10 at 24). Thus, the Companies and Staff proposed methodologies to obtain a proxy for 2006 fuel costs. While both had a different startnt$ point to the calculation of the 2008 proxy, we agree that in the absence of known actual is appropriate to establish a baseline. Therefore, based on the evidence costs, a proxy presented, we agree with 5taff's resulting value as the appropriate FAC baseline.

50 08-917-LL-SSO and 08-918-15.,-85Q

3. PAC?rrals

The Companies proposed to mitigate the rate impact on custolners of any FAC increases by phasing in their new FSP rates by defenting a portion af the annual incremental FAC costs during the F5P (Cos. App. at 4-5; Cos. Ex. 3 at 11; Cos. Ex.1 at 13- 15). The amount of the increznentai FAC expense that would be recovered from customers would be liraited so that total bill increases would not be more than 15 percent f or each of the ttuee years of the E9I' (ld.). The 15 percent target for FEiC does not iniclude cost increases associated with the transmission cost recovery rider (TM) or "'itt' any new goverLuiient mandates (the Companies' could apply to the Commission for recovery of cost.y incurred in conjlmction with compliance of new goveriunent mandates, including any Commission rules imposed a#ter the filing of the AEP-Chio application (Cos. App, at 6)). The Companies prciposed to periodically reconcile the FAC to actual costs, subject to the maximum phase-in rates (Cos. Ex. I at 14-15)- Under the Compaiv.es' proposal, any incremental FAC expense that exceeds the znaximum rate levels will be deferred. The Companies project the deferrals under the proposed BSP to be $146 million by Decetnlrer 31, 2011 for CSP and $554 miltion by December 31, 2011 for OP (Cos. Ex, 6, 8xhikrit LVA- 1). If the projected FAC expense in a given period is less than the maximam phase-in FfS.C rates, the Cornpareies proposed to give the Commission the option of charging the customer the actual FAC expezuse amount or increasing the FAC rates up to the maximum levels in order to reduce any existing deferred PAC expestse balance (Id.). Any deferred PAC expense remaining at the end of 2011 would be recovered, with a canying cost at the Weighted Average Cost of Capitat (WACC), as an unavoidable surcharge from 2(T12 to 2018 (id.). As noted previously, Staff, OCC, and Sierra support ihe FAC mechanism thatwiB be updated and reconciled cluarterly (Staff. Ex. 8 at 34; OCC Ex. at 11 at 4,5, 31,40; oCEA Br. at 47-48, 67-68). Staff, f3CC, and Sierra, however, oppose the creation of any Iong-term deferrals for fuel costs (Staff Ex. 10 at 5; OCFA Br. at 62). Sirnilarly, the Commercial recommended that "customers pay the fuI1 cost of fuel during the E5I'" Group (Comunercial Group Ex. I at 9). Constellation argued that the deferral proposal should be rejected because it masks the true cost of the £+SP generatio rr deferrals have effect nies artificially suppressing conservation, the carrying costs proposed by the Compa would be set at the Com.panies cost of capital, which would include equity, and cteferrecl ar-nounts (instead, customers customers do not want to pay interest on any would ratller pay when the costs are incurred so as to not pay the interest) (Constellation Br. at 8-9). Tbe Scbools also questioned the need for the phase-in of rates, as well as the avoiciability of the surclrarge that would be created to collect the deferred fuel costs, vdth carrying charges, from 2012 to 2018 (Schools Br. at 3).

51 08-917-EL-SS0 and 08-918-E1,-SSt?

If the Conunission, however, authorizes such deferrals to levelize rates during the ESp period, St•aff, OCC, and Sierra believe that the deferrals shouTd be short-term deferrals that do not extend beyond the ESP period (Staff Ex. 10 at 5; OCEA Bn at 62). TEU also supports the use of a phase-in to stabilize rates, but does not believe that Section 4928.144, Revised Code, allows the deferrals to extend beyond the TsSP term (IEU Br. at 27-29). of WACC, staling that such an Furthermore, C)CC opposed the Companies' nse approach is not reasonable and results in excessive payments by customers (t7CC Fx.10 at 34). Through testimony, oCC asserts that the carrying charges on deferrals should be based on the current long-term coat of debt ({lCC Ex.14 at 34-35; Tr. Vol. VI at 157158). However, in its joint brief, OCC seems to have modified its position and is now arguing that the carrying charges should be calculated to reflect the short-term actual cost of debt, excluding equity (C)CEA Br. at 62). In reliance on QCC's testimony, Constellation submi.ts that it is appropriate to use the long-term cost of debt (Constellation fir, at 8). The Commercial Group also opposed the use of WACC; instead, Commercial Gxoup witness '-in deferrals entirely Corman recomntended that the Companies finance the FAC phase. with short teran debt given that the accruals are a temporary investment and not long- term capital (Conumercial Group Ex.1 at 9-11).

Additionally, the Commercial Group and OCC argued that the deferred fuel expenses should be calculated to reflect the net of applicable deferred income taxes (Commercial Group Ex.1 at 9-10; OCEA Dr. at 63)• CoznYnercial Group witness Gorman testified that if a company does not recover the fuel expense in the year that it was incurred, the company will reduce its current tax expense and record a deferred tax obligation. The deferred tax obligation would then represent a temporary recovery of the fuel expense via a reduction to the current income tax expense (Commercial Group Ex. l at 10). Conunercial Group vvitness Gorman then goes on to recognize that the income tax will ultimatety have to be paid after the incremental fuel cost is recovered from customers, but states that, while deferred, the company will partially recover its deferred fuel balance through the reduced income tax eapense (ld.). 'fo bolster their argument that deferred fuel expenses should be calculated on a net-of-tax basis, OCC and Sierra relied, in their brief, on a witness' testimony in an unrelated proceed`utg, which has been eujrsequently withdrawn as explained above. Neither OCC nor Sierra offered any record evidence to support its positior4

ACP-Ottio, on the other hand, argued that the calculation of carryi.ng charges for the deferrals should not be done on a net-of-tax basis. AEP-(7hio witatess Assante testified that l€rniting the application of the carrying cost rate to a net-of-tax balance of PAC deferrals improperly utilizes a traditional cost-of-service ratemaking approach in a generation pricing proceeding (Tr. Vol. IV at 158-160). Additionally, whfle the Companies proposed the phase-in proposal to help n-vitigate increases and believe that their proposal

52 -22- Q8-917-EL-5sO and 08-918-kLSSO is reasonable, in light of the opposition received from several parties, the Companies stated that they would accept a modification to their ESP that eluninated such deferrals (Cos. Repfy Br. at 41-42). To enswe rate or price stability for consumers, Section 4928,144, Revised Code, authorizes the Gommission to order any just and reasonable phase-in of any electric utility rate or price established pursuant to 4928.143, Revised Code, with carrying charges, through the creation of regulatory assets. Section 4928.144, Revised Code, also mandstes that any deferrals associated with the phase-in authorized by the Coinrnission sshall be collected through an unavo3dable surcharge. Section 4928.144, Revised Code, does s.tot, however, limit the time period of the phase-in or the recovery of the deferrals created by the phast-in througli the unavoidable surcharge.

Contrary to OCC and others7 we believe that a phase-in of the increases is necessary to ensure rate or price stability and to rnitigate the impact on eustomers during this diffic:tilt economic period, even with the modifications to the PSF that we have made hereiir. To this end, the Commission appreciates the Companies' recognition that over 15 percent rate increases on customers' bi2ls would cause a severe hax`dship on customera. Nonctheless, given the current econo ac we ^^ise our auPh n^ty pursuant proposed by the Companies is toa high. . to 5ectiozl 4928.144, Revised Code, and find that the Companiea should phase-in any authorized iricrea.4es so as not to exceed, on a total bill basis, an increase of 7petcent for CSP and Spercent for OP for 2009, an increase of 6percent for CSP and 7percent for OP for 2010, and an increase of 6percent for CSP and 8percent for OP for 2011 are more appropriate levels. Based on the applicatimy as modified herein, the resulting i"creases amount to approximate overall average generation rates of 5.47 cents/kVJh and. 4.29 cents/kWh for CSP and OP, respectiveiy in 2009; 6.07 cents/kWh and 4.75 cents/kWh for CSP and OF, respectively, in 2010; and 6:31 cPnts/ktNh and 5.31 cer:ts/kWh for CS17' and CQP, respectively, in 2011. Any amount over the allowable total bill increase percentage ievels will be deferred pursnant to Section 4928.144, Revised Code, with carrying costs. If the PAC expense in a given period is less than the maxintum phase-in FAC rate established herein, the Companies shall begin amortization of the prior defex-red FAC balance a=ad increase the FAC rates up to the maximum levels allowed to reduce any existing deferred FAC expense balance, including carrying costs. As required by Section 4928.144, R.evised Code, any deferred FAC expeiue balance remaining at the end of 2011 shall be recovesed

7 See, e.g., pCC Reply Bx. at 45-467 ConsteIlatiozi Br. at 6-9. belie#' B IJutrierous letters filed in the docket bp various custolnexs cmf'rm our

53 -23- 0&-917-EL-SSC) and 08-918-EL-SSO via an unavoidable surcharge. We believe that this approach balances otu objectives of yeax with litttiting the total bill increases that customers will be charged in any one minirtmizing the deferrals and carrying charges collected from customeis.

Based on the record in this proceeding, we do not find the intervenors' azguniertts concerning the calculation of the carrying charges persuasive. Instead, for purposes of a phase-in approach in which.t3te Cornpan'tes are expected to carry the fuel expenses electxic service already provided to the customers,9 we find that the incurred for Companies have met their burden of demonstrating that the carrying cost rate calculated based on the WACC is reasonable as proposed by the Cnmpanies. As explained previously, Section 4929144, Revised Code, provides the Cornml.'tsfon with discretion regarding the creation and duration of the phase-in of a rate or price established pursuant to Sectirms 4928.141 through 4928.143, Revised Code. The Cocnnn-dssion is not convinced by arguments that limit the collection of the deferrals to the term of the ESP. Limiting the phase-nL to the term of the P.SP may not enaure rate or price stability for consutners w'stttict that three-year period and may create excessive increases, wluch may defeat the purpose for estab9iskvng a phase in. The lindtation of any deferrals to the '6SP term may alsa negate the cap established by the Conurtission herein to provide stability tO consutnere. Therefore, we find that the collection of any deferrals, with carrying costs, created by the phasrin that are remauzing at the end of the EST' term shall occur from 2012 to 201& as necessary to recover the actual fuel expenses incurred plus carrying costs.

