American Electric Power Describes June 22 - 26 Region-wide Electricity Shortage as an Anomaly; Asserts Regulatory Intervention Is Not Warranted

July 24, 1998•News Release

COLUMBUS, Ohio, July 24, 1998 -- In response to a request from the Indiana Utility Regulatory Commission, American Electric Power (NYSE: AEP) presented its initial findings regarding the power shortage and high energy prices experienced in the Midwest in late June. The report points to unusually high temperatures over a very wide region, unplanned outages at power plants throughout the region, transmission constraints in systems to the north and east, and failures of suppliers to meet their commitments as the primary causes. "The combination of these factors must be characterized as an anomaly," said Henry Fayne, executive vice president - financial services. "But the market and the utility operating systems worked. AEP successfully met the requirements of its firm load customers." Fayne told the Commission that the extreme price spikes that the market saw will moderate naturally as the market matures. "We can expect new generation in response to the higher prices. Moreover, as we introduce more opportunities for customers to respond to real-time price signals, demand will adjust to the supply more rapidly and the price swings will be more moderate. "Regulatory action is not required," he concluded. "Comsumers will be better served if we allow the market to mature." Fayne explained that the combination of events was extremely unusual. The widespread heat, spanning from Chicago to Philadelphia to Montgomery, Ala., has a 0.3 percent chance of occurring in late June. Also, AEP had about 5,300 megawatts, or 21 percent, of its generating capacity out of service on an unplanned basis. The probability that so much generation would be out of service on an unplanned basis is only 1.5 percent. AEP's total generating capacity is 23,759 megawatts. Fayne told the Commission that AEP's operations and maintenance practices are appropriate, despite the convergence of outages the week of June 22. AEP maintains consistently high and above-target availability of generation, and has improved the equivalent availability of its fossil units. In 1996, on-peak availability was 84.2 percent; for the 12 months ended June 1998, on-peak availability was 84.9 percent. The company has stated previously that it doesn't anticipate needing to add generation to the AEP system until at least summer 2004. "Our planning practices remain valid, and reserve margins remain adequate," Fayne said. He noted that the June peak demand is consistent with what was expected later in the summer, which means the current AEP reserve margin exceeds 18 percent. For long-range planning, AEP uses a 12 percent reserve margin as the target. Craig Baker, vice president - transmission policy for AEP, addressed the performance of AEP's transmission system. The system, with 22,000 miles of wire running through seven Midwest states, and interconnecting with 24 other utilities' systems, is used extensively by other utilities and power marketers to transfer electricity from one region to another. Baker indicated that, despite a heavy east/south-to-north/west power flow due to unit outages in Illinois, Wisconsin and Michigan, AEP did not constrain transmission. Prior to March 1998, however, AEP accepted 5,000 megawatts of firm transmission reservations to the north and west for the summer season. After March, AEP accepted reservations for that period on a weekly or daily basis only. There have been some rejections of transmission requests based on anticipated system limits. "High internal loads, high power transfers across our system, and the need to be able to maintain service to our own firm customers (led AEP to reject outside requests)," Baker said. AEP did not enact any transmission loading relief procedures (TLR) related to its facilities during the week of June 22 - 26. However, constraints on other systems that did enact TLRs created a problem regarding moving power from one system to another. Because of the TLRs, 2,000 megawatts scheduled to be supplied to AEP were cut on June 25 and 26. Paul Addis, executive vice president - energy services, spoke about how the supply shortage affected the power market. "Several suppliers failed to meet their obligations, which resulted in energy shortages, increased costs, obligations for liquidated damages and bankruptcies," Addis said. Although prices spiked from a routine $35 per megawatt-hour to more than $5,000 per megawatt-hour, "the market effectively matched supply and demand," according to Addis. "Interruptible tariffs work," Fayne later said. "Our (interruptible-contract) customers responded to price signals; some curtailed energy use, some purchased power regardless of price, and others alternated their decisions based on specific prices." Twenty-eight large industrial customers throughout AEP's service territory have elected interruptible service contracts. In exchange for taking on some risk of having their power curtailed in periods of short supply and/or high prices, the industrial customers pay a discounted price for their electricity. Through the years, these customers have saved hundreds of millions of dollars under the terms of their contracts. Fayne pointed out that AEP did successfully meet the energy requirements of its firm-load customers (e.g., residential customers, small businesses and others who contract for continuous power regardless of supply). "We implemented our emergency operating plan through step 11 (of 12 steps)," Fayne said. AEP: -- began generating power to the maximum of its capability; -- interrupted service to its large industrial customers who have elected interruptible-service contracts that carry discounted rates (28 total); -- reduced its electricity use throughout its own facilities in seven states; -- instituted a three-volt reduction on the system; -- attempted to operate an additional, small back-up plant in Fort Wayne, but was unsuccessful in bringing it on line; -- curtailed short-term deliveries to be supplied from AEP generation; and -- asked the public to conserve energy. The next step would have been rolling blackouts, in which power to different areas throughout AEP's service territory would be manually interrupted for between 15 minutes and four hours at a time. The voluntary curtailment effected a savings of about 600 megawatts, and rolling blackouts were not necessary. AEP has never instituted rolling blackouts. The last time AEP asked the public for voluntary reductions was winter 1994. AEP, 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. Wholly owned subsidiaries provide power engineering, energy consulting and energy management services around the world. The company is based in Columbus, Ohio. On Dec. 22, 1997, AEP announced a definitive merger agreement for a tax-free, stock-for-stock transaction with Central and South West Corp., a public utility holding company based in Dallas.

For More Information, Contact: Deb Strohmaier Senior Media Representative American Electric Power 614/223-1656

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