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AEP Plans to File for Rate Hike

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American Electric Power Co. (AEP - Free Report) has decided to file a new rate plan with Public Utilities Commission of Ohio (PUCO) regulators. The new rate plan proposes new rates that would be effective from June 1, 2012 through May 31, 2015.

In the plan, the company proposes an increase in rates for residential, commercial and industrial customers in Central Ohio. On average, this would translate into a single-digit percentage increase in rates.

Per the proposal, average residential customers in the company’s Columbus Southern Power territory will witness a monthly bill increase of 5%, from $6.24 to $7.40, effective from June 1, 2012. After one year, in June 2013, it would increase 0.25% and would further increase 0.5% thereafter in June 2014. All the conditions remain the same for the company’s Ohio Power residential customers, except that there would be an increase of 5.5% in 2013.

The company plans to increase rates at a lower percentage for the small companies, which were hit hard by the previous rate hike plan. Per the hike, a customer in the Columbus Southern territory would experience an increase of 2% in 2012, no increase in 2013 and an increase of 0.25% in 2014. For customers at Ohio Power, the rates would increase 5% in 2012, 5.6% in 2013 and only 0.29% in 2014.

For industrial customers at Columbus Southern, rates would increase by 0.1% and 1.0% in 2012 and 2013, respectively and remain unchanged in 2014.  Rates at Ohio Power would increase 3% and 9.4% in 2012 and 2013 respectively and then get locked in 2014.

The increase in rates for Ohio Power customers was higher than the customers of Columbus Southern. Therefore, the increases were more for Ohio customers.

The company is planning to merge both the territories. Overall, the plan to file a modified rate plan is the result of a rejection of an AEP Ohio rate plan that the regulators had approved earlier. However, the Public Utilities Commission had to reject the plan due to the protests made by small businesses, school districts, municipal governments and churches that experienced a 40% surge in their electric bills in January 2012.

Also, the company plans to charge a fee when customers move to a competing electricity provider. It has requested the commission to charge a fee to the first 21% of customers who switch and charge a higher fee for any additional customer switches thereafter. Post-June 2013, the lower fee would be applicable for 31% of customers who switch initially and exactly a year after, in June 2014, it would be applicable for 41% of the customers.

American Electric Power Company is a public utility holding company, which through its directly and indirectly-owned subsidiaries, generates, transmits, and distributes electricity, natural gas, and other commodities. Its steady earnings base provides stability to the revenue stream and insulates the company from adverse regulatory decisions and detrimental effects of lower sales in a particular service area.

Going forward, we expect the company to offer stable earnings through consistent performance in core regulated operations, growth through transmission network expansion and an above average dividend yield. However, tepid economies in a number of its service states restrict opportunities for growth.

Also, uncertainty surrounding pending regulatory cases, its predominantly fossil-fuel based generation assets and lower wholesale sales are a matter of concern. The company presently retains a short-term Zacks #3 Rank (Hold) that corresponds with our long-term Neutral recommendation on the stock.

AEP mainly competes with CenterPoint Energy, Inc. (CNP - Free Report) and Duke Energy Corporation (DUK - Free Report) .

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