Regarding C3CC's, 5ierra's, and the Carnmercial Group`s recamtnend^tio a ns^ af-tax tax deductibility of the debt rate be reflected in. the carrying chaz'ges basis,10 we have recentiy explained that this recomrnendation accounts for the deductibility of the debt rate, but does not acconnt for the fact that the revenaes coliected are tixable?1 If we were to adopt the net-of-tax recommendation, the Companies would not recover the fu.ll carrying charges on the authorized deferrals. We believe that this outcome would be inconsistent with the explicit directive of Section 4928.144, Revised

9 We agree with the Companies that this deas3on is consistent with our decision in the recentTCfiR and accounttng cases with regard to the calculation baeed on the long-term cost of debt See In re Cuittmbue ^^ Pomer Cor+tpany, Case No. 08.1202-EL-tTNC, and Sout7tern Porer Cornpany and Ohio ern Power C^^op^uvtee'^ ehrbeiiev tha (Decen7 her 17, 200t3) and In re CaCnrnbus Souti C n^'ith zegard to the 13©2-EL-UNC, Finding and Order (December 19, 2008). equity componenk these cases are distingssahable from the current F.57P prtoce.di:xg, wbew we uc establishing the stnndard 5ervice offer and requiring the Coaqanies ta defer ttte colteciiore of incurred generation costs associatcv3 with fuel over a tonger period. We also believe that thxs decision'' reasonable in light of our redu4tion to the Companies' pxop^ ed f^ FC^^ ^o ^^^^^wasa odiert^se effect of requirung the Companies to defer a higher pemen g proposed. 10 OCEA Br, at 63-64; Conwtercial Group Ex. I at 9-10. Tolerfo Edfson Co., Case No. 07-551-EI-AIR, et Tn m Ohio Edisun Co., The Clrts7und Electric Itiumirtuting Co.. ai., Opixlion atid Order at YO (January 21, 2009)-

54 -24- 08-917-EL-SSo and 08-918-EL-SSU

Code: "If the conzmissiori s order includes such a phase-in, the order also shall provide for the creation of regulatory assets pursuant to generally accepted accounting principles, by authorizing the deferral of incurred costs equal to the amount not collected, plus carrying charges on that amount" Therefore, we find that the carrying charges on the should be calculated on a gross-of-tax rather ttan a net-of-tax basis in order TAC deferrals to ensure that the Companies recover their actual fuel c:xpenses. Accordingly, we modify the deferral provision of the Companies' ESP to lower the overall amount that may be charged to customers in any one year. th t4. incremantal Car in C st for 2001-2,U 8 E viro nental v _arryi.n^_C Cost Rate

A coniponent of the non-FAC generation increase is the inccenental, ongoio.g carrying costs associated with envixonmentat investments made dur3ng 2001-2008. The Cocnpanies propose to include, as a part of their ESP, costs direetly r2lated to energy produced or purchased. While the Companies are not proposing to include the recovery of capital carrying costs on environmental capital investments in the FAC, the Companies. an, requesting recovery of carrying charges for the incremental amount of the ei-ivironmental investments made at their generating facilities from 2001 to 2008. The Companies' annual capital carrying costs for the inerenmental 2001-2008 envixonmental investments not currently rc:flected in rates equals $84 million for OP and $26 million for CSP. cumulat vc nviro7nmental capital expenditares for each company mulped by the carrying cost rate. Eacli company's capital expendituses in the k5P are determined by the expenditures made since the staxt of the mar'ket development period as offset by the estimate included in the Companies' xate stabitization plan (RSP) case, Case No. 04-169- EL-l3NC, and the environmental expenditures included in the Coinpanies' adjustments received in ttie RSP 4 Percent Cases;z (Cos. Ex. 7 at 15-17, Exivbits PjN-8, PjN-12). The Companies calculated the carrying cost rate based on levelized invesiment and depreciation over the 25-year iife of the environntenta}. investment. CSP and OF utilized a capital structure of 50 percent cominon equity and 50 percent debt to calculate the carrying charges, asserting that such is consistent with the capital structure as of March 31, 2008, and consistent with the expected capital structure during the 1ySP period. i ''- Short-terin debt mid the Gavin Lease were excluded from OF's capital stnacture. A^ l flhio asserts that such was the process in the RSP 4 Percent Cases. AEP-Obio also argues that, for ratemaking purposes, the Gavin I.ease is considered an operating lease as opposed to a component of rate base. Further, the Companies reason that the WACC incorporated a 10.5 percent RflS as used by the Cornmission in the pTeCeedu'g ta transfer

Pawer Conipuny, Case Nos. Q7-123z-t.'t"In'1C, 07-2192- 12 In re Cbinmbus So«flrern Puwer Company and Ohio ZL-L1NC, and 07-1278-E3 -LTIVC (RSP 4 Percent Cases).

55 -23- 08-917-EL-SSO and 08-918-EL-SSO 16-17, MonPower's certified territory to C.SP ([vlonPower Transfer Casc)ts (Cos• Ex• 7 at 19, ahibit PjN-£S, Exhibits PJN-'f0 - PJl`.4-13; Cos, Ex. 7-B at 7).

Staff testified that the Companies should be allowed to recover carrying costs as5ociated with capitalized 'uivestinenis tn comply with enviranmental requirements made between 2001-2008 that are not curren.tly reftected in rates (Staff Tvc. 6 at 2, 4-5). Staff confirmed that AFP-Ohio`s estimated revenue increases for incremental carrying costs associated with additional environmental investments in the a.mounts of $26 rt3llton for G5P and $84 miltion for OP are not eturent]y reflected in rates (Id.).

OCEA and {7EG oppose the Companies' request for recovery of environmental carrying charges on investrnents made prior to January 1, 2". flFsC contends that the rates in the RSP Case islciuded recovery for environmental capital improvements made through December 31, 2008, as reflected in the RSP 4 Percent Cases. Further, OCEA and OEG argue that SB 221 onty permits the recovery of carrying costs associated with environmental expenditures that are pfvdently incurred and that occur on or after Ex. 10 at 32; January 1, 2009, pursuant to 5ection 4928.143(13)(2)(b), Revised Code (OCEA OEG Ex. 3 at 21). Thus, OCEA reasons that approval of such expenditures necessitates an after-the-fact review, which cannot be cors&idered in this proceeding. OEG, however, is not opposed to the Companies' increases due to environmentat capital additions made after January 1, 2009, in the ESP in accardance with Section 4928.143(B)(2)(b), Revised Code (qliG Hx. 3 at 20). OEG and Kroger argue that the Companies assertion that existuig rates do not reflect environmental carrying costs ignores the Compan3es' non- environmentai investment and the effects of accvtmulated depreciation and, fherefore, according to OEG and Kroger, fails to denlonstrate any net under-recovery of generation costs in total by the Companies (OEty Ex. 3 at 21; ICroger Ex. 1 at 10-11). OCEA and APAC/OPAE agree that the Companies have failed to demonstrate that they lack the earnings to make the cnvironrnental investments (OCEA Ex. 10 at 32; APAC/pPAH Br. at 5-6). assertg that there are several reasons that the Companies' atternpt Further, (JCEA to recover environmental carrying cost during the EST' is unlawfut. DCEA contends that it is retroactive ratemakSngu and Senate Bill 3, which was the gotrexning law from 7A01 to 200, included rate caps pursuant to Section 4928.34(A)(6), Revised Code, and the RSP, applicable to 2006 through 2008, included timitations on the rate increases. Therefore, the .her, t?Cf±A Companies can not collect now for costs incurred during those periods. 1^ua+'

Tenitory in Ohio to Nte Columbus Paunr Cornpany's Certif+ctt 13 in the Matter of the Transfer ofMorumgaGsta Southern Pmuar Cmpmn'J, Case No. 05-765-EL-tA+1C. Be1i'f'sl. Co. (195'7), 76bOhio St. 25. 14 Keca Irtdtcstries, 7rac. v. Cincirnucti & Suburbm=

56 08-97.7-EL-SSO and 08-916-Eir33C3 -26- states that allowing for recovery of such environmental carry7ng cosis would also violate the Stipulation and the Commission`s order in the ETP case.15

OCEA argues that, should the Commission allow ABI'-Ohio to recover car'rying costs on enviroztrnental inveatments, the Cosnparnies carrying charges should be based on actual investments m.ade, isot actual and forecasted env"vro.nmental expenditures, and the carrying costs should be adjusted. More speci#icalty, OCEA. recommends that because the Companies failed to provide any support or explanation of the calculation of the property taxes or general and administrative components of the carrying, cost calculatian, the C:oizuiiission should nat grant recovery of these aspects of the Cornpanies request. Additioiiatly, OCEA and IECJ argue that the proposed carrying cost rates do not reflect actual financing for environmental investments, which could impact the calculation of the carrying cost rates (IEU Br. at 21-22, citing IHt3 Ex. 7 at 132133; Tr. VaI. X[ at 111-113; The carrying cost rates, according to IEU and UCEA, should be OCEA 13r. at 71-72). revised to reflect achti-tl financing, including the use of pollution control bonds that have been secured by the Companies (Id-). To support their argament, IEU and OCEA rely on Staff witness Cahaan who testified at the hearing that "if specific finaneing mechanisms can be identified that would be appropriate and applicable to the assets being financed, I see no reason why those shouldn't be specifically used"16 (IEU Br. at 21 22; t7CEA Br, at 72-73). However, Staff witness Cahaan also stated that "CA]t the time when we looked at the carrying cost calculations it seemed reasonabie, given the cost of debt and cost of equity of the company,"17 which is consistent with his prefiIed testimony that said: "I have examui.ed the carrying costs rates provided to Mr. Soliman atYd found them to be re,asonable" (Staff Ex. 20 at 7).

(jCgA also recommends that the carrying costs for deferrals of environmental costs be revised to reflect aGtuat short-term cost of debt, as opposed to WACC as proposed by the Companies, and that the calculated carry.ing charges should not be based on the original cost of the environmental investment but at cost minus depreciation. Thus, QCEA argues that the Companies are seeking a return on and a return of their investment as would be the case under traditional ratemakfng, but overstating the depreciation the carrying cost rates, 13.98 percent for OP and component. OCEA also advocates that 14.94 pen;ettt for CSP, are too high in light of the econontic environment at this tinte Finally, 0CEA wges the Comn-dssion to offset the Companies' (OCFA Br. at 73-74). request frn' carrying charges by the Section 199 provision of the Intermal Revenue Code (Section 199). 6ection 199 allows the Companies to take a tax deduction for °qualified production activities income" equal to 6 percent in 2009 and 9 percent in 2010 and

Companyfdr Appnrart Application of Cotum6us Southern Pocoer Comparrg aru! Ohio pozoer rg In t7ir Maf tcr of t&e Case N. 99-1729-ES,-EfT' artt149- of T)wir Elrctric Trnnsitiore Plans and far Receipt of Transition Rwenues, 1?30-F[.FsTP, Opinion and Order (5eptemiser 28. 2000). 1s fr, rzot, xn at 237. 77 Id,

57 08-917-$L-,_O and 08-918-EIrSSO -27- thereafter. IEU, OEG, and OCEA request that the Commission adjust the carrying costs for the Section 199 deduction as the Comnlission has found appropriate in the Conmpanies' 07-63 Case1$ andin the FiretF.nergy LP Case. OCEA argues that whi.le Section 4928143(B)(2)(a), Revised Code, allows the Companies to automatically recovet' the cost of federally mandated carbon or energy taxes, which will be passed on to ctLstomers, custoiners should be afforded the benefits of the Section 199 tax deduction (OCEA Br. at 74-75; lEU Br. at 21; lEU Ex.10 at 6; OEG Ex. 3 at 23).

