Ever listened to an investor owned utility's earnings call? They're an acquired taste, because your first one sounds like complete and utter gibberish. Are these people speaking English? Is there some fancy 1% business speak language that they didn't teach you in school? Nope. I think company management just plain ol' makes crap up to keep the investment analysts guessing.
Case in point -- Nick Akins and his "block and tackle spending."
And then, when you look at the other capital that we're spending, it's block and tackle spending that typically is recovered from a regulated standpoint.
Blink. Blink. What? Just for shits and giggles I plugged "block and tackle spending" into google. I got a wikipedia description of block and tackle
that describes it thus: "...a system of two or more pulleys with a rope or cable threaded between them, usually used to lift or pull heavy loads,"
and a whole bunch of boating websites. So, Nick is going to rig up some contraption that spends money using a system of pulleys and rope? Sounds complicated. I guess that's why they pay him the big bucks!
Anyhow... once you realize that the emperor has no clothes and that these corporate elitists are really not speaking in some special language, like pig latin, that your plebeian self doesn't understand, earnings calls are quite entertaining. AEP's 4Q 2013 call on Monday was no exception.
AEP's CFO finally gets around to admitting that energy efficiency has flattened out residential demand growth and it's not expected to recover.
Residential sales, shown in the upper left quadrant, were up 0.9% for the quarter, which brings the annual sales flat to 2012. We continue to see modest customer growth in our Western service areas, while our East customer accounts were essentially flat. Average usage per customer has been impacted by home energy efficiency programs. For these reasons, we are expecting normalized residential sales to be down nearly 1% in 2014.
Too bad he's arriving late for the party. How much do they pay this guy to make these brilliant conclusions?
AEP also got some apt questions about its planned "transmission spend," such as what it's going to take to make AEP fall out of love with transmission as an investment vehicle... oh, say, maybe as a little section 206 complaint or two:
Michael J. Lapides - Goldman Sachs Group Inc., Research Division
Yes, 2 questions unrelated. First, on the transmission side. We've seen in the MISO and in New England dockets where interveners are seeking lower transmission base ROEs. If same things happens in some of -- whether it's the Southwest Power Pool, whether it's in PJM, how -- what do you think that tipping point is where we change or, I don't know, you're incentive or your desire to be a sizable investor in transmission in the U.S.?
Nicholas K. Akins - Chairman, Chief Executive Officer, President, Member of Executive Committee and Member of Policy Committee
I think, as long as transmission is, at a premium or equal to the state rates, we're in good shape. And I think, clearly, there is an incentive being placed on building transmission. We're happy with that. And if -- really, once again, the FERC needs to send some messages here that from a policy perspective that we want to continue building transmission in this country. And as long as that premium is at or above the state rates, then we're in good shape.
Brian X. Tierney - Chief Financial Officer and Executive Vice President
FERC was clearly, Michael, looking to attract a capital into this space. And what they've done with their ROEs has done exactly what FERC wanted to happen. So as long as they, as Nick was saying, as long as they continue to send a signal that they want increased investment in this area, we'll respond to that signal.
Nicholas K. Akins - Chairman, Chief Executive Officer, President, Member of Executive Committee and Member of Policy Committee
Okay, I think it's good -- I think, it continues to be part and parcel to the overall grid expansion that's going on in the resilience of the grid. And there's going to continue to be spin regardless. The question is, do you really want to satisfy that precursor of transmission being build out to respond to the generation retirements and so forth to optimize the grid so that you can do that as a prerequisite and then focus on the rest of the underlying system. That's what key. I think you got to get through this transitional process we're at in this industry. So transmission needs to be incentivized in that regard because that will provide the greatest benefit in terms of resiliency of the grid, but also in terms of the optimization of the resources that are attached to the grid.
Blah, blah, blah, grid expansion, transmission build out, blah, blah, what could go wrong
What about fierce, organized opposition to AEP's transmission plans? The people have spoken and their action has seriously complicated or delayed many of AEP's transmission plans, in the past, currently, and in the future. In fact, opposition is getting more organized and more knowledgeable. And we're not going away.
