AMERICAN ELECTRIC POWER CO INC (AEP)

2014 Climate Risk Disclosure Analysis

Industry Group: Electric Power & Gas Utilities

Standard Industrial Classification: Electric Services

Index Membership: FT Global 500, S&P 500, Russell 3000

Financial Year End: Dec 2013

and Description of Material Subsidiaries AEP was incorporated under the laws of the State of New York in 1906 and reorganized in 1925. It is a public utility holding company that owns, directly or indirectly, all of the outstanding common stock of its public utility subsidiaries and varying percentages of other subsidiaries. The service areas of AEP's public utility subsidiaries cover portions of the states of Arkansas, Indiana, Kentucky, Louisiana, Michigan, Ohio, Oklahoma, Tennessee, Texas, Virginia and West Virginia. The transmission facilities of AEP's public utility subsidiaries are interconnected and their operations are coordinated. Transmission networks are interconnected with extensive distribution facilities in the territories served. The public utility subsidiaries of AEP have traditionally provided electric service, consisting of generation, transmission and distribution, on an integrated basis to their retail customers. Restructuring laws in Michigan, Ohio and the ERCOT area of Texas have caused AEP public utility subsidiaries in those states to unbundle previously integrated regulated rates for their retail customers. In Ohio, AEP's regulated utility recently separated its generation assets from its distribution and transmission assets... 10-K Filing (2014-02-25)

