CSPCo and OPCo Rate Matters

Ohio Electric Security Plan Filings

2009 – 2011 ESPs

The PUCO issued an order in March 2009 that modified and approved CSPCo's and OPCo's ESPs which established rates at the start of the April 2009 billing cycle. The ESPs are in effect through 2011. The order also limited annual rate increases for CSPCo to 7% in 2009, 6% in 2010 and 6% in 2011 and for OPCo to 8% in 2009, 7% in 2010 and 8% in 2011. Some rate components and increases are exempt from these limitations. CSPCo and OPCo collected the 2009 annualized revenue increase over the last nine months of 2009.

The order provided a FAC for the three-year period of the ESP. The FAC was phased in to avoid having the resultant rate increases exceed the ordered annual caps described above. The FAC is subject to quarterly true-ups, annual accounting audits and prudency reviews. See the “2009 Fuel Adjustment Clause Audit” section below. The order allowed CSPCo and OPCo to defer any unrecovered FAC costs resulting from the annual caps and to accrue associated carrying charges at their respective weighted average cost of capital. Any deferred FAC regulatory asset balance at the end of the three-year ESP period will be recovered through a non-bypassable surcharge over the period 2012 through 2018. That recovery will include deferrals associated with the Ormet interim arrangement and is subject to the PUCO's ultimate decision regarding the Ormet interim arrangement deferrals plus related carrying charges. See the “Ormet Interim Arrangement” section below. The FAC deferral as of June 30, 2011 was $27 million and $526 million for CSPCo and OPCo, respectively, excluding $388 thousand and $43 million, respectively, of unrecognized equity carrying costs.

Discussed below are the significant outstanding uncertainties related to the ESP order:

The Ohio Consumers' Counsel filed a notice of appeal with the Supreme Court of Ohio raising several issues including alleged retroactive ratemaking, recovery of carrying charges on certain environmental investments, Provider of Last Resort (POLR) charges and the decision not to offset rates by off-system sales margins. In November 2009, the Industrial Energy Users-Ohio (IEU) filed a notice of appeal with the Supreme Court of Ohio challenging components of the ESP order including the POLR charge, the distribution riders for gridSMART® and enhanced reliability, the PUCO's conclusion and supporting evaluation that the modified ESPs are more favorable than the expected results of a market rate offer, the unbundling of the fuel and non-fuel generation rate components, the scope and design of the fuel adjustment clause and the approval of the plan after the 150-day statutory deadline.

In April 2011, the Supreme Court of Ohio (the Court) issued an opinion addressing the aspects of the PUCO's 2009 decision that were challenged which resulted in three reversals, only two of which may have a prospective impact through a remand proceeding. First, the Court concluded that the PUCO's decision amounted to retroactive ratemaking. Since the pertinent revenues were collected in 2009 and the Ohio Consumers' Counsel did not successfully pursue the remedy of obtaining a stay of the order prior to the revenues being collected, there is no remand to the PUCO or refund to customers for this error. Second, the Court held that the PUCO's conclusion that the POLR charge is cost-based conflicted with the evidence and remanded the issue to the PUCO for further consideration. Third, the Court reversed the order's legal basis for a carrying charge associated with certain environmental investments and remanded that issue to the PUCO to determine whether an alternative legal basis supports the charge. Pursuant to a May 2011 PUCO order, CSPCo and OPCo implemented rates subject to refund and filed remand testimony in June 2011. For the month ended June 30, 2011, CSPCo and OPCo recorded $14 million and $16 million, respectively, of revenues subject to refund. In June 2011, the Ohio Consumers' Counsel and the IEU filed testimony recommending a complete denial of collection of any POLR charges and carrying charges on certain environmental investments collected from 2009 through 2011. They proposed unfavorable adjustments for CSPCo and OPCo of up to $370 million and $417 million, respectively, excluding carrying costs. The proposed adjustments include a reduction of deferred FAC and other regulatory assets for the period prior to June 2011 of up to $298 million and $336 million for CSPCo and OPCo, respectively, which management believes is without merit and violates the Court's decision. The proposed adjustments also include refunds and rate reductions of related revenues beginning in June 2011 of $72 million and $81 million for CSPCo and OPCo, respectively. Hearings were held in July 2011.

