10-K 1 ye10aep10k.htm AMERICAN ELECTRIC POWER 2010 10-K Unassociated Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
___________________
 
FORM 10-K
___________________
(Mark One)

x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended December 31, 2010

o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from __________ to_________

Commission
File Number
 
Registrants; States of Incorporation;
Address and Telephone Number
 
I.R.S. Employer
Identification Nos.
 
1-3525
 
American Electric Power Company, Inc. (A New York Corporation)
 
13-4922640
 
1-3457
 
Appalachian Power Company (A Virginia Corporation)
 
54-0124790
 
1-2680
 
Columbus Southern Power Company (An Ohio Corporation)
 
31-4154203
 
1-3570
 
Indiana Michigan Power Company (An Indiana Corporation)
 
35-0410455
 
1-6543
 
Ohio Power Company (An Ohio Corporation)
 
31-4271000
 
0-343
 
Public Service Company of Oklahoma (An Oklahoma Corporation)
 
73-0410895
 
1-3146
 
Southwestern Electric Power Company (A Delaware Corporation)
1 Riverside Plaza, Columbus, Ohio 43215
Telephone (614) 716-1000
 
72-0323455

Securities registered pursuant to Section 12(b) of the Act:

 
Registrant
 
 
Title of each class
 
Name of each exchange
on which registered
American Electric Power Company, Inc.
 
Common Stock, $6.50 par value
 
New York Stock Exchange
Appalachian Power Company
 
None
   
Columbus Southern Power Company
 
None
   
Indiana Michigan Power Company
 
None
   
Ohio Power Company
 
None
   
Public Service Company of Oklahoma
 
6% Senior Notes, Series B, Due 2032
 
New York Stock Exchange
Southwestern Electric Power Company
 
None
   


Securities registered pursuant to Section 12(g) of the Act:

Registrant
 
Title of each class
American Electric Power Company, Inc.
 
None
Appalachian Power Company
 
4.50% Cumulative Preferred Stock, Voting, no par value
Columbus Southern Power Company
 
None
Indiana Michigan Power Company
 
None
Ohio Power Company
 
4.50% Cumulative Preferred Stock, Voting, $100 par value
Public Service Company of Oklahoma
 
None
Southwestern Electric Power Company
 
4.28% Cumulative Preferred Stock, Voting, $100 par value
   
4.65% Cumulative Preferred Stock, Voting, $100 par value
   
5.00% Cumulative Preferred Stock, Voting, $100 par value

 
 

 
Indicate by check mark if the registrants American Electric Power Company, Inc., and Appalachian Power Company is each a well-known seasoned issuer, as defined in Rule 405 on the Securities Act.
Yes  x
No.  o
     
Indicate by check mark if the registrants Columbus Southern Power Company, Indiana Michigan Power Company, Ohio Power Company, Public Service Company of Oklahoma and Southwestern Electric Power Company, are well-known seasoned issuers, as defined in Rule 405 on the Securities Act.
Yes  o
No.  x
     
Indicate by check mark if the registrants are not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.
Yes  o  
No.  x
     
Indicate by check mark whether the registrants (1) have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrants were required to file such reports), and (2) have been subject to such filing requirements for the past 90 days.
Yes  x
No.  o
     
Indicate by check mark whether American Electric Power Company, Inc. has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
 
Yes  x
No.  o
Indicate by check mark whether Appalachian Power Company, Columbus Southern Power Company, Indiana Michigan Power Company, Ohio Power Company, Public Service Company of Oklahoma and Southwestern Electric Power Company have submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrants were required to submit and post such files).
 
Yes  o
No.  o
Indicate by check mark if disclosure of delinquent filers with respect to Appalachian Power Company, Ohio Power Company, Public Service Company of Oklahoma or Southwestern Electric Power Company pursuant to Item 405 of Regulation S-K (229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements of Appalachian Power Company, Ohio Power Company, Public Service Company of Oklahoma or Southwestern Electric Power Company incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
x
 
     
Indicate by check mark whether American Electric Power Company, Inc. is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See definitions of ‘large accelerated filer’, ‘accelerated filer’ and ‘smaller reporting company’ in Rule 12b-2 of the Exchange Act.  (Check One)
   
     
Large accelerated  filer                                           x
 
Accelerated filer                    o
Non-accelerated filer                                              o (Do not check if a smaller reporting company)
Smaller reporting companyo
     
