I ORIGIN A b Y . ' E N T E R E D
PUBLIC SERVICE COMMISSION OF WEST VIRGINIA
CHARLESTON
At a session of the PUBLIC SERVICE COMMISSION OF WEST VIRGINIA, at
the Capitol in the City of Charleston on the 28th day of September, 1984.
CASE NO. 84-475-E-GI
APPALACHIAN POWER COMPANY, a corporation. Review of fuel costs of Appalachian Power Company for the period July 1, 1983 through June 30, 1984, for the purpose of establishing a fuel increment in rates to be effective October 1, 1984 through September 30, 1985.
APPEARANCES : Charles R. McElwee and William C. Porth, Jr. , representing Appalachian Power Company, Respondent; T. D. Kauffelt, representing FMC Corporation, Intervenor; Henry McNicholas and Lee F. Feinberg, represent- ing Appalachian Industrial Electricity Consumers (AIEC), Intervenors; Billy Jack Gregg, representing Consumer Advocate Division; and Mark Thessin, representing Commission Staff.
COMMISSION ORDER
PROCEDURE
By order entered in Case No. 83-384-E-GI on Jankgry 3 1 , 1984 the Com-
mission authorized Appalachian Power Company (APCO) to collect the amount
of 1.687 cents per kilowatt hour during the period February 1, 1984
through September 3 0 , 1984 as the fuel increment in rates to be charged by
APCO.
In APCO's current rate case, Case No. 83-697-E-42T, a joint stipu-
lation among all parties, except the Consumer Advocate, was presented to
the Commission calling for, among other things, creation of an "expanded
net energy cost" factor on an experimental basis. Under this concept, all
revenues and costs associated with system sales, not just energy or fuel
costs, would be removed from base rates and recovered through deferred
PUBLIC SERVICE COMMISSION
accounting on a dollar-for-dollar basis in the Net Energy Charge (NEC).
On July 3 , 1984, the Consumer Advocate petitioned for a hearing on the
expanded NEC issue.
In order to examine actual fuel costs of APCO and to consider evi-
dence relating thereto, and to develop a complete record concerning the
issue of whether system sales, revenues and expenses should be included in
an expanded NEC, and if s o , what the proper level of NEC should be com-
mencing October 1, 1984, the Commission issued an order on July 30, 1984
making Appalachian Power Company respondent to a new proceeding to appear
at a hearing scheduled to be held in the Commission's Hearing Room at the
Capitol in the City o f Charleston on Tuesday, September 18, 1984, at 9:30
a.m., and each succeeding weekday thereafter, as necessary. The respon-
dent and a l l interested parties were ordered to present information and
evidence concerning the appropriate level of a net energy charge (a) under
the traditional NEC including only fuel costs and recoveries related to
system sales as was done in Case No. 83-384-E-GI; (b) under the expanded
NEC including all revenues and expenses from system sales as contemplated
under the joint stipulation presented on June 11, 1984 in Case No. 83-697-
E-42T; and ( c ) any alternative proposal. That order allowed any person to
appear and object to respondent's evidence or present evidence relating to
respondent's fuel costs. The Commission further ordered that persons or
corporations interested in participating in this proceeding file a
petition to intervene and APCO was ordered to give proper notice of these
proceedings.
The following procedural schedule for the case was established in the
July 30, 1984 order:
PUBLIC SERVICE COMMISSION 2 .
direct testimony.
September 14, 1984 - filing of APCO's rebuttal testimony. Petitions to intervene were received from the Consumer Advocate Divi-
sion (CAD) on August 1, 1984, FMC on August 9 , 1984 and Appalachian Indus-
trial Electricity Consumers (AIEC) on September 4, 1984.
On September 7, 1984 AIEC filed a motion with the Commission request-
ing that the Commission extend the time within which they and the CAD are
to file direct testimony until the close of business on September 11,
1984, and further requesting that any rebuttal testimony to Staff testi-
mony be filed on or by September 14, 1984, and that any other rebuttal
testimony be filed at the commencement of the September 18, 1984 hearing.
By order of September 7, 1984 the Commission .granted AIEC's motion
and changed the procedural schedule as follows:
September 11, 1984 - filing of Intervenor's direct testimony. September 14, 1984 - filing of rebuttal testimony to Staff's
direct testimony.
