Guest Blogger: AEP's Decision Reveals Legal, Political, and Economic Realities Associated with Implementing Carbon Capture and Sequestration (CCS) Technology

By John S. Wyckoff, CPG Senior Regulatory Scientist, Technology Sciences Group, Inc. Washington, DC[1]

In less than four weeks after the Supreme Court ruled in favor of American Electric Power Company and four other power companies (see SCOTUS Holds That Plaintiffs Cannot Maintain Federal Common Law Nuisance Claims Against GHG-Emitting Utilities,) American Electric Power (AEP) announced on July 14, 2011 that it terminated its cooperative agreement regarding its Mountaineer Carbon Dioxide Capture and Storage Demonstration project with the U.S. Department of Energy due to the uncertain status of the U.S. climate policy and the continued weak economy.   As part of its announcement AEP stated that it is impossible to gain regulatory approval to recover its share of costs for validating and deploying the technology without federal requirements to reduce greenhouse gas emissions already in place.  (see AEP Announcement).   

Cost Recovery Not Approved

A review of AEP’s announcement and its 2011 First Quarter 10-Q filed on March 31, 2011 (see 10-Q, March 31, 2011) provides insight into the company’s decision-making and in particular AEP’s ability (or lack there-of) to recover a portion of its costs from its rate base. The 10-Q indicates that in May 2010 Appalachian Power Company (APCo) and Wheeling Power Company (WPCo) (subsidiaries of AEP) submitted a base rate filing and requested rate base treatment of the Product Validation Facility (PVF) as part of its development of the Mountaineer Carbon Capture and Storage Project.   In March 2011, the West Virginia Public Service Commission (WVPSC) denied the request for rate base treatment of the PVF largely due to its experimental operation. The March 2011 base rate order provided that should APCo construct a commercial scale carbon capture and sequestration (CCS) facility, only the West Virginia portion of the PVF costs, based on load sharing among certain AEP operating companies, may be considered used and useful plant in service and included in future rate base.  As a result, APCo recorded a pretax write-off of $41 million ($26 million net of tax) in the first quarter of 2011. As of March 31, 2011, APCo recorded a noncurrent regulatory asset of $19 million related to the PVF.

Status of Project and Work Completed

During 2010, American Electric Power Service Company (AEPSC) on behalf of APCo began the project definition stage for the potential construction of a new commercial scale CCS facility under consideration at its Mountaineer Plant.  AEPSC applied for and was selected to receive funding from the U.S. Department of Energy (DOE) for the project in the amount of 50% of allowable costs incurred for the CCS facility up to a maximum of $334 million. A Front-End Engineering and Design (FEED) study, scheduled for completion during the third quarter of 2011, was supposed to refine the total cost estimate for the CCS facility and the results from the FEED study were to be evaluated by Company before it sought any regulatory approvals to build the CCS facility. As of March 31, 2011, APCo had incurred $25 million in total costs and had received $7 million of DOE eligible funding resulting in a net $18 million balance.

Other Carbon Capture and Sequestrations Projects Funded by DOE

The Mountaineer project was one of three Carbon Capture and Sequestration (CCS) Projects that the DOE announced on December 4, 2009 that it had selected to support with $979 million in funds from American Recovery and Reinvestment Act.  The other two projects were:

1) Southern Company Services, Inc. (Birmingham, AL) Project Title: Southern Company Carbon Capture and Sequestration Demonstration

2) Summit Texas Clean Energy, LLC (Bainbridge Island, WA) Project Title: Texas Clean Energy Project (TCEP) (see DOE Announcement of CCS Projects).

In light of the legal, political (See MLA's A Challenging Legislative Environment - Democratic and Republican Staff Directors Provide Legislative Outlook for Energy Policy,)