APCo likely to ask for increase

Appalachian Power Co. finished 2010 in the black, but not nearly in as strong financial condition as in recent years with expense growth outpacing revenues and a 12 percent decline in net income year over year.
The less-than-stellar financial results come as the utility prepares to file another biennial rate review on March 31 with the State Corporation Commission, as required by a 2007 revision to state law.
Company spokesman Todd Burns declined to discuss details of the filing. “We’ve all along said we expect electricity costs to increase,” he said. “Revenues are increasing, but our expenses are outpacing our revenues.”
Charles Patton, Appalachian’s president and chief operating officer, said much the same in January, noting that the company hadn’t done a very good job of preparing its customers for the last major rate increase it sought in 2009.
The company reported annual revenues of $3.27 billion, up from $2.87 billion in 2009, a 13.9 percent increase. Expenses, however, increased to $2.89 billion, from $2.5 billion, a 15.6 percent rise.
Net income after interest and tax expenses in 2010 was $136.6 million, a 12 percent decrease from $155.8 million in 2009. Parent company American Electric Power reported financial data for Appalachian and its other subsidiaries to the Securities and Exchange Commission on Feb. 25.
The two biggest factors driving the increased expenses were a $54 million charge to pay for early retirements and other reductions to the company’s labor force, and another $54 million write-off to reflect regulators’ rejection of the company’s attempt to pass along to customers its share of an experimental carbon-capture technology at a West Virginia power plant. The company expects the labor force cuts to reduce expenses in 2011 and 2012.
Another factor driving expenses was a $30 million increase in depreciation costs related to the retrofitting of older power plants with new environmental compliance equipment, Burns said.
Appalachian says it has spent $2.4 billion on compliance with federal environmental regulations since 2005. Appalachian and parent AEP generate most of their electricity by burning coal.
Appalachian’s return on equity was 7 percent in 2010, below the 10.53 percent cap set by the SCC. The company sees this as a key measure of financial performance.
Overall, AEP reported year-end earnings of $1.2 billion on revenue of $14.4 billion. Earnings per share were $2.53, a decline of 43 cents. AEP’s systemwide ongoing return on equity is 10.75 percent.
Appalachian has been sharply criticized by Virginia legislators and consumer advocates for a series of rate increases since 2007.
In 2009, Appalachian sought a generation and base rate increase of $154 million. In July, the SCC instead approved a $62 million increase.
As of January, despite the base rate increase, typical Appalachian customers paid $96.21 for 1,000 kilowatts of electricity, about $6 less than January 2010 because of decreased coal costs and the expiration of an environmental and reliability surcharge.
The same customer paid $57.82 for the same amount of electricity in 2005.