AEP needs a new business plan. Transmission is not the carefree investment vehicle Nick thinks it is...
Frederick County Commissioner Billy Shreve is asking Potomac Edison to donate some land for a park; specifically, the 150-acre Browning Farm, where the utility was planning to build a substation for the Potomac Appalachian Transmission Highline.
He called it a win-win for First Energy and county citizens.
Mr. Akins said he wants to avoid the bruising battles that delayed or doomed big projects in the past, like the 275-mile Potomac-Appalachian Transmission Highline project from West Virginia to Maryland. AEP and partner FirstEnergy Corp. dropped development plans for the complex project in 2011.
"Sometimes, we were just dreaming" that the companies could get enormous power lines built across multiple states, Mr. Akins said. He said AEP now is focusing on shorter projects blessed by federal regulators that eliminate grid bottlenecks. "It's where you want to put your money," he said.
The transmission investment gravy train has also left the station. The sheer number of new transmission projects proposed combined with today's ease of online information sharing and social media tools has led to an explosion of knowledgeable, interconnected transmission opposition groups who are combining resources across the country to delay or stop unneeded projects altogether.
Instead of embracing innovation and new technology to make the existing grid smarter
, some utilities are intent on merely building more of the same old dumb grid, or actively attempting to stifle innovation by forcing us all into an historic "consumer" position where we must funnel money to incumbent utilities in order to survive
. Ultimately, this plan will also fail, because technology marches relentlessly on
How we produce and use electricity is also changing. Not only is producing our own electricity locally better for our economy, it's also much more reliable. Hurricane Sandy was one of the biggest wake-up calls we've had recently, and the inevitable Monday morning quarterbacking of that disaster reveals that increasing long distance, aerial transmission from remote generation is simply dangerous.
Making our grid more reliable isn't about building more transmission. It's about change:
This includes traditional tactics, such as upgrading power poles and trimming trees near power lines. But it also encompasses newer approaches, such as microgrids and energy storage, which allow operators to quickly reconfigure the system when portions of the grid go down. Implicit to such plans is the need to ensure uninterrupted power to critical sites such as oil and gas refineries, water-treatment plants, and telecommunication networks, as well as gasoline stations, hospitals, and pharmacies.
Some of the nation’s leaders seem receptive to such approaches.
Elected officials, progressive regulators, energy producers, energy consumers, and innovative companies embracing new technology are also increasingly joining forces to move our energy economy forward and away from the dated centralized generation and transmission business plan of the past. Companies who continue to deny the inevitable will ultimately be the ones left behind in irrelevance.
The Columbus Dispatch
and a couple of investment analysts gushed all over AEP CEO Nick Akins for "leading on ideas" yesterday.
What's Nick's idea? Getting out of the generation business and betting AEP's future on long-distance transmission.
...a transformation of the company’s structure and a shifting notion of what AEP needs to do to remain relevant in a changing energy landscape.
In doing so, the company is de-emphasizing what was once a crown jewel, the fleet of Ohio power plants, and putting a greater focus on developing an interstate network of power lines.
“The less we have to spend on centralized generation, the better off we are,” he said in a recent interview.
When he says “centralized generation,” he means big power plants. AEP will be closing more plants than it is building.
The company is shifting resources so it can expand its transmission system, made up of the high-voltage power lines that carry electricity across state lines and between metro areas.
Maybe ol' Nick missed the EEI report earlier this year, Disruptive Challenges: Financial Implications and Strategic Responses to a Changing Retail Electric Business
. The report cautioned electric utilities to avoid "that Kodak moment" for investors by embracing new technology and addressing competitive threats.
While getting out of the competitive centralized generation business "addresses" the threat that AEP may lose some of it's golden eggs in an unpredictable market, AEP is not embracing new technology or making itself relevant in a changing energy landscape. It's simply putting even more of its golden eggs into a business plan that it will help to make obsolete.