7.2te Companies emphasize that their request for carry.uig costs is for the incremental carrying charges on the 2001-2008 investments that the Companies wlll incur post-January 1, 2009. AEP-Oh.to explainled that the carrying costs themselves are the costs that the Companies will incur after January 1, 2009, and, therefore, the Ccunpanies reason that the "without limitation" language in Section 4928,1.93 I3 2, Revised Cocle, su {p} zts their request (Tr. `Val. XIV at 93, 114). AEP-Ohio stres.ses tl^t Section 4928.143 B 2, Revised Code, is the basis for the carcying cost request as opposed to paxagraph (B}(2)(a) ot Section 4928.143, Revised Code, as OCEA and OEG claim and, therefore, the arguments as to retraactive ratemaking are nxisplaced (Cos. Repiy' Br. at 29,31D). Further, the Cocnpanies insist that 5ection 492$.143(S)(2)(b), Revised Code, supports their request, as the carrying charges are necessary to recover the ongoing cost of investmente in environmental facilities aztd equipment that are esvsential to keep the generation units operating. The Companies assert that the operating costs of their generation units remain ivell below the cost of securing the power on the market (i:os. Ex. 7 B at 7).

As to the claims that the carrying costs are overstated, the Companies claim that the levelized depreciation approach used by the Companfes is better for customers than traditional ratema.king given the relative newness of the environmental investments (Tr. Val. V at 55-56; Tr. Vol. VIi at 22-23). The Companies also argue that the Coenpanies' investments in environmental compliance equipment during 2001-2008 were not factored into the rates unbundled in 2000 and capped under the MT' case as atleged, The rate increase approved, as part of the RSP, and the R5P 4 Percent Cases did not, according to the Companies, provide recovery of the carrying coats to be incurred duxing the ESl' (Cos. Fx. 7, Exhibits PJN-8 - PJN-9 and PJN-12). The Companies reply that the period intervenorsl request to adjust carrying eharges for the Section 199 deduction is flawed. AEP-Ohio states that the Section 199 deduLflon is not a reduction to the statutory tax rate used in the WACC, a fact which AEP-C)hio assertshas been recognized by FERC and the Financial Accounting Standards $oard. The Compailses further note that IP,U Vol. Bowser indeed confirmed that Section 199 does not reduce the statutory tax rate (Tr. The Companies also argue, and IEU witness Bowser agreed, that the Xl at 271-273). Section 199 tax deduction is applicable to AEP Corporation as awhole and not to each operating subsidiary. The Companies note, therefore, that any deduction available to

Compmty, Case No. 07-63-HGUNC, C3pud.on and 18 Irz re Cblunibus Smitheni Power Cvmpaay mad Ohfo Puwer Order (October 3,2007) (07-63 Cnse),

58 -28- 08-917-EL-SSO and 0£I-918-B1.-SSO

tS,Ep-Ohio is reduced if one of the other AEP Corpoxatian operating affiliates is not eligible for the Section 199 deductIon (Cos. Br. 36; Tr. Vol. )Ci at 2b6-267}. Accordingly, the Companies state that P.EP-Ohio has not been able to take the fufl deduction (Tr. Vol. XIV at 115417)- Further, the Companies argue that the intervenors have niisinterpreted the Comniission s decision in the FirstEnergy ESP Case to imply that the Commifision made an adjustment to account for the Section 199 deduction. For these reasons, the Companies request that the Com.rnission reconsider adjustixag carrying charges for the potential Section 199 deduction.

Upon review of the record, we agree with Staff that AEPd)hio should be allowed to recover the incremental capital carrying costs that wiU be incurred after January 1, 2009, on past environmental investnients (2001-2008) that are not presently reflected in the Conlpanies' existing rates, as contemplated in. AEF-{?hso s I2SP Case. Further, the CommissSon finds that tis decision regarding tlte rec°verY of continuing carrying costs on environmental iaxvestrnents, based on the WACC, is consistent with our decis9on in the 07-63 Case aild the Rcai' 4 Percent Cases. Aaditioria.lty, we agree with S4riff that the leveiized carrying cost rates proposed by AEP-()hio are reasonable and, therefore, should be approved. We further find, as we concluded in the FirstEriergy ESP Case, that adequate modifications to the Compardes` ESP application have been made in this order to account for the possibility of any applicable Section 199 tax deductions.

C. Azunial Non-PAC lncrcases

The Companies proposed to increase the non-FAC portion of their generation rates by 3 percent for CSP and 7 percent for OP for each year of the ESP to provide a recovery mechanism for increasing costs retated to matters such as carrying costs associated with new envirorunental investments made during the ESP perlod, increases sn the general scipated, non-mandated generation- costs of providing generation service, and unant' related cost increases. Specifically, as part of this automatic increase, the Companies intend to recover thc carrying costs associated with anticipated environmental investments that wi1l be necessary duxing the E,iP period (2009-2011) (Cas. Br. at 27; Cos. Reply Br. at 46-49). The Companies ar,gued that the annual increases axe not cost-based and are avoidable for those customers who shop. The Companies also proposed two exceptions to the fixed, annual increases, one for generation plant closures and the other for QI''s lease associated with the scrubber at the Gavin Plant, wh'sch would require additional Commission approval during the ESP. After establishing the PAC coznponent of the current generation 580 to get a FAC baseline, the Companies determined that the rernainder of the current generation SSO ivauld be the non-FAC base component.

The intervenors oppose automatic annual increases in the non -RAC component of the generation rate, and argue that any generation increases should be cost-based (IEU Br.

59 08-917-EL-SSO and q8-918-ET.-SSO -20^ at 24; OPAE/ APAC Br. at 6; QkiG Br, at 12; C?CEA Dr. 29-31). C3TxG contends that since the Conrpanies have not provided any support for the autornatic annual increases, which could result in total rate increases over the three-year period of $87 million for CSI' and $262 million for OP, the annual increases should be disaIlowed (OEG a. 3 at 18-19); Sirnilar7y, TCroger argues that AF.z"'-{7hio did not appropriately account for costs associated with the non-PAC ccxinponent of the proposed generation rates (Kroger Sr. at 14).

Staff opposes C5P's and QP's recorainended annual, non-FAC increases of 3 and 7 percent, respectively (Staff Ex. 10 at 4). Instead, Staff stated that it believes a anore appropriate escalation of the non-FAC. generation component would be half of the proposed amottnts, therefore, recoirunending annual inereases of 1.5 percent for CSP and 3.5 percent for QP (Td.). Staff witness Cahaan rationalized the proposed reduction by stating lhat "an average of 5% for the two companies xnay have been a reasonable expectation of cost increases at the time that the ESP was contenrpiated, but not now. With the recent financial crises, we are entering a recessionary, and possibly a defYationary, per-iod and any expectations of price increases need to be revised downward" (Id.). Furthermore, while recogn{zing that the ultimate balancing of interests lies with the Conunission, Staff witness Cabaan testified that Staff's recommended reduclian in the proposed increases was a reasonable balance between the Companies' obligation and costs to serve cnstomers and the current economic conditions (Tr. V'ol. Xtl at 211). The Companies rejected Staff's rationalization for the reduction in their proposed non-FAC increases (Cos. Reply Br. at 49). FEEU also rejected StafYs rationalization for the xeduction, arguing that no automatic inereases are warranted (fF.U Br. at 24).

Stating that it is in the public interest for the Companies to continue investing in environmental equipment and to be in compliance with current and future envirorkrnental requirements, Staff witness Soliman also recommended that AFiI'-Ohio be permi.tted to recover carrying costs for anticipated environmental investments made during the E9P period (Staff Ex. 6 at 5). Staff recommended tlu.3t this recovery occur through a future proceeding upon the request of the Companies for recovery of additional carrying costs associated with actual environmental investn'tent after the investments have been made (Staff Br. at 6-7). Specifica]ly, Staff suggested that the Gommission require the Companies to file an application in 2010 for rocovery of 2009 actual envirorirnental investment cost . and annually thereafter for each succeeding year to reflect actual expenditures (Tr. Vol. XII at 132; Stafl Ex. 10 at 7). OCEA sc.ems to agree with Staff's recommendat3on (OCEA Br. at 71).

The Coinpanies further respond that Section 4928.143, Revised Code, does not require that the SSC? price be cost-based and, instead, Section 4928.143(B)(2)(e), Revised Code, authorizes electric utilities to include in their ESP provisions for automatic increases in any component of the 9St} price (Cos. Reply Br. at 48-49).

60 o8-9T7-EL-SSC) and 08-918-EL-S!3O

'I'he Commission finds Staff's approach with re$u'd to the recovery of the carrying costs for an.ticipated environmental investnients made during the k'SP to be reasonabie, artd, therefore, we direct the Companies to request, through an annaal filing, recovery of additional carrying costs after the investments have been nnade.

We also agree with Staff that the econorn.ic conditions must be balanced against the Companies provision of electric service under an ESI'. In balancing these two interests, as well as considering all components of the ESI', we believe that it is appropriate to modify this provision of the Companies' PSP and remove the indusion of any automatic non-FAC increases. As recognized by several irttervenors, the record is void of sufficient support to rationaliEe automatic, annuaI generation increases that are not cost-based, but that are significant, equaling approximately $87 nullzon for C.9P and $262 million for OP (see, i.e., OCEA Br. at 29-30, citing Tr. VoI. XIV at 208-209). We also befieve the moctification is warranted in light of the fact that we have removed one of the Cornpanies' significant costs factored into establishing the proposed automatic increases. Accordingly, we find that the F',SP should be modified to elimitiate any automatic increases in the non-1^AC portion of the Companies' generation rates.

IV. DIS'TTtCBUTION

A. Annual I?istribution Increases

To support initiatives.to improve the Companies' distribution system and service to customers, the Companies proposed the foIlowing two plans, which wiil result in annual distribution rate increases of 7 pereent for CSP and 6•5 percent for OP:

1. hnfiancecl Servira Reliability Plan fESRI']

The Companies proposed to implement a new, three-year ESRP pursuant to 4928.143(B)(2)(h), ftevised Code,19 which includes an enhanced vegetation initiative, an enhanced underground cable initiative, a distribution automation initiative, and an enhanced overhead inspection and rnitigation initiative (Cos. Ex. 11 at 3). While noting that they are providing adequate and reliable electric service, the Cotnpanies Jastify the need for the 1;SRP by stating that customers` service reliability expectations are in+u'easing, and in order to maintain and enhance reliability, the ESRP is -equired (Id, at 3, 8,10-14). consisting of the four reliability ASI'-Ohio further states that the three-year ESRP,

tW sirppark their 19 On page 72 of its brief, the Companies rely on Section 4928.154(B)(2)(h), Revised Code, for the incrementat casts of the incrementat ESRP atltvities• We are request to receive cost recovery error and that the Companies inlYnded to cite to as.su¢ting that the reference wfls a typographiral Section 4928.143(B)(2)(h), Revised Code (sea Cos. RepSy Br. at 50-51).