Disclosure Breakdown

Disclosure Rank

96th percentile in Russell 3000

Disclosure Abstract

Relevance:
7%
CAA Clean Air Act.
CO2 Carbon dioxide and other greenhouse gases.
Cook Plant Donald C. Cook Nuclear Plant, a two-unit, 2,191 MW nuclear plant owned by I&M.
CRES provider Competitive Retail Electric Service providers under Ohio law that target retail customers by offering alternative generation service.
CSPCo Columbus Southern Power Company, a former AEP electric utility subsidiary that was merged into OPCo effective December 31, 2011.
EPACT The Energy Policy Act of 2005.
ERCOT Electric Reliability Council of Texas regional transmission organization.
ESP Electric Security Plans, a PUCO requirement for electric utilities to adjust their rates by filing with the PUCO.
ETT Electric Transmission Texas, LLC, an equity interest joint venture between AEP and Mid American Energy Holdings Company Texas Transco, LLC formed to own and operate electric transmission facilities in ERCOT.
Federal EPA United States Environmental Protection Agency.
FERC Federal Energy Regulatory Commission.
I&M Indiana Michigan Power Company, an AEP electric utility subsidiary.
Interconnection Agreement An agreement by and among APCo, I&M, KPCo and OPCo, that defined the sharing of costs and benefits associated with their respective generation plants. This agreement was terminated January 1, 2014.
IURC Indiana Utility Regulatory Commission.
KGPCo Kingsport Power Company, an AEP electric utility subsidiary.
KPCo Kentucky Power Company, an AEP electric utility subsidiary.
kV Kilovolt.
LPSC Louisiana Public Service Commission.
i MISO Midwest Independent Transmission System Operator.
MMBtu Million British Thermal Units.
MPSC Michigan Public Service Commission.
MW Megawatt.
NOx Nitrogen oxide.
item 1. Business
8 Relevance:
5%
Clean Air Act Requirements The CAA establishes a comprehensive program to protect and improve the nation's air quality and control mobile and stationary sources of air emissions. The major CAA programs affecting our power plants are described below. The states implement and administer many of these programs and could impose additional or more stringent requirements.
The Acid Rain Program The 1990 Amendments to the CAA include a cap-and-trade emission reduction program for SO2 emissions from power plants. By 2000, the program established a nationwide cap on power plant SO2 emissions of 8.9 million tons per year, and required further reductions in 2010. The 1990 Amendments also contain requirements for power plants to reduce NOx emissions through the use of available combustion controls.
The success of the SO2 cap-and-trade program encouraged the Federal EPA and the states to use it as a model for other emission reduction programs.
9 Relevance:
29%
The existing standard for carbon monoxide was retained in 2011. The states will develop new SIPs for these standards, which could result in additional emission reductions being required from our facilities.
In 2005, the Federal EPA issued the Clean Air Interstate Rule (CAIR), which requires additional reductions in SO2 and NOx emissions from power plants and assists states developing new SIPs to meet the NAAQS. For additional information regarding CAIR, see Management's Discussion and Analysis of Financial Condition and Results of Operations under the headings entitled Environmental Issues - Clean Air Act Requirements. In August 2011, the Federal EPA issued a final rule to replace CAIR (the Cross State Air Pollution Rule (CSAPR)) that would impose new and more stringent requirements to control SO2 and NOx emissions from fossil fuel-fired electric generating units in 27 states and the District of Columbia. Petitions for review were filed with the U.S. Court of Appeals for the District of Columbia Circuit, and CSAPR was vacated. That decision is currently under review by the U.S. Supreme Court. CAIR remains in effect until the Federal EPA develops a replacement rule. For additional information regarding CSAPR, see Management's Discussion and Analysis of Financial Condition and Results of Operations under the headings entitled Environmental Issues - Clean Air Act Requirements.
Hazardous Air Pollutants As a result of the 1990 Amendments to the CAA, the Federal EPA investigated hazardous air pollutant (HAP) emissions from the electric utility sector and submitted a report to Congress, identifying mercury emissions from coal-fired power plants as warranting further study. In 2011, the Federal EPA issued a final rule setting Maximum Achievable Control Technology (MACT) standards for new and existing coal and oil-fired utility units and New Source Performance Standards (NSPS) for emissions from new and modified power plants. For additional information regarding MACT, see Management's Discussion and Analysis of Financial Condition and Results of Operations under the headings entitled Environmental Issues - Clean Air Act Requirements.
Regional Haze The CAA establishes visibility goals for certain federally designated areas, including national parks, and requires states to submit SIPs that will demonstrate reasonable progress toward preventing impairment of visibility in these areas (Regional Haze program). In 2005, the Federal EPA issued its Clean Air Visibility Rule (CAVR), detailing how the CAA's best available retrofit technology requirements will be applied to facilities built between 1962 and 1977 that emit more than 250 tons per year of certain pollutants in specific industrial categories, including power plants.
PSO is in the process of implementing a settlement with the Federal EPA in order to comply with the Regional Haze program requirements in that state. For additional information regarding CAVR and the Regional Haze program requirements, see Management's Discussion and Analysis of Financial Condition and Results of Operations under the headings entitled Environmental Issues - Clean Air Act Requirements.
