AEP's power play: de-emphasizing electricity plants

Nick Akins, president, CEO, and soon to be chairman, of Columbus-based American Electric Power

By  Dan Gearino

The Columbus Dispatch Sunday December 29, 2013 6:07 AM

American Electric Power is in the middle of rapid change, and the man at the controls is just getting started. • Nick Akins, president and CEO of the Columbus-based utility, has been in charge for two years, presiding over a transformation of the company’s structure and a shifting notion of what AEP needs to do to remain relevant in a changing energy landscape.

In doing so, the company is de-emphasizing what was once a crown jewel, the fleet of Ohio power plants, and putting a greater focus on developing an interstate network of power lines.

“The less we have to spend on centralized generation, the better off we are,” he said in a recent interview.

When he says “centralized generation,” he means big power plants. AEP will be closing more plants than it is building.

The company is shifting resources so it can expand its transmission system, made up of the high-voltage power lines that carry electricity across state lines and between metro areas. AEP already has the largest transmission system in the country, with 38,964 miles of lines in 11 states. Its new projects, including several joint ventures, include several stretches of 765-kilovolt lines, which are the equivalent of a superhighway.

Akins, 53, has worked his entire career for AEP and the former Central and South West Corp., which merged with AEP.

In November, he said the company would spend $4.5 billion on transmission projects from 2014 to 2016, which is a substantial share of the parent company’s $11.4 billion capital budget for those years. He estimated that earnings from the transmission activities would nearly double from 2013 to 2014.

AEP’s focus on transmission began under Akins’ predecessor, Michael Morris, and then was clarified and broadened in the first few months of Akins’ tenure. The company has developed a series of transmission projects that will provide reliable financial returns at a time when the industry’s main sources of income are flat.

“They’re ahead of their pack in terms of jumping on the transmission bandwagon,” said Julien Dumoulin-Smith, a utility analyst for UBS Securities.

And now, other utilities — including Akron-based FirstEnergy — have followed this year with their own strategy shifts to invest more in interstate power-line projects. AEP’s advantage is that it is already deep into the process of financing and gaining regulatory approval for the projects, while others are just beginning.

“These guys have been in the kitchen for a large number of projects for a large number of years,” Dumoulin-Smith said.

Shifting focus

While the company pumps money into interstate power lines, it is de-emphasizing its Ohio power plants.

At the behest of Ohio regulators in 2011, the company agreed to split its Ohio operations into two companies: one that delivers power and handles billing, and one that owns and operates power plants.

The separation means that AEP’s power plants will no longer directly serve the utility’s customers in the state. Instead, the plants will sell electricity on the open market, while the delivery business will purchase electricity on the market for its customers. AEP’s power plants probably will serve a portion of the company’s customers, but only through a competitive-bidding process in which other companies have the opportunity to offer a lower price.

AEP, which was reluctant to split its Ohio operations, has responded by focusing on the delivery business.

Meanwhile, the Ohio power plants are a shrinking asset. Because of environmental rules and the age of some of the plants, the company has announced a series of shutdowns that will occur over the next few years.

Also, AEP is in the process of transferring two plants away from Ohio regulation. The plants, both of which are in West Virginia near the Ohio line, will be regulated in nearby states that allow a utility to sell electricity directly to consumers.

Once the moves are complete, AEP will have 8,668 megawatts of power-plant capacity in the new Ohio power-plant subsidiary, which will be down from 11,652 megawatts today.

Akins says the company is responding to an economic climate in which there is little reason to build power plants in Ohio. The state’s electricity demand has been flat, and the regulatory structure provides no clear way to pay for plant construction.

“You wind up with what I call ‘the big doughnut,’ ” Akins said. “Ohio is essentially the hole in the middle because there hasn’t been any support for generation in that region.”

Todd Snitchler, chairman of the Public Utilities Commission of Ohio, does not see any reason for alarm about the wave of power-plant shut-downs.

“From the short-term perspective, I think what we’re seeing is that the market forces are wringing out some of the inefficiencies that have been in the (power-plant) fleet,” he said.

That said, his agency is monitoring the schedule of plant shutdowns and working with various companies to make sure that changes in the electricity supply are gradual.

AEP’s power plants will be spun off into their own subsidiary on Tuesday. Ohio customers probably won’t notice any change for a while, as rates have been set through mid-2015.

Considering the company’s lack of emphasis on the Ohio plants, many observers are asking if AEP plans to sell these assets. Akins isn’t ruling out a sale.

“I think the verdict is still out,” he said.

Market conditions mean there is little downside to selling the plants, according to analysts. The wholesale price of electricity is so low that power-plant operators are struggling to meet their sales targets.

The risk in selling the plants is that wholesale prices might rebound, and the owners of plants will see a surge in income. If AEP no longer owns plants in Ohio, the new owners will be the beneficiaries of any price increase.

 Taking the lead

Taken as a whole, AEP’s strategic shifts have turned the company into a trend-setter for its industry, said Paul Fremont, an analyst for Jeffries & Co.

“The company has moved from being a follower to, for the first time in a long time, potentially leading on ideas,” he said.

He attributes the shift to Akins’ decisive management style and to the way the market and regulators have forced AEP to make hard choices.

The company’s board of directors rewarded Akins for his efforts by naming him chairman, a move that takes effect on Wednesday. He will continue to hold the titles of president and CEO. He will be replacing Morris, who has served as non-executive chairman for the past two years.

Akins says he’s having fun and is eager to see the work of the past two years come to fruition.

“We are now at a point where we can start defining our success,” he said. “Before, we had a huge anvil we were dragging around, whether it be environmental expense or whether it be other things we were dealing with that were reactionary. We’re finally at a point where we can map out the strategy of this company going forward. It is exhilarating.”

dgearino@dispatch.com

@dispatchenergy