61 -31- 0$-917-SL-S50 and 08-418 EL-SSO distribution progranrs, is designed to moderniae and improve the Companirs' infrastructure (ld.). (a) Fnhanred veatatlozr initiative

The Coinpanies state that the purpose of this new initiative is tr, im.prove the customer's overall service experience by reducing and/or eliminatini; momentary interruptions and/or sn..stained outages caused by vegetation. The Companies proposed to accomplish this goa! by balancing its performance-based approach to reflect a greater consideration of cycle-based factors (id, at 26-28). The Companies state that under their proposed vegetation initiative, they will employ additional a'esources (approxhI3ately , greater emphasis on cycle- double the current number of tree crews in t3hto), ennploy based planning and scheduling, increase the level of vegetation management work performed so that aIl distribution rights-of-way caa be inspected and znain^ end, and utiii.7.e improved technoiogies to collect tree inventory data to opiirnize p g and scheduling by predicting problemareas before outages occur (Id. at 28-29).

(b) Eniranced ucjderpround cable irlitiative

The Companies state that the purpose of this initiative is to reduce momentary interruptions and sustained outages due to failures of aging under'gro'zud cable. The CornpanieW plan to target underground cables manufactured prior to 1992 to replace and/or restore the integrity of the cable insulation (Id. at 31).

(c) T^' bri.bution automation (DA) initiative

The Compan.ies explain that t).A is a, critical component of their proposed l,rridSMART distribution initiative that is described below. DA is an advanced technology that improves service reliability by minimiaiag, quickly identifying and rsolaftg faulted distribution line sections, and remotely restoring service interruptions (ld. at 34-35).

(d) Enhanced overhead ins ection and miti *ation iniiiative

The C.ompanies state that the purpose of this initiative is to improve the customer's overall service experience by reducing equipment-related mowentary interruptions and sustained outages. "I'1'.e : ompanies iritend to accompiish this goal through a coniprehensive overhead inspection pxocess that wilt proactively identify equipment thadfi is prone to fail (Id. at 18). ':Che Companies also state that the new program w^ go bey the current inspection program required by the electric service and safety (F^) rules, is a basic visual assessment of the general condition of the distribution facilittes, by whfch conducting a comprehensive inspection of the eyuiprnent on each structure via walking the circuit lines and physically climbing or using a bucket track to inspect (Td.. at 19). Irt conjunction with this program, AEP-Ohio proposes to focus on five targebed overhead

62 -32- tl$-917-EL-SS© and 08-918-EL-SSt3 asset initiatives, including cutout replacement, arre.ster replacement, rectoser replacement, 34.5 k.V protection, and fauit indicatar (id. at 2(1-22).

Generally, nuxnerous i.ntexvenors and Staff opposed the distributian?nitiatives and cost recovery of such initiatives tiuough this proceeding. Many parties advocated for deferral of these distribution initiatives, and the ESRP as a whole, for consideration in a future distribution base rate case (Staff Br. at 7; Staff Ex.1 at 6-7; OPAEJAPAC at 1,9; IEU Br. at 25-26; Kroger Br. at 18; 01-IA Br, at 17; OMA Br. at 6). Further, OCEA argued that the Comparues have not demonstrated that the 'ESRI' is incremental to what the Companies are required to do and spend under the current ESSS rules and current distribution, rates (OCEA Br. at 44; CK:C Ex. 13 at $-11). t/V1tile supporting several aspects of the Companies' ESRP programs, Staff lviiaiess Roberts also questioned the incremental 70-77). nature of the proposed ts,SRP programs (Staff Ex. 2 at 46,13,17,18; Tr. Vol. ULEi at

The Conunission agrees, iii part, with Staff and the inten+enors, The Conunission recognizes that Seckion 4928.143(I3}(2)(h), Revised Code, authorizes the Companies to include in its ESP provisions regarding single-issue ratemaking for di.etribtttion infrastructure and modernization incentives. However, wlule SB 221 may have allowed Companies to itulude such provisions in its ESP, the zntent could not have been to provide a'blank check' to electric utitities. In deciding whether to approve an. ESP that contains provisions for distribution in.frastructare and modexnization incentives, Section I 4928.143(B)(2)(h), Revised Code, specificaliy requires the Comnission to examine the reliabiJity of the electric utility's distribution system and ensiue that customers' and the electric utilities' expectations are aligned, and to ensure that the electric utility is emphasizing and dedicating sufficient resources to the reTiability of its distribution system, Given AEP-Ohio's proposed ESRP, the only way to examine the full distribution system, the reliability of such systetn, and custorners' expectations, as well as whether the programs proposed by AEP-Ohio are "enhanced" inifiiatives (truly incremental), is through a di.stribution rate case where aI1 components of distribution rates axe subject to xeview. Therefore, at this time, the Cot'sunission denies the Companies' reques-t to impternent, as well as recover costs associated therewith, the enhanced underground cable initiative, the distribution automation initiative; and the enhanced overhead inspection and mitigation initiative. Witli regard to these issues, we coricur wi'th OHAt "The recard in thfs case reflects the fact that the distribution prong of AEI''s electric service deserves further Comrnission scrutiny - but not in tlLe context of this accelerated ESI' proceeding" (OHA Br. at 17).

Nonetheless, the Comnmission finds that AEP-Ohio has demonstrated in the record of this proceeding that it faces increased costs for vegetation management and that a specif.ic need exists for the imp2ementation of the enhanced vegetation initiative, as pxoposed as part of the three-year ESRI', to support an incremental level of reliability ac^ivities in order to maintain and improve service levels. 'tlre Companies' current

63 48-417 CL-5SC1 and flB-918-E1rsSMM approach to its vegetation management program is mostly reactive (Staff Ex. 2 at 10). Wlule we recognize the difficulties that recent events have caused, we believe that it is important to havc a balanced approach that not onJy reacts to certain incidents and problems, but that also proactively limits or reduces the impact of weather events or incidents. In addition to reacting to problems Ihat occur, it is imperative that A8P-Olu.o implem.e,nts a cycle-based approach to maintain the overall system. To tlvs end, the Companies &ave demonstrated in the record that inc-reased spending earmarked for specific vegetation initiatives can reduce tree-caused outages, resulting in bettet'relia'bility (Cos. px. 21 at 27-31). UCC witness Cleaver also recognized a problem with the cu-rrent vegetation management program, and supported the adoption of a new, llybrid approach that incorporates a cycle-based tree-trimming program with a performance-based program ((3CC Ex. 13 at 30, 35). Staff witness Roberts further suppor°ted the move to a new, four-year cycle-based approach and reeonunen.ded that the enhanced vegetation initiative include the foIlowing: end-to-end circuit rights-of-way inspections and maintenance; mid-point circuit inspections to review vegetation clearance from conductors, equipment, and facilities; greater clearance of all overhang above three•plrase pr3rnary lines and single-phase lines; removal of danger trees located outside of rights-of- ways where property owner's peimission can be secured, and using technology to collect tree inventory ciata to optirnize planning and scheduling (Staff Ex. 2 at 13).

The Cammission is satisfied that the Comparues have demonstrafied in the record that the costs associated with the proposed vegetation initiative, irncluded as part of the proposed three-year ESRP, are incrementai to the current D3stribution lregetation Management program and the costs embedded in distribution rates (Cos. b'ac. 73. aE 26-31). SpecificaIly, the Companies proposed to employ additional resources in Ohio, place a greater emphasis on cycle-based plaruung and 5chedu}ing, and increase the level of vegetation management work performed (Fd. at 28-29), Although OCCs witness questions the incremental nature of the costs proposed to be included in the enhalueed vegetation initiative, t3C;C offered no evidence that the proposed initiative is already included in the cnirent vegetation management program, and thus, is not incremental (t3CC Lx.13 at 30-36). Rather, CCC seems to quibble with the definition of "enhanced." OCC witness Cleaver stated: "I recommend that the Commission rule that the Company's proposed Vegetation Management Programs, while an improvement over its curmit addifional tree performance based program, is not an eniamurmerzf but rather a reflection of trinuning needed as a result of their prior program" (Id. at 35 (etatiphasis added)). Furthermore, we believe that the. record clearly reflects customers' expectations as to tree- caused outages, service interruptions, and reliability of customers` service.20 We also believe that, presently, those custotner expectations are not aligned with the Companies' expectations. However, as required by Section 4928.143(B)(2)(h), Revised. Code, we believe that the Compardes' proposal for a new vegetation initiative mare closely ali,gns

20 A common theme front the customers throughout the locai public hearings was that outetges due to vebetation have been problemaHc.

64 08-917-EL-SSO and 08-918-1ri.-S50 the customers' expectations with the Companies' expectations as it relates to tree-caused outages, irnportaru:e of reliability, and the increasing frctstration sun•ounding momenkary outages with the emergence of new technol.ogy.

Accordingly, in balancing the customers' expectations and needs with the issues raised by several intervenoxs, the Commission finds that the enhanced vegetation initiative proposed by the Companies, with Staff's additional recommendations, is a reasonable program that will advance the state policy. To this end, the Commission approves the establishment of an FSRP rider as the appropriate meehanism pursuant to Section 4928.143(B)(2)(h), Revised Code, to recover such costs. The ESRP rider initially wIll include os-dy the incremental costs associated with the Gompanies proposed ^c.11 at 91, Chart 7) as set forth herein. Consiatent enhanced vegetation initiative (Cos. E. with prior decisions,21 the Conunission a4so believes that, pursuant to the sound policy goals of Section 4928.02, Revised Code, a distribution rider established pursuant to 8ection 4928.143(B)(2)(h), Revised Code, should be based upon the electric utility's prudently incurred costs. Therefore, the E9RP rider will be subject to Commission review and reconciliation on an anmual basis,

As for the recovery of any costs associated with the Companies' remaining initiatives (i.e., enhaticed underground cable initiative, distribution automation initiative, and entianced overhead 'uvspection and ntitigation initiative), the ESRP rider wiIl not include costs for any of these programs iintil sneh time as the Commission has reviewed the programs, and associated costs, in conjunction wlth the current distribution system in the context of a distribution rate case as explained above. If the Commission, in a sub.sequent proceeding, detennines that the programs regarding the rernaining initiatives should be implemented, and thns, the associabed costs should be recovered, those costs ntay, at that tiine, be included in the PSI21' rider for future recovery, subject to reconciliation as di,scussed above.

2. Grid9MART

The Companies propose, as part of their Fa"P, to initiate Phase 1 of gridSMAItT, a three-year pilot, in northeast central Ohia. GridSMART will include three main cocnponents, AMI, DA, and Home Area Network (HAN). The AMI system features inclu.de smart meters, two-way communicatians networks, and the infdz•rnation technology systeuls to support system interaction. AEP-Ohio contends that AMl rvill use iateznal commurdcations systems to convey real-tiane c:nergy usage and load irsfornaation to both the customer and the company. Acarrding to the Companies, AMI will provide the capability to rnonitor equipment and convey information about certain cnalfunctions and operating conditions. DA will provide real-time control and rnonitorlttg of seler-t

711uminating Co., Toledo Edieon Co., Case No. 08-935-GtrSSO, 21 Sn re Ohia Edisan Gn., 77 e Ckcreinn t Fleefrr•c Opinion and Order at 41 (llecember 19, 2008).