CO2 Regulation In the absence of comprehensive climate change legislation, the Federal EPA has taken action to regulate CO2 emissions under the existing requirements of the CAA. Such actions are being legally challenged by numerous parties. For additional information regarding the Federal EPA action taken to regulate CO2 emissions, see Management's Discussion and Analysis of Financial Condition and Results of Operations under the headings entitled Environmental Issues - Clean Air Act Requirements.
Our fossil fuel-fired generating units are large sources of CO2 emissions. If substantial CO2 emission reductions are required, there will be significant increases in capital expenditures and operating costs which would hasten the ultimate retirement of older, less-efficient, coal-fired units. To the extent we install additional controls on our generation plants to limit CO2 emissions and receive regulatory approvals to increase our rates, return on capital investment would have a positive effect on future earnings. Prudently incurred capital investments made by our subsidiaries in rate-regulated jurisdictions to comply with legal requirements and benefit customers are generally included in rate base for recovery and earn a return on investment. We would expect these principles to apply to investments made to address new environmental requirements. However, requests for rate increases reflecting these costs can affect us adversely because our regulators could limit the amount or timing of increased costs that we would recover through higher rates. For our sales of energy based on market rate authority, however, there is no such recovery mechanism.
Several states have adopted programs that directly regulate CO2 emissions from power plants, but none of these programs are currently in effect in states where we have generating facilities. Some of our states have established mandatory or voluntary programs to increase the use of energy efficiency, alternative energy, or renewable energy sources (Arkansas, Indiana, Louisiana, Michigan, Ohio, Oklahoma, Texas, Virginia, and West Virginia). We are taking steps to comply with these requirements primarily through entering into power supply agreements giving us access to power generated by wind turbines. Federal EPA has been consulting with states to see whether and how such programs might become part of a CO2 emission reduction program for existing utility generating units. For additional information, see Management's Discussion and Analysis of Financial Condition and Results of Operations under the headings entitled Environmental Issues - Clean Air Act Requirements.
11 Relevance:
32%
Climate Change - Position and Strategy We continue to support a federal legislative approach to energy policy as the most effective means of reducing emissions of CO2 and other greenhouse gases (generally referred to as CO2) that recognizes that a reliable and affordable electricity supply is vital to economic recovery and growth. We do not believe regulating CO2 emissions under the Clean Air Act is the appropriate solution. During the past decade, we have taken voluntary actions to reduce and offset our CO2 emissions. Unfortunately, two of the voluntary programs that helped businesses such as AEP to set quantitative commitments no longer exist. The Federal EPA's Climate Leaders Program and the Chicago Climate Exchange both ended their reduction obligations at the end of 2010. However, through these programs and others, we voluntarily reduced our CO2 emissions by approximately 96 million metric tons during the 2003 to 2010 period.
We expect our emissions to continue to decline over time as we diversify our generating sources and operate fewer coal units. The projected decline in coal-fired generation is due to a number of factors, including the ongoing cost of operating older units, the relative cost of coal and natural gas as fuel sources, increasing environmental regulations requiring significant capital investments and changing commodity market fundamentals. Our strategy for this transformation is to protect the reliability of the electric system and reduce our emissions by pursuing multiple options. These include diversifying our fuel portfolio and generating more electricity from natural gas, increasing energy efficiency and investing in renewable resources, where there is regulatory support. Meanwhile, the Federal EPA began regulating CO2 emissions from large stationary sources such as power plants in 2012 under the New Source Review prevention of significant deterioration and Title V operating permit programs.
In September 2013, the Federal EPA reproposed a Carbon Pollution Standard for New Power Plants. This regulation, based on EPA authority under section 111(b) of the Clean Air Act, would establish New Source Performance Standards for CO2 for new fossil-fueled-fired electric generating units. The proposed regulation would limit the ability to construct new coal-fired facilities in the future due to strict emission limits if they are finalized. AEP does not currently have plans to permit or construct any new coal-fired facilities and the proposed rule does not directly impact existing facilities. The EPA is scheduled to propose standards, regulations or guidelines, as appropriate, for CO2 from existing fossil fuel units in June 2014, though the scope and extent of the standards is currently unknown.