As competitive centralized generation closes, it is being replaced by independently owned distributed generation. Distributed generation doesn't need new transmission. Nick won't be collecting any eggs if he kills all the chickens.
A better idea to embrace new technology and establish future relevance was adopted by competitive generation company NRG earlier this year.
...NRG is installing solar panels on rooftops of homes and businesses and in the future will offer natural gas-fired generators to customers to kick in when the sun goes down, Chief Executive Officer David Crane said in an interview.
AEP loves regulated businesses. It's a guaranteed revenue stream for a bulky, staid, not-particularly-innovative company.
AEP, which was reluctant to split its Ohio operations, has responded by focusing on the delivery business.
Meanwhile, the Ohio power plants are a shrinking asset. Because of environmental rules and the age of some of the plants, the company has announced a series of shutdowns that will occur over the next few years.
Also, AEP is in the process of transferring two plants away from Ohio regulation. The plants, both of which are in West Virginia near the Ohio line, will be regulated in nearby states that allow a utility to sell electricity directly to consumers.
Once the moves are complete, AEP will have 8,668 megawatts of power-plant capacity in the new Ohio power-plant subsidiary, which will be down from 11,652 megawatts today.
Akins says the company is responding to an economic climate in which there is little reason to build power plants in Ohio. The state’s electricity demand has been flat, and the regulatory structure provides no clear way to pay for plant construction.
So, dumping competitive, centralized generation is a smart idea, but increasing investment in long distance transmission to support a shrinking pool of centralized generators is not sustainable.
While AEP is banking on federally regulated interstate transmission to nearly double earnings from transmission activities from 2013 to 2014, AEP seems to have forgotten what happened with its PATH project. Big, interstate transmission projects with long lead times lead to big failure. That's because "need" for these projects is constantly shifting, and if opposition can delay them long enough, they become obsolete. Opposition is growing by leaps and bounds. AEP ain't seen nothing yet!
It's a risky proposition and I don't think it's a particularly good idea.
Akins says he’s having fun and is eager to see the work of the past two years come to fruition.
“We are now at a point where we can start defining our success,” he said. “Before, we had a huge anvil we were dragging around, whether it be environmental expense or whether it be other things we were dealing with that were reactionary. We’re finally at a point where we can map out the strategy of this company going forward. It is exhilarating.”
We'll be "having fun" too, supporting companies embracing the new technology of distributed generation, and dragging the progress of AEP's transmission projects down like a huge anvil. Although AEP can ignore growing public discontent, it ultimately cannot be denied.
Every year, the Federal Energy Regulatory Commission issues a report of its enforcement actions. The 2013 report
was issued last month.
There was an interesting section of the report about formula rates. A formula rate is a type of rate setting that involves a forward-looking collection of rates based on a projected budget. Interstate electric transmission rates are set under FERC's federal jurisdiction and simply passed through unscathed in your state ratemaking process to your electric bill. A formula rate is a blank template that calculates the rate
according to set formula in compliance with FERC's accounting and ratemaking guidelines. Each year, the transmission owner populates the formula with numbers from its projected budget to arrive at the amount it is permitted to charge for service, and then collects that amount from its customers during the year. At the end of the year, the transmission owner must file another formula rate calculation that trues up the projected rate by comparing it to actual spending. The company then adjusts the following rate year to make up any difference between the two, whether an over-collection or under-collection.
Now, here's the rub. This is all being done on the honor system. And, as the old saying goes, there's no honor among thieves
. FERC audits a small percentage of formula rates every year, either on its own initiative or through referral when a problem is reported. FERC does not audit every formula rate every year. Instead, FERC relies on the people who pay these rates to raise the red flag if something is amiss. There are special protocols (instructions) attached to each formula rate that detail the procedures to be followed to review the formula rate and file a legal challenge if any discrepancies between transmission owner and customer cannot be resolved. So, who is doing this job for you, little ratepayer? Is it your local electric company? Is it your state public service commission? Is it your state consumer protection office? Chances are it's none of the above, and NOBODY is reviewing the transmission rates you are paying. It's not that these entities don't care that you may be being ripped off, it's that they don't have the resources or knowledge to do the job, so they simply skip it and hope for the best. This situation does not serve your interests.