Indicate by check mark whether Appalachian Power Company, Columbus Southern Power Company, Indiana Michigan Power Company, Ohio Power Company, Public Service Company of Oklahoma and Southwestern Electric Power Company are large accelerated filers, accelerated filers, non-accelerated filers or smaller reporting companies.  See definitions of ‘large accelerated filer’, ‘accelerated filer’ and ‘smaller reporting company’ in Rule 12b-2 of the Exchange Act.  (Check One)
   
     
Large accelerated filer                                          o
 
Accelerated filer                o
Non-accelerated filer                                           x (Do not check if a smaller reporting company)
Smaller reporting companyo
     
Indicate by check mark if the registrants are shell companies, as defined in Rule 12b-2 of the Exchange Act.
Yes  o
No.  x


Columbus Southern Power Company and Indiana Michigan Power Company meet the conditions set forth in General Instruction I(1)(a) and (b) of Form 10-K and are therefore filing this Form 10-K with the reduced disclosure format specified in General Instruction I(2) to such Form 10-K.

 
 

 

 
   
Aggregate market value of voting and non-voting common equity held by non-affiliates of the registrants as of June 30, 2010, the last trading date of the registrants’ most recently completed second fiscal quarter
 
 
Number of shares of common stock outstanding of the registrants at
December 31, 2010
American Electric Power Company, Inc.
 
$15,530,071,139
 
480,807,156
       
($6.50 par value)
Appalachian Power Company
 
None
 
13,499,500
       
(no par value)
Columbus Southern Power Company
 
None
 
16,410,426
       
(no par value)
Indiana Michigan Power Company
 
None
 
1,400,000
       
(no par value)
Ohio Power Company
 
None
 
27,952,473
       
(no par value)
Public Service Company of Oklahoma
 
None
 
9,013,000
       
($15 par value)
Southwestern Electric Power Company
 
None
 
7,536,640
       
($18 par value)

Note On Market Value Of Common Equity Held By Non-Affiliates

American Electric Power Company, Inc. owns all of the common stock of Appalachian Power Company, Columbus Southern Power Company, Indiana Michigan Power Company, Ohio Power Company, Public Service Company of Oklahoma and Southwestern Electric Power Company (see Item 12 herein).

 
 

 

Documents Incorporated By Reference

 
Description
Part of Form 10-K
Into Which Document Is Incorporated
   
Portions of Annual Reports of the following companies for
the fiscal year ended December 31, 2010:
Part II
American Electric Power Company, Inc.
 
Appalachian Power Company
 
Columbus Southern Power Company
 
Indiana Michigan Power Company
 
Ohio Power Company
 
Public Service Company of Oklahoma
 
Southwestern Electric Power Company
 
   
Portions of Proxy Statement of American Electric Power Company, Inc. for 2011 Annual Meeting of Shareholders.
Part III
   
Portions of Information Statements of the following companies for 2011 Annual Meeting of Shareholders:
Part III
Appalachian Power Company
 
Ohio Power Company
 
Public Service Company of Oklahoma
 
Southwestern Electric Power Company
 


This combined Form 10-K is separately filed by American Electric Power Company, Inc., Appalachian Power Company, Columbus Southern Power Company, Indiana Michigan Power Company, Ohio Power Company, Public Service Company of Oklahoma and Southwestern Electric Power Company.  Information contained herein relating to any individual registrant is filed by such registrant on its own behalf. Except for American Electric Power Company, Inc., each registrant makes no representation as to information relating to the other registrants.

You can access financial and other information at AEP’s website, including AEP’s Principles of Business Conduct (which also serves as a code of ethics applicable to Item 10 of this Form 10-K), certain committee charters and Principles of Corporate Governance. The address is www.AEP.com.  AEP makes available, free of charge on its website, copies of its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after filing such material electronically or otherwise furnishing it to the SEC.



 
 

 

TABLE OF CONTENTS
Item
Number
 
Page
Number
 
Glossary of Terms
i
 
Forward-Looking Information
iv
PART I
1
 
Business
 
   
General
1
   
Utility Operations
11
   
AEP River Operations
23
   
Generation and Marketing
23
1
A
Risk Factors
24
1
B
Unresolved Staff Comments
36
2
 
Properties
36
   
Generation Facilities
36
   
Transmission and Distribution Facilities
38
   
Titles
38
   
System Transmission Lines and Facility Siting
38
   
Construction Program
39
   
Potential Uninsured Losses
39
3
 
Legal Proceedings
40
4
 
(Removed and Reserved)
40
   
Executive Officers of the Registrant
40
PART II
5
 
Market For Registrants’ Common Equity, Related Stockholder Matters And Issuer Purchases Of Equity Securities
42
6
 