On or before commencement of September 18, 1984 hearing - all other rebuttal testimony
The hearing began on September 18, 1984. At the commencement of the
hearing Staff introduced a Joint Stipulation and Agreement for Settlement
(Stipulation) which was agreed to by the Staff of the Public Service Com-
mission of West Virginia and Appalachian Power Company. By the terms of
the Stipulation APCO and the Commission Staff,
(1) recommended, on an experimental basis, the implementation of an Expanded NEC formulated in accordance with the Joint Stip- ulation and Agreement for Settlement and Supplement to Joint Stipulation and Agreement for Settlement in APCO's pending rate case, Case No. 83-697-E-42T7
3 . P U B L I C S E R V I C E COMMISSION
(2) agreed to a compromise technique in computing the fuel- related NEC jurisdictional average factor whereby a trendline was constructed on the basis of 25 months which resulted in a fuel-related NEC jurisdictional average factor of 1.703c/Kwh at source level,
( 3 ) agreed to a NEC underrecovery balance as of September 30, 1984 of $5,829,313 with the understanding that all of APCO's post-January 1, 1984 over/underrecovery balances would remain open for re-examination in APCO's next fuel review proceeding because the Company began calculating over/underrecoveries as of January 1, 1984 with new line l o s s factors which the Staff has not yet had an opportunity to examine for reasonableness, and
(4) in areas relating to generating unit performance, the Staff and APCO agreed that engineering issues for any particular fuel review should be sorted out by the data request process in lieu of requiring specific pre-filed testimony on specific areas which may not even be in controversy.
APCO also agreed to cooperate with Staff in evaluating various reasonable
performance assumptions used in PROMOD 111.
During the hearing intervenors AIEC and FMC agreed to participate in
the Stipulation. The CAD did not join in the Stipulation.
The hearing ended on September 21, 1984. This case was then
submitted to the Commission for decision.
EVIDENCE
During the course of the hearing, Appalachian Power Company presented
the testimony and exhibits of four witnesses:
Ronald H. Hively, Director of Tariffs, Rates and Contracts for APCO,
provided testimony in support of the Stipulation entered into between APCO
and Staff in this case. Additionally, he testified as to the appropriate-
ness of including capacity equalization charges in system sales and using
the 1983 system sales realizations in developing the system sales com-
ponent of the expanded net energy cost.
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D
Thomas L. Stephens, Supervisor of Fuel Regulation in the Rates and
Contracts Department, appeared to support the Stipulation and provided
testimony and exhibits as to the following:
- APCO's actual coal expense and net energy cost for the July 1 9 8 3 through June 1 9 8 4 period.
- APCO's forecasted coal expense by month for the July 1 9 8 4 through September 1 9 8 5 period.
- APCO's West Virginia jurisdictional NEC recovery position estimated as of September 30, 1 9 8 4 .
- The expanded NEC factors which should be removed from the Company's currently effective West Virginia jurisdictional rates.
- The expanded NEC factors which the Company is proposing be incorporated in its West Virginia jurisdictional rates effective October 1, 1 9 8 4 .
- Proposal of a revised P.S.C. West Virginia Tariff No. 8 incorporating the Company's proposed expanded NEC factors.
- Sample billing analysis comparing currently effective and proposed rates.
Mr. Stephens also supplied rebuttal testimony which updated Staff's
trendline projection of NEC to recognize the actual July 1 9 8 4 NEC and
which updates APCO's recovery position as of September 3 0 , 1 9 8 4 .
Additional rebuttal testimony was provided by Mr. Stephens which
illustrated errors and problems determined by APCO to exist in the data
and methodology used by CAD witness Byron Harris in his direct and revised
direct testimony.
Thomas G . Frost, Vice President-Coal Procurement in the Fuel Supply
Department of the American Electric Power Service Corporation, presented
an overview of APCO's coal procurement program, including a review of
contracts negotiated by APCO since the last fuel review. He also provided
testimony comparing APCO's actual delivered coal costs through June 30,
1 9 8 4 against the forecasted delivered coal prices for the same period
PUBLIC SERVICE COMMISSION 5.
presented in the last fuel review. Also, Mr. Frost submitted information
relating to APCO's forecasted coal prices for the fourth quarter of 1 9 8 4
and the first, second, and third quarters of 1 9 8 5 .
In his rebuttal testimony, Mr. Frost addressed issues raised by CAD
witness Norman Kilpatrick as t o APCO's current coal purchasing practices.
Thomas S. Jobes, Forecast Coordinator in the Controller's Department
of American Electric Power Service Corporation, presented a forecast of
APCO's estimated total company net energy requirements and cost for the
period of October 1, 1 9 8 4 through September 3 0 , 1 9 8 5 , and a detailed
overview of the methodology involved in the forecast.
The Commission Staff presented the testimony of three witnesses:
Bashar Khoury, Chief Utilities Analyst in the Finance and Special
Studies Division of the Public Service Commission, provided testimony in
support of the Stipulation and addressed the appropriateness o f the terms
of the Stipulation.
Earl E. Melton, an Engineer in the Electric Section of the Engineer-
ing Division of the Public Service Commission, presented a review of the
operating performance of generating units owned wholly or in part by APCO
during the July 1, 1 9 8 3 through June 3 0 , 1 9 8 4 period, comparing unit
thermal efficiencies to expected levels and unit reliability indices to
historical and national averages.
Darrell W. Preece, a Utilities Analyst in the Finance and Special
Studies Division of the Public Service Commission, presented evidence as
to APCO's coal and net energy costs during the period July 1, 1 9 8 3 through
June 3 0 , 1 9 8 4 and the net energy costs projected f o r the period October 1,
1 9 8 4 through September 3 0 , 1 9 8 5 . He provided a recommended fuel level for
the period October 1, 1 9 8 4 through September 3 0 , 1 9 8 5 and addressed the
PUBLIC SERVICE COMMISSION L OF WEST VIRGINIA
u.
appropriateness of using the estimated underrecovery level as of September
30, 1 9 8 4 which was adopted in the Stipulation.
