Closed-door talks common in utility-rate cases

Dec 19 - McClatchy-Tribune Regional News - Dan Gearino The Columbus Dispatch, Ohio

The process that led to an American Electric Power rate increase approved by the Public Utilities Commission of Ohio last week could be described as double-secret negotiations.

Before official negotiations ever took place, behind-the-scenes conversations between AEP and the PUCO were used to put the outline of a deal in place, according to documents obtained by The Dispatch through a public-records request.

The PUCO is a state agency charged with regulating the state's utilities, and the rate-approval process is supposed to be transparent and conducted in a way that serves the public interest.

The AEP plan failed on both counts, said Sam Randazzo, lead attorney for Industrial Energy Users-Ohio.

"It is a bad deal measured by everything the commission is obligated to obey and respect," Randazzo said in testimony filed in the case.

This is one of the first major cases handled by new leadership at the PUCO. The result is a package that gives AEP about half of the additional money it wanted, and it gives advocates for deregulation some of the policy changes they wanted. To get there, both sides made concessions.

Notably absent from discussion of the final agreement were consumer advocates, who argue that the proposal contains years of unjustified rate increases.

And the process raised concerns about the relationship between regulator and regulated utility.

Here's an example: AEP's rate proposal in January included $173 million worth of charges to cover the cost of environmental programs and of customers switching to other electricity providers. But an Ohio Supreme Court decision in April said that such charges weren't legal, and it appeared that the charges would have to be reduced or eliminated.

When AEP came up with a new version of the plan in August, the company's solution to the issues raised by the court case was to eliminate $173 million for the improper charges for 2012 but add $173 million to base rates.

The PUCO board modified and approved the plan last week, allowing an increase of about $75 million in base rates for 2012. The panel is led by an appointee of Gov. John Kasich, Todd Snitchler.

Snitchler said the PUCO made a great effort to serve the public good in that case and does so in general.

"We're responsible to all ratepayers across the spectrum, whether it's residential, commercial or industrial," he said.

Terri Flora, an AEP spokeswoman, said the results show this was a fair process.

"From the start, this settlement agreement never included what all parties wanted, but more so reflected significant compromises by a number of stakeholders," she said.

Officially, the AEP settlement talks began on Aug. 3. That's when more than 20 companies and organizations met at the PUCO offices in a Downtown office building for closed-door talks to see whether they could agree on a version of the utility's rate plan that had been issued in January.

The other interested parties had spent most of the year preparing to argue about AEP's original plan, but what they didn't know is that additional communication had been going on since mid-June between AEP and the PUCO. In effect, these were the closed-door talks within the closed-door talks.

By late summer, the original rate plan had been replaced by a new one. The framework of the new plan was based on documents AEP had been exchanging with the PUCO staff for at least a month during the summer, according to emails between PUCO staff members.

Flora said there was nothing unusual about the meetings, and she noted that the PUCO staff also held meetings with other parties in which AEP representatives were not present.

Matt Butler, a PUCO spokesman, said the agency's staff has an "open-door policy" for groups that want to meet. The discussions with AEP were about the underlying application from January, not a new proposal, he said.

Responding to concerns that too much took place behind closed doors, he said that much of the process was carried out in public, including a 13-day hearing and thousands of pages of testimony.

People involved in the case say they are not surprised to learn about what happened behind the scenes, even if they don't like it.

"It's just standard operating procedure, and consumer advocates have had to adapt to it," said Dave Rinebolt, executive director of Ohio Partners for Affordable Energy, an advocacy group for low-income customers.

Often, by the time the official negotiations begin, the company and the PUCO staff have settled most of their differences, said Janine Migden-Ostrander, who was the state's consumers' counsel until she stepped down in mid-October. The final agreement is often a deal between the company and the PUCO's staff, layered with incentives for business groups, environmentalists and others to get them to sign on.

"It creates a political cover so the commission can say, 'All these parties support this thing,"" Migden-Ostrander said. "They'll try to get one consumer group, one industrial group, one environmental group, and then they'll say, 'Gee whiz, we have a broad range of stakeholders.' "

This viewpoint extends to some of the businesses and other organizations that regularly appear before the PUCO.

"There's really been no representation of the little guy at the table," said Steve Casciani, CEO of Border Energy in Powell, a natural-gas and electricity supplier.

Emails from participants show some of the back-and-forth of negotiations. This ranged from big issues, such as the millions of dollars in rate cuts desired by big manufacturers, to small ones, such as the $100,000 for street lighting desired by the cities of Hilliard and Grove City.