Selected Financial Data
42
7
 
Management’s Discussion And Analysis Of Financial Condition And Results Of Operations
42
7
A
Quantitative And Qualitative Disclosures About Market Risk
42
8
 
Financial Statements And Supplementary Data
42
9
 
Changes In And Disagreements With Accountants On Accounting And Financial Disclosure
43
9
A
Controls And Procedures
43
9
B
Other Information
43
PART III
10
 
Directors, Executive Officers and Corporate Governance
44
11
 
Executive Compensation
45
12
 
Security Ownership Of Certain Beneficial Owners and Management And Related Stockholder Matters
45
13
 
Certain Relationships and Related Transactions, And Director Independence
46
14
 
Principal Accounting Fees And Services
46
PART IV
15
 
Exhibits and Financial Statement Schedules
48
   
Financial Statements
48
   
Signatures
49
   
Index to Financial Statement Schedules
S-1
   
Reports of Independent Registered Public Accounting Firm
S-2
   
Exhibit Index
E-1


 
 

 

GLOSSARY OF TERMS

The following abbreviations or acronyms used in this Form 10-K are defined below:
 
Abbreviation or Acronym
 
Definition
AECC
 
Arkansas Electric Cooperative Corporation, an unaffiliated corporation
AEGCo
 
AEP Generating Company, an electric utility subsidiary of AEP
AEP or parent
 
American Electric Power Company, Inc.
AEP East companies
 
APCo, CSPCo, I&M, KPCo and OPCo
AEP Power Pool
 
APCo, CSPCo, I&M, KPCo and OPCo, as parties to the Interconnection Agreement
AEP River Operations
 
AEP’s inland river transportation subsidiary, AEP River Operations LLC (formerly AEP MEMCO LLC), operating primarily on the Ohio, Illinois, and lower Mississippi rivers
AEPSC
 
American Electric Power Service Corporation, a service company subsidiary of AEP
AEP System or the System
 
The American Electric Power System, an integrated electric utility system, owned and operated by AEP’s electric utility subsidiaries
AEP West companies
 
PSO, SWEPCo, TCC and TNC
AEP Utilities
 
AEP Utilities, Inc., a subsidiary of AEP, formerly, Central and South West Corporation
AFUDC
 
Allowance for funds used during construction (the net cost of borrowed funds, and a reasonable rate of return on other funds, used for construction under regulatory accounting)
ALJ
 
Administrative law judge
APCo
 
Appalachian Power Company, a public utility subsidiary of AEP
APSC
 
Arkansas Public Service Commission
Buckeye
 
Buckeye Power, Inc., an unaffiliated corporation
CAA
 
Clean Air Act
CAAA
 
Clean Air Act Amendments of 1990
CCS
 
Carbon capture and storage technology
CERCLA
 
Comprehensive Environmental Response, Compensation and Liability Act of 1980
CO2
 
Carbon dioxide and other greenhouse gases
Cook Plant
 
The Donald C. Cook Nuclear Plant, owned by I&M, and located near Bridgman, Michigan
CSPCo
 
Columbus Southern Power Company, a public utility subsidiary of AEP
CSW
 
Central and South West Corporation, a public utility holding company that merged with AEP in June 2000.
CSW Operating Agreement
 
Agreement, dated January 1, 1997, as amended, originally by and among PSO, SWEPCo, TCC and TNC, currently by and between PSO and SWEPCo governing generating capacity allocation, energy pricing, and revenues and costs of third party sales.  AEPSC acts as the agent for the parties.
DOE
 
United States Department of Energy
DP&L
 
The Dayton Power and Light Company, an unaffiliated utility company
Duke Ohio
 
Duke Energy Ohio, Inc.
EMF
 
Electric and Magnetic Fields
EPA
 
United States Environmental Protection Agency
EPACT
 
The Energy Policy Act of 2005
ERCOT
 
Electric Reliability Council of Texas
ESP
 
Electric Security Plans, filed with the PUCO, pursuant to the Ohio Amendments
ETEC
 
East Texas Electric Cooperative
FERC
 
Federal Energy Regulatory Commission
FPA
 
Federal Power Act
I&M
 
Indiana Michigan Power Company, a public utility subsidiary of AEP
IGCC
 
Integrated Gasification Combined Cycle
 

 
i

 

Abbreviation or Acronym
 
Definition
Interconnection Agreement
 
Agreement, dated July 6, 1951, as amended, by and among APCo, CSPCo, I&M, KPCo and OPCo, defining the sharing of costs and benefits associated with their respective generating plants
IURC
 
