FERC last week partially granted four cooperatives’ challenge of American Electric Power (NASDAQ:AEP) companies’ annual update for transmission formula rate charges under the SPP tariff (ER18-194).

The commission agreed with several of the co-ops’ complaints but also rejected others. It ordered AEP to make a compliance filing within 60 days.

The proceeding stems from a formal challenge by East Texas Electric Cooperative, Northeast Texas Electric Cooperative, Arkansas Electric Cooperative Corp. and Golden Spread Electric Cooperative of AEP’s annual informational filings in 2020 on behalf of its Southwestern Electric Power Co. and Public Service Company of Oklahoma (PSO) affiliates. The filing detailed the true-up calculations of charges for the 2019 rate year under the companies’ respective transmission formula rates.

In a settlement approved by FERC in 2019, the AEP rates transitioned from a historical formula rate to a forward-looking formula rate and removed directly assignable transmission costs related to generation.

The cooperatives claimed that in the new formula rates, AEP improperly:

• • included regulatory commission fees in one account;
  • accounted for capital lease interest expense;
  • included coal-mining assets;
  • included non-utility railcar facilities;
  • included prepayments for tax credits that were sold;
  • failed to include all unfunded reserves;
  • included accumulated deferred income taxes (ADIT) related to accumulated accruals recovered through rates without including the reserves; and
  • included ADIT related to rate refunds.

FERC disagreed with AEP’s argument that the co-ops’ challenge sought to undermine the settlement process by raising the same issues addressed through the settlement, saying the pertinent issue was whether AEP properly implemented the 2019 rate year formula. The commission agreed with the co-ops that the settlement did not bar future challenges to unfunded reserves and regulatory fees included in the 2019 rate year, finding that they were eligible for inclusion in the challenge, along with whether certain tax credits qualifying as prepayment.

The commission granted the challenge to the proper accounting of regulatory fees, finding they were not taxes. They directed AEP to include in its compliance filing the calculations reflecting the fees’ inclusion and to refund with interest the amounts improperly collected for the 2019 rate year.

FERC also accepted the challenges to capital lease interest expense, the ADIT related to the accumulated reserve accruals for employee benefit costs and the ADIT related to rate refunds.

The commission ordered AEP to refund with interest on all amounts improperly collected for the 2019 rate year and that the refunds be reflected as adjustments in the next rate year’s annual update. It said AEP had not justified why including the ADIT balance in the 2019 rate year’s rate base is appropriate given the ratemaking treatment of the associated accrued reserves. AEP also failed to address whether the ADIT related to rate refunds should be included in rate base when the underlying refund amounts associated with the ADIT are excluded from rate base, FERC said.

The commission, however, denied the challenge to the proper ratemaking treatment for the coal-mining assets and railcar facilities. It found AEP had properly recorded the tax credits at issue, and it also denied the challenge on unfunded reserves associated with contingent liabilities, saying the related employee benefit accounts, except for workers’ compensation, are not considered contingent because PSO knows that it will incur those expenses even if their timing is uncertain.