In an Aug. 26 message, an attorney representing Hilliard, Grove City and the Association of Independent Colleges reminded the PUCO staff what his organizations wanted out of the deal. The attorney said he had discouraged his clients from speaking to the news media about their view that AEP's proposed rates were "unwarranted and problematic," and he hoped AEP would give his clients at least some of what they wanted. All three of his clients supported the final deal.

After three weeks of talks, several of the parties indicated they could not support the AEP plan. This included all the consumer groups, Industrial Energy Users-Ohio and one of AEP's rivals, FirstEnergy.

And then there were groups that were never part of the negotiations. Small-business advocates didn't send an attorney to even monitor the case, and their constituents suffered. The Dispatch reported earlier this month that the AEP plan imposed some of the largest rate increases on certain types of small businesses.

The PUCO staff and other parties decided to continue the talks with only the smaller number of groups that still saw the possibility of a compromise.

Eric Weldele, chief of staff for the PUCO, says his staff was one of the last parties to agree to the AEP plan, not one of the first. He disagrees with anyone who suggests that the staff is too cozy with the utilities it regulates.

"We are truly interested in bal-

ancing all of the interests across the state of Ohio," he said. "We are not looking to the bent of the utilities or anyone else."

Shifting costs

The case took place in the shadow of the April ruling by the Ohio Supreme Court that said the PUCO had not justified the amounts of several charges in a previous AEP rate plan --charges for environmental programs and for the potential costs of customers switching to other electricity providers.

During negotiations, the $173 million that AEP wanted to cover those costs suddenly disappeared and was replaced with an additional $173 million in base rates.

PUCO staff members noticed the shift; one wrote to a colleague in an Aug. 27 email that "oddly enough," the two numbers were the same. "Oddly enough" was followed with a smiley-face icon. TheDispatch obtained the email through a public-records request.

Other emails provide more evidence of this transfer. On Aug. 24, a staff member wrote to colleagues that "we would like to move EICCR to base g," which is a reference to moving environmental costs to base-generation costs. The final agreement contained no reference to environmental costs being a component of base rates.

So when the court presented an obstacle, AEP and the PUCO staff responded by working together to shift dollars in a way that allowed the questionable charges to continue under a different name.

Butler, the PUCO spokesman, said this is a mistaken reading of the emails. "The charges were eliminated, not moved," he said.

AEP declined to comment about this issue because it deals with parts of negotiations that a PUCO administrative-law judge has said are confidential. The Dispatch received not only a redacted version of the Aug. 27 message but also an unredacted version, apparently by accident.

On Sept. 7, AEP said it had reached a settlement with most of the participants. In this version, the 2012 base-rate increase was $151 million, which was $22 million less than the company had previously sought but much more than the roughly $75 million the PUCO board later approved.

Although that doesn't replace the $173 million in improper charges, it is much more than consumer groups said would be appropriate, considering that rates had steadily increased in the prior three years.

If not for the emails, there would be no evidence of what happened. The lack of evidence means that critics of the plan would have had a much more difficult time arguing, in court or otherwise, that the improper charges had merely been renamed.

The September version of the plan had at least one big policy shift from the one in January. AEP agreed to change its corporate structure by 2015 in a way that embraces deregulation. This is similar to a plan Duke Energy agreed to a few months later, an approach long sought by business groups.

Despite all the differences between the January and September proposals, the increase in money for AEP was about the same, according to testimony filed in the case. The January plan called for an average rate of 8.88 cents per kilowatt hour in 2012, while the September one called for an average of 8.83 cents, a difference of 0.05 cents. The average includes all customers of both of AEP's Ohio operating companies: Columbus Southern Power and Ohio Power.

Twist ending

The PUCO board surprised many observers last week when it modified the September plan. Among other changes, the board said it would allow only 50 percent of the generation base-rate increase from the prior plan. In 2012, this is an estimated $75 million difference. Including the two following years, the combined difference is an estimated $300 million.

AEP has not yet said how the plan will affect a typical bill for residents.

Snitchler said the board had to change the agreement the staff had signed because of a number of concerns. For one, evidence in the case showed that the rate increases in the September plan would have led to prices higher than the equivalent prices on the open market, he said. This would have violated a provision of a 2008 state energy law, inviting a legal challenge.

"We certainly are mindful of potential rate impacts across all customer bases," he said. "When we took a look at what the (September plan) provided for, we thought there were ways for us to improve upon what was already there. We hope that this is palatable to AEP. We think that it's good for consumers."

Randazzo, the attorney for Industrial Energy Users-Ohio, said the ruling reduces many of the problems in the proposal, but it does not eliminate them.

"If you look at it from a legal perspective, the law obligated the commission to modify the settlement," he said.

The result does not wipe away concerns about a flawed process, he said.

dgearino@dispatch.com