AEP and CSW Answer Market Power Concerns, Address Transmission, Customer Protection Issues

Jan. 14, 1999•News Release

Columbus, Ohio, and Dallas, Texas (Jan. 14, 1999) -- American Electric Power Company, Inc. ("AEP")[NYSE: AEP] and Central and South West Corporation ("CSW")[NYSE: CSR] have supplemented their filing with the Federal Energy Regulatory Commission (FERC) for approval of their proposed merger. The supplemental filing, which was submitted to the FERC late Wednesday, addresses issues raised by the FERC in its Nov. 10, 1998 order. The issues include perceived market power created when the merger is completed, AEP's plans for participation in a regional transmission organization and the companies' proposed mechanism for protecting wholesale customers from merger-related costs in excess of merger savings. A similar filing will be submitted to the Public Utility Commission of Texas on Friday. "It is our belief that we have outlined a proposal in this filing that satisfactorily addresses market power and other issues raised by the FERC and other parties," said Rich Munczinski, AEP senior vice president - corporate planning and budgeting. "To create this proposal, we have analyzed the most up-to-date market data available using the same technique utilized by the FERC and reviewed market power mitigation measures ordered by the FERC prior to approval of other mergers," Munczinski said. "We're confident that our proposal meets the standards set by the FERC when approving previous mergers. "This also shows our commitment to the completion of this merger, which creates value for customers, shareholders and employees of the newly combined company." In response to market power concerns, AEP and CSW propose divesting ownership of 550 megawatts of generation capacity in two power pools: 300 megawatts of generation capacity at CSW's Northeastern Power Station Units 3 and 4, located in the Southwest Power Pool (SPP); and 250 megawatts of generation capacity at the Frontera Power Plant, a merchant plant under construction and located in the Electric Reliability Council of Texas (ERCOT). Northeastern Power Station Units 3 and 4, owned and operated by CSW's Public Service Company of Oklahoma (PSO) and located near Oologah, Okla., have a combined capacity of 900 megawatts and are fueled by coal. Frontera is a 500-megawatt, natural gas-fired, combined-cycle plant under construction near the City of Mission in the Rio Grande Valley of Texas. The plant, which is expected to begin full commercial operation by the end of 1999, is being built by CSW Energy, a non-utility CSW subsidiary, and is intended to sell energy into the wholesale market. AEP and CSW will work with advisors to develop an auction process. Following completion of the merger, the newly combined AEP will become the operator of both power stations. No staffing changes at the plants are anticipated as a result of the divestiture. The auction process for sale of ownership interests in the Northeastern generation capacity will begin after two conditions are satisfied. First, in order to preserve the benefits to shareholders and ratepayers of the pooling of interests accounting treatment used for the merger, two years must have passed after the completion of the merger before the divestiture process can begin. Second, because energy generated by Northeastern Power Station is used by CSW operating unit Public Service Company of Oklahoma to serve its native load, the auction of that generation cannot begin until the progress of retail access and penetration by alternate suppliers has caused a reduction in the native load obligations to the point that the 300 megawatts is no longer required to satisfy SPP reliability criteria. Until these conditions are met for the divestiture of generation from Northeastern, AEP and CSW will sell 300 megawatt-hours of energy per hour in a system power sale. This sale will effectively remove the generation from the control of AEP and CSW until ownership of the capacity can be divested. Because the Frontera plant is not intended to serve native load, divestiture of ownership interest in the Frontera capacity will not require progress in retail restructuring. However, in order to preserve the benefits to shareholders and ratepayers of pooling of interests accounting treatment, the divestiture process for the Frontera capacity will not begin until two full years have passed after the completion of the merger, unless AEP and CSW are fully satisfied that an earlier sale will not cause the benefits of the pooling of interests accounting treatment to be lost. Until the Frontera divestiture takes place, AEP and CSW will conduct a unit power sale of 250 megawatt-hours of energy per hour from the Frontera plant, again effectively removing the generation from the control of AEP and CSW until ownership of the capacity can be divested. The supplemental filings also addressed issues related to AEP's participation in a regional transmission organization and the companies' proposed mechanism for protecting wholesale customers from merger-related costs in excess of merger savings. In November 1998, AEP, FirstEnergy and Virginia Power announced an agreement to move forward with a proposal to prepare a FERC filing for a regional transmission entity, known as the Alliance, with a formal filing expected during the first quarter of 1999. Since the announcement, Consumers Energy has also agreed to join the Alliance. As presently constituted, the Alliance is the second largest of eight currently formed or contemplated regional transmission organizations. "AEP has contributed a substantial amount of money and managerial resources to participation in the Alliance development process," said Craig Baker, AEP's vice president - transmission policy. "AEP's participation in the Alliance process assures its commitment to place its transmission facilities in the hands of an independent operator, which should fully alleviate any concern that the company could use the facilities in an anti-competitive manner." On the ratepayer protection issue, AEP and CSW have made a "hold harmless" commitment where no wholesale customer will be charged any merger costs in excess of merger savings. In addition, to expand ratepayer protections, AEP and CSW have agreed to offer certain wholesale customers an "open season" -- the ability to terminate contracts early -- should the merged company file for a rate increase under Section 205 of the Federal Power Act during a four-year period following consummation of the merger. "The hold harmless commitment and the open season opportunity in the event of a rate increase assure that wholesale customers will not bear costs of the merger if costs exceed the benefits," Baker said. AEP and CSW jointly filed with the FERC on April 30, 1998 for approval of their proposed merger. On Nov. 10, 1998, the FERC issued an order instructing AEP and CSW to address several competitive issues related to the merger. Hearings are expected to begin June 1 with a final order anticipated during the fourth quarter of this year. The companies announced a definitive merger agreement for a tax-free, stock-for-stock transaction on Dec. 22, 1997. The companies also have filed applications seeking approval of the merger with the Arkansas and Texas commissions, as well as the Oklahoma Corporation Commission, the Louisiana Public Service Commission, the Nuclear Regulatory Commission and the Securities and Exchange Commission. The Arkansas Public Service Commission has granted conditional approval of the merger application, subject to the Arkansas Commission's review of actions in other jurisdictions. The Nuclear Regulatory Commission has also granted approval. The companies plan to make the final two filings associated with approval of the merger with the Federal Communications Commission and the Department of Justice in the near future. Central and South West Corporation is a Dallas-based public utility holding company that owns four U.S. electric utility subsidiaries with 1.7 million customers, a regional electricity company serving 2 million customers in the United Kingdom, and nonutility subsidiaries involved in energy-related investments as well as subsidiaries that offer telecommunications, energy efficiency and financial transactions. American Electric Power Company, Inc., a global energy company, is one of the United States' largest investor-owned utilities, providing energy to 3 million customers in Indiana, Kentucky, Michigan, Ohio, Tennessee, Virginia and West Virginia. AEP has holdings in the United States, the United Kingdom, China and Australia. AEP's wholly owned subsidiaries provide power engineering, energy consulting and energy management services around the world. The company is based in Columbus, Ohio.

For More Information, Contact: American Electric Power: Pat Hemlepp 614/223-1620 Central and South West: Larry Jones 214/777-1276

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