OREANDA-NEWS. The Public Utilities Commission of Ohio's (PUCO) authorization of retail rate riders for the recovery of costs associated with FirstEnergy Corp.'s (FE) and American Electric Power Company, Inc.'s (AEP) affiliate purchased power agreements (PPAs) is a constructive credit development for them and their Ohio-based utility and power generation subsidiaries, according to Fitch Ratings.

However, pending complaints filed with the Federal Energy Regulatory Commission (FERC) earlier this year are a source of uncertainty regarding the viability of the affiliate PPAs. In addition, Fitch expects parties opposing the PPAs will seek a rehearing and, ultimately, judicial review of the PUCO order.

Two complaints were filed with FERC earlier this year challenging FE's and AEP's affiliate PPAs. The complainants seek fast track approval to rescind waivers and to review the contracts and to extend PJM Interconnection's (PJM's) minimum offer price rule (MOPR) to the affected generating plants, respectively. The filings underscore competitive power supplier concerns regarding out-of-market subsidies provided by the PPAs (together, approximately six gigawatts of capacity) and their potential impact on PJM's capacity auctions.

Merchant generators operating in PJM's region, including Calpine and Dynegy, filed a complaint with the FERC on March 21 seeking fast track expansion of PJM's MOPR to address subsidies for generating capacity included in AEP and FE's affiliate contracts. In a separate action filed in January 2016, the Electric Power Supply Association (EPSA) and other complainants seek rescission of FERC waivers of affiliate power sales restrictions granted to AEP and FE. In each filing, the complainants assert PJM capacity market price suppression resulting from the AEP and FE affiliate PPAs, among other things. Fitch believes the FERC could fast track the complaints, addressing the relevant issues prior to PJM's next capacity auction in May 2016 or set them for hearings, which could take a year or more.

On Dec. 1, 2015, FE's Ohio-based distribution utilities Ohio Edison Co., The Cleveland Electric Illuminating Co. and The Toledo Edison Co. filed a settlement agreement in their electric security plan (ESP) proceeding with PUCO. Later that month, AEP's Ohio Power Co. (OPCo) also filed a settlement seeking PUCO authorization to recover costs associated with its affiliate PPAs. Signatories to AEP's and FE's non-unanimous settlement agreements included the PUCO staff. Several intervenors, including certain merchant generators, opposed the settlement agreements as proposed.

In its order, PUCO made a few, more notable modifications to the settlements. These modifications include prohibition of increases to customer bills for two years for FE and a 5% limit to increases to customer bills for AEP through the end of AEP's current ESP (May 31, 2018). Additionally, this precludes recovery of potential capacity penalties from ratepayers.

The approved affiliate PPAs have a term of eight years each. The utilities will buy power from specific generating units owned or controlled by AEP and FE affiliate gencos (and Ohio Valley Electric Corporation entitlements) through a PUCO-authorized, cost-based tariff and sell the power in wholesale power markets. The difference between the market price and price paid by the utilities will be charged or credited to customers through the unavoidable tariff. All else equal, Fitch expects the PPAs to reduce business risk and enhance cash flows at AEP's merchant genco subsidiary, AEP Generation Resources, Inc. and FE's FirstEnergy Solutions.