June 8, Enclosed find the Attorney General s Direct Testimony and Exhibits and related Proof of Service. Sincerely,

Transcription

1 STATE OF MICHIGAN DEPARTMENT OF ATTORNEY GENERAL P.O. BOX LANSING, MICHIGAN BILL SCHUETTE ATTORNEY GENERAL June 8, 2018 Ms. Kavita Kale Michigan Public Service Commission 7109 West Saginaw Highway Lansing, MI Dear Ms. Kale: Re: MPSC Enclosed find the Attorney General s Direct Testimony and Exhibits and related Proof of Service. Sincerely, Michael E. Moody Assistant Attorney General c All Parties

2 PROOF OF SERVICE - U The undersigned certifies that a copy of the Attorney General s Direct Testimony and Exhibits was served upon the parties listed below by ing the same to them at their respective addresses on the 8th day of June Amanda Churchill Indiana Michigan Power Company: Richard J. Aaron RAaron@dykema.com MPSC Staff: Amit T. Singh singa9@michigan.gov Attorney General: Michael Moody Moodym2@michigan.gov ag-enra-spec-lit@michigan.gov 1

3 STATE O F MICHIGAN BEFORE THE MICHIGAN PUBLIC SERVICE COMMISSION In the matter of the application of INDIANA MICHIGAN POWER COMPANY for approval of a Power Supply Cost Recovery Plan and factors for the Year 2018 / MPSC Direct Testimony And Exhibits of Sebastian Coppola On behalf of Attorney General Bill Schuette June 8, 2018

4 1 2 Qualifications Q. PLEASE STATE YOUR NAME, OCCUPATION, AND ADDRESS. 3 4 A. My name is Sebastian Coppola. I am an independent business consultant. My office is located at 5928 Southgate Rd., Rochester, Michigan Q. PLEASE SUMMARIZE YOUR PROFESSIONAL QUALIFICATIONS A. I am a business consultant specializing in financial and strategic business issues in the fields of energy and utility regulation. I have more than thirty years of experience in public utility and related energy work, both as a consultant and utility company executive. I have testified in several regulatory proceedings before the Michigan Public Service Commission (MPSC or Commission) and other regulatory jurisdictions. I have prepared and/or filed testimony in rate case proceedings, revenue decoupling reconciliations, gas conservation programs, Gas Cost Recovery (GCR) cases and Power Supply Cost Recovery (PSCR) cases. As accounting manager and later financial executive for two regulated gas utilities with operations in Michigan and Alaska, I have been intricately involved in regulatory proceedings related to gas cost recovery cases, gas purchase strategies, rate case filings and power plant cost analysis. I have also supported other witnesses in testimony before the MPSC in various rate setting and other regulatory proceedings. 19 Q. WHAT EXPERIENCE DO YOU HAVE WITH ELECTRIC UTILITIES? U S. Coppola 2 6/8/18

5 A. I have performed rate case analyses and filed testimony in several electric general rate cases addressing issues on revenue requirement, sales level determination, operation and maintenance expenses, cost allocations, cost of capital, cost of service and rate design, and various cost tracking mechanisms. In addition, I have performed analysis of power costs and filed testimony in power supply cost recovery mechanisms, including reconciliation of annual power supply costs In my position as Senior Vice President of Finance at MCN, I also had responsibility for project financing of independent power generation plants in which MCN was an owner. In this regard, I was intricately involved and became knowledgeable of PURPA qualified 10 cogeneration plants in Michigan and other states. In addition, I was involved in negotiating the development and financing of power generation and electricity distribution plants in other countries, such as India Q. PLEASE LIST SOME OF THE MORE RECENT CASES YOU HAVE PARTICIPATED IN BEFORE THE MPSC AND OTHER REGULATORY AGENCIES. A. Here is a partial list of the most recent regulatory cases in which I have participated: o Filed testimony on behalf of the Michigan Attorney General in DTE Gas Company (DTE Gas) GCR Plan case U o Filed testimony on behalf of the Michigan Attorney General in Upper Peninsula Power Company (UPPCO) 2018 Tax Credit A refund case U o Filed testimony on behalf of the Michigan Attorney General in DTE Gas 2018 Tax Credit A refund case U o Filed testimony on behalf of the Michigan Attorney General in DTE Electric Company (DTEE) 2018 PSCR Plan case U U S. Coppola 3 6/8/18

6 o Filed testimony on behalf of the Michigan Attorney General in Consumers Energy Company (CECo) 2018 PSCR Plan case U o Filed testimony on behalf of the Michigan Attorney General in DTE Gas 2017 gas rate Case U on several issues, including revenue, operations and maintenance costs, capital expenditures, cost of capital, rate design and other items. o Filed testimony on behalf of the Michigan Attorney General in Consumers Energy Company (CECo) 2017 gas rate Case U on several issues, including revenue, operations and maintenance costs, capital expenditures, cost of capital, rate design and other items. o Filed testimony on behalf of the Michigan Attorney General in CECo 2016 Power Supply Cost Recovery (PSCR) reconciliation case U R. o Assisted the Michigan Attorney General in the review of several Gas Cost Recovery (GCR) and PSCR cases during 2017 and 2018, and proposed terms for settlement of those cases. o Assisted the Michigan Attorney General in the filing of comments with the Michigan Public Service Commission relating to rate case filing requirements in case U-18238, refunds of tax savings from the lower federal tax rate in case U and Performance Based Regulation. o Filed direct and rebuttal testimony on behalf of the Illinois Attorney General for the reconciliation of the rate surcharge for the Qualified Infrastructure Program (Rider QIP) of the Peoples Gas and Coke Company s (Peoples Gas) in Docket o Filed testimony on behalf of the Michigan Attorney General in DTE Electric Company (DTEE) 2017 electric Rate Case U on a several issues, including revenue, operations and maintenance costs, capital expenditures, cost of capital, rate design and other items. o Filed testimony on behalf of the Michigan Attorney General in CECo 2017 electric rate Case U on a several issues, including revenue, operations and maintenance costs, capital expenditure programs, cost of capital and other items. o Filed direct and rebuttal testimony on behalf of the Illinois Attorney General for the re-opening of proceedings in the restructuring of the Peoples Gas and Coke Company s (Peoples Gas) main replacement program and gas system modernization plan in Docket o Filed testimony on behalf of the Michigan Attorney General in the Upper Michigan Energy Resources Corporation (UMERC) application for a certificate of public necessity and convenience to build two power plants in the Upper Peninsula of Michigan in case U U S. Coppola 4 6/8/18

7 o Filed testimony on behalf of the Michigan Attorney General in SEMCO Energy Gas Company (SEMCO) application for a certificate of public necessity and convenience to build a pipeline in the Upper Peninsula of Michigan in case U o Filed testimony on behalf of the Public Counsel Division of the Washington Attorney General in Puget Sound Energy s 2016 Complaint for Violation of Gas Safety Rules in Docket No. UE o Filed testimony on behalf of the Michigan Attorney General in DTEE 2017 PSCR Plan case U o Filed testimony on behalf of the Michigan Attorney General in CECo 2015 PSCR reconciliation case U R. o Filed testimony on behalf of the Michigan Attorney General in CECo 2016 gas general rate case U on a several issues, including revenue, operations and maintenance costs, capital expenditures, working capital, cost of capital and other items. o Filed testimony on behalf of the Illinois Attorney General for the restructuring of the Peoples Gas s main replacement program in Docket o Filed testimony on behalf of the Michigan Attorney General in DTE Gas GCR Plan reconciliation case U R. o Filed testimony on behalf of the Michigan Attorney General in the formation of UMERC and the transfer of Michigan assets of Wisconsin Public Service Corporation and Wisconsin Electric Company to UMERC in Case U o Filed testimony on behalf of the Michigan Attorney General in CECo s Court of Appeals Remand Case U for review of the Automated Meter Infrastructure (AMI) opt-out fees. o Filed testimony on behalf of the Michigan Attorney General in CECo 2016 electric Rate Case U on a several issues, including revenue, operations and maintenance costs, capital expenditure programs, cost of capital, rate design and other items. o Filed testimony on behalf of the Michigan Attorney General in Michigan Gas Utilities Corporation (MGUC) GCR Plan case U o Filed testimony on behalf of the Michigan Attorney General in DTEE 2016 electric Rate Case U on a several issues, including revenue, revenue decoupling, operations and maintenance costs, capital expenditures, cost of capital, rate design and other items. o Filed testimony on behalf of the Michigan Attorney General in SEMCO Energy Gas (SEMCO) GCR Plan case U Appendix A elaborates further on my qualifications in the regulated energy field. U S. Coppola 5 6/8/18

8 1 Prepared Direct Testimony Q. WHAT IS THE PURPOSE OF YOUR TESTIMONY? A. I have been asked by the Michigan Department of Attorney General, Special Litigation Division, to make an independent analysis of Indiana Michigan Power Company s ( I&M or Company ) PSCR Plan for the year This testimony presents a report of my analysis Q. WHAT TOPICS ARE YOU ADDRESSING IN YOUR TESTIMONY? A. I will be addressing the following topics in this case: 1. The lower return on equity ( ROE ) rate recently agreed by American Electric Power ( AEP ) for transmission services billed to I&M. 2. The ROE rate included in the calculation of power costs paid to AEP Generating Company ( AEG ). 3. The reduction in purchase power and transmission costs from the lower federal tax rate effective in The need for a revised PSCR factor that reflects the lower costs from items 1-3 above. The absence of a discussion of other matters in my testimony should not be taken as an indication that I agree with those aspects of I&M s PSCR plan filing. My testimony is, instead, a consequence of focusing on priority issues within the available resources Q. IS YOUR TESTIMONY ON THESE TOPICS ACCOMPANIED BY EXHIBITS? A. Yes. I have included the following exhibits to accompany this testimony: U S. Coppola 6 6/8/18

9 Exhibit AG-1 AEP News Release on Settlement of Transmission ROE Rate 2. Exhibit AG-2 I&M Response on ROE Included in AEG Unit Power Agreement 3. Exhibit AG-3 I&M Response on ROE Update and Power Bill Q. PLEASE SUMMARIZE YOUR CONCLUSIONS REGARDING THE TOPICS YOU IDENTIFIED ABOVE. A. In summary, my conclusions and recommendations are as follows: 1. On April 19, 2018, AEP announced that it had reached a settlement agreement with a group of its power transmission customers to lower the base ROE rate billed for transmission investments. As a transmission customer of AEP, I&M will benefit from the lower ROE rate and one-time refund applicable to prior years. The transmission costs included in the PSCR filing for 2018 and for future years do not reflect these cost savings I recommend that in concert with AEP, the Company should determine the revised transmission costs applicable to 2018 and the remaining four years of the PSCR plan. I also recommend that the Commission consider the lower transmission costs in establishing the proper PSCR factor for For too long, I&M s customers have been paying higher power costs due to an outdated and excessive ROE rate imbedded in the cost of power billed by AEG. The Company should challenge this high ROE rate with its affiliate power supplier AEG immediately and attempt to reach a settlement for an ROE rate in line with current conditions. If in rebuttal testimony in this case, the Company refuses to agree to the proposal discussed later in my testimony, then I recommend that the Commission direct its staff to initiate a complaint with FERC to lower the ROE rate. Furthermore, the Commission should issue a Section 7 warning to the Company that its inaction to challenge the excessive ROE rate charged U S. Coppola 7 6/8/18