In April 2010, the IEU filed an additional notice of appeal with the Court challenging alleged retroactive ratemaking, CSPCo and OPCo's abilities to collect through the FAC amounts deferred under the Ormet interim arrangement and the approval of the plan after the 150-day statutory deadline. In June 2011, the Court affirmed the PUCO's decision and dismissed the IEU's appeal.

In January 2011, the PUCO issued an order on CSPCo's and OPCo's 2009 SEET filings and determined that OPCo's 2009 earnings were not significantly excessive but determined relevant CSPCo earnings exceeded the PUCO determined threshold by 2.13%. As a result, the PUCO ordered CSPCo to refund $43 million ($28 million net of tax) of its earnings to customers, which was recorded as a revenue provision on CSPCo's December 2010 books. The PUCO ordered that the significantly excessive earnings be applied first to CSPCo's FAC deferral, including unrecognized equity carrying costs, as of the date of the order, with any remaining balance to be credited to CSPCo's customers on a per kilowatt basis. That credit began with the first billing cycle in February 2011 and will continue through December 2011. Several parties, including CSPCo and OPCo, filed requests for rehearing with the PUCO, which were denied in March 2011. In May 2011, the IEU and the Ohio Energy Group filed appeals with the Court challenging the PUCO's SEET decisions. CSPCo and OPCo are required to file their 2010 SEET filings with the PUCO in 2011. Based upon the approach in the PUCO 2009 order, management does not currently believe that CSPCo or OPCo had any significantly excessive earnings in 2010.

Management is unable to predict the outcome of the ESP remand proceeding and litigation discussed above. If these proceedings, including future SEET filings, result in adverse rulings, it could reduce future net income and cash flows and impact financial condition.

January 2012 – May 2014 ESP

In January 2011, CSPCo and OPCo filed an application with the PUCO to approve a new ESP that includes a standard service offer (SSO) pricing on a combined company basis for generation. The rates would be effective with the first billing cycle of January 2012 through the last billing cycle of May 2014. The ESP also includes alternative energy resource requirements and addresses provisions regarding distribution service, energy efficiency requirements, economic development, job retention in Ohio, generation resources and other matters. The SSO presents redesigned generation rates by customer class. Customer class rates vary, but on average, customers will experience base generation increases of 1.4% in 2012 and 2.7% in 2013. The April 2011 decision by the Supreme Court of Ohio referenced above in connection with the 2009-2011 ESP could impact the outcome of the January 2012-May 2014 ESP, though the nature and extent of that impact is not presently known. In July 2011, various intervenors filed testimony that generally asserts CSPCo's and OPCo's proposed SSO rates are higher than the market-rate offer, and objects to certain proposed riders as well as to the proposed non-bypassable nature of certain riders. Additionally, the IEU and Ohio Consumers' Counsel object to revenues collected in the period 2009 through 2011 for POLR and carrying charges related to environmental investments and propose similar adjustments as discussed in the ESP remand proceeding. See the “2009-2011 ESPs” section above. A hearing for this case is scheduled for August 2011 and a decision is expected in the fourth quarter of 2011.

2011 Ohio Distribution Base Rate Case

In February 2011, CSPCo and OPCo filed with the PUCO for annual increases in distribution rates of $34 million and $60 million, respectively. The requested increase is based upon an 11.15% return on common equity to be effective January 2012.

In addition to the annual increases, CSPCo and OPCo requested recovery of the projected December 31, 2012 balances of certain distribution regulatory assets of $216 million and $159 million, respectively, including approximately $102 million and $84 million, respectively, of unrecognized equity carrying costs. These assets and unrecognized carrying costs would be recovered in a requested distribution asset recovery rider over seven years with additional carrying costs, beginning January 2013. The actual balance of these distribution regulatory assets as of June 30, 2011 was $100 million and $64 million for CSPCo and OPCo, respectively, excluding $61 million and $45 million, respectively, of unrecognized equity carrying costs. If CSPCo and OPCo are not ultimately permitted to fully recover their deferrals, it would reduce future net income and cash flows and impact financial condition.

