POWER February 2015 - 42

GENERATION TRANSITIONS
American Electric Power: A Coal
Powerhouse Repositions Itself
American Electric Power, one of the premier generating utilities in the U.S.,
is caught between a deregulated rock-wholesale competitive capacity
markets that don't, in the company's opinion, value solid equipment over
ephemeral demand response-and a regulatory hard place of increasing
federal government rules that devalue on-the-ground coal-fired generation.
Add the competitive challenge of cheap natural gas as a generating
fuel, and you get a coal-dominated generating system in transition.
Kennedy Maize
O
hio-based American Electric Power
(AEP), one of the most successful electric
utilities in U.S. history, is " a company
in transition, " says Mark McCullough,
the company's executive vice president for
generation. In a November POWER interview,
McCullough described how the company with
38 GW of generating capacity is moving from
a system dominated by cheap, plentiful coal
located in the regions it serves to something
else: natural gas.
Coal Concentration Challenged on
Multiple Fronts
" From an overall perspective, " McCullough
said, " AEP today is in the mid-60s " for its
systemwide percentage of coal generation.
" We are in the low 20s for gas, and less than
5% nuclear. The rest is hydro and renewables. "
That's going to change.
Today and in the short term, AEP's heavy
reliance on coal is getting challenged by the
burgeoning supply of cheap natural gas, much
of it coming from fracked Marcellus and Utica
shale formations in AEP's service territory in
the rust belt (Ohio, West Virginia, Indiana,
Virginia) and Texas. Added to that market
competition is a regulatory thrust driven by
the Obama administration's Environmental
Protection Agency (EPA), principally the
Mercury and Air Toxics Standards (MATS,
now under review by the U.S. Supreme Court
on the grounds of costs versus benefits) and
the looming EPA global warming rules, the
" Clean Power Plan, " grounded in Section
111(d) of the 1990 Clean Air Act. The timing
of the climate rules, says McCullough,
" doesn't work for 2020. You can't get there
from here. The targets and the basis for the targets
have a number of flaws. Our transmission
folks and the Southwest Power Pool say the
reliability issues are too difficult to solve. "
AEP's immediate strategy involves investing
heavily in its muscular transmission system,
42
featuring more 765-kV transmission lines than
all other U.S. transmission systems combined,
along with moving some of its coal-fired plants
away from competitive wholesale markets and
into conventional state-based regulation. AEP's
transmission system is strategically positioned
to take advantage of the growing cost-of-service
market for transmission across large areas
of the country. According to AEP, " Our transmission
system supplies about 10 percent of
the demand in the Eastern Interconnection, the
transmission system that serves 38 U.S. states
and eastern Canada, and 11 percent of the demand
in ERCOT, covering much of Texas. "
Talking to Wall Street analysts last fall,
AEP CEO Nick Akins said, " Keep in mind,
we are in the middle of a multiyear plan to
reposition our company, focused on infrastructure
investments, particularly in the
transmission and regulated utility lines of our
business, improving our customer service
through process and technology improvements,
transforming our generation resources,
and defining an employee culture that
enables the adaptability, flexibility and entrepreneurship
that the future will demand. "
In early January, TheStreet.com reported that
AEP had hired Goldman Schs to examine
selling off the company's 7,923-MW merchant
generating business, with an expected
sale price of $2.8 billion to $3.6 billion.
Part of AEP's generation transition, as
ElectricityPolicy.com detailed, is asking the
Public Utilities Commission of Ohio (PUCO)
to " guarantee income from four of its coalfired
power plants, which have had difficulty
showing a profit in the PJM Interconnection's
forward capacity market. The plants
were part of a restructuring that separated
Ohio investor-owned utilities' generation
from their wires and retail service businesses. "
The Ohio regulators in early December
said they would hear AEP's request for the
Kyger Creek plant in southeastern Ohio, the
www.powermag.com
first of the four stations the company wants
to shift into state cost-of-service regulation.
The 1955-vintage, 1,000-MW plant is jointly
owned by AEP (43%) and FirstEnergy (21%),
with the balance owned by other utilities.
The Columbus Dispatch reported, " Environmentalists,
consumer advocates and
competing electricity suppliers have come
out against the plan, which they see as an
unneeded subsidy that will prolong the life
of a coal-fired power plant. " The PUCO staff
has also opposed the utility's plan, while the
commission rejected its staff's recommendation
when it granted the hearing.
AEP has made a similar proposal for
shielding its 50% share of the Mitchell plant
in West Virginia from the wholesale market. It
would spin off its 800-MW Mitchell share into
tiny Wheeling Power, a West Virginia distribution
utility run by AEP subsidiary Allegheny
Power Co. and regulated by the Public Service
Commission of West Virginia. ElectricityPolicy.com
characterized the deal as " the mouse
that was asked to swallow the elephant. "
FirstEnergy, based in Akron, Ohio, facing
many of the same issues as AEP with regard
to the wholesale markets, has also asked the
Ohio commission to provide an umbrella of
regulated prices for some of its coal-fired
plants in order to protect against losses in the
PJM capacity market. FirstEnergy owns the
other half of the Mitchell plant.
A Newer Challenge: Demand
Response
McCullough elaborated on the problems with
the PJM forward (2016) market, which is hurting
both AEP and FirstEnergy. " We haven't
lacked success in bidding " into the PJM capacity
market, he said. But there are insufficient
profits he claimed, pointing to PJM's
generous payments for customer demand response,
driven by Federal Energy Regulatory
Commission (FERC) rules giving demand rePOWER
| February 2015
http://www.icy.com http://www.TheStreet.com http://www.ElectricityPolicy.com http://www.powermag.com
POWER February 2015

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