10 by AEG could be considered imprudent and could result in potential disallowances in the reconciliation of 2018 PSCR costs. 3. Given the change in the federal tax rate, the power costs and PSCR factor for 2018 are significantly overstated. I recommend that the Company be proactive in determining the amount of transmission and power purchase cost reductions expected during 2018, and provide this information in its rebuttal testimony in this case including revised exhibits. 4. As discussed in my testimony there are three main areas where cost adjustments will result in a significant decrease in the total forecasted power costs for The 2018 PSCR factor proposed by the Company is no longer appropriate. I recommend that in rebuttal testimony the Company revise the calculation of the 2018 PSCR factor and propose a new factor that reflects the adjustments I have identified in my testimony. The remainder of my testimony provides further details and support to these summary conclusions and recommendations Lower ROE For AEP Transmission Services Q. PLEASE DISCUSS YOUR FINDINGS REGARDING THE RECENTLY ANNOUNCED SETTLEMENT AGREEMENT WHEREBY AEP WILL REDUCE THE ROE RATE IMBEDDED IN THE COST OF TRANSMISSION SERVICES BILLED TO I&M. A. On April 19, 2018, AEP announced that it had reached a settlement agreement with a group of its power transmission customers to lower the base ROE rate billed for U S. Coppola 8 6/8/18

11 transmission investments from 10.99% to 9.85%. 1 AEP also agreed to make a one-time refund of $50 million to its transmission customers for periods prior to The settlement agreement was filed with the Federal Regulatory Commission ( FERC ) on March 28, 2018 and approval is pending. Exhibit AG-1 includes a copy of the news release issued by AEP. 6 7 The settlement follows a complaint filed by the group of AEP East Companies 2 on October 26, 2016 in FERC Docket No. EL Q. WHAT IS YOUR CONCLUSION AND RECOMMENDATION? A. As a transmission customer of AEP, I&M will benefit from the lower ROE rate and onetime refund applicable to prior years. The transmission costs included in the PSCR filing for 2018 and for future years do not reflect these cost savings I recommend that in concert with AEP, the Company should determine the revised transmission costs applicable to 2018 and the remaining four years of the PSCR plan. The Company should file the revised transmission costs and related revised exhibits with its rebuttal testimony in this case I also recommend that the Commission consider the lower transmission costs in establishing the proper PSCR factor for After including an adder of 0.50% for AEP participation in the regional transmission organization (RTO), the total ROE rate is 10.35%. 2 The AEP East Companies include: (1) Appalachian Power Company, Columbus Southern Power Company, Indiana Michigan Power Company, Kentucky Power Company, Kingsport Power Company, Ohio Power Company, and Wheeling Power Company (together, the AEP East Operating Companies); and (2) AEP Appalachian Transmission Company, Inc., AEP Indiana Michigan Transmission Company, Inc., AEP Kentucky Transmission Company, Inc., AEP Ohio Transmission Company, Inc., and AEP West Virginia Transmission Company, Inc. (together, the AEP East Transcos). U S. Coppola 9 6/8/18

12 Excessive ROE Rate In AEG Power Purchases Q. PLEASE DISCUSS YOUR FINDINGS REGARDING THE ROE RATE IMBEDDED IN THE COST OF POWER THAT I&M BUYS FROM AEG. A. As described on page 10 of Company witness Nora Fazio, the Company buys 70% of the power of the Rockport Units 1 and 2 to which AEG is entitled. Pursuant to a power purchase agreement between I&M and AEG, subject to FERC Rate Schedule No. 1, the Company pays AEG for a share of the operating and other expenses of the Rockport generating units, including a return on the investment in the plants. According to the Unit Power Agreement ( UPA ), last amended on May 8, 1989, the ROE rate in the calculation of the return on investment is currently set a 12.16% From all indications, the ROE rate has not been recently updated. In discovery, the Company was asked to provide the date when the ROE rate was last revised. In its response, the Company did not provide this information and simply referred to the UPA. The UPA includes an attachment for the Determination of Power Bill. The third page of this attachment 3 shows the ROE rate of 12.16% to be applied to the cost of equity capital in the calculation of the return on investment. The discovery response with a copy of the UPA is included in Exhibit AG-2. After reviewing a copy of the actual bill rendered by AEG for the month of December 2017, I have validated the fact that the calculation of the return on investment for Unit 1 and 2 includes the ROE rate of 12.16% Q. WHAT IS YOUR ASSESSMENT OF THE ROE RATE OF 12.16% USED IN CALCULATING THE COST OF POWER THAT I&M BUYS FROM AEG? 3 Also labeled page 14 of. U S. Coppola 10 6/8/18

13 A. The ROE rate is both outdated and excessive. As discussed above under the April 2018 ROE settlement for transmission services, it is evident that ROE rates have declined significantly in recent years. The ROE rate of 10.49% (excluding the 0.50% adder for RTO participation) previously approved for AEP transmission services by FERC is indicative of how outdated and excessive the 12.16% ROE rate is, which AEG uses to bill I&M for power sales. That ROE rate is even more out of line when compared to the 9.85% rate accepted by AEP in the April 2018 settlement As additional points of reference, the Michigan Public Service Commission in its April 12, 2018 order in the Company s General Rate Case No. U approved an ROE of 9.9%. Furthermore, the average ROE rate for 2017 reported by Regulatory Research Associates for vertically integrated electric utilities with power generation plants was 9.8% Q. DID YOU DETERMINE THE IMPACT ON THE ANNUAL COST OF POWER BILLED TO I&M BY AEG AT A LOWER ROE RATE? A. Yes. Using the December 2017 billing model provided by the Company, I changed the ROE rate from 12.16% to 9.85%. I used the 9.85% rate based on the analysis presented above as a reasonable ROE rate that reflects current conditions. The lower ROE rate results in potential annual power cost savings of approximately $1.8 million to I&M customers. These cost savings should be realized by the I&M s customers at least beginning in S&P Global Market Intelligence, RRA Regulatory Focus, Major Rate Case Decisions U S. Coppola 11 6/8/18

14 Q. DOES THE UPA PROVIDE FOR A PROCEDURE TO CHALLENGE THE REASONABLENESS OF THE ROE OF 12.16%? A. Yes. Page 3 of the Determination of Power Bill section of the UPA states the following: In October of 1988, and every October thereafter for the effective duration of AEGCO s formula rate, any purchaser under AEGCO s two unit power agreements, any state regulatory commission having jurisdiction over the retail rates of purchasers under these agreements, or any other entity representing customers interest, may file a complaint with the Commission with respect to the specified rate of return on common equity. If the Commission, in response to such a complaint, or on its own motion, institutes an investigation into the reasonableness of the specified return on common equity, such investigation shall be pursued under the special procedures set forth as follows: A. The only issue to be addressed under these special procedures shall be the continued collection of the return on equity as incorporated in the formula rate; and B. Refund will be due, should the return on equity, specified in the formula be found not just and reasonable, dating from the first day of January immediately following the date the complaint is filed or an investigation is instituted by the Commission on its own motion, calculated on the resulting difference in rates due to the application of the return found to be just and reasonable and the return stated in the formula. The first such effective date for the calculation of refunds shall be January 1, It is clear that under the UPA the Company has the ability to challenge the high ROE level and it is perplexing why it has not already done so. In discovery, the Company was asked to explain any plans it, or AEG, has undertaken to update the ROE rate. The response points to legal strategy and speculative potential regulatory filings but does not answer the question. Exhibit AG-3 includes a copy of the discovery response Q. WHAT IS YOUR CONCLUSION AND RECOMMENDATION? A. For too long, I&M s customers have been paying higher power costs due to an outdated and excessive ROE rate imbedded in the cost of power billed by AEG. The Company U S. Coppola 12 6/8/18

15 should challenge this high ROE rate with its affiliate power supplier AEG immediately and potentially reach a settlement for an ROE rate in line with the Base ROE included in the April 2018 settlement agreement with the AEP East Companies, retroactive to at least the beginning of If in rebuttal testimony in this case, the Company refuses to agree to this proposal, then I recommend that the Commission direct its staff to initiate a complaint with FERC to lower the ROE rate. Furthermore, the Commission should issue a Section 7 warning to the Company that its inaction to challenge the excessive ROE rate charged by AEG could be considered imprudent and could result in potential disallowances in the reconciliation of 2018 PSCR costs Federal Tax Cut Impact on Transmission and Power Costs Q. PLEASE DISCUSS THE IMPACT OF THE RECENTLY ENACTED REDUCTION IN THE CORPORATE FEDERAL INCOME TAX RATE ON TRANSMISSION AND PURCHASED POWER COSTS. A. The Company uses power transmission services provided by AEP and other transmission companies to move, import and export electric power within and in and out of its service area in Michigan and Indiana. The transmission companies are regulated by the FERC and coordinate its services through the PJM System Operator ( PJM ). The rates previously charged by the transmission companies to I&M reflected a federal tax rate of 35%. For 2018 and future years, the Company has projected transmission costs in this PSCR case based on transmission rates which reflect the 35% tax rate. Additionally, the Company buys power from AEG and potentially from other power supplies under U S. Coppola 13 6/8/18

16 1 2 formula rates or rate mechanisms which include recovery of federal income taxes at a 35% tax rate The recently enacted Tax Cuts and Jobs Act of 2017 ( TCJA ) reduced the corporate federal tax rate from 35% to 21% effective January 1, 2018, and also made other revisions to the federal tax structure. Regulated transmission companies and power companies under certain rate schedules are obligated to reduce their rates to reflect the lower tax rate and also refund the benefits of the lower tax rate since January The refunds and lower rates should also incorporate the cost savings from the reduction in the accumulated deferred federal income taxes. These tax benefits which are to flow to the ultimate consumers of electric energy are likely to be in the hundreds of millions of dollars of which the Company will receive a large share In the news release included in Exhibit AG-1, AEP stated that as part of the settlement agreement of April 2018 with the AEP East Companies, it filed updated transmission formula rates that incorporate the savings of the tax reform. According to AEP, those cost savings are $163 million for I&M will receive a significant portion of these cost savings in Some of the tax benefits will continue into future years as AEP passes through the benefit of the lower tax rate on the accumulated deferred taxes However, the forecasted transmission costs and PSCR costs filed by the Company in September 2017 in this case do not reflect those cost savings. In addition, the filed PSCR costs do not reflect the benefits of the lower federal tax rate applicable to U S. Coppola 14 6/8/18