Proposed CSPCo and OPCo Merger

In October 2010, CSPCo and OPCo filed an application with the PUCO to merge CSPCo into OPCo. Approval of the merger will not affect CSPCo's and OPCo's rates until such time as the PUCO approves new rates, terms and conditions for the merged company. In January 2011, CSPCo and OPCo filed an application with the FERC requesting approval for an internal corporate reorganization under which CSPCo will merge into OPCo. CSPCo and OPCo requested the reorganization transaction be effective in October 2011. In July 2011, the FERC issued an order approving the proposed merger. A decision is pending from the PUCO. Management is unable to predict the outcome of this proceeding.

2009 Fuel Adjustment Clause Audit

As required under the ESP orders, the PUCO selected an outside consultant to conduct the audit of the FAC for CSPCo and OPCo for the period of January 2009 through December 2009. In May 2010, the outside consultant provided its confidential audit report to the PUCO. The audit report included a recommendation that the PUCO review whether any proceeds from a 2008 coal contract settlement agreement which totaled $72 million should reduce OPCo's FAC under-recovery balance. Of the total proceeds, approximately $58 million was recognized as a reduction to fuel expense prior to 2009 and $14 million was recognized as a reduction to fuel expense in 2009 and 2010. Hearings were held in August 2010. A decision from the PUCO is pending. Management is unable to predict the outcome of this proceeding. If the PUCO orders any portion of the $58 million previously recognized gains or any future adjustments be used to reduce the FAC deferral, it would reduce future net income and cash flows and impact financial condition.

2010 Fuel Adjustment Clause Audit

In May 2011, the PUCO-selected outside consultant issued their results of the 2010 FAC audit for CSPCo and OPCo. The audit report included a recommendation that the PUCO reexamine the carrying costs on the deferred FAC balances and determine whether the carrying costs on the balances should be net of accumulated income taxes. As of June 30, 2011, the amount of OPCo's carrying costs that could potentially be at risk is estimated to be $13 million, excluding $16 million of unrecognized equity carrying costs. The amount of carrying costs for CSPCo that could potentially be at risk is immaterial. A decision from the PUCO is pending. Management is unable to predict the outcome of this proceeding. If the PUCO order results in a reduction in the carrying charges related to the FAC deferrals, it would reduce future net income and cash flows and impact financial condition.

Ormet Interim Arrangement

CSPCo, OPCo and Ormet, a large aluminum company, filed an application with the PUCO for approval of an interim arrangement governing the provision of generation service to Ormet. This interim arrangement was approved by the PUCO and was effective from January 2009 through September 2009. In March 2009, the PUCO approved a FAC in the ESP filings and the FAC aspect of the ESP order was upheld by the Supreme Court of Ohio's April 2011 decision referenced in the “2009-2011 ESPs” section above. The approval of the FAC as part of the ESP, together with the PUCO approval of the interim arrangement, provided the basis to record regulatory assets for the difference between the approved market price and the rate paid by Ormet. Through September 2009, the last month of the interim arrangement, CSPCo and OPCo had $30 million and $34 million, respectively, of deferred FAC related to the interim arrangement including recognized carrying charges. These amounts exclude $1 million and $1 million, respectively, of unrecognized equity carrying costs. In November 2009, CSPCo and OPCo requested that the PUCO approve recovery of the deferrals under the interim agreement plus a weighted average cost of capital carrying charge. The interim arrangement deferrals are included in CSPCo's and OPCo's FAC phase-in deferral balances. See “Ohio Electric Security Plan Filings” section above. In the ESP proceeding, intervenors requested that CSPCo and OPCo be required to refund the Ormet-related regulatory assets and requested that the PUCO prevent CSPCo and OPCo from collecting the Ormet-related revenues in the future. The PUCO did not take any action on this request in the 2009-2011 ESP proceeding. The intervenors raised the issue again in response to CSPCo's and OPCo's November 2009 filing to approve recovery of the deferrals under the interim agreement and this issue remains pending before the PUCO. If CSPCo and OPCo are not ultimately permitted to fully recover their requested deferrals under the interim arrangement, it would reduce future net income and cash flows and impact financial condition.

