Let Energy Market Respond to June Events, AEP's Tomasky Tells Senate Committee

Sept. 24, 1998•News Release

WASHINGTON, D.C., Sept. 24, 1998 – Late June's short-term escalation of Midwest wholesale electricity prices was an anomaly and does not signal a need to reverse Federal Energy Regulatory Commission policies that have fostered the competitive wholesale marketplace, Susan Tomasky, American Electric Power (NYSE: AEP) general counsel and senior vice president - legal, told the U.S. Senate Committee on Energy and Natural Resources today. At the hearing, FERC Chairman James Hoecker reported on the results of a FERC staff study resulting from an intensive inquiry into the June 22-26 events. Hoecker stated that during its review the staff "was unable to conclude that the regional pricing abnormalities were attributable in any measurable way to misconduct, self-dealing or manipulation." The FERC report confirms AEP's experience during the week of June 22. Although "short term wholesale prices were very high," these prices were for very small increments of power, Tomasky said. Tomasky urged the committee to rely upon market participants to respond to these events. "We believe that the result will be a strengthened and more efficient wholesale marketplace and a strong foundation for efforts of all policy makers and market participants to chart the course toward a fully competitive electricity marketplace," Tomasky said. Tomasky explained that four factors converged to create late June's emergency condition: -- The weather was warmer than expected and the warmer temperatures covered a very wide region. -- 5,300 megawatts of generation on the AEP system were out of service on an unplanned basis. -- Transmission constraints on other systems limited some energy flows to systems west of AEP. -- Counterparty failures also affected wholesale energy markets. "Each of these conditions was, in itself, unusual," Tomasky said. "The occurrence of all of these factors at once must be characterized as an anomaly. "During the past several years, there have been many new entrants into the wholesale power trading business, and some were not adequately prepared for the conditions of June, 1998," Tomasky said. "Most trading contracts contain liquidated damage provisions which require a defaulting supplier to pay its customer's replacement costs for the non-delivered energy. Some traders who had insufficient credit support to obtain the necessary supplies to fulfill their contractual obligations simply defaulted on those obligations. These supply failures heightened the concern about the ability to obtain needed supplies, and drove the market price higher, especially in the day-ahead market." When energy is plentiful, trading prices generally range between $20 and $30 a megawatt-hour, Tomasky said. By contrast, Commonwealth Edison stated that it paid $6,000 per megawatt-hour for one transaction in late June. "The highest price paid by AEP during the period was $3,700 per megawatt-hour for a very small amount (10 megawatt-hours) of energy," Tomasky said. "These high prices must be put in perspective, however. The highest prices were in effect for very short periods, at the peak of the emergency, and affected only a small fraction of the total customer usage. For example, the 10 megawatt-hours of energy purchased at $3,700 represented only one-tenth of one percent of the energy produced and purchased by AEP to meet its load in that hour." Tomasky noted that the high energy prices had very little effect on AEP's native load customers. The effect of all of AEP's power purchases during the week of June 22 on its firm retail customers would be an increase in the company's fuel charge of .02 cents per kilowatt-hour (kwh), or about 20 cents for a residential customer using 1,000 kwh that month. "AEP's power merchants during the most critical time periods were focused totally on buying power to fulfill AEP's obligation to serve its firm load customers," Tomasky said. "During the peak hours on June 25, AEP had suspended all off-system sales except for committed long-term firm sales and an emergency sale to a neighboring system. At the same time, AEP was purchasing as needed to supply its load and maintain operating reserves. "AEP was a net purchaser during the hours of peak demand." And, according to Tomasky, the market worked. "On the whole, the market and existing operating procedures worked to maintain reliable firm service during the emergency," Tomasky said. "Certainly, the high market prices and market volatility experienced during that week were unprecedented, but AEP believes that these conditions will change as the market matures. "Some of the necessary changes already are occurring," she noted. "Inexperienced, undercapitalized and unprofessional marketers will exit the market, thus preventing the defaults that contributed to the price swings. Supply and demand-side alternatives will moderate price volatility. New generation will be added as potential suppliers see the opportunity for profitable power sales. Additional demand-side response can be expected as real-time pricing products are expanded with customer choice. Customers will more and more take advantage of risk mitigation alternatives including fixed price supply arrangements and financial instruments." 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: Pat D. Hemlepp Manager, Media Relations American Electric Power 614/223-1620

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