65 08-427-EI.-SSC) aztid 08-418-EI.-55C7

electrical components with the distribution system, hiduding capacitor banks, voltage regulators, reclosers, and automated line switches. HAN will be installed in the customer's home or business and wi]I provide the customer with uiforntation to allow the customer to conserve energy. I-IAN inclerdes providing residential and business custome.rs who have centraf air conditioning with a programmable cornmunicating thermostat (PCT) and a load control switch (LCS), which is installed ahead of a major electrical appTiance and wiil tu.rn the appliance on and off or cycle the appliance on and off. AEP-Ohio reasorw that centrai air conditioners are typically the largest piece of electrical equipment in the home and w'sll yield the most significant demand response benefit (Tr. Vol. III at 304). LCS will provide customers who have a direct load control or interruptible tariff the ability to receive cornmands from the meter and the option to respond and signat the appropriate action to the meter for confirination. The Companies propose a phased-in implementation of Phase 1 gridSMAR`.C to approximately 110,000 meters and 70 distribution circuits in an approximately 100 square mile area within CSI"''s eS further service territory (Cos. :Ex. 4 at 5,12-13; Tr. Vol. IlI at 9{I3-304)• '1'he Compan► propose to extend the inatallation of I)A to 20 zircuits in ar'eas beyond the gridSMART Phase 1 program. 'I'he Companies propose a phased-in approach to fiztly implement gridS[v1AF.T throughout their service area over the next 7 to 10 years, if granted appropriate regulatory treatment. The Companies estimate the net cost of gridSMAItT of $2.7 Phase 1 to be approximately $109 million (including the projected net savings million) over the three-year period (Cos. Ex. 4 at 15-16, KLS-1). The rate design for .ric1SMART includes the projected cost of the program over the life of the exluipment. The Companies ltave requested recovery during the ESP of only the costs to be incurred the three-year term of the E5P (Cos. F.x. l at DNIIt-4). Thus, AEI'-Ohio asserts that during it is inappropriate to consider the long-term operational cost savings when the long-term costs of gridSMAR'r have not been included in the ESI' for recovery.

Although Staff generally supports the Companies' implementation of gridSlvIART, particularly the AMI and DA components, Staff raises a few concerns with this aspect of the Conipanies' fiSI7 application. Staff is concerned that the overhead costs for meter purchasing is overstated and recommends that the overhead costs be reviewed before approval to ensure that the costs are not duplicativez of the overhead meter purchasing costs currently recovered in the Coiiipanies' rates (Staff Ex. 3 at 3). Staff argues that there is no reason for the Companies to restrict the PCTs to customers with air conditioning to any customer that desires to own this only, and recommends that the device be offered type of thernlostat to control air conditioning or otl3er electricad appliances (_^taff Z3r, at 12). Staff and C)CC also argue that customers who have invested in advanced technological equipment for gridSrirIART will not benefit from dynamic pricing and time differentiated rates if the Companies do not sirnultaneously file tariffs for such services (Staff Ex. 3 at 5; OCEA Br. at 82). Staff reeoznmenda that the Companies offer some form of a critical peak pricing rebate for residential customers, and some form of hedged price for cotnmercial customers for a fixed amount of the custvmers demand (Staff Ex. 3 at 5).

66 0&-917-EL-SSO and 08-918-EL-SSO

Further, Staff argues that the Companies' gridSMART' proposal does not contain sufficient infortnation regarding any risk-sharing between the ratepayers and shareholders, operational savings, or a cost/benefit analysis, and states that AEP-OJltio did not quantify any customer or societal benefits of the proposed gridSMART irritiative Br. at 12-13). Staff notes fhat accord'vng to the Companies, DA wilt. not be (Staff implemented until 2011, the third year of the ESP, and that the F.9P proposes to install DA beyond the Phase I gridSMART area ('I'r. Vol. III at 246). Staff opposes DA outside of the I'liase I area because the Companies` cannot estimate the expected reliability improvements associated with the installation of DA. Staff also argues that L7A costs should be recovered through a DA rider. The cost of gridSMART, per AEP-Oh.io's proposal, is to be recovered by adjusting distributiorr rates. Staff is opposed to incre.asing distribution rates in this proceeding (Staff Ex. 5 at 6). Instead, Staff recommends that a rider be established and set at zero. The Staff argues that a rider has several bmefits over the proposed increase to distribution rates, including separate accounting for gr3cISIvIART costs, an opportunity to approve and update the pTan annualty, assurance that expenditures are made before cost recovery oceurs, and an opportunity to audit expenditures prior to recovery. Finally, Staff also advocates that the Companies share the financiai risk of gridSMART between ratepayeis and sfiareholders, as there is a benefit to the Companies. Additioru7l.ly, Staff questions whether gridSMART will meet utistitnum reliabiRty standarcls. Lastly, Staff assexts that AFP•Ohio shoald cortduct a study that quantifies both custotner and societal benefits of its gridSMART plan (Staff Sr. at 14).

C7CC, Sierra, and OPAE/APAC argue that the Companies ESP fails to denlonstrate that its gridSMAl2'f program is cost-effective as required by Sections 4928.02(I7) and 4928.64(E), Revised Code, and state that AEP-Ohio's assurrtption that the societal and customer benefits are self-evidettt is mispllced (OCBA Br. at 77-80; QPAE/APAC Br: at 17-18). OCC, Sierra, and OPAE/APAC note that there are a number of factors about the program that the Companies have not deterntined or evaiuated, which are essential to the Cornmission's comideration of the plan. OCC, Sierra, and OPAE/APAC state that the Companies have failed to include any fuil gridSIv1ART impletnentation plan or costs, the anticipated life cycle of various components of gridSMAl2T, a rnethodolog,y for evaluating perfonnance of Oc1SMART Phase T, an estimate of a customer s bill savings, or the positive impact to the environrnestt or job creation (OCirA Br. at 79-80; OPAE\APAC Br. at 17-18). Further, CICC's vaihu:ss states that the ESP fails to acknowledge that full systea-t implementation is required before many of the benefits of gridSMART can actually be realized (OCC Bx. 12 at 6). OCC reco.trunends that i'ltase I have its own set of perfortnance measures, a more detailed project plan, inc3uding budget, resottrce allocation, and life cycle operating cost projections for the ful17-70 year implementation period of gridSMA1.2T and beyond, and performance measures for the Comnussion's approval (OCC Sx.12 at 18).

67 0$-917-RI^ SSO and 08-918-EL-SS0 ^7-

AEP-Chio regards the Staffs proposal to offer PC"I`s to any customer as overly generous, particularly given that Staff is recommending that the rider be set initiaUy at zero (Cos. Br, at 68-69). AEP-Ohio also submits that it has committed to offering new service tariffs associated witli Phase I of gridSMART once the technology is instaIled and the billing funcrionalities available (Cos. Ex. 1 at 6; Tr. Vol. III at 304-305; Cos. Br. at 68- 69). Further, regarding Staff`s policy of risk-sharing, the Compani.es contend that the assertion that the gridSMA1tT investment benefits CSP just as much as it does customers is not true and, given that the operational savings do not equal or exceed the cost of the argues that program, is without any basis presented in the record. `I'hus, :ATcP-0hio discounting the net cost to be recovered by CSP is unfair and inappropriate (Cos. Reply Br. at 63-64). The Cornpanies are unclear how the Staff expects to determine whether gridSlvIART meets the min.imum reliability standards and contend that this issue was first raised in the 5taff's brief. Nonetheless, the Companies argue that imposing reliability standards as to gridSMART Phase 1 is inappropriate, priniarily because sttict accountability for achieving the expected reiiability impacts does not take into account the many dynamic factors that impact service reliability index performance. Moreover, accurate measurement and verification of the discrete impact of gridS'IVIAR.'C deployment on a particular reliability index would be difficult. The Campanies also explain that the expected reIiability impacts provided to the Staff were based on good faith esfimates of the full implementation of gridSMART Phase 1 as proposed by the Colnpanies. Thus, the Companies would prefer the establishm.ent of deployment project milestones as opposed to specific reliability impact standards.

Although the Coinpanies anaintain that their percentage of distribution increase is reasonable and an appropriate part of the EaP package, in recognition of 5taft's prefer.'erue for a distribution ridex and to address various parties' conce,rns regarding the acLurracy of .ABP-Ohio's cost estinlates for gridSMART Phase I, the Companies would agree to a gridSMART Phase I rider set at the 2009 revenue requirement subject to aiuiual true-up and reconciliation based on CSp's prudently incurred net costs (Cos. Reply Br. at 70; Cos. Bx.1, Hxlubit DIvIR-4).

The Cotnrnission believes it is important that steps be taken by the electric utilities to explore and implement techntdogies, such as AMI, that will potentially provide long- term benefits to customers and the electric utility. GridSIVIART Phase I wiil provide CSP with beneficial inE'ormation as to ittnplementation, equipment prefaretzces, custoiner expectations, and customer education requirements. A properly desil;ned ^`'tv'Il systes^ and DA can decrease the scope and duration of electric outages. More reliable service is clearly beneficial to CSP's customers. The Commission strongly supports the implementation of AIvfl and DA, with HAN, as we believe these advanced technologies are the foundaflon for AkP-Ohio providing its customers the, ability to bettex manage their energy usage and reduce their energy costs. Thus, we encourage CSP to be more expedient in its efforts to implement these components of gridSMART. While we agree

68 -W 08-917-&L,-SSO and 08-918-EL„SSO

informatian is necessary to implement a successful Phase I program, we that additional do not believe that all infonnation is required before the Cornnussion can conclade that the program is beneficial to ratepayers and should be implemented. Therefare, we will rider, as we agree with the Staff that a rider development of a g,xidSMAT(T approve the ates, including has several benefits over the proposed annual increase to distribution r separate accounting for gridSMART, an opportunity to approve and update the plazt each year, assnrance that expenditures are made before cost recovery occurs, and an to audit expenditures prior to recovery. The Cornrrussion notes that recent opportunity federal legislation makes matching funds available to smart grid projects. Accordingly, proposal contained in its proposed. PSi' to recover $109 the Companies' gridSMART million over the tersn of FSP, should be revised to $54.5 million, which is half of the Companies' requested amount. Additionally, we direct CSf to make the necessary filing for federal matching funds under the American Recovery and Reinvestment Act of 20D9 The gridSMAIZT rider shalI for the balance of the projected costs of gridSMA11T Phase 1. established at $33.6 million for the 2009 projected expenses subject to annual be itv.tialiy incurred costs. true-up and teconciliation based on the company's prudently

the creation of the EfiRP rider and the gridSMAR'I.' rider, the Cornmission With finds that annual distribution rate increases in the amounts of 7 percent for CSP and 6.5 percent for QP to recover the costs for the FSR.I' and gridSMART programs are utulecessary and should be rejected. Accordingly, the Commis5ion finds that A.kd'-tJhio's rider and the gridSMART rider, as ESP should be modified to include theMRP proposed increases. approved hercin, and to eliminate the aiulual distrihution rate

6. Riders

2. Provider of Last Resort (POLR Rider -

'I'he Companies proposed to include in, their BST' a distribution non-bypassabie POLR rider (Cos. App. at 6-8). The PQLR charge was proposed to collect a POLR revenue reqixirement of $108.2 miilion for CSP and $60.9 million for OP (Cos, Ex, 2-A at 34; Cos. Ex. 1, Fxhibit DMR-5). The Companies stated that they have a statutory obligation to be the POLR,22 and thus, the proposed POLR charge is based on a quantitative artalysis of to the Companies to provide to customers the optionality associated with POLR the cost serv+.ce (Cos. Ex. 2-A at 25-26), AEP-Ohio argued that this charge covers the cost of allowing a customer to remain with the Compasties, or to switch to a Corcipefiitive Petail Electric Service (CRES) provider and then return to the Companies' 990 after shopping (Id.). To further support the proposed increase, the Companies added that their current POLR charge is sigzv.ficantIy below other Ohio electric utilities' POLR charges (Cos• Ex. 2 at 8). The Cnmpanies utilized the Black-Scholes Model to calculate their cost of fulfilling

72 See Section 4428.14I (A) and 4918.14, RevisecI Code.

69 08-917-EL-S.SO and (&91$-i:L-SS0 -39- the POLR obligation, comparing the customers rights to "a series of options on powee (Cos. Br. at 43; Cos. Ex. 2-A at 31). f+EP-C3Iuo listed the five quantitative inputs used in the Black-Scholes Model:1) the market price of the underlying asset; 2) the strike price; 3) the time frame that the option covers; 4) the risk free interest rate; and 5) the volatility of the underlying asset (Id.). The Companies assert that the resultit.ig POLR charge is conserv atively low (Cos. '6r. at 44).