Economic Development Rider

In April 2010, the IEU filed a notice of appeal of the 2009 PUCO-approved Economic Development Rider (EDR) with the Supreme Court of Ohio. The EDR collects from ratepayers the difference between the standard tariff and lower contract billings to qualifying industrial customers, subject to PUCO approval. The IEU raised several issues including claims that: (a) the PUCO lost jurisdiction over CSPCo's and OPCo's ESP proceedings and related proceedings when the PUCO failed to issue ESP orders within the 150-day statutory deadline, (b) the EDR should not be exempt from the ESP annual rate limitations and (c) CSPCo and OPCo should not be allowed to apply a weighted average long-term debt carrying cost on deferred EDR regulatory assets. In June 2011, the Supreme Court of Ohio affirmed the PUCO's decision and dismissed the IEU's appeal.

In June 2010, the IEU filed a notice of appeal of the 2010 PUCO-approved EDR with the Supreme Court of Ohio raising the same issues as noted in the 2009 EDR appeal. In addition, the IEU added a claim that CSPCo and OPCo should not be able to take the benefits of the higher ESP rates while simultaneously challenging the ESP orders. In June 2011, the IEU voluntarily dismissed the 2010 EDR appeal issues that were the same issues dismissed by the Supreme Court of Ohio in their 2009 EDR appeal referenced above. A decision from the Supreme Court of Ohio is pending on the remaining issue.

As of June 30, 2011, CSPCo and OPCo have incurred EDR costs of $59 million and $55 million, respectively, including carrying costs. Of these costs, CSPCo and OPCo have collected $50 million and $39 million, respectively, through the EDR, which CSPCo and OPCo began collecting in January 2010. The remaining $9 million and $16 million for CSPCo and OPCo, respectively, are recorded as deferred EDR regulatory assets. If CSPCo and OPCo are not ultimately permitted to recover their deferrals or are required to refund EDR revenue collected, it would reduce future net income and cash flows and impact financial condition.

Ohio IGCC Plant

In March 2005, CSPCo and OPCo filed a joint application with the PUCO seeking authority to recover costs of building and operating an IGCC power plant. Through June 30, 2011, CSPCo and OPCo have collected $12 million and $12 million, respectively, in pre-construction costs authorized in a June 2006 PUCO order and incurred $11 million and $11 million, respectively, in pre-construction costs. As a result, CSPCo and OPCo established net regulatory liabilities of approximately $1 million and $1 million, respectively. The order also provided that if CSPCo and OPCo have not commenced a continuous course of construction of the proposed IGCC plant before June 2011, any pre-construction costs that may be utilized in projects at other sites must be refunded to Ohio ratepayers with interest. As of June 2011, there were no active IGCC projects at other AEP sites. In June 2011, CSPCo and OPCo filed a recommendation with the PUCO to refund to customers $2 million and $2 million, respectively, for the over-recovered pre-construction costs including interest. Intervenors have filed motions with the PUCO requesting all collected pre-construction costs be refunded to Ohio ratepayers with interest.

Management cannot predict the outcome of any cost recovery litigation concerning the Ohio IGCC plant or what effect, if any, such litigation would have on future net income and cash flows. However, if CSPCo and OPCo are required to refund pre-construction costs collected in excess of the over-recovered pre-construction costs, it would reduce future net income and cash flows and impact financial condition.

3. RATE MATTERS

As discussed in the 2010 Annual Report, the Registrant Subsidiaries are involved in rate and regulatory proceedings at the FERC and their state commissions. The Rate Matters note within the 2010 Annual Report should be read in conjunction with this report to gain a complete understanding of material rate matters still pending that could impact net income, cash flows and possibly financial condition. The following discusses ratemaking developments in 2011 and updates the 2010 Annual Report.