For additional information on legislative and regulatory responses to greenhouse gases, including limitations on CO2 emissions, see Management's Discussion and Analysis of Financial Condition and Results of Operations under the headings entitled Environmental Issues - Climate Change. Specific steps taken to reduce CO2 emissions include the following:
Renewable Sources of Energy Some of the states we serve have established mandatory or voluntary programs to increase the use of energy efficiency, alternative energy, or renewable energy sources (Arkansas, Indiana, Louisiana, Michigan, Ohio, Oklahoma, Texas, Virginia and West Virginia).
23 Relevance:
4%
In addition, AEP has historically sold less power, and consequently earned less income, when weather conditions are milder. Unusually mild weather in the future could diminish AEP's results of operations and may impact its financial condition. Conversely, unusually extreme weather conditions could increase AEP's results of operations.
25 Relevance:
4%
In addition, AEP transmission and distribution has historically delivered less power, and consequently earned less income, when weather conditions are milder. Unusually mild weather in the future could diminish AEP transmission and distribution's results of operations and may impact its financial condition. Conversely, unusually extreme weather conditions could increase AEP transmission and distribution's results of operations.
item 1a. Risk Factors
32 Relevance:
2%
The 2012 ESP allowed the continuation of the fuel adjustment clause, maintained recovery of several previous ESP riders and approved a storm damage recovery mechanism.
34 Relevance:
4%
Rate regulation may delay or deny full recovery of capital improvements, additions, storm damage operations and maintenance expense repairs and other costs. - Affecting each Registrant Our public utility subsidiaries currently provide service at rates approved by one or more regulatory commissions. These rates are generally regulated based on an analysis of the applicable utility's expenses incurred in a test year. Thus, commission-approved rates may or may not match a utility's expenses at any given time. There may also be a delay between the timing of when these costs are incurred and when these costs are recovered. We often finance the operations and maintenance expense to repair facilities damaged by storms or other severe weather events until the operations and maintenance storm costs, including any deferred regulatory assets, are recovered in rates.
36 Relevance:
5%
Fuel or water supply interruptions caused by transportation constraints, adverse weather such as drought, non-performance by our suppliers and other factors.
Catastrophic events such as fires, earthquakes, explosions, hurricanes, tornados, ice storms, terrorism (including cyber-terrorism), floods or other similar occurrences.
39 Relevance:
5%
37 Our operating results may fluctuate on a seasonal or quarterly basis and with general economic and weather conditions. - Affecting each Registrant Electric power generation is generally a seasonal business. In many parts of the country, demand for power peaks during the hot summer months, with market prices also peaking at that time. In other areas, power demand peaks during the winter. As a result, our overall operating results in the future may fluctuate substantially on a seasonal basis. The pattern of this fluctuation may change depending on the terms of power sale contracts that we enter into. In addition, we have historically sold less power, and consequently earned less income, when weather conditions are milder. Unusually mild weather in the future could diminish our results of operations and harm our financial condition. Conversely, unusually extreme weather conditions could increase AEP's results of operations in a manner that would not likely be sustainable.
39 Relevance:
36%
In addition, if drought conditions or other factors cause the water levels of one or more of these rivers to drop below the amount necessary to permit commercial barging traffic, it would prevent our AEP River Operations from transporting cargo on the affected river. Conversely, if unusually high amounts of precipitation or other factors cause the water levels of one or more of these rivers to be too high to permit commercial barging traffic, it would prevent our AEP River Operations from transporting cargo on the affected river. Extreme water levels that do not close river basin commercial traffic can still harm our business if the levels curtail the total volume permitted to move on the affected river. The levels on portions of the Mississippi River in 2013 have been reported as remaining at or approaching the lowest since the levels caused by severe drought in 1988. Any reduction in the commercial activities of our AEP River Operations due to low water levels could reduce future net income and cash flows.
We are subject to physical and financial risks associated with climate change. - Affecting each Registrant There is a growing consensus on the evidence of global climate change. Climate change creates physical and financial risk. Physical risks from climate change include an increase in sea level and changes in weather conditions, such as changes in precipitation and extreme weather events. Our customers' energy needs vary with weather conditions, primarily temperature and humidity. For residential customers, heating and cooling represent their largest energy use. To the extent weather conditions are affected by climate change, customers' energy use could increase or decrease depending on the duration and magnitude of the changes. Increased energy use due to weather changes may require us to invest in additional generating assets, transmission and other infrastructure to serve increased load. Decreased energy use due to weather changes may affect our financial condition, through decreased revenues. Extreme weather conditions in general require more system backup, adding to costs, and can contribute to increased system stress, including service interruptions. Weather conditions outside of our service territory could also have an impact on our revenues. We buy and sell electricity depending upon system needs and market opportunities. Extreme weather conditions creating high energy demand on our own and/or other systems may raise electricity prices as we buy short-term energy to serve our own system, which would increase the cost of energy we provide to our customers.