The numerous intervenors and Staff opposed the level of POLR charge proposed by the Coinpaaies, as well as the use of the Black-Scholes Model to calculate the I'CfLR charge (OPAE/APAC Br. at 14-17; OCC Ex. 11 at 5-14). 5pecifically, OCC and others questioned the use of the LIBOR rate as the input for the risk-free interest rate (Tr. Vol. X XI at 166-182). Staff questioned the risk that the I'^LR charge at 165-182,188-I89,1'r. Vol. was intended to compensate the Companies for, explaining that there are or,ly two risks involved: one risk is the risk of customers returning to the SvSO and the other risk is that the customers leave and take service fmm a CRES providet' (migration risk) (Staff Ex. 10 at 6). Staff witness Catiaan testified that the risk associated with customers retarning to the SSO could be avoided by requiring the customer ta return at a market price, instead of the SuO rate, which would either be paid directly by the returrning customer or any ir

The Companies responded that their risk is not nSleviated by customers agreeing to return aE market price, argusng that future circumstances or policy considerations may require them to retieve customers of their promises to pay market price when circumstances eYrange (Cos. Ex. 2-A at 27-30). AEP-Ohio's witness expressed skepticism as to a fatare Commission upholding such promises (Id). AEp-Ohio also opposed recovering any costs for market purchases incrured for returning customers through the FAC as an improper subsidization of those customers who chose to shop, and then return to the electric utility, by non shopping customere (Cos. Ex. 2-£s at 14-16). Furthermore,'the Companies claim that their risk of being the POL1t exists, regardless of historic or current shopping levels ([d.). Nonetheless, A,EP'writriess Baker testified that, even adopting Staff witness Cahaan's theory that the Companies are only at risk for migration (the right of customers to leave the S50), migratioa risk equals approxinaately 90 pexcent of the Companies' POLR costs pursuant to the Blactk-Scholes model ('Tr. Vol. XIV at 204-205; Cos. Ex. 2-E at15-16).

70 08-917-EL-SSO and 08-918-1iG-S5C}

As the POLR, the Commission believes that the Companies do have some risks associated with customers switthing to CRES providers and returning to the electric utility`s SSO rate at the conclusion of CRI;S contracts or during times of rising prices. However, we agree with the intervenors and Staff that tlte POLR charge as proposed by the Coinpanies is too Iligh, but we do not agree that there is no risk or a very minimal risk as suggested by some. As noted by several intervenois and 5taff., the risk of retunung customers may be mitigated, not eliminaled, by requiring customers that switch to an alternative sitpplier (either through a governmental aggregation or individuaI C12ES and pay masket price, if they return to the providers) to agree to return to market price, electric utility after taking service from a CR> S provider, for the remaining period of the ESP term or until the customer switches to another alternative supplier. In exchange for this coannutment, those customers shall avoid paying the POLR charge, We believe that this outcome is consistent with the xequirement in Section 4928.20(J), Revised Code, which allows governmental aggregations to elect not to pay standby service charges, in exchange for agreeing to pay market price for power if they return to the electric utility. Therefore, based on the record before us, we conclude that the Compaaies' proposed BSP should be nlodified such that the POLR xider wfIl be based on the cost to the Companies to be the POI.R and carry the risks associated thexewith, including the migration risk. The Commission accepts the Conrpanies' witxuess' quantification of that risk to ecjua190 percent of the estimated POLR costs,23 and thus, finds that the POLR rider shall be established to collect a I'OLR revenue requirement of $97.4 mitlion for C.SP and $54.8 million for OP. Additionally, the POLR rider shall be avoidable for those customers who shop and agree to return at a market price and pay the market price of power i.ncurred by the Companies to serve the returning customers. Accordingly, the Commission finds that the POLR ride,r, which is avoidable, should be approved as modified herein.

2. Re^ultor,yAssetR3der

The Companies proposed to begin the recovery of a variety of regulatory assets that were authorized in various Commission proceedings regarding the Companies' electric transition plan: (L'Tl'), rate stabilizafion plan (RSP), line extension program, green pricing power program, and the transfer of the R4onPower's service territory to CSF. In their application, the Cumpanies proposed to begin the amortization of tlrese regulatory assets in 2011 and complete the arnoiitizat3on over an eight-year periocl. The projected balances at tlie end of 2010 to amortize are $120.5 million for CSP and $80.3 million for OP. AFP-Ohio asserts tbat these projected balances, or the value on June 30, 20f1t3, were not challenged by any party. To recover these regulatory assets, the Companies created a RAC rider to be collected from customers in 2011 through 2018. The rider revenues will be reconciled on an annual basis for any over- or under-recoveries,

23 6ee C:os. );x.1, Exhibit DMR-5.

71 08-917-EL-SSO and 48-91$-EL-SSt? 41

Staff proposed that the eight-year amortization perzod proposal be deferred until the Companies' next distribution rate case where all components of distribution ratEt4 ar.e subject to review (Staff Ex. 1 at 4). AEP-t)hio responded tliat 58 221 authorizes single- issue ratemaking related to distribution service, which is what it is proposing. AET'-Ohio also iYotcs that the only opposition to the Companies proposal is with regard to the collection of the historic regulatory assets, which was by Staff (Cos. Reply Br. at 94). The Companies submit that Staff's preference to deal with this isaue in a distribution rate case is irrelevant and inconsistent with the statute.

The Commission finds that the Companies have not demonstrated that the creation of the IUC rider in its proposed ESP, as a single-issue ratemaking item for distribution infrastructure and modeinization incentives, fulfills the requiremettts of SB 221 or advances the state policy. Therefore, the Cotxnrtission finds that the RAC rider should not be approved in this proceeding. We note, however, that we agree with Staff that the consideration of the requested amortiaation of regulatory assets is more appropriate within the context ©f a distribution rate case where all distribution related costs and issues can be exainined collectively. Accordingly, the Commission finds that P.EP-Ohio`s proposed ESI' should be modified to eliminate the RAC ri.der.

3. Energy k.fficiency, Peak Demand ReducHn^^ I7 erna7.ld Response, and TnterruUtible Capabilities

(a) n r F.Eficiencyand Peak Demand lieduction

Section 4928.66, Revised Code, requlres the electric ntilities to implement energy efficiency programs that will achieve energy savings aad peak demand programs designed to reduce the electric utility's peak deniand. Specifically, an electric utdity must aclu.eve energy savings in 2009, 2010, and 2011 of .3 perGent, .5 percent, and .7 percent, respectively, of the normalized annual kWh sales of the electric utility during the preceding three calendar years. This savings continues to rise unfiil the cumulative savings reach 22 percent by 2025. Peak demand must be reduced by one percent iri 2009 and by .75 percent annuaU.y unti12018.

CS? and 01' include, as part of their E.SP, an unavoidable Energy Efficiency and Peak Demand Reduction Cost Recovery Rider (EE/PDR rider). The estimatect annual DSM program cost (including both BE and PDR) is to be trued-up annually to actual cost and compared to the antortization of the actual deferral on an annual basis via the EE/PDR rider (Cos. Ex. 6 at 47-95).

(b) 13aselines and Benchmarks

In the E.9P, the Compuues have established the baselines for meeting the benchmarks for statutory coinpliance by weather norrrializing retail sales, excluding

72 Os-917-F.7r5.5fJ and 08-913-Efr..SSt3 economic development load, accountzng for the load of former MonPower service territory and the C3rmetJHaazuiibal Real Estate load, accounting for future load growth due to the Companies economic development efforts, and accounting for increased load associated tivith the funds for econornic development purposes pursuant to the order in Case No: O4-169-Et,-C7ItD (RSP Order)24 (Cos. Eac. 8 at 4; Cos. Ex. 2A at 46-51). The 'tions 4928.64(li) and Companies contend that its process is consistent with Sei. 4928,66(A)(2)(a), Revised Code. The Companies request that the methodology be adopted in this proceeding so as to provide the Companies lear guidance with statutory compliance mandates. Further, the Companies reserve their right to request additional adjustrnents due to regulatory, economic, or technological reasons beyond the reasonable control of the Coznp`mies.

As to the calculation of the Companies' base3ine, Staff asserts that the former MonPower load was acquired prior to the three-year period (2006 to 2008) and is not truly economic development. Therefore, Staff contends that the MonPow'er load is not a reasonable adjusirnent to the baseline. Staff suggests that the Companies' savings and peak demand reductions for 2009 be as set forth by Staff witness Scheck (Staff Ex. 3 at 6-8, Ex. GC5-1 and Ex. GCS-2). Staff recommends that CSP and OP niake a case-by-tase filing with the Con>znission to receive credit for the energy savings and peak demand reduction efforts of the electric utility's mercantile customers. Staff argues that because programs like PJM's demand response programs are not committed for in.begra8on into the electric efficiency and peak reduction programs, such credits should not count utilities energy towards AEP-Ohio's annual benclunarks and retail customers who have such agreements should not receive an exemption from AEP-Ohi.o's energy efficiency cost recovery mechanism (5taff Br. at 17-19; Staff Ex. 3 at 6-11).

Kroger recornmends an opt-out provision of the rider for non-residential customers tha[ are above a threshold aggregate load (10 MW at a sirigle site or aggregated at multiple sites) within the AEP-Ohio service territories. ICroger proposes that, at the time of the opt-out request, the customer would be required to self-certify or attest to AEP- Ohio that for each facility, or aggregated facilities, the customer has conducted an energy aiidit or analysis within the past three years and has implemented or plans to implement the cost-effective measures identified in the audit or analysis. TKroger argues that the unavoidable rider penalizes customers who have implemented cost efficient DSM nteasures. Kroger contends that this is consistent with the intent of Section 4928.66(A)(2)(c), Revised Code (Kroget Ex.1 at 13-14).