Regulatory Assets Not Yet Being Recovered
				APCo				I&M
				June 30,		December 31,		June 30,		December 31,
				2011		2010		2011		2010
	Noncurrent Regulatory Assets (excluding fuel)			(in thousands)				(in thousands)
	Regulatory assets not yet being recovered
		pending future proceedings to determine
		the recovery method and timing:
	Regulatory Assets Currently Not Earning a Return
		Virginia Environmental Rate Adjustment Clause		$	65,348	$	55,724	$	-	$	-
		Deferred Wind Power Costs			37,839		28,584		-		-
		Storm Related Costs			25,225		25,225		-		-
		Mountaineer Carbon Capture and Storage
			Product Validation Facility (a)		19,254		59,866		-		-
		Special Rate Mechanism for Century Aluminum			12,708		12,628		-		-
		Other Regulatory Assets Not Yet Being Recovered			1,469		604		-		-
	Total Regulatory Assets Not Yet Being Recovered			$	161,843	$	182,631	$	-	$	-

				CSPCo				OPCo
				June 30,		December 31,		June 30,		December 31,
				2011		2010		2011		2010
	Noncurrent Regulatory Assets (excluding fuel)			(in thousands)				(in thousands)
	Regulatory assets not yet being recovered
		pending future proceedings to determine
		the recovery method and timing:
	Regulatory Assets Currently Earning a Return
		Line Extension Carrying Costs (b)		$	37,240	$	33,709	$	23,709	$	21,246
		Customer Choice Deferrals (b)			30,108		29,716		29,492		29,141
		Storm Related Costs (b)			19,609		19,122		11,301		11,021
		Acquisition of Monongahela Power (b)			8,592		7,929		-		-
		Economic Development Rider			3,143		3,057		3,143		3,057
		Other Regulatory Assets Not Yet Being Recovered			291		287		396		391
	Regulatory Assets Currently Not Earning a Return
		Acquisition of Monongahela Power (b)			4,052		4,052		-		-
		Other Regulatory Assets Not Yet Being Recovered			48		43		65		58
	Total Regulatory Assets Not Yet Being Recovered			$	103,083	$	97,915	$	68,106	$	64,914

				PSO				SWEPCo
				June 30,		December 31,		June 30,		December 31,
				2011		2010		2011		2010
	Noncurrent Regulatory Assets (excluding fuel)			(in thousands)				(in thousands)
	Regulatory assets not yet being recovered
		pending future proceedings to determine
		the recovery method and timing:
	Regulatory Assets Currently Earning a Return
		Storm Related Costs (c)		$	18,426	$	-	$	-	$	-
	Regulatory Assets Currently Not Earning a Return
		Storm Related Costs (c)			-		17,256		1,239		1,239
		Other Regulatory Assets Not Yet Being Recovered			-		574		740		613
	Total Regulatory Assets Not Yet Being Recovered			$	18,426	$	17,830	$	1,979	$	1,852

(a) APCo wrote off a portion of the Mountaineer Carbon Capture and Storage Product Validation Facility as denied for recovery by the WVPSC in March 2011. See "Mountaineer Carbon Capture and Storage Project Product Validation Facility" section below.

(b) Requested to be recovered in a distribution asset recovery rider. See the "2011 Ohio Distribution Base Rate Case" section below.

(c) In June 2011, an order was received approving recovery of PSO storm costs and associated carrying costs with recovery to begin in August 2011. Starting in the second quarter of 2011, and in accordance with the order received from the OCC, PSO recorded a return on its storm related costs.

FERC Rate Matters

Seams Elimination Cost Allocation (SECA) Revenue Subject to Refund – Affecting APCo, CSPCo, I&M and OPCo

In 2004, AEP eliminated transaction-based through-and-out transmission service (T&O) charges in accordance with FERC orders and collected, at the FERC's direction, load-based charges, referred to as RTO SECA, to partially mitigate the loss of T&O revenues on a temporary basis through March 2006. Intervenors objected to the temporary SECA rates. The FERC set SECA rate issues for hearing and ordered that the SECA rate revenues be collected, subject to refund. The AEP East companies recognized gross SECA revenues of $220 million from 2004 through 2006 when the SECA rates terminated. APCo's, CSPCo's, I&M's and OPCo's portions of recognized gross SECA revenues are as follows:

Company	(in millions)
APCo	$	70.2
CSPCo		38.8
I&M		41.3
OPCo		53.3

In 2006, a FERC Administrative Law Judge (ALJ) issued an initial decision finding that the SECA rates charged were unfair, unjust and discriminatory and that new compliance filings and refunds should be made. The ALJ also found that any unpaid SECA rates must be paid in the recommended reduced amount.

