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Utility gets OK for sale of bond to cover old debts

CHARLESTON, W.Va. - Appalachian Power and state ratepayer groups have reached a deal to allow the power company to sell bonds to cover hundreds of millions of dollars worth of old debts rather than pass those costs onto consumers all at once.

Under the agreement, which still needs to be approved by the state Public Service Commission, APCo and its sister company, Wheeling Power, would sell $376 million worth of bonds that would be paid off over a term of up to 15 years.

Most of the debt was taken on to cover substantial increases in coal costs during 2008 and 2009.

The proposed settlement agreement followed weeks of private negotiations between the power companies and the PSC's Consumer Advocate Division, PSC staff attorneys, Century Aluminum and the West Virginia Energy Users Group, which includes major state manufacturers like Dupont, Bayer and Steel of West Virginia Inc.

While bond debt payments would cause an increase in consumers' power bills, that increase would be far less than the higher rates the companies would need to cover payment of the debts all at once.

The companies have estimated they would need to raise current rates by 30 to 40 percent to cover the costs all at once.

The new plan would essentially function as a mortgage, with the debt slowly paid over time.

"It's a good proposal based upon the situation we're in," said Byron Harris, director of the PSC's Consumer Advocate Division.

The bond sale would cap a four-year effort on the part of Appalachian and Wheeling to recover their outstanding fuel costs.

Customers pay for power company fuel and purchased power costs through a charge called the Expanded Net Energy Cost, or ENEC. That charge is included in the overall rate on a customer's power bill.

The PSC reviews this charge each year and adjusts it based on a company's ongoing fuel costs.

After being saddled with $442 million in fuel, purchased power and pollution control equipment costs in 2009, Appalachian and Wheeling asked the PSC for a 43 percent rate increase.

To avoid slamming customers all at once, the PSC opted for a plan that would spread those costs over four years. It granted a 10.5 percent increase in 2009, a 7.2 percent increase in 2010 and a 7.3 percent increase in 2011.

But those increases failed to significantly reduce the power companies' outstanding balances. By the end of 2011, Appalachian and Wheeling still had about $311.9 million in ENEC charges outstanding.

Since the original plan didn't work, the power companies successfully lobbied state lawmakers to pass a bill last year allowing them to finance the outstanding debt by selling bonds.

In addition to the outstanding $311.9 million ENEC balance, the companies also will use the bond sale to pay off about $41.5 million in one-time costs and plant improvements.

The PSC also ruled previously that the company could use the bond sale to recover about $22.7 million in outstanding power costs owed by the shuttered Century Aluminum plant in Ravenswood. 

While still significant, $64 million in non-fuel related costs is less than the $103 million in other non-fuel related debts the companies originally asked to recover in the case.

Harris said while it's unfortunate consumers still have to pay for these costs, the bond sale seems to be the best strategy given the available options.

"Once you determine that there's this big chunk of money we owe the company, then the question is what's the best way to pay back that debt," he said. "I think that's what this accomplishes."

Harris estimated that by issuing bonds rather than continuing to go through the ENEC process, the companies will save ratepayers about $35 million this year.

"It would reduce a 1,000 kilowatt hour-per-month bill by almost $2 a month," he said.

However, consumers might not see such decreases on their bills.

That's because the PSC is considering other rate hike cases this year.

The first involves Appalachian Power's plan to purchase additional portions of the John Amos power plant in Poca and the Mitchell power plant in Ohio. The company could spend about $1 billion on the purchases.

 The PSC also has ordered the power companies to come up with new tree-trimming programs - a response to the power outages that followed the June 29 derecho. Power companies are to submit the plans and their additional costs to the PSC later this year.

Harris said it's likely rate increases resulting from those cases would counteract any reduction in rates caused by the sale of bonds. 

"At the end of the day, it's not clear that anybody's going to see an actual rate decrease," he said. "Maybe lower than it would otherwise be, but we'll see."

An Appalachian Power spokeswoman did not respond to a request for comment on the bond case.

The Public Service Commission has retained a financial adviser to review the proposed settlement and bond sale. Once that adviser reviews the proposal, commissioners will schedule a public hearing on the plan.

Pending the outcome of that review and the hearing, the commission will either accept the plan or recommend further changes.

Contact writer Jared Hunt at business@dailymail.com or 304-348-4836.


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