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Federal ruling says American Electric Power can ignore Virginia law

17 March 2004 – The federal government issued a preliminary ruling Friday that American Electric Power can ignore a Virginia law preventing the utility from joining a regional power grid until July.

In a dispute watched closely by state regulators and utilities nationwide, a Federal Energy Regulatory Commission judge said laws in Virginia and Kentucky that prevented AEP from joining PJM Interconnection interfered with federal efforts to ensure a reliable and efficient interstate power transmission system.

The case is at the forefront of a battle between low-cost Southeastern utilities that fear being forced into regional power pools governed by the federal government and Northeastern states and utilities that favor groups like PJM. Dominion Virginia Power, the dominant electric company in Hampton Roads and Virginia, will not be affected by the decision immediately.

The judge rebuked Virginia for economic protectionism. He agreed with testimony that Virginians likely would benefit from the integration of AEP, the utility with the second most customers in the state, into PJM, a non-profit company that runs a power grid stretching from the Northeast to the Midwest. Dominion also has applied in Virginia to join PJM.

“The judge did a very thorough job in analyzing the case,” said Craig Baker, a senior vice president at AEP. “Apparently he believes that the weight of the evidence supplied by parties other than the Virginia and Kentucky commissions led him to that decision.”

The full FERC commission still must issue a final order. Officials with the Virginia State Corporation Commission, which was supported in the case by the governor and attorney general, said they would appeal the case to federal court if necessary.

“We’re trying to preserve our ability to analyze the situation as required by the Virginia statute and see what’s in the public interest in Virginia,” said Howard Spinner, director of the division of economics and finance.

Virginia regulators and lawmakers fear the loss of authority over its utilities to the federal government that will accompany the handing of control over long-haul electric transmission lines to PJM.

Ironically, legislators are about to extend Virginia’s capped electric rates for three years in the hope that wholesale markets like PJM will help competition develop in Virginia. Both AEP and Dominion expect savings and efficiencies in PJM that will benefit Virginia ratepayers.

FERC originally required AEP to join PJM as part of a merger with Central and South West Corporation in 2000. FERC hoped PJM could prevent the merged company from exercising market power by keeping competitors from moving electricity across its transmission lines.

Virginia law doesn’t prohibit AEP or Dominion Virginia Power from joining PJM. In fact, the 1999 deregulation law requires the utilities to join a regional group. But at the urging of the SCC, the General Assembly passed a law last year prohibiting the Virginia utilities from joining until July 2004 — and then only with SCC approval.

The passage of the Virginia law last year prevented AEP from joining PJM by May 2003, as it had planned and been approved by FERC. Ever since then, the SCC has had an ongoing case with AEP and has asked for studies proving that Virginians will benefit from AEP joining PJM.

Finally last November, FERC used a section of a 1978 utility law to order AEP to ignore the Virginia and Kentucky laws because they aren’t designed to protect the “public health, safety or welfare” or guard against a fuel shortage.

The states argued that they were trying to protect their ratepayers from high costs associated with joining PJM. But the judge agreed with testimony suggesting that Congress only sought to shield states from attacks on their ability to make environmental and zoning decisions.

The SCC is also concerned that PJM also gains some authority over rates Virginians will pay. That’s because as part of the PJM role as traffic cop, it fixes overloads of the system by deciding which power generators will run and that can affect the prices that utilities like AEP and Dominion pay for electric customers in Virginia.

AEP plans to become part of PJM by October, and hopes to convince Virginia and Kentucky regulators that it’s a good idea.