AEP filed briefs jointly with other affected companies asking the FERC to reverse the decision. In May 2010, the FERC issued an order that generally supports AEP's position and requires a compliance filing to be filed with the FERC by August 2010. In June 2010, AEP and other affected companies filed a joint request for rehearing with the FERC.

The AEP East companies provided reserves for net refunds for SECA settlements totaling $44 million applicable to the $220 million of SECA revenues collected. APCo's, CSPCo's, I&M's and OPCo's portions of the provision are as follows:

Company	(in millions)
APCo	$	14.1
CSPCo		7.8
I&M		8.3
OPCo		10.7

Settlements approved by the FERC consumed $10 million of the reserve for refunds applicable to $112 million of SECA revenue. In December 2010, the FERC issued an order approving a settlement agreement resulting in the collection of $2 million of previously deemed uncollectible SECA revenue. Therefore, the AEP East companies reduced their reserves for net refunds for SECA settlements by $2 million. The balance in the reserve for future settlements as of June 30, 2011 was $32 million. APCo's, CSPCo's, I&M's and OPCo's reserve balances as of June 30, 2011 were:

Company	June 30, 2011
	(in millions)
APCo	$	10.0
CSPCo		5.6
I&M		5.9
OPCo		7.6

In August 2010, the affected companies, including the AEP East companies, filed a compliance filing with the FERC. If the compliance filing is accepted, the AEP East companies would have to pay refunds of approximately $20 million including estimated interest of $5 million. The AEP East companies could also potentially receive payments up to approximately $10 million including estimated interest of $3 million. A decision is pending from the FERC. APCo's, CSPCo's, I&M's and OPCo's portions of potential refund payments and potential payments to be received are as follows:

	Potential		Potential
	Refund		Payments to
Company	Payments		be Received
	(in millions)
APCo	$	6.4	$	3.2
CSPCo		3.5		1.8
I&M		3.7		1.9
OPCo		4.8		2.4

Based on the AEP East companies' analysis of the May 2010 order and the compliance filing, management believes that the reserve is adequate to pay the refunds, including interest, that will be required should the May 2010 order or the compliance filing be made final. Management cannot predict the ultimate outcome of this proceeding at the FERC which could impact future net income and cash flows.

Possible Termination of the Interconnection Agreement – Affecting APCo, CSPCo, I&M and OPCo

In December 2010, each of the AEP Power Pool members gave notice to AEPSC and each other of their decision to terminate the Interconnection Agreement effective January 2014 or such other date approved by FERC, subject to state regulatory input. No filings have been made at the FERC. It is unknown at this time whether the AEP Power Pool will be replaced by a new agreement among some or all of the members, whether individual companies will enter into bilateral or multi-party contracts with each other for power sales and purchases or asset transfers or if each company will choose to operate independently. This decision to terminate is subject to management's ongoing evaluation. The AEP Power Pool members may revoke their notices of termination. If any of the AEP Power Pool members experience decreases in revenues or increases in costs as a result of the termination of the AEP Power Pool and are unable to recover the change in revenues and costs through rates, prices or additional sales, it could reduce future net income and cash flows.

PJM/MISO Market Flow Calculation Settlement Adjustments - Affecting APCo, CSPCo, I&M and OPCo

During 2009, an analysis conducted by MISO and PJM discovered several instances of unaccounted for power flows on numerous coordinated flowgates. These flows affected the settlement data for congestion revenues and expenses and dated back to the start of the MISO market in 2005. In January 2011, PJM and MISO reached a settlement agreement where the parties agreed to net various issues to zero. In June 2011, the FERC approved the settlement agreement.

Rate Matters [Abstract]

Rate Matters