Indiana Utility Regulatory Commission
KgPCo
 
Kingsport Power Company, a public utility subsidiary of AEP
KPCo
 
Kentucky Power Company, a public utility subsidiary of AEP
KPSC
 
Kentucky Public Service Commission
Lawrenceburg Plant
 
A 1,146 MW gas-fired unit owned by AEGCo and located near Lawrenceburg, Indiana
LLWPA
 
Low-Level Waste Policy Act of 1980
LPSC
 
Louisiana Public Service Commission
 
   
MISO
 
Midwest Independent Transmission System Operator
Moody’s
 
Moody’s Investors Service, Inc.
MW
 
Megawatt
NOx
 
Nitrogen oxide
NPC
 
National Power Cooperatives, Inc., an unaffiliated corporation
NRC
 
Nuclear Regulatory Commission
NSR Consent Decree
 
The 2007 settlement with the Federal EPA, the United States Department of Justice, certain states and special interest groups that ended the litigation which had alleged that APCo, CSPCo, I&M and OPCo violated the new source review requirements of the CAA.
OASIS
 
Open Access Same-time Information System
OATT
 
Open Access Transmission Tariff, filed with FERC
OCC
 
Corporation Commission of the State of Oklahoma
Ohio Act
 
Ohio electric restructuring legislation
Ohio Amendments
 
Amendments to the Ohio Act adopted in April 2008 which required electric utilities to adjust their rates by filing an ESP with the PUCO
OPCo
 
Ohio Power Company, a public utility subsidiary of AEP
OSS
 
Off-system sales
OVEC
 
Ohio Valley Electric Corporation, an electric utility company in which AEP and CSPCo together own a 43.47% equity interest
PJM
 
PJM Interconnection, L.L.C., a regional transmission organization
PM
 
Particulate Matter
Power Pool
 
The pooled generation resources of AEP East companies established under the Interconnection Agreement
PSO
 
Public Service Company of Oklahoma, a public utility subsidiary of AEP
PUCO
 
Public Utilities Commission of Ohio
PUCT
 
Public Utility Commission of Texas
RCRA
 
Resource Conservation and Recovery Act of 1976, as amended
REP
 
Texas retail electricity provider
Rockport Plant
 
A generating plant owned and partly leased by AEGCo and I&M (two 1,300 MW, coal-fired) located near Rockport, Indiana
ROE
 
Return on Equity
RTO
 
Regional Transmission Organization
SEC
 
Securities and Exchange Commission
S&P
 
Standard & Poor’s Ratings Service
SO2
 
Sulfur dioxide
SPP
 
Southwest Power Pool
SWEPCo
 
Southwestern Electric Power Company, a public utility subsidiary of AEP
TA
 
Transmission Agreement dated April 1, 1984 by and among APCo, CSPCo, I&M, KPCo, KgPCo, OPCo and WPCo, which allocates costs and benefits in connection with the operation of transmission assets

 
ii

 

Abbreviation or Acronym
 
Definition
TCA
 
Transmission Coordination Agreement dated January 1, 1997, restated and amended, as approved by FERC in 2002, by and among, PSO, SWEPCo, TNC and AEPSC, in connection with the operation of the transmission assets of the three public utility subsidiaries
TCC
 
AEP Texas Central Company, formerly Central Power and Light Company, a public utility subsidiary of AEP
Texas Act
 
Texas electric restructuring legislation
TNC
 
AEP Texas North Company, formerly West Texas Utilities Company, a public utility subsidiary of AEP
TVA
 
Tennessee Valley Authority
VSCC
 
Virginia State Corporation Commission
WPCo
 
Wheeling Power Company, a public utility subsidiary of AEP
WVPSC
 
West Virginia Public Service Commission

 
iii

 
FORWARD-LOOKING INFORMATION
 
This report made by the registrants contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934.  Many forward-looking statements appear in “Item 7—Management’s Financial Discussion and Analysis,” but there are others throughout this document, which may be identified by words such as “expect,” “anticipate,” “intend,” “plan,” “believe,” “will,” “should,” “could,” “would,” “project,” “continue,” and similar expressions, and include statements reflecting future results or guidance and statements of outlook. These matters are subject to risks and uncertainties such as those below and as further described in our Risk Factors that could cause actual results to differ materially from those projected. Forward-looking statements in this document speak only as of the date of this document. Except to the extent required by applicable law, we undertake no obligation to update or revise any forward-looking statement.  Among the factors that could cause actual results to differ materially from those in the forward-looking statements are:

·
The economic climate and growth in, or contraction within, our service territory and changes in market demand and demographic patterns.
·
Inflationary or deflationary interest rate trends.
·
Volatility in the financial markets, particularly developments affecting the availability of capital on reasonable terms and developments impairing our ability to finance new capital projects and refinance existing debt at attractive rates.
·
The availability and cost of funds to finance working capital and capital needs, particularly during periods when the time lag between incurring costs and recovery is long and the costs are material.
·
Electric load, customer growth and the impact of retail competition, particularly in Ohio.
·
Weather conditions, including storms, and our ability to recover significant storm restoration costs through applicable rate mechanisms.
·
Available sources and costs of, and transportation for, fuels and the creditworthiness and performance of fuel suppliers and transporters.
·
Availability of necessary generating capacity and the performance of our generating plants.
·
Our ability to resolve I&M’s Donald C. Cook Nuclear Plant Unit 1 restoration and outage-related issues through warranty, insurance and the regulatory process.
·
Our ability to recover regulatory assets and stranded costs in connection with deregulation.
·
Our ability to recover increases in fuel and other energy costs through regulated or competitive electric rates.
·
Our ability to build or acquire generating capacity, including the Turk Plant, and transmission line facilities (including our ability to obtain any necessary regulatory approvals and permits) when needed at acceptable prices and terms and to recover those costs (including the costs of projects that are cancelled) through applicable rate cases or competitive rates.
·
New legislation, litigation and government regulation, including oversight of energy commodity trading and new or heightened requirements for reduced emissions of sulfur, nitrogen, mercury, carbon, soot or particulate matter and other substances or additional regulation of fly ash and similar combustion products that could impact the continued operation and cost recovery of our plants.
·
Timing and resolution of pending and future rate cases, negotiations and other regulatory decisions (including rate or other recovery of new investments in generation, distribution and transmission service and environmental compliance).
·
Resolution of litigation.
·
Our ability to constrain operation and maintenance costs.
·
Our ability to develop and execute a strategy based on a view regarding prices of electricity, natural gas and other energy-related commodities.
·
Changes in the creditworthiness of the counterparties with whom we have contractual arrangements, including participants in the energy trading market.
·
Actions of rating agencies, including changes in the ratings of debt.
·
Volatility and changes in markets for electricity, natural gas, coal, nuclear fuel and other energy-related commodities.
·
Changes in utility regulation, including the implementation of ESPs and related regulation in Ohio and the allocation of costs within regional transmission organizations, including PJM and SPP.
·
Accounting pronouncements periodically issued by accounting standard-setting bodies.
 
 
iv

 
 
·
The impact of volatility in the capital markets on the value of the investments held by our pension, other postretirement benefit plans, captive insurance entity and nuclear decommissioning trust and the impact on future funding requirements.
·
Prices and demand for power that we generate and sell at wholesale.
·
Changes in technology, particularly with respect to new, developing or alternative sources of generation.
·
Other risks and unforeseen events, including wars, the effects of terrorism (including increased security costs), embargoes, cyber security threats and other catastrophic events.
·
Our ability to recover through rates or prices any remaining unrecovered investment in generating units that may be retired before the end of their previously projected useful lives.

 
v

 


 
PART I

ITEM 1.                      BUSINESS

GENERAL

OVERVIEW AND DESCRIPTION OF SUBSIDIARIES

AEP was incorporated under the laws of the State of New York in 1906 and reorganized in 1925. It is a public utility holding company that owns, directly or indirectly, all of the outstanding common stock of its public utility subsidiaries and varying percentages of other subsidiaries.

The service areas of AEP’s public utility subsidiaries cover portions of the states of Arkansas, Indiana, Kentucky, Louisiana, Michigan, Ohio, Oklahoma, Tennessee, Texas, Virginia and West Virginia. The generating and transmission facilities of AEP’s public utility subsidiaries are interconnected and their operations are coordinated. Transmission networks are interconnected with extensive distribution facilities in the territories served. The public utility subsidiaries of AEP have traditionally provided electric service, consisting of generation, transmission and distribution, on an integrated basis to their retail customers. Restructuring legislation in Michigan, Ohio, and the ERCOT area of Texas has caused AEP public utility subsidiaries in those states to unbundle previously integrated regulated rates for their retail customers.

The AEP System is an integrated electric utility system. As a result, the member companies of the AEP System have contractual, financial and other business relationships with the other member companies, such as participation in the AEP System savings and retirement plans and tax returns, sales of electricity and transportation and handling of fuel. The companies of the AEP System also obtain certain accounting, administrative, information systems, engineering, financial, legal, maintenance and other services at cost from a common provider, AEPSC.