17 1 2 purchased power costs to be billed by AEG and other power suppliers in 2018 and subsequent years Q. WHAT IS YOUR CONCLUSION AND RECOMMENDATION? A. Given the change in the federal tax rate, the power costs and PSCR factor for 2018 are significantly overstated. I recommend that the Company be pro-active in determining the amount of transmission and power purchase cost reductions expected during 2018, and provide this information in its rebuttal testimony in this case including revised exhibits Revised 2018 PSCR Factor Q. WHAT REVISIONS DO YOU PROPOSE TO THE 2018 PSCR FACTOR? A. As discussed above in my testimony there are three main areas where cost adjustments will result in a significant decrease in the total forecasted power costs for The 2018 PSCR factor proposed by the Company is no longer accurate or appropriate. I recommend that in rebuttal testimony the Company revise the calculation of the 2018 PSCR factor and propose a new factor that reflects the adjustments I have identified in my testimony The Commission should only approve a revised PSCR factor that more accurately reflects the lower power costs that the Company will likely experience in The Commission should also instruct the Company to adjust the PSCR factor during 2018 to pass-through the benefit of the lower transmission and power purchase costs to PSCR U S. Coppola 15 6/8/18

18 1 2 customers as quickly as possible during 2018 and should avoid a large over-recovery of PSCR costs at year-end Q. DOES THIS CONCLUDE YOUR PREPARED DIRECT TESTIMONY? A. Yes, it does. However, I reserve the right to amend, revise and supplement my testimony to incorporate new information that may become available. U S. Coppola 16 6/8/18

19 Appendix A Experience and Qualifications of Sebastian Coppola Mr. Sebastian Coppola is an independent energy business consultant and president of Corporate Analytics, Inc., whose place of business is located at 5928 Southgate Rd., Rochester, Michigan EMPLOYMENT BACKGROUND Mr. Coppola has been an independent consultant for more than 15 years. Before that, he spent three years as Senior Vice President and Chief Financial Officer of SEMCO Energy, Inc. with responsibility for all financial operations, corporate development and strategic planning for the company s Michigan and Alaska regulated and non-regulated operations. During the period at SEMCO Energy, he had also responsibility for certain storage and pipeline operations as President and COO of SEMCO Energy Ventures, Inc. Prior to SEMCO, Mr. Coppola was Senior Vice President of Finance for MCN Energy Group, Inc., the parent company of Michigan Consolidated Gas Company (now DTE Gas Company). During his 24-year career at MCN and MichCon, he held various analytical, accounting, managerial and executive positions, including Manager of Gas Accounting with responsibility for maintaining the accounting records and preparing financial reports for gas purchases and gas production. In this role, he had also responsibility for preparing Gas Cost Recovery (GCR) reconciliation analysis and reports, and supporting preparation of testimony for the cost of gas reconciliation proceedings before the MPSC. Over the years, Mr. Coppola also held the positions of Treasurer, Director of Investor Relations, Director of Accounting Services, Manager of Corporate Finance, Manager of Customer Billing and Manager of Materials Inventory and Warehousing Accounting. In many of 1

20 Appendix A Experience and Qualifications of Sebastian Coppola these positions he interacted with various operating areas of the company and was intricately involved in construction and operating programs, defining gas purchasing strategies, rate case analysis, cost of capital studies and other regulatory proceedings. ENERGY INDUSTRY AND REGULATORY EXPERIENCE As a business consultant, Mr. Coppola specializes in financial and strategic business issues in the fields of energy and utility regulation. He has more than thirty years of experience in public utility and related energy work, both as a consultant and utility company executive. He has testified in several regulatory proceedings before State Public Service Commissions. He has prepared and/or filed testimony in electric and gas general rate case proceedings, power supply and gas cost recovery mechanisms, revenue and cost tracking mechanisms/riders and other regulatory proceedings. As accounting manager and later financial executive for two regulated gas utilities with operations in Michigan and Alaska, he has been intricately involved in operating and construction programs, gas cost recovery and reconciliation cases, gas purchase strategies and rate case filings. Mr. Coppola has more than 15 years of experience in the area of gas supply and regulatory proceedings. He has led or participated in the financial operations, gas supply planning and/or gas cost recovery arrangements of two major gas utilities in Michigan and in Alaska. He has prepared testimony in multiple electric and gas general rate cases, Power Supply Cost Recovery (PSCR) and Gas Cost Recovery (GCR) proceedings, Cast Iron and Pipeline Replacement Programs and other regulatory cases on behalf of the Michigan Attorney General, Citizens Against Rate Excess (CARE), the Public Counsel Division of the Washington 2

21 Appendix A Experience and Qualifications of Sebastian Coppola Attorney General, the Illinois Attorney General and the Ohio Office of Consumers Counsel in electric and gas utility rate cases, including AEP Ohio, Ameren-Illinois Utilities, Avista, Consumers Energy, Detroit Edison, MichCon (DTE Gas), Michigan Gas Utilities Corp, PacifiCorp, Peoples Gas, Puget Sound Energy, SEMCO, Upper Peninsula Power Company and Wisconsin Public Service Company. As accounting manager and later financial executive for two regulated gas utilities, he has been intricately involved in gas purchase strategies and CGR reconciliation cases. He has had direct responsibility for preparing GCR reconciliation analysis and reports, and supporting preparation of testimony for the cost of gas reconciliation proceedings before the Michigan Public Service Commission (MPSC). He is intricately familiar with the power supply and gas cost recovery mechanisms, gas supply and pricing issues, and regulatory issues faced by utilities. As manager of customer billing, Mr. Coppola developed intricate knowledge of customer billing and meter reading operations. As manager of materials inventory and warehousing accounting, he also developed intricate knowledge of pipeline and materials procurement, warehousing and construction operations including safety compliance issues. Mr. Coppola has testified extensively on gas utility pipeline, service lines and inside meters replacement programs related to at-risk pipes that provide safety issues to customers and the general public. In his role as Treasurer and Chairman of the MCN/MichCon Risk Committee from 1996 through 1998, Mr. Coppola was involved in reviewing and 3

22 Appendix A Experience and Qualifications of Sebastian Coppola deciding on the appropriate gas purchase price hedging strategies, including the use of gas future contracts, over the counter swaps, fixed price purchases and index price purchases. As Treasurer at MCN and SEMCO, Mr. Coppola was intricately involved in raising more than $2.5 billion of debt, preferred and common stock in public offerings and private placements. He has a vast knowledge of capital markets and investors expectations about utility investments. In March 2001, Mr. Coppola testified before the Michigan House Energy and Technology Subcommittee on Natural Gas Fixed Pricing Mechanisms. Mr. Coppola has participates in natural gas issue forums sponsored by the American Gas Association and stays current on various energy supply issues through review of industry analyst reports and other publications issued by various trade groups. Specific Regulatory Proceedings And Related Experience: o Filed testimony on behalf of the Michigan Attorney General in DTE Gas Company (DTE Gas) GCR Plan case U o Filed testimony on behalf of the Michigan Attorney General in Upper Peninsula Power Company (UPPCO) 2018 Tax Credit A refund case U o Filed testimony on behalf of the Michigan Attorney General in DTE Gas 2018 Tax Credit A refund case U o Filed testimony on behalf of the Michigan Attorney General in DTE Electric Company (DTEE) 2018 PSCR Plan case U o Filed testimony on behalf of the Michigan Attorney General in Consumers Energy Company (CECo) 2018 PSCR Plan case U o Filed testimony on behalf of the Michigan Attorney General in DTE Gas 2017 gas rate Case U on several issues, including revenue, operations and maintenance costs, capital expenditures, cost of capital, rate design and other items. 4

23 Appendix A Experience and Qualifications of Sebastian Coppola o Filed testimony on behalf of the Michigan Attorney General in Consumers Energy Company (CECo) 2017 gas rate Case U on several issues, including revenue, operations and maintenance costs, capital expenditures, cost of capital, rate design and other items. o Filed testimony on behalf of the Michigan Attorney General in CECo 2016 Power Supply Cost Recovery (PSCR) reconciliation case U R. o Assisted the Michigan Attorney General in the review of several Gas Cost Recovery (GCR) and PSCR cases during 2017 and 2018, and proposed terms for settlement of those cases. o Assisted the Michigan Attorney General in the filing of comments with the Michigan Public Service Commission relating to rate case filing requirements in case U-18238, refunds of tax savings from the lower federal tax rate in case U and Performance Based Regulation. o Filed direct and rebuttal testimony on behalf of the Illinois Attorney General for the reconciliation of the rate surcharge for the Qualified Infrastructure Program (Rider QIP) of the Peoples Gas and Coke Company s (Peoples Gas) in Docket o Filed testimony on behalf of the Michigan Attorney General in DTE Electric Company (DTEE) 2017 electric Rate Case U on a several issues, including revenue, operations and maintenance costs, capital expenditures, cost of capital, rate design and other items. o Filed testimony on behalf of the Michigan Attorney General in CECo 2017 electric rate Case U on a several issues, including revenue, operations and maintenance costs, capital expenditure programs, cost of capital and other items. o Filed direct and rebuttal testimony on behalf of the Illinois Attorney General for the re-opening of proceedings in the restructuring of the Peoples Gas s main replacement program and gas system modernization plan in Docket o Filed testimony on behalf of the Michigan Attorney General in the Upper Michigan Energy Resources Corporation (UMERC) application for a certificate of public necessity and convenience to 5

24 Appendix A Experience and Qualifications of Sebastian Coppola build two power plants in the Upper Peninsula of Michigan in case U o Filed testimony on behalf of the Michigan Attorney General in SEMCO Energy Gas Company (SEMCO) application for a certificate of public necessity and convenience to build a pipeline in the Upper Peninsula of Michigan in case U o Filed testimony on behalf of the Public Counsel Division of the Washington Attorney General in Puget Sound Energy s 2016 Complaint for Violation of Gas Safety Rules in Docket No. UE o Filed testimony on behalf of the Michigan Attorney General in DTEE 2017 PSCR Plan case U o Filed testimony on behalf of the Michigan Attorney General in CECo 2015 Power Supply Cost Recovery (PSCR) reconciliation case U R. o Filed testimony on behalf of the Michigan Attorney General in CECo 2016 gas general rate case U on a several issues, including revenue, operations and maintenance costs, capital expenditures, working capital, cost of capital and other items. o Filed testimony on behalf of the Illinois Attorney General for the restructuring of the Peoples Gas s main replacement program in Docket o Filed testimony on behalf of the Michigan Attorney General in DTE Gas Company (DTE Gas) GCR Plan reconciliation case U R. o Filed testimony on behalf of the Michigan Attorney General in the formation of UMERC and the transfer of Michigan assets of Wisconsin Public Service Corporation and Wisconsin Electric Company to UMERC in Case U o Filed testimony on behalf of the Michigan Attorney General in CECo Court of Appeals Remand Case U for review of the Automated Meter Infrastructure (AMI) opt-out fees. o Filed testimony on behalf of the Michigan Attorney General in CECo 2016 electric Rate Case U on a several issues, including 6