IEU riotes that the Convnission has previously rejected a proposal similar to Kroger s opt-out proposal with a demand tlueshold for mercantile customers in IIuke's

Case No. 04-169-EGORD, Opinion snd 24 In re Colun+btrs 5ou1juxrz Pamacr Company and Ohio Pauvr Compnny, Order (Ianuary 26, 2005) (RSP Order).

73 OS-917-E3LrSSO and 05-918-EL-SSO

ESP case.25 IEU urges the Comrnission, consistent with Section 4928.66, Revised Code, (IEU Reply Br. at and its determination in the Duke IsSP case, to reject ICroger's rc.^yuest 22).

The Commission concludes that the acquisition of the former MonPower load shoutd not be excluded from baseline. The MonPower load was not a load that CSP served and would have lost, but for some action by C^S?. Therefore, we find that the CoYnpanies' exclusion of the MonPower load in the energy efficiency baseline is inappropriate. The Commission does not believe that all economic development should automatically result in an exclusion frorn baseline. On the otherhand, we agree with the Companies adjustment to the baseline for the Ormet load. We note that the Companies and Staff agree that the impact of customer-sited specific DSM resources will be included in the Companies' compliance benchrnarles and adjusted for any existing resources that had historic implication during the years 2006-2006. The Commission also recagnizes that Staff and ttie Compani<-, agree that the appropriate approach would be for the Cornpanies to make case-by-case filings with the Comrnission to receive credit for contributions by ntercantile customers.

In regards to Kroges's recommendatian, for an opt-out process for certain commerclal or fndustrial custorners, the Commission finds Kroger's proposal, as advocated by tCroger witness Higgins, too speculative. It is best that the Commission deter;nine the inclusion or exemption of a mercantile customer's tJSM on a case-by-case basis. We note that Section 492$.66(A)(2){c), Revised Code, provides, in pertinent part, the following:

Any mechanism design.ed to recover the cost of energy efficiency and peak dema.n.d reduction programs under divisions {A)(1)(a) and (b) of this sr.'ction may exempt mercantile customers tttat commit their demand response or other customer-sited capabilities, whether existing or new, for integration into the electric distribution utility's demand-response, energy efficiency, or peak dentartd reduction progxam.F, if the contznission detezmines that that exemption reasonably encourages such customer to commit those capabilities to those programs.

This provision of the statute permits the Commission to approve a ri.der that exempts Tnercanti2e customers who commit their capabilities to the e7r.ctric utility. However, the statute does not dictate a minimum consumption level. For these reasons, Uhe Cominission rejects Kroger's proposal.

+30, et al., Opinion and OrEter (Decemta 17, 2008) 75 tn +e Bukr Energy Ohio, Inc., Case hTO. 08-920-EL,. (Duke FSP Order).

74 08-917-EIrSSCT and 08-918-EI fSSO (c) En gZy Efficieqcy and I'eak Demand I+eduction Prot^rams

The Companies proper3e ten energy efficiency and peak demand reduction prograrns that will be refined and supplemented at the completion of the Market Potential Study ttirough the creation of a workiuig collaborative grottp of stakeholders.

As part of the Compardes' energy efficiency and peak demand reduction plan, the Companies propose to spend $178 million on the following programs: (1) Residential Standard Offer Prograczt, Small Conunercial and Industrial Standard Offer Progratn, Ffficient Commercial and Industrial Standard Offer Prograna; (2) Targeted Energy Weatherization Program; (3) Low Income Weather.ization Program; (4) Residential and Small Commercial Compact F"luorescent Lighting Program (5) Comm.ercial and Industrial I.ighting I'rograin; (6) 5tate and Municipal Light Emitting Diode Program; (7) Energy StarO New I-Ion-Les Program (8) Energy StarM Home Appliance Program, (9) Renewable Energy `I'echnology I'rogram; (10) Industrial Process Partners Prog;ram (Cos. Ex. 4 at 20- 22). OEG supports the Companies EPs/PDR rider as a reasonable propnsal (ORG Ex- 2 at 13). OPAE generally supports the Conipanies proposed programs as reasonable for low- income and moderate income custamers. However, OPAE requests that the Companies be required to empower the collaborative to design appropriate programs, provide funding for existing programs that can rapidly provide energy efficiency and demand response reductions, and to retain a tturd-party administrator to tnanage program implementation (OPAE Ex_ 1 at 16-17; OPAI:/APAC Br. at 21-22).

Staff also generally approves of the Companies' demand-side management and energy efficiency programs. However, Staff notes that certain of .AEP-Ohio's progr'ams are expensive and should. be required to comply with the Total Resources Cast Test (Staff Br. at 17-19; Staff Ex, 3 at 6-11).

OCC makes five specific recommeiidations (t7CC Ex. 5 at 9). Fitst, OCC contends that the Companies DSM programs for low-income residential customers are adequate but should be available to all residential customers in Ohio. Second, OC:C recommends that AEP-Ohio work with Columbia Gas of Ohio, Inc., to develop a one-stop horne of the ESP. "i'hird, OCC recommends that programs for perforinance program in year two consumers above 175 percent of the federal poverty level should be competitively bid and castoiners charged for services according to a sliding fee scale based on income. Fourth, like Staff, OCC contend,s that a1l programs should be evaluated for cost-effectiveness pursuant to the Total Resource Cost Test. FinaIIy, OCc expresses concern regarding the administrative costs of the programs, in conlparison to energy efficiency programs offered by other Ohio utilities and recommends that the adtninistrative cost of ti-te DSM program (administrative, educational, and marketing expenst=s) be detemuned by the collaborative, and limited to 25 percent of the program costs to evsure that the majority of the program dollars reach the customers (Id.).

75 08-917-EL-SSU and 08-918-EL-SSO -45-

The Commissioat directs, as the Companies submit in their ESP, that the collaborative process be used to contain adniinistrative cost of the BE/ FDR prograrns and to etr.sure, with the possible exception of low-income weatherization programs, that all programs comply with the Total Resource Cost Test We do not agree with OPAE/APAC that a third-party administrator is necessaty to act as a liaison between the Companies and the collaborative, Thus, the Companies should proceed with the proposed EE/PDR programs proposed in its ESP as justified by the market project study and as refined by the collaborative.

(d) Interrui?tible (_aoacitv

The Complnies count their interruptible setvice towards their peak demand reduction requirements in accordance with Section 4928.66(A)(2)(b), Revised Code. More specifically, the C.'ompanies propose to increase the limit of C1P's Interruptible Foisrer- Diseretionarv Schedu.le (Schedule IRP-D) to 450 Megawatts (MW) from the current limit of 256 MW and to modify CSP's Emergency Curtailable Service (EC'S) and Pxi.ce Curtailable 9eiroice (PCS) to make the services more attractive to custosners. The Compani.es request that the Commission recognize the Companies' ability to curtail custozner usage as part of the peak demand reductions (Cos. Ex.1 at 5-6).

Staff advocates that any credits awarded for the annnal peak demand reduction targets for the Companies' interruptible programs should only apply when actual rcductions occur (Staff Ex. 3 at 11). OCEA argues that interraptible load should not be counted toward ALP-C)hio s peak demand reduction as it is contrary to the intent of SB 221 to improve grid reliability and would be based on load under the control of the customer rather than AEP-Ohio. Further, OCEA argues that the Companies would reap an inequitable benefit from interruptible load (possibly in the form of off-system sales) that is not reduced at peak which would allow the Compmues bo sell the load or avoid buying additional power. OCEA contends that any such benefit is not passed on to customers (t)CEA Br. at 102-103; Tr. Vol.1X at 68-69).

7"he Companies argue that capacity associated with interruptible custom.ers shouid be counted toward coinpliance with the requirements of Section 4928.66, Revased Code, as the ability to interrupt is a significant demand reduction resource to AEP-Ohio. Further, the Companies state that interrttptions have a real impact on customers and the Companies do not want to interrupt service when there is no system or market requiretnent to do so (Cos. 'Ex. l ae 6). T 4ie Cornpanies note that Section 492$.66(A;(1)(b); Revised Code, requires the electric utility to implement programs "designed to achieve" a specified peak demand reduction level as opposcd to "achieve" a specified level of energy savings as required by Section 492$.66(A)(1)(a), Revised Code. Staff witness Scheck admits that the plain meaning of "desig,zted to achieve" and "achieve" are different ('i'r. Vol. VlTI at 208). The Companies argue that the different language in the statutory requirements is intended to recognize the differences between energy efficiency programs

76 08-917-EL-SS0 and 0$-928-EL-5S0 46-

and peak denzand reduction programs. As such, the Companies contend that Staffs position is not snpported by the language of the statute and it does not overcome the policy rationale presented by the Companies. The Companies also note that, in the context of integrated resource planning, interruptible capabilities are counted as capacity and evaluated iri the need to plan for pew power facilities. Finally, the Comparries note that the Conm-assion defines native load as internal load nninus interruptible loadA For these reasons, the Companies contend that their interruptible capacity should be counted toward their compliance with the peak de.nzand reduction benchmarks (Cos. Br.114-1.15; Cos, Reply Br. at 90-93).

Purtlier, the Companfes claim that interruptible customers receive a benefit in the fortn of a reduced rate for tatcing intrrruptible service irrespective of whether their service is actually curtailed. AEP-C)hio notes that it includes such interruptible service as a part of its supply portfolio, unlike tlie PjM demand response prog,rams, which is based on PJM's zonal load, T'herefore, AEP-Ohio asserts there iv no disparate treatment between counting interruptible capabilities as part of peak demand reduction compliance requirexnents and prohibiting retail part'tcipation in wholesale Fj1vI demand reduction prograins (Cos. Reply Br. at 90-91). Further, as to OCEA's claims regarding interruptible custoiner load, the Companies argue that the assertions are without merit or basis in the statnte. The Com.panies argue that counting interntptible load fits squarely within the stated intent of the statute that programs be "designed to achieve" peak demand reduction and facilitates the ability to avoid the construction of new power planta. As to the customer's control of interruptible load argument, the Companies note that the customer has a choice to "buy tlanugh" to obtain replacement power at market prices to avoid curtailment and in such situations the Companies' supply portfolio is not affected. Regarding OC:EA's assertion that the Cornpariies might benefit from the associated interruptioii, AEP-Ohio acknowledges that off-system sales are indircctly possible, as are other circun-^,stances, based on the market price. Nonetheless, A&1'-Ohio argues that such does not altcr the fact that AEP-Ohio's retail supply obligation is reduced and the supply portfolio is not accessed to serve the retail customer. Accordingly, ApI'-C3hio asserts that interntptibie tariff capabilities should count toward the Cozmpanies' peak demand reduction compliance requirements.

The Comniission agrees with the Staff and OCEA that iriterruptible load should not be counted in the Companies' determination of its EE/PDR compliance requirements unless and until the load is actaally interrupted. As the Companies recogxtize, it is imperative, with regard to the PJM demartd response progratiis, that the Companies 1=.ave

26 Sec proposed Rule 4901:5-5-01(Q), O.A.C., Tn the Matter of the Adoption of Ruies fos Atternatiae and Reneux!ble Er:ergy 7echHOiog9es and kesm rces, and Etnrssian Confra77ic7roriing ReRre rertrenM ara! fimeicdurent Cnde, Pursumet to C7rapter of C'.7utprcrs 2901:5-1, 4902:5-3, 49015-5, and 49015-7 of the Ohio Administrative 4928, Reaiscd Code, to hnpteunent Sermfe Aiti Nv. 221, Case Nn. 08-888-F,TrORT3 (Green Ritleq).