Transmission owners know that nobody is minding the store, therefore they have been taking advantage of the situation to "accidentally" include all sorts of expenses and incorrect calculations that jack up rates and cost you extra money. I say "accidentally" because there's always the chance that they will get fingered for a FERC audit, or get challenged by a couple of housewives from West Virginia. In case they are caught by FERC, they pretend any misdeeds were an "accident" and promise to issue refunds. It's a gamble the transmission owner is willing to take because chances are they won't get caught. If they do get caught, they may not have to refund the whole amount they stole from customers, either because the entire amount of the thievery isn't discovered, isn't proven, or is negotiated through a settlement. It's a risk that's profitable to take. Therefore, transmission owners are routinely ripping us off.
FERC notes that certain trends are developing in the way transmission owners rip us off.
During the past several years, DAA observed noncompliance in certain areas that warrant highlighting for jurisdictional entities and their corporate officials. Although there are other areas of noncompliance associated with the topics presented below, the areas discussed relate to areas where DAA has found consistent patterns of noncompliance. Greater attention is needed in these areas to prevent noncompliance and to avoid enforcement action.
Formula Rate Matters. DAA rigorously examines the accounting that populates formula rate recovery mechanisms that are used in determining billings to wholesale customers. In recent formula rate audits, DAA observed certain patterns of noncompliance in the following areas:
Merger Goodwill – including goodwill in the equity component of the capital
structure absent Commission approval;
Depreciation Rates – using state-approved, rather than Commission-approved,
Merger Costs – including merger consummation costs (e.g., internal labor and other general and administrative costs) without Commission approval;
Tax Prepayments – incorrectly recording tax overpayments which are not applied
to a future tax year’s obligation as a prepayment leading to excess recoveries
through working capital;
Asset Retirement Obligation (ARO) – including ARO amounts in formula rates,
without explicit Commission approval;
Below-the-Line Costs – attempting to move below-the-line costs into formula rates (e.g., lobbying, charitable contributions, fines and penalties, and compromise settlements arising from discriminatory employment practices); and
Improper Capitalization – seeking to include in rate base (and earn a return on) costs that should be expensed.
This is completely unsurprising to me, since I've seen (and challenged) many of these incorrect practices. But what does continue to surprise me is that nobody has the inclination to stop it. If formula rates are to be used to set transmission rates, and FERC knows that they are subject to manipulation and purposeful over recovery, then there simply must be some entity designated to monitor them in the interest of consumer protection. While states have agencies designated to protect their consumers from greedy utilities, there is no federal counterpart at FERC.
FERC's mission is to "assist consumers in obtaining reliable, efficient and sustainable energy services at a reasonable cost through appropriate regulatory and market means." FERC is failing us on formula rates.
Patience and I met two very delightful new friends today. Hyosil Kim, a reporter for Korean newspaper The Hankyoreh
, and her translator Brian Kim, spent the day with us touring Jefferson County and learning about PATH's spectacular, flaming failure to get its transmission project sited and permitted.
PATH's failure is interesting to the people of South Korea because they are engaged in their own furious battle with transmission developer Kepco over a 765kV line intended to export nuclear power out of the country.
The concept of social justice is being debated in Korea, just as it is here. Why should any person have to sacrifice their home and well-being to serve the energy or environmental needs of others?
We took a fond trip down memory lane with many of our fellow PATH opponents during our tour of PATH's proposed route, recalling funny and touching moments during our successful David v. Goliath struggle to take control of our own energy future.
You'll be happy to know that the story of The Coalition for Reliable Power is just as funny when translated into Korean!
The message Hyosil will take back to Korea is encouragement for the people to persevere and refuse to give up!