25 Appendix A Experience and Qualifications of Sebastian Coppola revenue, operations and maintenance costs, capital expenditure programs, cost of capital, rate design and other items. o Filed testimony on behalf of the Michigan Attorney General in Michigan Gas Utilities Corporation (MGUC) Gas Cost Recovery (GCR) Plan case U o Filed testimony on behalf of the Michigan Attorney General in DTEE 2016 electric Rate Case U on a several issues, including revenue, revenue decoupling, operations and maintenance costs, capital expenditures, cost of capital, rate design and other items. o Filed testimony on behalf of the Michigan Attorney General in SEMCO Energy Gas (SEMCO) GCR Plan case U o Filed testimony on behalf of the Michigan Attorney General in DTE Gas GCR Plan case U o Filed testimony on behalf of the Michigan Attorney General in DTE Gas 2015 gas general rate case U on a several issues, including revenue, operations and maintenance costs, capital expenditures, main replacement program, Revenue Decoupling Mechanism (RDM) program, cost of capital and other items. o Filed testimony on behalf of the Michigan Attorney General in Consumers Energy Company (CECo) GCR Plan case U o Filed testimony on behalf of the Michigan Attorney General in CECo 2016 Power Supply Cost Recovery (PSCR) Plan case U o Filed testimony on behalf of the Michigan Attorney General in CECo GCR Plan reconciliation case U R. o Filed testimony on behalf of the Michigan Attorney General in DTE Electric (DTEE) 2016 PSCR Plan case U o Filed testimony on behalf of the Michigan Attorney General in SEMCO GCR Plan reconciliation case U R. o Filed testimony on behalf of the Michigan Attorney General in CECo 2015 gas general rate case U on a several issues, including revenue, operations and maintenance costs, capital expenditures, main replacement program, infrastructure cost recovery mechanism, cost of capital and other items.. 7

26 Appendix A Experience and Qualifications of Sebastian Coppola o Filed testimony on behalf of the Michigan Attorney General in CECo Gas Choice and End-User Transportation tariff changes case U o Analyzed the gas rate case filings of MGUC in Case U and assisted the Michigan Attorney General in settlement of the case. o Filed testimony on behalf of the Michigan Attorney General in CECo 2014 Power Supply Cost Recovery (PSCR) reconciliation case U R. o Filed testimony on behalf of the Michigan Attorney General in DTE Gas Company (DTE Gas) GCR Plan reconciliation case U R. o Filed testimony on behalf of the Michigan Attorney General in DTEE 2014 electric Rate Case U on a several issues, including operations and maintenance costs, capital expenditures, AMI program, cost of capital and other items. o Filed testimony on behalf of the Michigan Attorney General in DTE Gas GCR Plan case U o Filed testimony on behalf of the Illinois Attorney General in Ameren Illinois Company s 2015 general rate case on operation and maintenance costs in Docket o Filed testimony on behalf of the Michigan Attorney General in CECo 2014 electric Rate Case U on a several issues, including sales, operations and maintenance costs, capital expenditures, cost of capital, AMI program, revenue decoupling and infrastructure cost recovery mechanisms. o Filed testimony on behalf of the Michigan Attorney General in CECo GCR Plan case U o Filed testimony on behalf of the Michigan Attorney General in MGUC GCR Plan case U o Filed testimony on behalf of the Michigan Attorney General in CECo 2015 PSCR Plan case U o Analyzed the electric rate case filings of Northern States Power in Case U and Wisconsin Public Service Company U-17669, and assisted the Michigan Attorney General in settlement of these cases. 8

27 Appendix A Experience and Qualifications of Sebastian Coppola o Filed testimony on behalf of the Michigan Attorney General in CECo GCR Plan reconciliation case U R. o Filed testimony on behalf of the Michigan Attorney General in MGUC GCR Plan reconciliation cases U R. o Filed testimony on behalf of the Michigan Attorney General in SEMCO Energy Gas (SEMCO) GCR Plan reconciliation case U R. o Filed testimony on behalf of the Michigan Attorney General in CECo 2014 gas general rate case U on a several issues, including revenue, operations and maintenance costs, capital expenditures, main replacement program, cost of capital and other items.. o Filed testimony on behalf of the Illinois Attorney General in Wisconsin Energy merger with Integrys on the Peoples Gas and Coke Company s Accelerated Main Replacement Program Docket o Filed testimony on behalf of Citizens Against Rate Excess in Wisconsin Public Service Company s 2013 Power Supply Cost Recovery (PSCR) plan reconciliation case U R. o Filed testimony on behalf of the Michigan Attorney General in Consumers Energy Company s (CECo) 2014 Power Supply Cost Recovery (PSCR) plan case U o Filed testimony on behalf of the Michigan Attorney General in CECo 2014 OPEB Funding case U o Filed testimony on behalf of the Michigan Attorney General in SEMCO GCR Plan case U o Filed testimony on behalf of the Michigan Attorney General in MGUC GCR Plan case U o Filed testimony on behalf of the Michigan Attorney General in CECo GCR Plan case U o Filed testimony for Citizens Against Rate Excess in Wisconsin Public Service Company s 2014 Power Supply Cost Recovery (PSCR) plan case U o Filed testimony in March 2013 on behalf of the Michigan Attorney General in CECo s electric Rate Case U on remand from the 9

28 Appendix A Experience and Qualifications of Sebastian Coppola Michigan Court of Appeals for review of the Automatic Metering Infrastructure (AMI) program. o Filed testimony for Citizens Against Rate Excess in Upper Peninsula Power Company s 2012 PSCR plan case U o Filed testimony on behalf of the Michigan Attorney General in MGUC GCR Reconciliation case U R. o Filed testimony on behalf of the Michigan Attorney General in DTE Gas Company GCR Reconciliation case U R. o Filed testimony on behalf of the Michigan Attorney General in CECo GCR Reconciliation case U R. o Filed testimony on behalf of the Michigan Attorney General in SEMCO GCR Reconciliation case U R. o Filed testimony for Citizens Against Rate Excess in Upper Peninsula Power Company s 2012 Power Supply Cost Recovery (PSCR) reconciliation case U R. o Filed testimony in Puget Sound Energy s 2013 Power Cost Only Rate Case on behalf of the Public Counsel Division of the Washington Attorney General in Docket No. UE on the power costs adjustment mechanism. o Filed testimony in PacifiCorp s 2013 General Rate Case on behalf of the Public Counsel Division of the Washington Attorney General in Docket No. UE on power costs, cost allocation factors, O&M expenses and power cost adjustment mechanisms. o Filed testimony on behalf of the Michigan Attorney General in SEMCO GCR Plan case U o Filed testimony on behalf of the Michigan Attorney General in MGUC GCR Plan case U o Filed testimony on behalf of the Michigan Attorney General in CECo s 2012 electric Rate Case U on a several issues, including cost of service methodology, rate design, operations and maintenance costs, capital expenditures and infrastructure cost recovery mechanism and other revenue/cost trackers. 10

29 Appendix A Experience and Qualifications of Sebastian Coppola o Filed reports on gas procurement and hedging strategies of four gas utilities before the Washington Utilities and Transportation Commission on behalf of the Washington Attorney General Office of Public Counsel in April o Filed testimony on behalf of the Michigan Attorney General in MGUC and SEMCO GCR Plan reconciliation cases U R and U R. o Filed testimony for Citizens Against Rate Excess in Upper Peninsula Power Company s 2012 Power Supply Cost Recovery (PSCR) plan case U o Filed testimony in MichCon s 2012 gas Rate Case U on a several issues, including sales volumes, revenue decoupling mechanism, operations and maintenance costs, capital expenditures and infrastructure cost recovery mechanism. o Filed testimony on behalf of the Washington Attorney General Office of Public Counsel on executive and board of directors compensation in the 2012 Avista general rate case. o Filed testimony for Citizens Against Rate Excess in Upper Peninsula Power Company s 2011 Power Supply Cost Recovery (PSCR) reconciliation case U R. o Filed testimony on behalf of the Ohio Office of Consumers Counsel in AEP Ohio s power supply restructuring case in June o Filed testimony on behalf of the Michigan Attorney General in MGUC and SEMCO GCR Plan cases U and U o Filed testimony for Citizens Against Rate Excess in Upper Peninsula Power Company s 2012 PSCR plan case U o Filed testimony for Citizens Against Rate Excess in Wisconsin Public Service Corporation s 2012 PSCR plan case U o Filed testimony for the Michigan Attorney General in CECo s gas business Pilot Revenue Decoupling Mechanism in case U o Filed testimony for the Michigan Attorney General in Consumers Energy Gas 2011 Rate Case U on several issues, including 11

30 Appendix A Experience and Qualifications of Sebastian Coppola sales volumes, operations and maintenance cost, employee benefits, capital expenditures and cost of capital. o Filed testimony for the Michigan Attorney General in SEMCO and MGUC GCR Plan reconciliation cases U R and U R. o Filed testimony for the Michigan Attorney General in Consumers Energy 2011 electric Rate Case U on several issues, including electric sales forecast, revenue decoupling mechanism, operations and maintenance cost, employee benefits, capital expenditures and cost of capital. o Filed testimony for the Michigan Attorney General in CECo s electric business Pilot Revenue Decoupling Mechanism in case U o Filed testimony on behalf of the Michigan Attorney General in SEMCO and MGUC GCR Plan cases U and U o Filed testimony for the Michigan Attorney General in Detroit Edison 2010 electric Rate Case U on several issues, including revenue decoupling mechanism, operations and maintenance cost, executive compensation and benefits, capital expenditures and cost of capital. o Filed testimony for the Michigan Attorney General in SEMCO GCR reconciliation case U R. o Filed testimony for Michigan Attorney General in MGUC GCR reconciliation case U R. o Filed testimony for Michigan Attorney General, in Consumers Energy Gas 2010 Rate Case U on several issues, including sales volumes, operations and maintenance costs, capital expenditures and cost of capital. o Filed testimony for Michigan Attorney General, in SEMCO 2010 Rate Case U on several issues, including sales volumes, rate design, operations and maintenance cost, executive compensation and benefits, capital expenditures and cost of capital. o Filed testimony, for Michigan Attorney General in Consumers Energy 2009 electric Rate Case U on several issues, including sales 12