The Appalachian Industrial Electricity Consumers presented the testi-
mony of two witnesses:
by Drazen-Brubaker and Associates, Incorporated, provided testimony relat-
ing to the proposed expanded NEC and the components included in the
expanded NEC. He also addressed the "experimental" designation of the
expanded NEC and made recommendations regarding this classification, and
commented on the use of incentive mechanisms in conjunction with the
expanded NEC.
Albert E. Clark, Senior Rate Consultant with the public utility con-
sulting firm of Hess and Lim, provided rebuttal testimony to the direct
testimony of CAD witness Byron L. Harris. Mr. Clark addressed Mr. Harris'
method of calculating the expanded NEC factors by class.
The Consumer Advocate Division presented the testimony of two
witnesses:
practices.
Byron L. Harris, Financial Analyst with the Consumer Advocate
Division, provided a calculaton of APCO's net over/underrecovery position
from October 1 9 8 2 through June 1984 and a calculation of the NEC recovery
factor excluding the proposed expanded NEC components. Mr. Harris a l s o
provided calculations of the expanded NEC recovery factor with and without
capacity equalization charges.
ISSUES
1. What is the appropriate level of underrecovery to be recognized?
2. What is the fuel-related NEC level to be recognized in rates?
3 . Should the expanded net energy cost (ENEC) concept be adopted as
proposed in the Joint Stipulation and Agreement for Settlement and Supple-
ment to Joint Stipulation and Agreement for Settlement in Case No. 83-697-
E-42T, APCO's pending general rate case?
4 . Is the test year 1983 used in APCO's pending rate case the
appropriate period upon which to base the non-fuel component of the
expanded NEC?
5. Should APCO be required, in future fuel review cases, to submit
testimony in a number of specific areas relating to generating unit per-
formance and to cooperate with the Commission Staff on evaluating generat-
ing performance assumptions using AEP's computer program PROMOD III?
6. (a) Should the Commission contact the Michigan Public Service
Commission regarding the repricing of AEP's affiliated coal from Utah
burned by AEP's Indiana-Michigan affiliate?
(b ) Should the Commission reprice coal purchased under future
long term contracts if they do not contain gross inequity clauses or
periodic unilateral price reopeners?
(c) Should APCO coal be repriced to the extent that the cheap-
est coal is diverted to other affiliates?
(d) Should the Commission order APCO to use every reopening
opportunity to lower the cost of coal and to make significant progress in
acquiring spot coal by cutting back to minimum obligations on high-priced
contracts?
(e) Should the Commission reprice Western coal if used during
any strike down to the level of APCO's non-affiliated purchases?
DISCUSSION
APCO calculated a cumulative NEC underrecovery balance, on an actual
basis, of $ 5 , 1 8 7 , 7 5 8 as of June 3 0 , 1 9 8 4 . A cumulative NEC underrecovery
balance of $ 5 , 8 2 9 , 3 1 3 as of September 3 0 , 1 9 8 4 , was determined on a fore-
cast basis, using estimates for the months of July, August and September
1 9 8 4 . In the Stipulation APCO and Staff agreed to use the September 3 0 ,
1 9 8 4 figure for the purposes of this proceeding, with the condition that
all post-January 1, 1 9 8 4 figures would remain open for review in the next
proceeding. This condition was based on the fact that APCO began cal-
culating over/underrecoveries using new engineering line loss factors as
of January 1, 1 9 8 4 , which Staff has not yet evaluated for reasonableness.
APCO derived the $ 5 , 8 2 9 , 3 1 3 underrecovery by recalculating the NEC recov-
ery position for the October 1 9 8 2 through September 1 9 8 3 period and esti-
mating over/underrecovery for the months o f July, August and September
1984 (TLS Exh. 1, pp. 6-7). The October 1 9 8 2 through September 1983
period was recalculated by APCO because the Company supplied incorrect
data to Staff at the last fuel review, which Staff used in determining the
over/underrecovery levels adopted in that proceeding (Case No. 83-384-E-
GI). The Commission subsequently denied APCO's Petition for Rehearing and
Reargument filed in that case. However, the Order of September 17, 1984
recognized that there may be some problems with the numbers utilized at
the last fuel review and stated that it would be appropriate for the
parties to address proper adjustments to the net overrecovery adopted in
the order of January 3 1 , 1 9 8 4 during the current fuel review. The
9 . PUBLIC SERVICE COMMISSION
OF WEST VIRGINIA
recalculation has produced an underrecovery level of $ 5 , 1 8 7 , 7 5 8 as of June
3 0 , 1 9 8 4 , which all parties, including the CAD, agree is the appropriate
level to be recognized as of that date. We are of the opinion that it is
reasonable and necessary to recalculate the West Virginia jurisdictional
October 1 9 8 2 through September 1 9 8 3 costs using the correct data in the
interest of producing an accurate actual net recovery position for pur-
poses of determining a fair and equitable rate for APCO.