77 -47- O8-917-EL-SSO and a8-91t3-]3In55O AT.P'Qhio's soxne control or commitment from the customer to be included as a part of Section 4928.66, Revised Code, compl"tance requirements.

Further, the Connnission emphasizes that we expect that applications filed pursuant to Section 9928.66(t1)(2)(b), Revised Code, to be initiated by the electric utility only when the circumstances are justified. At the time of'such filing by an electric utility, electric utility's continued compliance is the Comnussion will determine whether the possible under the circun-otances.

4. Economic Developtnenr Cost Recovery Ricler and the Partnershin with 0Iu.o Fund

The Companies' ESP application includes an unavoidable Economic Development Rider as a mecltanism to recover costs, incentives and foregone revenue associated with new or expandirnf; Commission•approved special arrangements for economic development and job retention. The Companies propose quarterly filings to establish rates based on a percentage of base distribution revemie subject to a true-up of any under- or over-collection in subsequent quarterly filings, ht addition, the Companies propose the fund from sbareholders. The fand would development of a"Partnership with Ohio" conaist of a $75 million commitment, $25 m.iIlion per year of the ESP, from shareholders. The Companies' goal is for approximately half of the fund to be used to provide assistance to low-income . custorners, including tmergy efficiency programs for such custorners, and the balance to be used to attract and retain business developinent within the AEP•Oluo service area (Cos. Ex.1 at 12; Cos. Ex. 3 at 15-16; Cos. Ex. 6 at 49; Tr. Vol. III at 115-119). dividing the recovesy of taCC proposes that the Cominission continue its policy of forgone mvenue subsidies equally froni ABP-Ohio's shareholders and customers or require shareholders to pay a larger percentage. Further, CJCC expresses some concern that the rider may be used in an anti-cornrnpetitive manner as it is not likely that incentives andJor discounts will be offered to shopping cust.ocners. To address OCC's anticompetitive concerns, OCC proposes that the Commission make the econoniie development rider avoidable or establish the charge as a percentage of the customer's entire bill ratlier than a percentage of distribution charges. C7CC also recommends that all parties participate in the initial and annual review of the economic development contracts and that, at the annual review, if the customer has not fulfilled its obligation, the arrangement be cancelied, the subsidy paid back, and the Companies directed to credit the rider for the discounts (OCC Ex. 14 at 4-8; OCEA Br. at 104-706).

The Companies contend that Section 4905.31, Revised Code, as amended by SB 221, explicitiy provides for the recovery of foregone revenues for entering into reasonable arrangements for economic development and, thus, OCC's recommendation to continue the Comniission's previous policy is misplaced. Further, the Companies note fliat the

78 {39-917-EL-S5C7 and 08-918-8[., SSO

Conunission's approval of any special arrangement will include a public interest determination. '1'hus, the Companies argue that OCC's recommendation for all parties to initially ancl annually review economic development arrangements is unnecessary, bureaucratic and burdensoine, and should be rejected. The Companies contend that economic development and fiill recovery of the foregone revenue for economic development is consistent with SB 221 and a significant feature of the Companies' ESP, which should not be modified by the Commission (Cos. Br. at 132).

The Conunissionlinds that C7CC's concerns are unfounded and unnecessary at this stage. The Commission is vested with the authority to review and deternzirte wbether or not economic development arrangements are in flie public interest. QCC's request is denied.

OPAE and APAC argue that the Companies have not provided any assurances that the $75 mfllion will be spent from the parmtership with Ohio fund if the Cornmission modifies the ESP and fails to state how much of the fund will be spent on low-income, at- risk populations (C?PAE/.APAC Br. at 19-20). The Companies submit that, if the ESP is SY in its entirety to detera-dne whether modified, they can then evaluate the modified ES this fund proposal contained in the ESP requires eiinv.nation or modification (Tr.. Vol. Ifi at 137-138; Tr. Vol. X at 232-233).

While the Partnership with Dhio fund is a key component of thc econontic development proposal, in light of the modifications made to the ESP pursuant to this opinion and order, we find that the Companies' shareholders should fund the Partnership with Ohio fund, at a minimum of $15 m'sllion, over tlre three-year ESP period, with all of the funds going to low-income, at-risk customer programs. Accordingly, we direct AE[ = Ohio to consult with Staff to administer the prograrn established hereiui.

C. Li.ne Extensiorvs In its ESP, AEP-OhiO proposes to modify certain existing line extensi"n policies and charges included in its schedules (Cos. Ex,10 at 5-14). Specifically, the Companies requested a modification to tlieir definition of line extension and system improvements, a continuation of the up-front payment concept established in Case No. 01-2708-ELrCOlF an increase in the up-front residential line extension charges, implementation of a uniform, up-front line extension charge for all nonresidenfiial projects, the eIimination of the end cise customerrs monthly surcharge, and the elimination of the alternative construction option (Id. at 3-4, b-7,10-12).

of Poever ComFarqb the Commission' s Invesfigation into tlte PWiciss and Procedrtres Ohio 27 lrt the Maftr.r of Ohio F.ddson Company, The Power Cvrrpar,y, T7ae Cievelarul Electric Illurninafing Comparay, ( nlumbu.s Sont3urn Installaflon of New Line LxEenaions, Company mul Monongahela Porner C'orttFany Reganting the Toledo Edison 2002). Case No. f77 2708-HI,COI, et al. Opinion nnd Order (November 7,

79 49- 08-917-PT.-SSO and 0&918-131.-550

Staff testified that distribution-related issues and costs, such as those related to line F'ix.13 at 4). IEU extensions, be examined in the context of a distribution rate case (Staff concurred with Staff's position (IEU Br. at 25). OCC also agreed and added that ABR Ohio shou3.d be retluired to deinonstrate in that rate proceeding that its costs related to line extensions have substantially increased, thereby justifying AEP-Ohlo's proposed increase to the up-front residential line extension charges (OC=.SA Br. at 87).

i'er SB 221, the Commission is required to adopt uniforrn, statewide Iine extension rules for nonresidential customers within six months of the effective date of the law. The Commission adopted such rules for nonresidential and residential casf'omers on is still November 5, 2008?8 Applications for rehearing were filed, which the Commission con.sidering. Accordingly, the neiv line extension rules are not yet effective.

The Conmiission finds that AEP-Ohio has not dem:orlstrated that its proposal to cvntinue, in its TiSP, its existing line extension policies regarding up-front payments, with modifications, is consistent with SB 221 or advances the policy of the state. Therefore, in light of the SB 221 mandate that the Commission adopt statewide line extension rules that will apply to .AFP-fJhio, we do not believe that it makes sense to adopt a unique poHcy for the Companics' ESP should be modified to eluninate the AEP-Ohio at this tisne, As such, provision regarding line extensions, which would have the effect of also eliminating the atternative construction option as requested by the Companies. A'pP-f)hio is, however, directed to account for all line extension expenditures, excluding prentium services, in plant in service until the new line extension rules become effective, where the recovery of such will be reviewed in the context of a distribution rate case. The Companies may corttinue to charge customers for premium services pursuant to their existing practices. .

V. TRANShritS.510N

In its FSP, the Cornpanies requested to retain the current TCRli, exCept the rnargiu7al loss fuel credit will now be reflected in the FAC instead of the TCRIt. We concur with the Cornpanies' request. We find the Companies' request to be consistent with our determination in the Companies' recent TCRR Case,211 and thus, approve the TCiZR rider as proposed by the Cortrpanies. Additionally, as contemplated by our prior order in ehe TCRR Case, any overrecovery of trati,smission loss-related costs, which has

4901:1-9, 4901:1-10, 8901:1-22, 4901.1-22, 4901:1-23, of tlu Cummissian's neureza of Chupters 26 See In tlzc A9atter Case No. 06-653-HL-ORD, Ninding and Order 4901:1-24, und 4901:2-25 of the Ohin Ad ninistratPue Cmte, (November 5, 200s), Entry on Rehearing (Decemier 17, 2(108) (06r653 Case). Ohio Pomer C-ornpuny to Adjust Appifca3iori of CotunrLus Soathernt Pawer Company and 21 In the Matier of tFw Case No. 08-1202-E1,CTNC, Finding and Order Encti Company's Trnnsrnission Cost Recovery Ridsr, (Decr.rnbes 17, 2008) (FCRR Cise).

80 0$-917-EL-SSEl and 03-918-EL-SSU `50-

occurred due to the timing of our approval of t:he Companies' ESP and proposed FAC, shall be reconciled in the overJunderrecovery process in the Companies' nextTCRR rider update filing.

VI. OTf-IER ISSUEE

A, Corporate Separation

1. Functional Senaration

In its E.sl' application, AF-p-Chio recluested to remain functianafly sefrarated for the term of the ESP, as was previously authorized by the Commission in the Companies^ rate stabilization plan. proceeding,3a pursuant to Section 4928.27(C), Revised Code (Cos. App. at'14; Cos, pr- at 86). the Cornpanies also requested to modify their corporate separation plan to allow each cornpany to retain its distribution and, for now, transmission assets and tliat, upon the expiration of functional separation, the Companies would sell or transfer their generation assets to an affiliate (Id.).

Staff testified that the Companies' generating assets have not been structm'ally cted that, separated from the operating companies (Staff I^a c. 7 at 2-3). Staff also recominend iut accordance with the recently adopted corporate separation rules issued by the Commission in the SSO Rules Case,31 the Companies should file for approval of their corporate separations plan within 60 days after the rules become effective. Furthermore, Staff proposes that the Companies' corporate separation pian should be audited by an independent au(iitor withai the first year of approval of the F.SP, the audit should be funded by the Companies, but managed by Staff, and the audit should cover compliance with the Contrni.sslon's rules on corporate separation (Staff Ex. 7 at 3-4). No party opposed AEP-t7hio`s request to remain functionally separate.

Accordingly, the Commission finds that, while the ESP may move forward for approval, as noted by Staff, in accordance -writh our recently adopted rules in the SSO Itules Case, the Companies must ffle for approval of their corporate separation plan wikhin 60 days after the rules become effective.

Company, Case No. 04-169-RLd3NC, Opinion aud 30 In re Colum6us Southern Power Cnmpany and Ohio I'oa+er Order at 35 (january 26, 2005). Ofjcr, Corporate Sepm'atfon, Reasonabla 31 In tbe Mattsr of the Adoption of Rutes for SMndard Service Uk'lities Pursuant to Sections 4928.14, 4928.I7, and Arrangernents, and Transmission Riders fm-^tertrie 8ubstlttete Senate Bift No. 221, Case No. 08-777-SL-C>RD, 390537, ttevised Code, as amended by Ameuded Pincting and Order (3eptesnber I7, 2001f), and Entry on Rehearing (Februury 11, 2tXt9) (SS(7 Rnles Ca+se).

81 -51- 08-917-EL-SSO and 08-918-EL-SSO

2. Transfer of GeneratingAssets

The Companies request authorization for C5p to sell or trarisfer two recently acquired generating faciliti(t