31 Appendix A Experience and Qualifications of Sebastian Coppola volumes, revenue decoupling mechanism, operations and maintenance cost and capital expenditures. o Filed testimony for Michigan Attorney General, in MichCon 2009 gas Rate Case U on several issues, including sales volumes, revenue decoupling mechanism, operations and maintenance cost, capital expenditures and cost of capital. o Filed testimony for Michigan Attorney General and was crossexamined in Consumers Energy 2009 gas Rate Case U on several issues, including sales volumes, revenue decoupling mechanism, operations and maintenance cost, capital expenditures and cost of capital. o Prepared testimony and assisted the Michigan Attorney General in discussions and settlement of SEMCO and MGUC GCR Plan cases U and U o Prepared testimony and assisted Michigan Attorney General in settlement of SEMCO GCR case U o Prepared testimony and assisted Michigan Attorney General in settlement of MGUC GCR case U o Prepared testimony and assisted the Michigan Attorney General in discussions and settlement of SEMCO GCR case U and reconciliation case U R. o Prepared testimony and assisted Michigan Attorney General in discussions and settlement of MGUC GCR reconciliation case U R. o Prepared testimony for Michigan Attorney General in SEMCO GCR Reconciliation Case U R. o Prepared testimony for Michigan Attorney General filed in MGUC GCR Reconciliation Case U R. o Participated in drafting of testimony for all aspects of SEMCO rate case filing with the Regulatory Commission of Alaska (RCA) in o Filed testimony in 2001 before the (RCA) and was cross-examined on the financing plans for the acquisition of Enstar Corporation and the capital structure of SEMCO. 13

32 Appendix A Experience and Qualifications of Sebastian Coppola o Developed a cost of capital study in support of testimony by company witness in the Saginaw Bay Pipeline Company rate request proceeding in o Prepared testimony for company witness on cost of capital and capital structure in MichCon 1988 gas rate case. o Filed testimony in MichCon gas conservation surcharge case in o Testified before MPSC ALJ in MichCon customer bill collection complaints in o Participated in analysis of uncollectible gas accounts expense for inclusion in rate filings between 1975 and o Participated in analysis of allocation of corporate overhead to subsidiaries and use of the Massachusetts Formula at MichCon and at SEMCO in 1975 and o Prepared support information on GCR and rate case-o&m testimony at MichCon from 1975 to o Filed testimony in MichCon financing orders in 1987 and o Participated in rate case filing strategy sessions at MichCon and SEMCO from 1975 to o Provided Hearing Room assistance and guidance to counsel on financial and policy issues in various cases from 1975 to EDUCATIONAL BACKGROUND Mr. Coppola did his undergraduate work at Wayne State University, where he received the Bachelor of Science degree in Accounting in He later returned to Wayne State University to obtain his Master of Business Administration degree with major in Finance in

33 MICHIGAN PUBLIC SERVICE COMMISSION Case No: U Indiana Michigan Power Company Exhibit: AG-1 Date: June 8, 2018 AEP New Release April 19, 2018 Page 1 of 2

34 MICHIGAN PUBLIC SERVICE COMMISSION Case No: U Indiana Michigan Power Company Exhibit: AG-1 Date: June 8, 2018 AEP New Release April 19, 2018 Page 2 of 2

35 MICHIGAN PUBLIC SERVICE COMMISSION Case No: U Indiana Michigan Power Company Exhibit: AG-2 Date: June 8, 2018 I&M Response to Discovery Request 1-16-AG with Attachment pages 1-38 Page 1 of 39

36 Page 1 of 38 AEP Generating Company FERC Rate Schedule No. 1 Unit Power Service to Indiana Michigan Power Company Tariff Submitter: AEP Generating Company FERC Tariff Program Name: FPA Electric Tariff Title: RS and SA Tariff Record Proposed Effective Date: December 31, 2012 Tariff Record Title: Indiana Michigan Power Company Unit Power Agreement Option Code: A

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47 Page 12 of 38 RATE DESIGN The total revenue requirement of AEGCO calculated pursuant to the IMECO- AEGCO Unit Power Agreement designated AEGCO FERC Rate Schedule No. 1 is designed to recover for AEGCO its total cost of providing power (and the energy associated therewith) available to AEGCO at the Rockport Plant. DETERMINATION OF POWER BILL In accordance with Section 1.3 of the Unit Power Agreement, I&M agrees to pay AEGCO in consideration for the right to receive all power (and the energy associated therewith) available to AEGCO at the Rockport Plant, as a demand charge for the right to receive such power (and as an energy charge for any associated energy taken by I&M), such amounts, less any amounts recovered by AEGCO from other sources, as shall be determined monthly as described below. Such amounts shall be calculated separately for Unit No. 1 (including Common Facilities) and for Unit No. 2. I&M shall then commence the payment of such amounts (power bill) on the earlier of the following dates: (i) June 30, 1985 and (ii) the date on which power including any test power, and any energy associated therewith, shall become available to AEGCO at the Rockport Plant. The power bill for Unit No. 1 (including Common Facilities) shall be calculated each month and shall reflect recovery only of those costs related to the plant in service. It shall consist of the sum of (a) a return on common equity, (b) a return on other capital, (c) recovery of operating expenses and (d) provision for federal income taxes as described below and as illustrated in the example attached. (a) Return on Common Equity, which shall be equal to the product of (i) the amount of common equity outstanding at the end of the previous month, but not more than 40% of the capitalization of AEGCO at the end of the previous month; (ii) (12.16% annual rate) as described in Note 1 below; (iii) the Operating Ratio, as defined in Note 2 below; and (iv) the Unit No. 1 Net In-Service Investment Ratio, as defined in Note 3 below, plus the product of (v) the amount of common equity in excess of 40% of the capitalization of AEGCO at the end of the previous month, if any such excess shall be determined; (vi) the weighted cost of debt outstanding at the end of the previous month; (vii) the Operating Ratio, as defined in Note 2 below; and (viii) the Unit No. 1 Net In-Service Investment Ratio, as defined in Note 3 below. For the purposes of these calculations, the amount of common equity shall be equal to the sum of the Common Stock (Accounts , 209, 210, 212, 214 and 217), Other Paid- In Capital (Accounts 207, 208, 211 and 213), and Retained Earnings (Accounts ) outstanding at the end of the previous month. Total capitalization shall be equal to the sum of Long-term Debt (Accounts including current maturities and unamortized debt premium and discounts), Short-Term Debt (Accounts 231 and 233), Preferred Stock (Accounts ), and Common Equity less any Temporary Cash Investments, Special

48 Page 13 of 38 Deposits and Working Funds (Accounts , 136, and 145) outstanding at the end of the previous month. (b) Return on Other Capital, which shall be equal to the product of (i) the amount equal to the net interest expense associated with Long-Term and Short-Term Debt, net of any Temporary Cash Investments, Special Deposits and Working Funds, plus the preferred stock dividend requirement associated with the Preferred Stock outstanding at the end of the previous month; (ii) the Operating Ratio, as defined in Note 2 below; and (iii) the Unit No. 1 Net In-Service Investment Ratio, as defined in Note 3 below. For the purposes of these calculations, net interest expense shall be equal to the sum of (i) the amount of Long-Term Debt outstanding at the end of the previous month multiplied by the weighted cost of such Long-Term Debt and (ii) the amount of Short-Term Debt outstanding at the end of the previous month multiplied by the weighted cost of such Short- Term Debt, less (iii) the amount of Temporary Cash Investments, Special Deposits and Working Funds outstanding at the end of the previous month multiplied by the weighted cost of Long Term and Short-Term Debt combined determined pursuant to (i) and (ii) above. (c) Recovery of Operating Expenses, excluding federal income taxes, which shall consist of provision for depreciation and amortization (Accounts , 411), including Asset Retirement Obligation (ARO) depreciation and accretion expenses (Accounts and ), taxes other than federal income taxes (Accounts ) and operating and maintenance expenses associated with Unit No. 1 (including Common Facilities) offset by other operating revenues as recorded on the Company s books during the month in accordance with the FERC Uniform System of Accounts for Major Electric Utilities (See Note 6). Recovery of expenses for test energy shall be limited to recovery of actual fuel expense as recorded on the Company s books during the month in accordance with the FERC Uniform System of Accounts for Major Electric Utilities. Operating and maintenance expenses shall include, and reflect the recovery of, Steam Power Generation Expenses (Accounts including lease rental payments recorded in Account 507), Other Power Supply Expenses (Accounts ), Transmission Expenses (Accounts ), Distribution Expenses (Accounts ), Customer Accounts Expenses (Accounts ), Customer Service and Informational Expenses (Accounts ), Sales Expenses (Accounts ) and Administrative and General Expenses (Accounts and 935). Recovery of 501 fuel expenses shall be adjusted to reflect the deferral and/or feedback of unrecovered levelized fuel expenses as may be recorded on the Company s books or as is currently recorded on the books of I&M. (d) Provision for Unit No. 1 s (including Common Facilities) allocated share of net current and deferred federal income tax expense and investment tax credit included in operating income as determined by the Company in accordance with federal income tax law, SEC approved consolidated current tax allocation procedures, and FERC rules and regulations. For purposes of computing federal income taxes, the interest expense deduction shall be equal to the sum of the net interest expense computed in accordance with paragraph (b) 2

49 Page 14 of 38 above plus the imputed interest expense associated with common equity that is in excess of 40% of AEGCO s net capitalization. The power bill for Unit No. 2 shall be calculated in the same manner as described for Unit No. 1 above except that it shall reflect the Unit No. 2 Net In-Service Investment Ratio and those expenses associated with Unit No. 2. Notes: 1. Return on Equity The return on common equity allowance shall be based upon a rate of return of 12.16% as set forth in sub-paragraph (a) above. In October of 1988, and every October thereafter for the effective duration of AEGCO s formula rate, any purchaser under AEGCO s two unit power agreements, any state regulatory commission having jurisdiction over the retail rates of purchasers under these agreements, or any other entity representing customers interest, may file a complaint with the Commission with respect to the specified rate of return on common equity. If the Commission, in response to such a complaint, or on its own motion, institutes an investigation into the reasonableness of the specified return on common equity, such investigation shall be pursued under the special procedures set forth as follows: A. The only issue to be addressed under these special procedures shall be the continued collection of the return on equity as incorporated in the formula rate; and B. Refund will be due, should the return on equity, specified in the formula be found not just and reasonable, dating from the first day of January immediately following the date the complaint is filed or an investigation is instituted by the Commission on its own motion, calculated on the resulting difference in rates due to the application of the return found to be just and reasonable and the return stated in the formula. The first such effective date for the calculation of refunds shall be January 1, Any other complaint which challenges the justness and reasonableness of any other component of the filed formula rate or any other complaint filed at any other time which challenges the justness and reasonableness of the specified rate of return on common equity and which is set for investigation by the Commission shall be pursued under Section 206 of the Federal Power Act. 2. Operating Ratio The Operating Ratio shall be computed each month commencing with the month in which Unit No. 1 at the Plant is placed in commercial operation. It shall be based on the balances, as recorded on the Company s books in accordance with the FERC Uniform 3