The CAD took issue with the forward extension of the over/under-
recovery calculation to September, 1 9 8 4 , on the basis that the purpose of
this fuel review is to review actual costs for the period of July 1, 1 9 8 3
to June 3 0 , 1 9 8 4 . It is the opinion o f the CAD that the purpose of the
fuel review, that is, a review of actual costs, is not served by using
estimates for the July through September 1 9 8 4 period, and that this period
can be reviewed in the next proceeding along with the other nine months in
the annual review period.
The cumulative underrecovery level of $ 5 , 8 2 9 , 3 1 3 adopted in the
Stipulation was calculated in part on an estimated July 1984 underrecovery
of $ 2 2 7 , 6 5 6 (TLS Exh. 5 , p. 1). As indicated in the Stipulation, the
actual underrecovery for July 1 9 8 4 is $ 9 0 6 , 9 2 3 (Joint Exh. 1, p. 5 ) .
Therefore, the estimated underrecovery level as of September 30, 1 9 8 4 is
closer to actual experience through July than the June 30 figure proposed
by the CAD.
The figures adopted in APCO's current rate case and the figures
adopted in this fuel review proceeding will become effective October 1,
1 9 8 4 . Considering that the estimated period at issue in this case is
relatively short, we feel that it is reasonable and appropriate to adopt
PUBLIC SERVICE COMMISSION 1 0 . O F WEST VIRGINIA
the underrecovery figure of $5,829,313 as agreed to in the Stipulation.
The estimates for the months of August and September, adopted in this
proceeding, will be reviewed through deferred accounting at the next fuel
review proceeding.
2. What is the Appropriate "Fuel-Related" NEC Level?
As will be discussed below, this case involves the issue of whether
or not a new or ''expanded" NEC should be considered for purposes of fuel
review. The old or "fuel-related" NEC is the fuel-related NEC component
of the expanded NEC or ENEC.
The Stipulation adopts a fuel-related NEC jurisdictional average of
1.703c/Kwh at source level. The figure was derived by using a compromise
technique employing a 25-month trendline. The Staff's original 24-month
trendline, ended June 30, 1984 and extrapolated through September 30,
1985, produced a "fuel-related" NEC of 1.69Oc/Kwh. APCO recommended a
factor of 1.721c/Kwh based on forecasts of net energy costs and
requirements for the period of October 1, 1984 through September 30, 1985.
Prior to the settlement agreement between APCO and Staff, APCO's actual
fuel-related NEC for the month of July 1984 became available. APCO
suggested that the Staff's trendline should cover the most recent 24-month
period. The Staff agreed to adopt the July 1984 figures into the
trendline but was unwilling to drop the July 1982 figure. Thus APCO and
Staff agreed to a compromise technique using a 25-month trendline. The
1.703c/Kwh figure agreed to by the parties as a result of the compromise
technique produced a West Virginia jurisdictional fuel-related NEC approx-
imately $2 million less than APCO's original forecast (Joint Exh. 1, p.
4 ) . There was no disagreement over the energy l o s s factors to be applied
for the purpose of setting rates in this case; however, the Staff reserves
PUBLIC SERVICE COMMISSION
OF W E S T VIRGINIA 11.
the right to review and reverse, if necessary, APCO's 1984 engineering
estimates for line losses. The figure of 1.703c/Kwh developed using the
25-month trendline was not contested. Staff witnesses Bashar Khoury and
Darrell W. Preece both stated that a 25-month trendline is appropriate and
that there is nothing unique or special about using a 24 or 25-month
period. We are of the opinion that the compromise technique set forth in
the Stipulation is reasonable and therefore adopt a traditional NEC level
of 1.703c/Kwh.
3. Adoption of the "Expanded" NEC Concept on an Experimental Basis as Proposed in the Stipulation.
In Appalachian Power Company's current rate case, Case No. 83-697-E-
42T, Staff and APCO proposed an expanded net energy cost concept. This
proposal, agreed to by APCO and the Commission Staff, is set out in their
"Joint Stipulation and Agreement for Settlement" and "Supplement to Joint
Stipulation and Agreement for Settlement" in Case No. 83-697-E-42T. The
ENEC concept takes APCO' s net realizations associated with American Elec-
tric Power system sales out of rate cases and places them in the annual
NEC review proceedings. The CAD does not believe that incorporating reve-
nues and expenses associated with system sales in the NEC proceeding is
the appropriate means of dealing with system sales. For reasons stated in
our order of September 28, 1984 , in Case No. 83-697-E-42T we adopted the
expanded NEC on an experimental basis.