We'll be posting a link to Hyosil's story here when it's written...
This has been a long time in coming, but FirstEnergy was ordered on Friday to "submit a detailed plan for implementing audit staff’s recommendations and correcting journal entries reflecting an approximate $1.2 million refund to affected customers from its transmission-only subsidiaries with formula rate recovery mechanisms, including Trans-Allegheny Interstate Line Company, Potomac-Appalachian Transmission Highline, LLC, and American Transmission System, Incorporated."The first time this problem reared its ugly head was during the July 2011 PATH Open Meeting to review its 2010 actual transmission revenue requirement. At this phone "meeting" I notified PATH that I had found expenses of the Allegheny Energy/FirstEnergy merger in its PATH rates.In September, FirstEnergy subsidiaries PATH and TrAILCo made entries to their quarterly FERC financial filings to effect a credit for amounts wrongly charged to ratepayers in violation of the company's "hold harmless" guarantee to the Commission that it would not charge merger expenses to ratepayers except under certain circumstances. Over a million dollars was credited, but because PATH and TrAILCo made the correction in the normal course of business, it did not credit ratepayers for interest on the amounts wrongly recovered.Throughout the fall of 2011, PATH counsel continued to argue with me in discovery about recovery of merger expenses, refusing to own up to the fact that other merger expenses had been recovered. In October, PATH filed a motion to dismiss the first formal challenge, claiming that the involvement of Ali Haverty and myself in its annual update review was costly to ratepayers. In response, I pointed FERC to the more than $1M savings ratepayers had realized due to my identification of merger costs wrongly included in PATH's revenue requirement that were subsequently reclassed on the company's Form No. 1 filings.Shortly thereafter, FERC notified FirstEnergy that it was commencing an audit to determine if the company had complied with the Commission's order in the merger case. In December, TrAILCo filed a revision to its revenue requirements to correct merger costs "inadvertently" recovered. It claimed this error had been noticed during an "internal staff review." Right....If you take time to read FERC's FirstEnergy merger order, you will see that parties to that case had argued that adequate safeguards did not exist at FERC to prevent FirstEnergy from ignoring the hold harmless stipulation and recovering merger costs. FERC poo-poo'd this idea, insisting that their processes would be adequate to catch any wrongful recovery.And then FirstEnergy went ahead and recovered the merger costs anyhow! Did FERC's processes identify this wrongful recovery? No, I did. How embarrassing!FirstEnergy made a whole bunch of promises it never intended to keep in order to get its merger with Allegheny Energy approved. In addition to wrongly recovering merger costs in FERC jurisdictional rates, the company has saddled its West Virginia ratepayers with "acquisition adjustment" premiums flowing from its merger, as well as causing hardship to a whole bunch of distribution customers by cutting its meter reading services that resulted in huge erroneous bills and service shut offs.FirstEnergy's past bad deeds seem to be catching up with them lately, and the group of people and entities enjoying the show keeps growing.
Thanks for the earnings call
fun today, FirstEnergy. It gave Patience and I an excuse to dine on fancy sandwiches and cornichons, drink Raging Bitch
, make certain hand gestures at the voices coming out of my laptop, and laugh at all the stupid things your NEOs
said. And a fun time was had by all... at least on this side of the internet connection!"FirstEnergy's third quarter net income this year tumbled to about half of what it was a year ago,"
read the lead of The Plain Dealer's pre-call story. I had to quickly whip up a side of schadenfreude to serve with lunch!Tony the Trickster mentioned that, after recent closings, his "fleet" of generators is now about the same size as FirstEnergy's "fleet" was at the time it merged with and swallowed up the former Allegheny Energy.
This wouldn't be the first time I pondered if the merger's sole purpose was to carve up the Allegheny carcass,
saving that which benefited FirstEnergy and tossing the rest on the rubbish heap. When does the sale of troubled Allegheny distribution subs begin, now that FirstEnergy has accomplished its evil plan to raise cash by sucking the lifeblood out of Mon Power/Potomac Edison and leaving a dried up, debt-laden shell that no longer provides service to its customers?