50 Page 15 of 38 System of Accounts for Major Electric Utilities, outstanding at the end of the previous month and shall be derived by dividing (a) the amount of Electric Plant In Service (Account 101 including amounts associated with leasehold improvements but excluding amounts associated with capitalized leased assets and excluding amounts associated with Asset Retirement Obligations); less Accumulated Provision for Depreciation and Amortization (Accounts 108 and 111 but excluding amounts associated with Asset Retirement Obligations); plus Plant Held for Future Use (Account 105 pursuant to the provisions of Note 4.D. below); Materials and Supplies (Accounts and 163 as adjusted pursuant to the provisions of Note 4.C. below); Other Deferred Debits (Account 186 pursuant to the provisions of Note 4.D. below); Prepayments (Account 165); Deferred Ash pond cost (Account 182.3); other working capital (Accounts 128, 131, 135, 143, 146, 171 and 174 less Accounts , 236, 237, 238, 241 and 242); and Unamortized Debt Expense (Account 181), less Other Deferred Credits (Account 253 including the unamortized gain on the sale of Rockport Unit No. 2); less Asset Retirement Obligation (Account 230); less Accumulated Deferred Federal Income Taxes (Accounts 190 and ) and Accumulated Deferred Investment Tax Credit (Account 255) related to the plant in service by (b) the sum of (i) the amount determined pursuant to (a) plus (ii) the amount of Construction Work In Progress (Account 707) plus Materials and Supplies (Accounts and 163), less Accumulated Deferred Federal Income Taxes related to the construction work in progress plus (iii) Plant Held for Future Use (Account 105), Other Deferred Debits (Account 186) and the amount of fuel inventory over the allowed level (Account ) not otherwise included in (a) above. 3. Net In-Service Investment Ratio The Unit No. 1 Net In-Service Investment Ratio shall be equal to 1.0 during the period commencing with the month in which Unit No. 1 at the Plant is placed in commercial operation and shall remain at 1.0 up to, but not including, the month in which Unit No. 2 at the Plant is placed in commercial operation. Thereafter, the Net In-Service Investment Ratio shall be computed each month, based on the balances, as recorded on the Company s books in accordance with the FERC Uniform System of Accounts for Major Electric Utilities, outstanding at the end of the previous month and shall be derived as follows: A. Unit No. 1 Net In-Service Investment Ratio shall be derived by dividing (a) the Net In-Service Investment associated with Unit No. 1 and Common Facilities by (b) the sum of the Net In-Service Investment associated with Unit No. 1 and Common Facilities plus the Net In-Service Investment associated with Unit No. 2. B. Unit No. 2 Net In-Service Investment Ratio shall be derived by dividing (a) the Net In-Service Investment associated with Unit No. 2 by (b) the sum of the Net In-Service Investment associated with the Unit No. 1 and Common Facilities plus the Net In-Service Investment associated with Unit No. 2. 4

51 Page 16 of Net In-Service Investment The Net In-Service Investment shall be computed each month commencing with the month in which Unit No. 2 at the Plant is placed in commercial operation. It shall be based on the balances, as recorded on the Company s books in accordance with the FERC Uniform System of Accounts for Major Electric Utilities, outstanding at the end of the previous month and shall consist of the following: A. Unit No. 1 Net In-Service Investment shall consist of the sum of Electric Plant in Service (Account 101 including amounts associated with leasehold improvements but excluding amounts associated with capitalized leased assets and excluding amounts associated with Asset Retirement Obligations), Plant Held for Future Use (Account 105 pursuant to the provisions of Note 4.D. below), Materials and Supplies (Accounts and 163 pursuant to the provisions of Note 4.C. below), and Prepayments (Account 165), Deferred Ash pond cost (Account 182.3), Other Deferred Debits (Account 186 pursuant to the provisions of Note 4.D. below), other working capital (Accounts 128, 131, 135, 143, 146, 171 and 174 less Accounts , 236, 237, 238, 241 and 242), and Unamortized Debt Expense (Account 181), less Other Deferred Credits (Account 253), less Asset Retirement Obligation (Account 230), less Accumulated Provision for Depreciation and Amortization (Accounts 108 and 111), Accumulated Deferred Federal Income Taxes (Accounts 190 and ) and Accumulated Deferred Investment Tax Credit (Account 255) related to such Unit No. 1 and Common Facilities in-service investment. B. Unit No. 2 Net In-Service Investment shall consist of the sum of Electric Plant in Service (Account 101 including amounts associated with leasehold improvements but excluding amounts associated with capitalized leased assets and excluding amounts associated with Asset Retirement Obligations), Plant Held for Future Use (Account 105 pursuant to the provisions of Note 4.D. below), Materials and Supplies (Accounts and 163 pursuant to the provisions of Note 4.C. below), Prepayments (Account 165), Deferred Ash pond cost (Account 182.3), Other Deferred Debits (Account 186 pursuant to the provisions of Note 4.D. below), other working capital (Accounts 128, 131, 135, 143, 146, 171 and 174 less Accounts , 236, 237, 238, 241 and 242), and Unamortized Debt Expense (Account 181), less Other Deferred Credits (Account 253 including the unamortized gain on the sale of Rockport Unit No.2), less Asset Retirement Obligation (Account 230), less Accumulated Provision for Depreciation and Amortization (Accounts 108 and 111), Accumulated Deferred Federal Income Taxes (Accounts 190 and ) and Accumulated Deferred Investment Tax Credit (Account 255) related to the Unit No. 2 in-service investment. 5

52 Page 17 of 38 C. AEGCO shall be permitted to earn a return on its fuel inventory, recorded in Account , not in excess of a 68-day coal supply as defined herein. To the extent AEGCO s actual fuel inventory exceeds the allowable 68-day level, the return on such excess shall be recorded in a memo account. When AEGCO s actual fuel inventory is less than the allowable 68-day level, AEGCO shall be permitted to recover the return previously unrecovered, but in no event shall the power bill reflect a return on fuel inventory in excess of 68-day supply. A 68-day coal inventory level shall be determined for each unit annually, and shall be based upon the actual experienced daily burn during the preceding calendar year. The actual experienced daily burn shall be defined to exclude the effect of forced and scheduled outages as well as curtailments as follows: For each unit: Actual experienced daily burn = 24 hours Where: (Tons burned per year) Operating hours and Operating hours = Hours in year minus forced and scheduled outage hours minus curtailment equivalent outage hours Curtailment equivalent outage hours = The product for each curtailment of: kw of curtailed capacity x Curtailment hours kw of rated capacity The value of the allowable 68-day coal supply used to determine each month s power bill shall be equal to the number of tons determined above multiplied by the cost per ton of coal in inventory at the end of the previous month. For 1990, a 68-day coal supply for AEGCO s share of Rockport Unit No. 2 shall be based on 12 months ending December 1990 data. For 1990 billing purposes, however, a 68-day coal supply for AEGCO s share of Rockport Unit No.2 shall initially be assumed to be equal to the 68-day coal supply for AEGCO s share of Rockport Unit No. 1, adjusted to reflect the Btu content and the unit cost of the coal for Rockport Unit No. 2. AEGCO shall maintain a cumulative record of the unrecovered return as well as the subsequent recovery of that return as follows: 6

53 Page 18 of 38 i) To the extent that AEGCO s actual fuel inventory exceeds the allowable 68-day coal supply, AEGCO shall record each month an amount equal to the sum of the unrecovered return on fuel inventory and the return on previously unrecovered amounts. The unrecovered return on fuel inventory shall be calculated each month by deriving the difference between the power bill that would result if full recovery were provided and the power bill that results with the 68- day limitation imposed. The return on previously unrecovered amounts shall be calculated by multiplying the cumulative return unrecovered at the end of the previous month by the capital costs used to derive the power bill, adjusted for federal income taxes. ii) To the extent that AEGCO s fuel inventory is less than the allowable 68-day coal supply, AEGCO shall record each month an amount equal to the return on previously unrecovered amounts less the recovered return in excess of actual inventory levels. The return on previously unrecovered amounts shall be calculated as described in (i) above. The recovered return in excess of actual inventory levels shall be calculated by deriving the difference between the power bill that would result if actual inventory balances were used and the power bill that results with an imputed inventory level. In no event will the cumulative value of the unrecovered return be allowed to fall below zero. D. AEGCO shall be permitted to include as part of its Net In-Service Investment Numerator amounts subsequently recorded in Accounts 105 and 186 subject to the conditions set forth in the Offer of Settlement in FERC Docket No. ER , et al. E. Other Special Funds (Account 128), Other Current and Accrued Assets (Accounts 131, 135, 143, 146, 171 and 174), Other Deferred Debits (Account 181), Other Current and Accrued Liabilities (Accounts , 236, 237, 238, 241 and 242), and Other Deferred Credits (Account 253) shall be directly assigned to unit No. 1 (including Common Facilities) or Unit No. 2 whenever possible. Whenever such direct assignment is not practical, such balances shall be allocated between the units in proportion to the net dependable capability of each of the units. F. To recognize that the lease rental expense will be collected monthly but that the lease payment will be paid semiannually, the lease rental payable balance will be reflected as a rate base reduction in calculating the operating ratio and the Unit 2 net-in-service investment ratio as a means to credit the Unit 2 customers for the time value of money. 7

54 Page 19 of Investment Balances For the purpose of calculating the Operating Ratio and Net In-Service Investment Ratio, amounts shall reflect the balances, as recorded on the Company s book in accordance with the FERC Uniform System of Accounts for Major Electric Utilities, outstanding at the end of the previous month, except that when plant greater than or equal to 1% of the prior month ending plant value is transferred into service during the current month, such prior month balances shall be adjusted to reflect such transfers to service. Such adjustment shall be pro-rated for the number of days during the month that such plant addition was in-service. 6. Allocation of Expenses Operating expenses shall be directly assigned to Unit No. 1 (including Common Facilities) or Unit No. 2 whenever possible. Whenever such direct assignment is not practical, such expenses shall be allocated between the units in accordance with the basis that gave rise to such expense. AEGCO s operating and maintenance expenses shall include, and AEGCO shall be allowed recovery of, administrative and general expenses, related payroll taxes and other cost, allocated to AEGCO by I&M as operator of the Rockport Plant or incurred directly by AEGCO. I&M shall allocate to AEGCO, a portion of I&M s administrative and general expenses charged to Accounts 920, 921, 922, 923, 924, 925, 926, 931 and 935; related payroll taxes charge to Account 408; and a portion of the expenses of the Rockport Information Center charged to Accounts 506, 511 and 514 that generally relate to Rockport Plant operations. Such charges shall be allocated to AEGCO on the basis of the ratio of AEGCO s share of the Rockport Plant operation and maintenance wages and salaries, divided by the sum of total Rockport Plant operations and maintenance wages and salaries, plus all other I&M operation and maintenance wages and salaries, less I&M s administrative and general wages and salaries. For the period beginning December 10, 1984 and ending December 31, 1985 this ratio will be developed based on actual 1985 amounts. In subsequent calendar years, this ratio will be adjusted annually based on the prior calendar year s amounts. AEGCO s operation and maintenance expenses shall also include, and AEGCO shall be allowed recovery of, other administrative and general expenses directly incurred by AEGCO and included in the appropriate administrative and general expense accounts. BILLINGS AND PAYMENTS All bills for amounts owing hereunder shall be due and payable on the fifteenth day of the month next following the month or other period to which such bills are applicable, or on the tenth day following receipt of the bill, whichever date is later. Interest on unpaid amounts shall accrue daily at the prime interest rate per annum in effect on the due date at the 8