Severe weather impacts our service territories, primarily when thunderstorms, tornadoes, hurricanes and snow or ice storms occur. To the extent the frequency of extreme weather events increases, this could increase our cost of providing service. Changes in precipitation resulting in droughts or water shortages could adversely affect our operations, principally our fossil generating units. A negative impact to water supplies due to long-term drought conditions could adversely impact our ability to provide electricity to customers, as well as increase the price they pay for energy. We may not recover all costs related to mitigating these physical and financial risks.
To the extent climate change impacts a region's economic health, it may also impact our revenues.
41 Relevance:
21%
Regulation of CO2 emissions, either through legislation or by the Federal EPA, could materially increase costs to us and our customers or cause some of our electric generating units to be uneconomical to operate or maintain. - Affecting each Registrant The U.S. Congress has not taken any significant steps toward enacting legislation to control CO2emissions since 2009. In December 2009, the Federal EPA issued a final endangerment finding under the CAA regarding emissions from motor vehicles. The Federal EPA also finalized CO2 emission standards for new motor vehicles, and issued a rule that implements a permitting program for new and modified stationary sources of CO2 emissions in a phased manner. Several groups have filed challenges to the endangerment finding and the Federal EPA's subsequent rulemakings. The Supreme Court has agreed to review whether EPA reasonably determined that establishing standards for new motor vehicles automatically triggered regulation of stationary sources through the prevention of significant deterioration and Title V permitting programs.
In 2012, the Federal EPA issued a proposed CO2 emissions standard for new power generation sources with a CO2 limit equivalent to a natural gas unit. In response to the comments submitted on this proposed rule, and in accordance with a directive from the President, EPA withdrew the April 2012 proposed rule and has issued a new proposal. This proposed rule includes separate, but equivalent, standards for natural gas and coal-fired units, based on the use of partial carbon capture and storage at coal units. We do not believe that carbon capture and storage has been adequately demonstrated, and intend to submit comments on the proposed rule. The President has also directed Federal EPA to issue standards for modified and reconstructed units, and a guideline for the development of state implementation plans that would reduce carbon emissions from existing utility units by June 2014, to finalize those standards by June 2015, and to require states to submit implementation plans no later than June 2016. Management believes some policy approaches being discussed would have significant and widespread negative consequences for the national economy and major U.S. industrial enterprises, including AEP and our customers.
If CO2 and other emission standards are imposed, the standards could require significant increases in capital expenditures and operating costs which would impact the ultimate retirement of older, less-efficient, coal-fired units. We typically recover costs of complying with new requirements such as the potential CO2 and other greenhouse gases emission standards from customers through regulated rates in regulated jurisdictions.
44 Relevance:
5%
Courts adjudicating nuisance and other similar claims against us may order us to pay damages or to limit or reduce our CO2 emissions. - Affecting each Registrant In the past, there have been several cases seeking damages based on allegations of federal and state common law nuisance in which we, among others, were defendants. In general, the actions allege that CO2 emissions from the defendants' power plants constitute a public nuisance due to impacts of global warming and climate change. The plaintiffs in these actions generally seek recovery of damages and other relief. If the pending or other future actions are resolved against us, substantial modifications of our existing coal-fired power plants could be required and we might be required to limit or reduce CO2 emissions.
44 Relevance:
3%
Volatility in market prices for fuel and power may result from:
Weather conditions, including storms.
Economic conditions.
Outages of major generation or transmission facilities.
Seasonality.
Power usage.
Illiquid markets.
Transmission or transportation constraints or inefficiencies.
Availability of competitively priced alternative energy sources.
44 Relevance:
2%
Further, in the event that alternative generation resources, such as wind and solar, are mandated or otherwise subsidized or encouraged through climate legislation or regulation and added to the available generation supply, such resources could displace a higher marginal cost fossil plant, which could reduce the price at which 43 market participants sell their electricity.

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