There has been much debate over the appropriate factors to include in
the expanded NEC. The parties to the Stipulation agreed that the appro-
priate factors for the purpose of calculating an "experimental" expanded
NEC are system sales, capacity equalization charges and other non-fuel
O&M. Most of the discussion surrounding these factors was focused on
12. PUBLIC SERVICE COMMISSION
OF WEST VIRGINIA
whether or not to include capacity equalization charges in the expanded
NEC. Capacity equalization charges are charges paid by APCO each month as
a result of APCO being a party to the interconnection agreement among AEP
companies. This agreement sets forth the terms of settlement between
generating companies of the AEP System of the cost of capacity and energy
used by member companies in making all sales, including system sales (R"
Rebuttal Exh. No. 1, p. 3). APCO contends that since capacity equaliza-
tion charges provide the means for sharing in the realizations from system
sales they should be included in the expanded NEC. On the other hand,
AIEC witness Donald Johnstone pointed out that it may not be proper to
include capacity equalization charges in the ENEC. He stated that these
charges are neither highly variable nor particularly difficult to
forecast. In addition, the capacity equalization payments do not neces-
sarily vary in relationship to the amount of system sales (AIEC Exh. 1,
pp. 5-8) . Mr. Johnstone believes that the capacity equalization charge is
the factor used in the ENEC which is most susceptible to change in the
next fuel review. He does, however, agree with the inclusion of these
charges in the expanded NEC with the caveat that this is an experimental
procedure (AIEC Exh. 1, pp. 3 - 4 ) .
The Commission notes that there are persuasive arguments on both
sides of the capacity equalization charge issue. The impact of including
capacity equalization charges in the NEC review is unknown. We find it is
appropriate to include this factor in the experimental ENEC at this time,
and would expect the matter to be re-litigated at the next fuel review.
The effect of classifying the ENEC as experimental is to ensure that the
Commission and parties to future fuel proceedings will explore the work-
ings of the expanded NEC to determine if it has resolved the system sales
PUBLIC SERVICE COMMISSION OF WEST V l R O l N l A
1 3 .
problem in a fair and equitable manner. In addition, it will not be
necessary to show that the current definition is unreasonable in order to
make changes in the expanded portion of the NEC in future fuel reviews.
It will only be necessary to show that an alternative definition is more
equitable than the one currently being adopted.
4 . Is the Test Year 1983 the Appropriate Period Upon Which to Base the Non-Fuel Component of the ENEC?
The non-fuel component utilized by APCO and Staff in determining the
expanded NEC adopted in the Stipulation is based on test year 1983 figures
used in APCO's current rate case, Case No. 83-697-E-42T (Staff Exh. DWP-G
and TLS Exh. 6 , p. 3 of 4 ) . This was the component used in the parties'
Stipulation in the above-mentioned rate case for the purpose o f deter-
mining an appropriate rate should the Commission adopt the expanded NEC
concept.
The CAD opposes the use of a non-fuel component based on the 1983
test year on the basis that the most recent actual data available should
be used. They suggest the use of a non-fuel component as of the 12 months
ending June 30, 1984 which includes a system sales net realization of
$71.2 million. The CAD argues that use of the 1984 data is more accurate
since APCO's system sales have been higher in 1984 than 1983 and it
synchronizes the expanded NEC with the July through June actual review
period employed in APCO's NEC cases.
APCO maintains that forecasted system sales realization levels for
the year ending September 30, 1985 of $65.3 million are not going to be
radically different from the $ 6 4 . 6 million 1983 level and deferred fuel
accounting can correct any differences that do occur (R" Exh. 1, pp. 2
and 3 and R" Reb. Exh. 1, p 8 ) .
PUBLIC S E R V I C E COMMISSION O F W E S T VIRGINIA
1 4 .
All parties, except CAD, agree on using the calendar 1983 system
sales realization levels in developing the ENEC. One of the reasons that
the experimental NEC concept is being adopted is that system sales are
variable and difficult to predict. CAD recommends use of the most recent
1984 figures; however, there is no guarantee that these figures will be
any closer to the actual 1985 system sales than the 1983 system sales
results, and there is evidence that the 1985 system sales levels will not
be radically different from the 1983 test year.
Therefore, considering that this is an experimental procedure and
that deferred fuel accounting can correct differences that occur between
the 1983 test year and actual experience for the forecast period, we are
of the opinion that it is reasonable and appropriate to base the system
sales component of the experimental ENEC on the 1983 test year used in
APCO's current rate case.
5 . Should APCO be Required, in Future Fuel Review Cases, to Submit Tes- timony in a Number ok Sp eciiic Areas Relating to Generating Unit Per- €ormance and to Cooperate with the Commission in Evaluating Generat- ing Performance Assumptions Using AEP's Computer Program PROMOD 111.
Staff witness Earl E. Melton recommended that operating performance
reviews be used as a factor in determining the reasonableness of fuel
expense. In furtherance of this he recommends that the Commission require
APCO to submit testimony relating to operating performance in six specific
areas (Staff Exh. EEM-A, pp. 9-10). In addition, MY. Melton believes that
APCO should be required to cooperate with Staff in evaluating performance
assumptions used in PROMOD I11 (Staff Exh. EEM-A, p. 10).