55 Page 20 of 38 Citibank, plus 2% per annum, from the due date until the date upon which payment is made. Unless otherwise agreed upon, the calendar month shall be the standard period for the purpose of settlements under this Agreement. If bills cannot be accurately determined at any time, they shall be rendered on an estimated basis and subsequently adjusted to conform to the terms of the unit power agreements. 9

56 Page 21 of 38 AEP GENERATING COMPANY SAMPLE POWER BILL SUMMARY OF MONTHLY POWER BILL Pg 1 of 18 Line No. 1 Return on Common Equity 2 Return on Other Capital 3 Total Return 4 + Fuel 5 + Purchased Power 6 - Other Operating Revenues 7 + Other Operation and Maintenance Exp 8 - Depreciation, Amortization and Accretion Expenses 9 + Taxes Other Than Federal Income Tax 10 + Federal and State Income Tax 11 = Total Unit 1 Monthly Power Bill 12 Determination of Federal Income Tax : 13 Total Return ( Line 3 ) 14 + Unit 1 Schedule M Adjustments 15 + Unit 1 Deferred Federal Income Taxes 16 - Unit 1 Interest Expense Deduction * 17 = Subtotal 18 x Gross-Up ( FIT Rate / 1-FIT Rate ) 19 = Unit 1 Current Federal Income Tax 20 + Unit 1 Def Fed & State Income Taxes 21 = Total Unit 1 Fed&State Income Taxes 22 Proof of Federal Income Tax : 23 Total Unit 1 Monthly Power Bill 24 - Operation and Maintenance Expenses 25 - Depreciation, Amortization and Accretion Expenses 26 - Taxes Other Than Federal Income Tax 27 - Unit 1 Interest Expense Deduction * 28 + Other Operating Revenues 29 = Pre-Tax Book Income 30 + Unit 1 Schedule M Adjustments 31 = Unit 1 Taxable Income 32 x Current Federal Income Tax Rate 33 = Unit 1 Current Federal Income Tax 34 + Unit 1 Def Fed & State Income Taxes 35 = Total Unit 1 Fed&State Income Taxes * From Page 4 of 18 : Line 21 + (Line 28 x Line 31 x Line 32) Amount =============== =============== ===============

57 Page 22 of 38 AEP GENERATING COMPANY SAMPLE POWER BILL OPERATING RATIO Pg 2 of 18 Line No. Amount 1 Operating Ratio: 2 Net In-Service Investment: 3 Electric Plant In-Service 4 - Accumulated Depreciation 5 + Materials & Supplies 6 + Prepayments 7 + Plant Held For Future Use (A/C 105) * 8 + Other Deferred Debits (A/C 186) * 9 + Other Working Capital *** 10 + Unamortized Debt Expense (A/C 181) 11 + Deferred ASH pond cost (A/C 182.3) 12 - Asset Retirement Obligation (A/C 230) 13 - Other Deferred Credits (A/C 253) 14 - Accumulated Deferred FIT 15 - Accumulated Deferred ITC 16 Total Net In-Service Investment 17 Non-In-Service Investment - CWIP : Construction Work In Progress 19 + Materials & Supplies 20 - Accumulated Deferred FIT 21 Total Non-In-Service Investment - CWIP 22 Non-In-Service Investment - Other : Plant Held for Future Use (A/C 105) ** 24 + Other Deferred Debits (A/C 186) ** 25 + Fuel Inventory Over Allowed Level **** 26 Total Non-In-Service Investment - Other 27 Total Investment (Lines ) ============ 28 Operating Ratio (Line 16/Line 27) 29 Non-In-Service Investment-CWIP Ratio (Line 21/Line 27) 30 Non-In-Service Investment-Other Ratio (Line 26/Line 27) Total Investment * As Permitted By FERC ============ ** Excluding Amounts on Lines 7 and 8 *** Accounts 128, 131, 135, 143, 146, 171 and 174, Less Accounts , 236, 237, 238, 241 and 242 **** Includes Rockport 1 and 2

58 Page 23 of 38 AEP GENERATING COMPANY SAMPLE POWER BILL NET IN-SERVICE INVESTMENT RATIO Pg 3 of 18 Line No. Amount 1 Net In-Service Investment Ratio: 2 Unit 1 Net In-Service Investment: 3 Electric Plant In-Service 4 - Accumulated Depreciation 5 + Materials & Supplies 6 + Prepayments 7 + Plant Held For Future Use (A/C 105) * 8 + Other Deferred Debits (A/C 186) * 9 + Other Working Capital ** 10 + Unamortized Debt Expense (A/C 181) 11 + Deferred ASH pond cost (A/C 182.3) 12 - Asset Retirement Obligation (A/C 230) 13 - Other Deferred Credits (A/C 253) 14 - Accumulated Deferred FIT 15 - Accumulated Deferred ITC 16 Total Unit 1 Net In-Service Investment 17 Unit 2 Net In-Service Investment: Electric Plant In-Service 19 - Accumulated Depreciation 20 + Materials & Supplies 21 + Prepayments 22 + Plant Held For Future Use (A/C 105) * 23 + Other Deferred Debits (A/C 186) * 24 + Other Working Capital ** 25 + Unamortized Debt Expense (A/C 181) 26 + Deferred ASH pond cost (A/C 182.3) 27 - Asset Retirement Obligation (A/C 230) 28 - Other Deferred Credits (A/C 253) 29 - Accumulated Deferred FIT 30 - Accumulated Deferred ITC 31 Total Unit 2 Net In-Service Investment 32 Total Net In-Service Investment ============ 33 Net In-Service Investment Ratio: 34 Unit 1 ( Line 16 / Line 32 ) 35 Unit 2 ( Line 31 / Line 32 ) * As Permitted By FERC ============ ** Accounts 128, 131, 135, 143, 146, 171 and 174, Less Accounts , 236, 237, 238, 241 and 242

59 Page 24 of 38 AEP GENERATING COMPANY SAMPLE POWER BILL CALCULATION OF RETURNS ON Pg 4 of 18 COMMON EQUITY & OTHER CAPITAL Line No. Amount 1 Net Capitalization: 2 Long-Term Debt 3 + Short-Term Debt 4 + Preferred Stock 5 + Common Equity 6 - Temporary Cash Investments 7 Net Capitalization ============ 8 40% of Net Capitalization 9 Return on Common Equity: 10 Lesser of Line 5 or Line 8 11 x Equity Return (Monthly Rate) 12 = Equity Return 13 x Operating Ratio 14 x Net In-Service Investment Ratio 15 = Subtotal 16 Excess of Line 5 Over Line 8 17 x Weighted Cost of Debt (Monthly Rate) 18 = Return on Equity over 40% of Capitalization 19 x Operating Ratio 20 x Net In-Service Investment Ratio 21 = Subtotal 22 Unit 1 Return on Equity (Line 15 + Line 21) ============ 23 Return on Other Capital: 24 Long-Term Debt Interest Expense (A/C ) 25 + Short-Term Debt Interest Expense (A/C 430) 26 + Other Interest Expense (A/C 431) 27 - Temporary Cash Investment Income * 28 = Net Interest Expense 29 + Preferred Stock Dividends (a/c 437) 30 = Net Cost of Other Capital 31 x Operating Ratio 32 x Net In-Service Investment Ratio 33 = Unit 1 Return on Other Capital * Line 6 x Line 19 from Pg 5 of ============

60 Page 25 of 38 AEP GENERATING COMPANY SAMPLE POWER BILL DETERMINATION OF WEIGHTED COST OF DEBT Pg 5 of 18 Line No. Amount 1 Debt Balances (Prior Month Ending) : 2 Long-Term Debt 3 + Short-Term Debt 4 + Other Debt 5 Total Debt Balances (Prior Month Ending) ============= 6 Weighting of Debt Balances : 7 Long-Term Debt 8 + Short-Term Debt 9 + Other Debt 10 Total Debt Balances ============= 11 Debt Cost Rates : 12 Long-Term Debt 13 Short-Term Debt 14 Other Debt 15 Weighted Cost of Debt : 16 Long-Term Debt 17 + Short-Term Debt 18 + Other Debt 19 Total Weighted Cost of Debt =============

61 Page 26 of 38 AEP GENERATING COMPANY SAMPLE POWER BILL DETERMINATION OF UNIT 1 MATERIALS AND SUPPLIES Pg 6 of 18 Line No. Amount 1 Unit 1 Materials and Supplies: 2 Fuel Stock - Coal (per Line 23) 3 Fuel Stock Expenses - Undistributed (152) 4 Fuel Stock - Oil (151) 5 Plant Materials & Operating Supplies 6 Merchandise 7 Undistributed Stores Expense 8 Total Materials & Supplies 9 Support of Coal Inventory Value: 10 Actual Coal Inventory (A/C ) 11 + Equivalent Inventory re: Deferred Return 12 = Imputed Coal Inventory =========== Coal Inventory W/68 Day Supply Cap 14 Tons Consumed 15 / Hours Available * 16 = Tons Consumed per Hour 17 x 24 Hours per Day 18 = Tons Consumed Per Day 19 x 68 days 20 = 68 day Supply (Tons) 21 x Coal Cost per Ton (per A/C at End of Prior Month) 22 = 68 day Coal Inventory 23 Lesser of Imputed or Capped Coal Inventory 24 Imputed Inventory Minus Line =========== 25 Accumulated Deferred Inventory Return - Unit 1 (Memo Item): 26 Beginning Balance 27 + Current Month Return on Beginning Balance 28 + Current Month Deferral 29 - Current Month Recovery 30 = Ending Balance ** =========== * Excludes Forced Outages,Scheduled Outages,and Curtailments ** May Not Be Less Than Zero