At December 31, 2010, the subsidiaries of AEP had a total of 18,712 employees. Because it is a holding company rather than an operating company, AEP has no employees. The public utility subsidiaries of AEP are:

APCo (organized in Virginia in 1926) is engaged in the generation, transmission and distribution of electric power to approximately 957,000 retail customers in the southwestern portion of Virginia and southern West Virginia, and in supplying and marketing electric power at wholesale to other electric utility companies, municipalities and other market participants. At December 31, 2010, APCo and its wholly owned subsidiaries had 2,186 employees.  Among the principal industries served by APCo are paper, rubber, coal mining, textile mill products and stone, clay and glass products. In addition to its AEP System interconnections, APCo is interconnected with the following unaffiliated utility companies: Carolina Power & Light Company, Duke Carolina and Virginia Electric and Power Company. APCo has several points of interconnection with TVA and has entered into agreements with TVA under which APCo and TVA interchange and transfer electric power over portions of their respective systems.  APCo is a member of PJM.

CSPCo (organized in Ohio in 1937, the earliest direct predecessor company having been organized in 1883) is engaged in the generation, transmission and distribution of electric power to approximately 749,000 retail customers in Ohio, and in supplying and marketing electric power at wholesale to other electric utilities, municipalities and other market participants. At December 31, 2010, CSPCo had 1,082 employees. CSPCo’s service area is comprised of two areas in Ohio, which include portions of twenty-five counties. One area includes the City of Columbus and the other is a predominantly rural area in south central Ohio. Among the principal industries served are primary metals, chemicals and allied products, health services and electronic machinery. In January 2011, CSPCo and OPCo filed an application with the FERC requesting approval for CSPCo to merge into OPCo, effective in October 2011.  Decisions are pending from the PUCO and the FERC.  In addition to its AEP System interconnections, CSPCo is interconnected with the following unaffiliated utility companies: Duke Ohio, DP&L and Ohio Edison Company.  CSPCo is a member of PJM.
 
 
1

 
I&M (organized in Indiana in 1925) is engaged in the generation, transmission and distribution of electric power to approximately 582,000 retail customers in northern and eastern Indiana and southwestern Michigan, and in supplying and marketing electric power at wholesale to other electric utility companies, rural electric cooperatives, municipalities and other market participants.  At December 31, 2010, I&M had 2,705 employees. Among the principal industries served are primary metals, transportation equipment, electrical and electronic machinery, fabricated metal products, rubber and chemicals and allied products, rubber products and transportation equipment. Since 1975, I&M has leased and operated the assets of the municipal system of the City of Fort Wayne, Indiana.  Subject to regulatory approval, I&M has agreed to purchase these assets.  In addition to its AEP System interconnections, I&M is interconnected with the following unaffiliated utility companies: Central Illinois Public Service Company, Duke Ohio, Commonwealth Edison Company, Consumers Energy Company, Illinois Power Company, Indianapolis Power & Light Company, Louisville Gas and Electric Company, Northern Indiana Public Service Company, Duke Indiana and Richmond Power & Light Company.  I&M is a member of PJM.

KPCo (organized in Kentucky in 1919) is engaged in the generation, transmission and distribution of electric power to approximately 174,000 retail customers in an area in eastern Kentucky, and in supplying and marketing electric power at wholesale to other electric utility companies, municipalities and other market participants.  At December 31, 2010, KPCo had 417 employees. Among the principal industries served are petroleum refining, coal mining and chemical production. In addition to its AEP System interconnections, KPCo is interconnected with the following unaffiliated utility companies: Kentucky Utilities Company and East Kentucky Power Cooperative Inc. KPCo is also interconnected with TVA.  KPCo is a member of PJM.

KgPCo (organized in Virginia in 1917) provides electric service to approximately 47,000 retail customers in Kingsport and eight neighboring communities in northeastern Tennessee. Kingsport Power Company does not own any generating facilities and is a member of PJM. It purchases electric power from APCo for distribution to its customers. At December 31, 2010, Kingsport Power Company had 52 employees.