APCO felt that it may be unnecessarily burdensome to be compelled to
present prefiled testimony in areas that might not even be the subject of
controversy. APCO and Staff agreed in the Stipulation that the
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significant issues could be sorted out in the discovery process and
addressed in their direct and rebuttal testimony to whatever extent is
appropriate. APCO also agreed to cooperate with Staff in evaluating
reasonable performance assumptions used in PROMOD 111. No parties con-
tested this provision of the Stipulation. The Stipulation encourages co-
operation between APCO and Staff and may have the desired effect of reduc-
ing the issues presented at future fuel reviews. We find that this pro-
vision of the Stipulation is reasonable and therefore do not feel it is
necessary to order APCO to submit testimony on a number of specific areas
of unit performance.
6(a). Should the Commission Contact the Michigan PSC Regarding Repricing ok Coal?
One of the issues raised in earlier fuel reviews was whether or not
the policy of repricing captive coal provides APCO with an incentive to
allow the prices in its non-affiliated contracts to rise. This issue
should become less significant in future fuel reviews since APCO has
recently divested itself of affiliated mines. CAD witness Norman
Kilpatrick points out that the Michigan Public Service Commission utilizes
two APCO contracts (DAL-TEX and Massey) to reprice AEP's affiliated coal
from Utah (Blackhawk Coal Company) burned by the Indiana-Michigan plant.
Mr. Kilpatrick states that AEP thus has an incentive to allow these APCO
contracts to rise in price because of the Michigan PSC's method of repric-
ing (CAD Exh. 1, p. 6). Therefore, CAD recommends that we contact the
Michigan PSC and request that they use a different method to reprice
Indiana-Michigan's affiliated coal.
16. PUBLIC SERVICE COMMISSION O F WEST VIRGINIA
APCO witness Thomas G. Frost points out that only 1,080 tons of
Blackhawk Coal is subject to repricing by the Michigan PSC (TGF Reb. Exh.,
p. 2).
We are of the opinion that it is not appropriate to request the
Michigan PSC to change their repricing practices at this time due to the
minimal amount of coal involved and the lack of evidence that AEP is in
( 1 fact manipulating APCO contracts to benefit the price of the 1,080 tons of Blackhawk Coal.
6 ( b ) . Should the Commission Reprice Coal Purchases Under Future Long Term Contracts if they Do Not Contain Gross Inequity Clauses or Periodic Unilateral Price ReoDeners?
The CAD is of the opinion that APCO requires a positive incentive to
insist on reopeners which reflect market conditions in their long term
contracts. The CAD, therefore, recommends that the Commission state that
it expects future long term contracts to contain gross inequity clauses or
periodic unilateral reopeners for the benefit of APCO. Should these con-
tracts not contain the recommended clauses, then the Commission should
reprice coal according to a "market basket'' approach (CAD Exh. 1, pp.
4 - 5 ) .
The Commission encourages APCO to insist on contract provisions which
keep the cost of coal at a price advantageous to APCO and the ratepayer.
The Commission recognizes that there are many market factors involved in
the negotiation of a coal contract, such that demand for the inclusion of
a specific term may trigger a demand for an offsetting term in the negoti-
ating process; however, we are of the opinion that there is merit to the
CAD'S recommendation. While we will not at this time commit to repricing
coal tonnage under contracts negotiated at arm's length, we believe it is
appropriate, especially considering APCO's purchasing power, to continue
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O F WEST VIRGINIA
to monitor APCO's purchasing practices to assure that they are making
progress in bargaining for the most advantageous terms possible under the
market conditions, including favorable price reopener clauses. We will,
however, not rule out the future consideration of the CAD's recommendation
should APCO not show continuing effort and progress in this area.
6(c). Should the Commission Reprice Coal to the Extent that APCO Diverts Its CheaDest Coal to Other Affiliates?
CAD witness Kilpatrick makes the assertion that APCO has a policy of
diverting its least expensive coal to affiliates. He further states that
retention of the high cost coal while exporting low cost coal has the
effect of raising APCO's overall coal cost. Mr. Kilpatrick recommends
that the Commission reprice the highest priced APCO coal to the FOB mine
price of exported coal (CAD Exh. 1, pp. 9 and 10).
The record does not support the contention that APCO retains high
cost coal while exporting only low cost coal. The Commission recognizes
that there are many operating reasons involved in the determination of
diverting coal such as boiler designs, environmental standards, transpor-
tation problems and inventory problems (TGF Reb. Exh. 1, p. 5). We will,
therefore, not adopt the CAD's recommendation on this issue.
6(d). Should APCO Use Every Reopening Opportunity to Lower the Cost of Coal and Acauire More SDot Coal bv Cuttine Back to Minimum Contrac- tual Obligations.
The CAD recommended that the Commission make it clear that we expect
APCO to make significant progress in acquiring low-cost spot coal by cut-
ting back to contractual minimum delivery levels of high-priced coal, s o
long as the spot market remains weak, and that we expect APCO to use every
reopening opportunity to "drive down" the cost of coal (CAD Exh. 1, p. 4 ) .