62 Page 27 of 38 AEP GENERATING COMPANY SAMPLE POWER BILL DETAIL OF OTHER OPERATING REVENUES Pg 7 of 18 Line Account Amount No. No. Description Forfeited Discounts Miscellaneous Service Revenues Sales of Water and Water Power Rent From Electric Property - Associated Companies Rent From Electric Property - Non-Associated Companies Interdepartmental Rents Other Electric Revenues Proceeds/Gains From Sale of Emission Allowances 9 Total Other Operating Revenues ===========

63 Page 28 of 38 AEP GENERATING COMPANY SAMPLE POWER BILL DETAIL OF OPERATION & MAINTENANCE EXPENSES Pg 8 of 18 Line Account Amount No. No. Description 1 500, Steam Power Generation - Operation Fuel - Operation Steam Power Generating - Maintenance 4 Total Steam Power Generation Expenses Other Power Supply Expenses Transmission Expenses - Operation Transmission Expenses - Maintenance 8 Total Transmission Expenses Distribution Expenses - Operation Distribution Expenses - Maintenance 11 Total Distribution Expenses Customer Accounts Expenses - Operation Customer Service and Informational Expenses - Operation Sales Expenses - Operation Administrative and General Expenses - Operation Administrative and General Expenses - Maintenance 17 Total Administrative & General Exp. 18 Total Operation & Maintenance Expenses ===========

64 Page 29 of 38 AEP GENERATING COMPANY SAMPLE POWER BILL DETAIL OF DEPRECIATION, Pg 9 of 18 AMORTIZATION AND ACCRETION EXPENSES Line Account Amount No. No. Description Depreciation Expense 1a ARO Depreciation Expense Amortization of Limited-Term Electric Plant Amortization of Other Electric Plant Amortization of Electric Plant Acquistion Adjustments Amortization of Property Losses, Unrecovered Plant and Regulatory Study Costs 6 Total Depreciation Exp. & Amortization ARO Accretion Expense 8 Total Depreciation, Amortization & Accretion Expenses ==============

65 Page 30 of 38 AEP GENERATING COMPANY SAMPLE POWER BILL DETAIL OF TAXES OTHER THAN FEDERAL INCOME TAXES Pg 10 of 18 Line Account Amount No. No. Description BS Taxes Other Than Federal Income Taxes, Utility Operating Income State Income Taxes 3 Total Taxes Other than FIT ===========

66 Page 31 of 38 AEP GENERATING COMPANY SAMPLE POWER BILL DETAIL OF UNIT 1 SCHEDULE `M' ADJUSTMENTS Pg 11 of 18 AND DEFERRED FEDERAL AND STATE INCOME TAX Line Account No. No. Description Amount 1 Unit 1 Schedule `M' Adjustments 2 N/A Excess ACRS Over Normalization Base Depreciation 3 N/A Excess Normalization Base Over Book Depreciation 4 N/A Other Unit 1 Schedule `M' Adjustments 5 Total Unit 1 Schedule `M' Adjustments * ========== 6 Unit 1 Deferred Federal Income Tax Excess ACRS Over Norm. Base Depr. (Line 2 x FIT Rate * -1) , Other Unit 1 Schedule `M' Adjustments Feedback of Accumulated DFIT re: ABFUDC - Unit 1 Negative Amount Denotes Reduction Feedback of Accumulated DFIT re: Overheads Capitalized - Unit Feedback of Accumulated DFIT re: Other Schedule `M' Adj.-Utility ========== 12 Total Unit 1 Deferred Federal and State Income Tax * * Positive Amount Denotes Increase In Taxable Income, Negative Amount Denotes Reduction.

67 Page 32 of 38 AEP GENERATING COMPANY SAMPLE POWER BILL DETAIL OF NET IN-SERVICE INVESTMENT UNIT 1 Pg 12 of 18 Line Account Amount No. No. Description 1 ELECTRIC PLANT IN SERVICE Electric Plant In Service Electric Plant Purchased Experimental Elec. Plant Unclassified Electric Plant In Process of Reclassification Electric Plant Leased to Others Completed Construction Not Classified Electric Plant Acquisition Adjustments Other Electric Plant Adjustments Other Utility Plant 11 Total Electric Plant In Service Plant Held For Future Use ACCUMULATED DEPRECIATION Accumulated Provision for Depreciation of Electric Utility Plant Accumulated Provision for Depreciation and Amort. of Elec. Utility Plant Accumulated Provision for Amortization of Electric Utility Plant Accumulated Provision for Amortization of Electric Plant Acquisition Adjustments Accumulated Provision for Depreciation and Amortization of Other Utility Plant 19 Total Accumulated Depreciation 20 MATERIAL AND SUPPLIES Fuel Stock Fuel Stock Expenses - Undistributed Residuals Plant Materials and Operating Supplies Merchandise Other Materials and Supplies Stores Expense Undistributed 28 Total Materials and Supplies (In-Service Portion) Prepayments Other Deferred Debits

68 Page 33 of 38 AEP GENERATING COMPANY SAMPLE POWER BILL OTHER WORKING CAPITAL, UNAMORTIZED DEBT EXPENSE, Pg 13 of 18 AND OTHER DEFERRED CREDITS Line Account No. No. Description * Other Special Funds Cash Other Intra Company Adjustments Accounts Receivable-Miscellaneous Accounts Receivable-Associated Company Interest and Dividends Receivable Miscellaneous Current and Accrued Assets Accounts Payable-General Accounts Payable-Associated Company Taxes Accrued Interest Accrued Dividends Declared Tax Collections Payable Misc Current and Accrued Liabilities 15 Total Other Working Capital Amount ========== Unamortized Debt Expense Other Deferred Credits * debit <credit>

69 Page 34 of 38 AEP GENERATING COMPANY SAMPLE POWER BILL DETAIL OF NET IN-SERVICE INVESTMENT UNIT 1 Pg 14 of 18 Line Account Amount No. No. Description 31 ACCUMULATED DEFERRED INCOME TAXES Accumulated Deferred Income Taxes Accumulated Deferred Income Taxes - Accelerated Amortization Property Accumulated Deferred Income Taxes - Other Property Accumulated Deferred Income Taxes - Other 36 Total Accumulated Deferred Income Taxes (In-Service Portion) Accumulated Deferred Investment Tax Credits Accumulated Deferred Investment Tax Credit 39 Total Accumulated Deferred Investment Tax Credits 40 Total Net In-Service Investment Unit 1 ============

70 Page 35 of 38 AEP GENERATING COMPANY SAMPLE POWER BILL DETAIL OF NON-IN-SERVICE INVESTMENT - CWIP AND OTHER Pg 15 of Line Account Amount No. No. Description Non-In-Service Investment - CWIP Construction Work In Process 2 MATERIAL AND SUPPLIES Fuel Stock Fuel Stock Expenses - Undistributed Residuals Plant Materials and Operating Supplies Merchandise Other Material and Supplies Stores Expense Undistributed 10 Total Material and Supplies (CWIP Portion) ACCUMULATED DEFERRED INCOME TAXES Accumulated Deferred Income Taxes Accumulated Deferred Income Taxes - Accelerated Amortization Property Accumulated Deferred Income Taxes - Other Property Accumulated Deferred Income Taxes - Other 16 Total Accumulated Deferred Income Taxes (CWIP Portion) TOTAL NON-IN-SERVICE INVESTMENT - CWIP ========== Non-In-Service Investment - Other Plant Held for Future Use Other Deferred Debits Fuel Inventory Over Allowed Level * 21 Total Non-In-Service Investment Other ========== * INCLUDES ROCKPORT 1 AND 2 UNIT 1 UNIT 2 TOTAL ==========

71 Page 36 of 38 AEP GENERATING COMPANY SAMPLE POWER BILL DETAIL OF NET CAPITALIZATION Pg 16 of 18 Line Account Amount No. No. Description 1 COMMON CAPITAL STOCK Common Stock Issued Common Stock Subscribed Common Stock Liability for Conversion Reduction In Par or Stated Value of Capital Stock Gain on Resale or Cancellation of Reacquired Capital Stock Installments Received on Capital Stock Capital Stock Expense Reacquired Capital Stock 10 Total Common Capital Stock 11 OTHER PAID-IN CAPITAL Premium on Capital Stock Donations Received from Stockholders Miscellaneous Paid-In Capital Discount on Capital Stock 16 Total Other Paid-In Capital 17 RETAINED EARNINGS Appropriated Retained Earnings Appropriated Retained Earnings- Amortization Reserve, Federal Unappropriated Retained Earnings 21 Total Retained Earnings 22 Total Common Equity 23 PREFERED CAPITAL STOCK Preferred Stock Issued Preferred Stock Subscribed Preferred Stock Liability for Conversion 27 Total Preferred Capital Stock

72 Page 37 of 38 AEP GENERATING COMPANY SAMPLE POWER BILL DETAIL OF NET CAPITALIZATION (Cont'd) Pg 17 of 18 Line Account Amount No. No. Description 28 LONG-TERM DEBT Bonds Reacquired Bonds Advances from Associated Companies Other Long-Term Debt Unamortized Premium on Long-Term Debt-Credit Unamortized Discount on Long-Term Debt-Debit 35 Total Long-Term Debt SHORT-TERM DEBT 36a Notes Payable (Short-Term Debt) 36b Unamortized Discount Notes Payable, Assoc Co (Money Pool) 38 Total Short-Term Debt 39 TEMPORARY CASH INVESTMENTS Interest Special Deposits Dividend Special Deposits Other Special Deposits , 145 Temporary Cash Investments 44 Total Temporary Cash Investments 45 NET CAPITALIZATION =========

73 Page 38 of 38 AEP GENERATING COMPANY SAMPLE POWER BILL DETERMINATION OF RATE OF RETURN (Net & Pre-Tax) Page 18 of 18 Line No. Amount 1 Capitalization Balances (Prior Month Ending) : 2 Long-Term Debt 3 + Short-Term Debt 4 + Preferred Stock 5 + Common Equity 6 - Capitalization Offsets 7 Total Capitalization Balances =========== 8 Weighting of Capitalization Balances : 9 Long-Term Debt 10 + Short-Term Debt 11 + Preferred Stock 12 + Common Equity 13 - Capitalization Offsets 14 Total Capitalization 15 Capitalization Cost Rates : =========== 16 Long-Term Debt 17 Short-Term Debt 18 Preferred Stock 19 Common Equity 20 Capitalization Offsets 21 Rate of Return (Net of Tax) : 22 Long-Term Debt 23 + Short-Term Debt 24 + Preferred Stock 25 + Common Equity 26 - Capitalization Offsets 27 Total Rate of Return (Net of Tax) =========== 28 Weighted Net Cost of Debt 29 + Pre-Tax Common Equity (Line 25 /.65) 30 = Rate of Return (Pre-Tax) ===========

74 MICHIGAN PUBLIC SERVICE COMMISSION Case No: U Indiana Michigan Power Company Exhibit: AG-3 Date: June 8, 2018 I&M Response to Discovery Request 2-54-AG excluding attachments Page 1 of 2