OPCo (organized in Ohio in 1907 and re-incorporated in 1924) is engaged in the generation, transmission and distribution of electric power to approximately 706,000 retail customers in the northwestern, east central, eastern and southern sections of Ohio, and in supplying and marketing electric power at wholesale to other electric utility companies, municipalities and other market participants. At December 31, 2010, OPCo had 2,100 employees. Among the principal industries served by OPCo are primary metals, chemical manufacturing, petroleum refining, and rubber and plastic products. In January 2011, CSPCo and OPCo filed an application with the FERC requesting approval for CSPCo to merge into OPCo, effective in October 2011.  Decisions are pending from the PUCO and the FERC.  In addition to its AEP System interconnections, OPCo is interconnected with the following unaffiliated utility companies: Duke Ohio, The Cleveland Electric Illuminating Company, DP&L, Duquesne Light Company, Kentucky Utilities Company, Monongahela Power Company, Ohio Edison Company, The Toledo Edison Company and West Penn Power Company.  OPCo is a member of PJM.

PSO (organized in Oklahoma in 1913) is engaged in the generation, transmission and distribution of electric power to approximately 532,000 retail customers in eastern and southwestern Oklahoma, and in supplying and marketing electric power at wholesale to other electric utility companies, municipalities, rural electric cooperatives and other market participants. At December 31, 2010, PSO had 1,150 employees. Among the principal industries served by PSO are paper manufacturing and timber products, natural gas and oil extraction, transportation, non-metallic mineral production, oil refining and steel processing, In addition to its AEP System interconnections, PSO is interconnected with Empire District Electric Company, Oklahoma Gas and Electric Company, Southwestern Public Service Company and Westar Energy, Inc.  PSO is a member of SPP.

SWEPCo (organized in Delaware in 1912) is engaged in the generation, transmission and distribution of electric power to approximately 520,000 retail customers in northeastern and panhandle of Texas, northwestern Louisiana and western Arkansas, and in supplying and marketing electric power at wholesale to other electric utility companies, municipalities, rural electric cooperatives and other market participants. At December 31, 2010, SWEPCo had 1,382 employees. Among the principal industries served by SWEPCo are natural gas and oil production, petroleum refining, manufacturing of pulp and paper, chemicals, food processing, and metal refining. The territory served by SWEPCo also includes several military installations, colleges and universities.
 
 
2

 
SWEPCO also owns and operates a lignite coal mining operation.  In addition to its AEP System interconnections, SWEPCo is interconnected with Cleco Corp., Empire District Electric Co., Entergy Corp. and Oklahoma Gas & Electric Co.  SWEPCo is a member of SPP.
 
TCC (organized in Texas in 1945) is engaged in the transmission and distribution of electric power to approximately 775,000 retail customers through REPs in southern Texas. TCC has sold all of its generation assets.  At December 31, 2010, TCC had 1,006 employees. Among the principal industries served by TCC are chemical and petroleum refining, chemicals and allied products, oil and gas extraction, food processing, metal refining, plastics, and machinery equipment. In addition to its AEP System interconnections, TCC is a member of ERCOT.

TNC (organized in Texas in 1927) is engaged in the transmission and distribution of electric power to approximately 186,000 retail customers through REPs in west and central Texas. TNC’s generating capacity has been transferred to an affiliate at TNC’s cost pursuant to an agreement effective through 2027.  At December 31, 2010, TNC had 319 employees. Among the principal industries served by TNC are petroleum refining, agriculture and the manufacturing or processing of cotton seed products, oil products, precision and consumer metal products, meat products and gypsum products. The territory served by TNC also includes several military installations and correctional facilities. In addition to its AEP System interconnections, TNC is a member of ERCOT.

WPCo (organized in West Virginia in 1883 and reincorporated in 1911) provides electric service to approximately 41,000 retail customers in northern West Virginia. WPCo does not own any generating facilities.  WPCo is a member of PJM. It purchases electric power from OPCo for distribution to its customers. At December 31, 2010, WPCo had 52 employees.

AEGCo (organized in Ohio in 1982) is an electric generating company. AEGCo sells power at wholesale to I&M, CSPCo and KPCo. AEGCo has no employees.

SERVICE COMPANY SUBSIDIARY

AEP also owns a service company subsidiary, AEPSC.  AEPSC provides accounting, administrative, information systems, engineering, financial, legal, maintenance and other services at cost to the AEP affiliated companies.  The executive officers of AEP and certain of its public utility subsidiaries are employees of AEPSC.  At December 31, 2010, AEPSC had 5,132 employees.
 
