The Cost Of Electricity
Many factors can affect the price and reliability of electricity. The cost of energy is important to customers and to the economic conditions of our service territory. High electricity rates have particularly affected economic growth in the eastern part of our service territory due to the large concentrations of energy-dependent heavy industry. In energy-intensive industries, such as primary metals, paper and chemical manufacturing, where electricity is a major cost of production, companies need to be able to plan and budget with some certainty if they are to continue operations. Rapidly increasing rates can result in a downward spiral for our regions if manufacturers are no longer able to compete and are forced to move elsewhere. Our service territory consists of many states in which mean household incomes are already below the national average. There are very real social and economic concerns to consider as the cost of electricity goes up.
To foster more timely recovery of expenses and greater regulatory certainty, AEP supports the use of alternative ratemaking models. The traditional rate case process cannot accommodate the scale and speed required for timely recovery of necessary utility investments, which puts upward price pressures on our customers. More timely recovery reduces regulatory lag, which allows for more uniform rate increases.
Certain state regulators have ordered some costs, such as fuel, to be deferred and collected in the future. But the bill eventually comes due and customers must pay for the costs of regulation, fuel used to generate their electricity in previous years, or investments that are needed to maintain reliability.
Securitization is a process in which certain regulatory assets, such as deferred fuel costs, are converted into cash through a sale of securities. Although we believe fuel should be recovered as those costs are incurred, securitization can mitigate the adverse impact of a large recoverable cost by spreading the cost to customers over several years at a lower interest rate. For example, in Texas, AEP has used securitization to recover state-mandated restructuring and stranded costs - costs associated with assets that are no longer in rates. Securitization legislation has been passed in other AEP jurisdictions where customers may experience similar upward price pressures.