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American Electric Power Company Inc.’s (AEP - Analyst Report) subsidiary, Southwestern Electric Power Company (SWEPCO), has received approval from the Public Utility Commission of Texas (PUCT) to increase the base rate for the company.

Per the approval, residential customers, consuming electricity of 1,000 kilowatt-hours (kwh) per month, will pay $7.00 per month more, representing an 8.9% hike. The revised rate will be applicable from Dec 2013. However, rate changes will be effective in a retroactive manner from Jan 29, 2013. The request was originally filed by the company in July last year that included $83 million of cost recovery for two new power plants and tree trimming activities. The approval from PUCT will fetch $39.4 million for SWEPCO.

The difference between the amounts billed under the former rates and the new approved rates from Feb 2013 through Nov 2013 will be billed to customers through a surcharge implemented at the same time as the new rates go into effect. This added 7.8% surcharge, which is about $6.00, will continue for about 10 months through Sep 2014.

The purpose of the current rate hike is to recover costs for two important power plants – J. Lamar Stall Unit and John W. Turk, Jr. Power Plant – as well as for vegetation management to maintain and ensure service reliability. J. Lamar Stall Unit, constructed by SWEPCO in 2010, is a natural gas-fueled combined-cycle power plant in Shreveport, La. It has a power generation capacity of 500 megawatt (MW). The other plant, John W. Turk, Jr., located in Hempstead County of Southwest Arkansas, is a coal-fueled ultra-supercritical power plant with a capacity of 600 MW. The plant was completed in Dec 2012.

American Electric aims to provide uninterrupted utility services to its customers at more competitive prices than its peers. SWEPCO serves 524,000 customers, including 182,000 in Texas. Despite the increase in residential electricity rates, it is still lower by about 33.6% than the national average. The approved rate hike will also remain 13.7% below the state average for comparable investor-owned utilities.

Regulated utility providers recoup their investments from customers through the filing of rate hike to the commission. Recently, another utility company Duke Energy Corporation’s (DUK - Analyst Report) subsidiary Duke Energy Carolinas received approval from the North Carolina Utilities Commission to increase the monthly electricity rates of the residential North Carolina customers. As per the commission’s approval, the new rate will be $110.32 after Sep 2015, up 7.4% from the current rate.

In October 2013, American Electric Power, one of the largest electric utilities in the U.S., raised its low end of the 2013 operating earnings guidance to $3.15 to $3.25 per share from $3.05 to $3.25 per share announced during its third quarter earnings release. Recently, the utility also provided its earnings expectations as well as spending budgets for the next three years (2014–2016). Investors reacted positively to the news with the share price moving up on Nov 11.

American Electric Power has a stable earnings base of approximately 5 million customers spread over 11 states. The utility is investing more capital in its regulated business to expand the stable earnings base. Furthermore, geographical diversity enables it to tap transmission opportunities with better returns, compared to its single-state utility peers. The company’s cost control initiatives, particularly overhead costs, are expected to yield results in the balance of the year.

American Electric Power carries a Zacks Rank #3 (Hold). However, stocks in the industry that are worth considering are Alliant Energy Corp. (LNT - Snapshot Report) and The AES Corp. (AES - Analyst Report), both with a Zacks Rank #2 (Buy).

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