Zacks_Analysts' Blog : Higher Rates Asks AEP Unit - Analyst Blog

With a view to recover the increasing cost of production and distribution of electricity, American Electric Power Co.'s (AEP) unit Appalachian Power filed four rate requests to the Virginia State Corporation Commission (SCC). The total impact of the proposed rate hike, if approved, will be 9.6%, translating to an annual increase of $115 million, and will be effective from 2012.

The monthly bill of a residential consumer using 1,000 kilowatt-hours (Kwh) of electricity in a month will be $104.99 if the rates are approved by the commission without any alteration.

American Electric Power's unit rate proposal includes four parts. Most importantly it includes a base rate case, which proposes a hike of $75 million or a 6.3% increase. The proposal also incorporates an environmental Rate Adjustment Clause (RAC), which requests a hike of $38 million or a 3.2% increase; a renewable RAC, which proposes a hike of $6 million or a 0.5% increase; and a generation RAC, which will actually result in $4 million of savings.

The rate requests, if approved, will allow Appalachian Power to generate funds to carry on the infrastructure investments, recover the higher costs for producing electricity and also install and operate environmental controls to comply with federal environmental regulation for coal-fueled power plants.

We note that American Electric Power’s unit Appalachian Power provides electricity to 1 million customers in Virginia, West Virginia and Tennessee.

We believe that the driving force behind Appalachian Power to propose rate base increases is to generate enough funds for complying with environmental regulations for its coal based power plants. These plants, fed by fossil fuel, generate the majority of the unit's 6,415 megawatt (MW) capacity. We appreciate the proposal to add the 580 MW natural gas-fired Dresden Plant in its portfolio as it will result in savings for the consumers by way of lower cost of environmental compliance and input costs for the gas fired plant.

One of its peers Entergy Corporation (ETR) lowered its electricity rates effective April 1, 2011. The average bill of a residential customer using 1,000 kWh per month will be $1.16 lower from April through June. The reduction mainly stems from a decline in the cost of natural gas, which is the main source of input for this utility.

Columbus, Ohio based American Electric Power is engaged in the generation, transmission, and distribution of electric power. The company generates electricity using coal and lignite, natural gas, nuclear, and hydroelectric energy. We maintain a long-term Neutral rating on the stock.