18. PUBLIC SERVICE COMMISSION
OF WEST VIRGINIA
The Commission believes that the record indicates that APCO has made
progress in the area of renegotiating for favorable contract terms and
acquiring spot coal. The Company has renegotiated several contracts with
the result of lowering the cost of coal (TGF, Exh. 1, pp. 3-13 and TGF
Reb. Exh. 1, pp. 7-8).
APCO has reduced several of its contracts to minimum tonnage obliga-
tions and expects its current contract portfolio to allow the opportunity
to purchase approximately 20% of its coal on the spot market (TGF Reb.
Exh. 1, p. 8 and TGF Exh. 1, p. 13).
While we recognize that APCO has made progress in lowering the cost
of its coal through renegotiation and purchasing on the spot market, the
Commission will continue to scrutinize APCO's purchasing practices to
assure that they are using every opportunity to lower the cost of coal.
We are of the opinion that it is appropriate to expect APCO to use all
reopening opportunities to renegotiate for lower costs and to continue to
make progress in cutting back to minimum contractual obligations on high
price coal to take advantage of a weak spot market, whenever possible.
This i s reasonable and appropriate since it will serve to benefit APCO and
the ratepayers in lowering APCO's costs.
6(e). Repricing of Western Coal.
CAD witness Kilpatrick has recommended that the Commission not con-
done the use of Western coal at APCO plants during any strike and that
Western coal should be repriced to the level of APCO's non-affiliated pur-
chases i f it is used (CAD Exh. l, p. 10). APCO maintains that its strike
contingency plans do not include an expectation that Western coal will be
needed at APCO plants (TGF Reb. Exh., pp. 6-7).
PUBLIC SERVICE COMMISSION
m
We are of the opinion that an order should not be issued on a contin-
gency that has not yet occurred, especially since the impact of such a
contingency, i.e., the purchase of Western coal during a UMWA strike, on
APCO's net energy costs is unknown. Furthermore, the Commission does not
want to restrict the resources available t o APCO in the event of unusual
circumstances. Therefore, we do not adopt the CAD'S recommendation on
this issue.
Future Reviews
During their closing statements, counsel for APCO and CAD discussed
the possibility of moving the hearing schedule ahead in order to give the
parties more time to prepare their evidence if the expanded net energy
concept is adopted. Considering the new factors involved in the fuel
review proceeding it may be appropriate to expand the discovery period,
but to keep the same filing and hearing schedule, as suggested by counsel.
The Commission will, therefore, consider petitions from the parties on the
adoption of an extended procedural schedule for the next fuel review.
FINDINGS OF FACT
1. The data supplied by APCO at the last fuel review and used by
Staff to calculate the over/underrecovery position adopted in that pro-
ceeding was incorrect.
2 . APCO has recalculated its West Virginia costs for the October
1 9 8 2 through September 1 9 8 3 period using correct data, which supports an
underrecovery level of $ 5 , 1 8 7 , 7 5 8 as of June 30, 1 9 8 4 .
3 . All parties agree to the June 3 0 , 1 9 8 4 underrecovery level cal-
culated by A P C O , but with reservations regarding line loss factors after
January 1, 1 9 8 4 .
2 0 . PUBLIC SERVICE COMMISSION O F WEST VIRGINIA
4 . The Stipulation adopts an underrecovery level of $ 5 , 8 2 9 , 3 1 3 as
of September 30, 1 9 8 4 by using estimated over/underrecovery for the months
of July, August and September 1 9 8 4 .
5. Staff agreed to accept APCO's underrecovery balance as of Sep-
tember 30, 1984 with the understanding that a l l post-January 1, 1984
over/underrecovery balances would remain open to review since Staff has
not evaluated new line l o s s factors which APCO is using in the calculation
of its over/underrecovery.
of 1.703c/Kwh based on a 25-month trendline.
7 . The expanded NEC proposed in the Stipulation in Case No. 83-697-
E-42T transfers consideration of revenues and costs associated with system
sales to the fuel review proceedings.
8. The expanded NEC is proposed on an experimental basis.
9 . The inclusion of capacity equalization charges in the expanded
NEC is questionable.
1 0 . The Stipulation recommends that the new non-fuel energy
components of the expanded NEC be based on 1 9 8 3 levels.
11. Deferred fuel accounting can correct any differences between the
figures used to compute the new non-fuel component of ENEC and actual
system sales.
12. APCO and Staff have agreed to sort out issues of significance
relating to generating unit performance in the discovery process and
address the issues to the extent deemed appropriate in the circumstances.
13. APCO has agreed t o cooperate with the Staff in evaluating gen-
erating performance assumptions using AEP's computer program PROMOD 111.
PUBLIC SERVICE COMMISSION
OF W E S T VIRGINIA 21.
1 4 . There is no evidence to support CAD'S assertion that A P C O has an
incentive to manipulate the price of its non-affiliated coal based on
1,080 tons of affiliated coal burned by APCO's affiliate Indiana-Michigan.