For example, we have reduced the size and mix of the fleet by closing and selling competitive units. Last month, we closed the Hatfield and Mitchell Power plants and we expect to complete the sale of certain hydro assets later this year. In addition, we completed the Harrison and Pleasants transfer this quarter. Once the RMR units are deactivated, our competitive fleet will be a little more than 13,000 megawatts. This is about the same size as our fleet prior to the Allegheny merger, but it's a much stronger platform of units, more environmentally controlled and more efficient overall.
It's all about Tony's "plan" to pull his ass out of the fire. It never was about serving customers, or any of that other dreck two of the WV PSC Commissioners wanted to believe.
Let's turn to an update on the financial plan that we introduced in February. Through a series of actions this year, we have made significant progress towards completing the plan, strengthening our credit metrics and reducing our risk profile.
This financial plan, which is now virtually complete, successfully improves the balance sheet at our competitive and regulated businesses and enhance liquidity in a very short period of time.
Tony's next great plan is to plop his "spend" into regulated transmission investment accounts that earn risk-free, high returns.
Last week, our Board of Directors approved as a part of our energizing the future program, a new multiyear $2.8 billion incremental investment in a transmission reliability excellence plan. The plan includes additional transmission investments above current plans, which are expected to be about $500 million in 2014, growing to about $700 million in 2015 and about $800 million in both 2016 and 2017. This program will begin with investment primarily in ATSI, but will ultimately extend throughout our service area. We currently expect to fund these investments with a combination of debt and equity. These projects include rebuilding lines and equipment to improve reliability and reduce future maintenance costs, enhancing and expanding communication networks to harden the system and increasing system capacity to meet the service level and reliability requirements of our customers.
This announcement turned the analysts on the call into curious monkeys
who wanted to know all about tricky Tony's tantalizing transmission targets, but that wiley old geezer strung them along, talking about rebuilding lower voltage lines that don't require regulatory approval and said he would talk more about it at an upcoming EEI conference. Tony also said that the company is primarily looking to "spend" inside its footprint and not looking for projects that have long lead times with respect to either approval processes or likely construction processes. Because they learned their lesson with PATH? Someone's been paying attention in class! But he forgot to tell them about FirstEnergy's proposal for a project to solve PJM's Artificial Island issues
, and any lingering ratepayer-funded PATH assets that may still be kicking around. Do you think the curious analysts were only pretending to be that clueless?In response to a question about coal costs, Donny started talking about pulling his lever. I'll spare you the hand gestures that instigated. And before the laughter had died down, Tony started talking about the possibility of things being soft down the road...I love my job.
Interested parties ask for information and clarification.
Time is quickly running out to send in your RSVP for PATH's upcoming "Open Meeting." Follow the instructions here
to send your RSVP for the meeting to PATH's lawyer on or before Oct. 28.This isn't a real "meeting." An overconfident and arrogant PATH wasted your money for several years holding actual in-person meetings, complete with coffee & donuts,
at its fancy DC counsel's office. However, the whimpering remains of PATH now holds this "meeting" over the phone via conference call.During the call, you can ask PATH any questions about its plan to collect another $39.8M from you in 2014.
If you are a party to the abandonment case, you cannot ask about that case, but only about the information contained in the 2014 Projected Transmission Revenue Requirement filing linked above. Silly, yes, but when has PATH ever been logical?A lot of you have been asking me what's going on with the abandonment case and why PATH continues to collect money from you. Until that case settles or is heard, PATH is permitted to continue to collect the reimbursement it requested when it filed for abandonment. If, after the case is over, it is determined that PATH has collected more than it is allowed, PATH will have to refund the difference to you.So, send in your RSVP for the November 1 @10:00 a.m. phone meeting and belly up to the farcical ratepayer question bar.
If you don't come, PATH will think you don't love them anymore.