15. There are many market forces at work in the negotiation of
long-term coal contracts which affect the terms of the contract.
16. There are several operating factors taken into consideration in
APCO's diversion of coal to other affiliates, not only price.
17. APCO has made reasonable progress in lowering its average cost
of coal through renegotiations and spot purchases.
18. APCO has developed contingency plans which do not include the
expectation of the need for Western coal during a UMWA strike.
1 9 . It may be appropriate to extend the schedule for the next fuel
review on account of the additional factors adopted in the expanded net
energy cost.
CONCLUSIONS OF LAW
1. It As appropriate and reasonable to ampt the estimated under-
recovery level of September 30, 1 9 8 4 .
2. APCO's post-January 1, 1 9 8 4 over/underrecovery balances will
remain open to review and redetermination since APCO is applying new line
l o s s factors to its calculation of over/underrecovery, which Staff has not
had an opportunity to evaluate.
3 . A fuel-related or ''traditional" NEC of 1.703c/Kwh derived from
Staff's 25-month trendline method is a reasonable calculation of APCO's
net energy cost.
4 . The expanded NEC as proposed in the "Joint Stipulation and
Agreement for Settlement'' and "Supplement to the Joint Stipulation and
PUBLIC S E R V I C E COMMISSION 22. OF WEST VIRGINIA
Agreement for Settlement" in Case No. 83-697-E-42T may be an appropriate
alternative for dealing with system sales.
5. The expanded NEC is to retain an "experimental" classification
until the Commission orders otherwise.
6. The experimental classification of expanded NEC is used to
ensure that the Commission and the parties to future fuel proceedings will
explore the working of the expanded NEC to determine if it has resolved
the system sales problem in a fair and equitable manner.
7. The experimental classification indicates that it will not be
necessary for the parties to show that the current definition is unreason-
able in order to make changes in the expanded portion of NEC. It is only
necessary to show that an alternative is more reasonable.
8. The inclusion of capacity equalization charges in expanded NEC
is reasonable considering the experimental classification of the ENEC
concept.
9 . It is reasonable to adopt a non-fuel component of expanded NEC
based on 1983 levels.
10. It is not appropriate for the Commission to formally contact the
Michigan Public Service Commission regarding the repricing of AEP affili-
ated coal burned at the Indiana-Michigan plant.
11. It is not appropriate, at this time, to adopt a policy of
repricing coal purchased under long-term contracts which do not contain
gross inequity clauses or periodic unilateral price reopeners.
12. APCO should bargain for the most advantageous terms possible
under the market conditions, including gross inequity clauses and periodic
unilateral price reopeners.
2 3 . P U B L I C SERVlCE C O M M l S S l O N OF WEST VIRGINIA
13. APCO should continue to make progress in lowering the cost of
coal through using reopening opportunities and cutting back to minimum
obligations on higher price contracts in order to take advantage of a weak
spot market.
14. It is not appropriate t o adopt a policy of repricing Western
coal in the event that it is purchased during a strike when APCO has tes-
tified that it has no expectations of needing Western coal.
remain open for review and reconsideration at the next fuel review.
I 4 . APCO and Staff will determine the significant generating
ORDER
performance issues in the discovery process and address those issues as
IT IS, THEREFORE, ORDERED that:
1. APCO and Staff's recommendation to implement an expanded NEC on
an experimental basis in accordance with the "Joint Stipulation and
Agreement for Settlement" and "Supplement to Joint Stipulation and
Agreement for Settlement" in Case No. 83-697-E-42T is hereby approved,
with emphasis on the experimental nature of expanded NEC.
2. The expanded NEC increment recommended in the Stipulation,
effective October 1, 1984, and attached hereto as Appendix A, shall be,
and hereby is, adopted as just and reasonable. Such increment is included
in the rates being approved contemporaneously in Case No. 83-697-E-42T.
3 . APCO's post-January 1, 1984 over/underrecovery levels will
they deem appropriate in the circumstances.
5. APCO will cooperate with Staff in evaluating reasonable
performance assumptions using AEP's computer program PROMOD 111.
PUBLIC S E R V I C E C O M M I S S I O N OF WEST VIRGINIA
2 4 .
rn
. 6. APCO should continue to make progress in lowering the cost of
coal by using every reopening opportunity to renegotiate a lower price and
cutting back to minimum contractual obligations on high price coal in
order to take advantage of a weak spot market.
7. The Executive Secretary of the Commission shall serve a copy o f
this order upon all parties of record by United States First Class Mail.
COMMISSIONER.
CHAIRMAN.
RMA/is
=ON
s!EEsE (2)
e m 1 . 955 1 . 955 1 . 955 1 . 926 I . 856 1.917
1.851
I . 803 1,787 1.745
-: m $0.039203/KW
over 90 m
off-peak 1 2 - 4 0 m 41 - 90 Kv over 90 Kv
1 . 803 1.787 .l, 745
$O.O10801/lW $O.O11214/XW $0 , 01U14/Kw
0 . oonc/Kwa SL