 
3

 
CLASSES OF SERVICE

The principal classes of service from which the public utility subsidiaries of AEP derive revenues and the amount of such revenues during the year ended December 31, 2010 are as follows:

Description
 
AEP System (a)
   
APCo
   
CSPCo
   
I&M
 
 
 
(in thousands)
 
UTILITY OPERATIONS:
 
 
   
 
   
 
   
 
 
Retail Sales
 
 
   
 
   
 
   
 
 
Residential Sales
  $ 5,125,000     $ 1,221,563     $ 883,766     $ 496,605  
Commercial Sales
    3,406,000       559,718       751,724       364,908  
Industrial Sales
    2,840,000       653,762       254,342       400,140  
PJM Net Charges
    (42,000 )     (14,008 )     (7,852 )     (7,998 )
Provision for Rate Refund
    (52,000 )     4,147       (50,000 )     -  
Other Retail Sales
    207,000       74,331       7,053       6,610  
Total Retail
    11,484,000       2,499,513       1,839,033       1,260,265  
Wholesale
                               
Off-System Sales
    1,812,000       439,689       223,799       474,472  
Transmission
    181,000       (20,518 )     (14,399 )     (139 )
Total Wholesale
    1,993,000       419,171       209,400       474,333  
Other Electric Revenues
    145,000       31,499       14,822       740  
Other Operating Revenues
    65,000       8,713       2,792       15,368  
Sales to Affiliates
    -       316,207       82,994       445,021  
Total Utility Operating Revenues
    13,687,000       3,275,103       2,149,041       2,195,727  
OTHER
    740,000       -       -       -  
TOTAL REVENUES
  $ 14,427,000     $ 3,275,103     $ 2,149,041     $ 2,195,727  

(a)
Includes revenues of other subsidiaries not shown.  Intercompany transactions have been eliminated for the year ended December 31, 2010.

Description
 
OPCo
   
PSO
   
SWEPCo
 
 
 
(in thousands)
 
UTILITY OPERATIONS:
 
 
   
 
   
 
 
Retail Sales
 
 
   
 
   
 
 
Residential Sales
  $ 735,551     $ 523,997     $ 496,454  
Commercial Sales
    464,770       337,856       392,193  
Industrial Sales
    660,952       222,087       275,229  
PJM Net Charges
    (9,295 )     -       -  
Provision for Rate Refund
    -       (55 )     (6,375 )
Other Retail Sales
    10,957       72,125       7,800  
Total Retail
    1,862,935       1,156,010       1,165,301  
Wholesale
                       
Off-System Sales
    311,246       46,364       240,935  
Transmission
    (16,288 )     30,039       44,336  
Total Wholesale
    294,958       76,403       285,271  
Other Electric Revenues
    1,313       14,503       18,942  
Other Operating Revenues
    17,509       3,218       2,150  
Sales to Affiliates
    1,046,992       23,528       51,870  
Total Utility Operating Revenues
    3,223,707       1,273,662       1,523,534  
OTHER
    -       -       -  
TOTAL REVENUES
  $ 3,223,707     $ 1,273,662     $ 1,523,534  
 
 
4

 
FINANCING

General

Companies within the AEP System generally use short-term debt to finance working capital needs.  Short-term debt is also used to finance acquisitions, construction and redemption or repurchase of outstanding securities until such needs can be financed with long-term debt. In recent history, short-term funding needs have been provided for by cash on hand, borrowing under AEP's revolving credit agreements and AEP’s commercial paper program.  Funds are made available to subsidiaries under the AEP corporate borrowing program. Certain public utility subsidiaries of AEP also sell accounts receivable to provide liquidity. See Management’s Financial Discussion and Analysis, included in the 2010 Annual Reports, under the heading entitled Financial Condition for additional information concerning short-term funding and our access to bank lines of credit, commercial paper and capital markets.

AEP’s revolving credit agreements (which backstop the commercial paper program) include covenants and events of default typical for this type of facility, including a maximum debt/capital test and, for AEP and its significant subsidiaries, a $50 million cross-acceleration provision. At December 31, 2010, AEP was in compliance with its debt covenants. With the exception of a voluntary bankruptcy or insolvency, any event of default has either or both a cure period or notice requirement before termination of the agreements. A voluntary bankruptcy or insolvency of AEP or one of its significant subsidiaries would be considered an immediate termination event.  See Management’s Financial Discussion and Analysis, included in the 2010 Annual Reports, under the heading entitled Financial Condition for additional information with respect to AEP’s credit agreements.

AEP’s subsidiaries have also utilized, and expect to continue to utilize, additional financing arrangements, such as leasing arrangements, including the leasing of coal transportation equipment and facilities.
 
ENVIRONMENTAL AND OTHER MATTERS

General

AEP’s subsidiaries are currently subject to regulation by federal, state and local authorities with regard to air and water-quality control and other environmental matters, and are subject to zoning and other regulation by local authorities. The environmental issues that we believe are potentially material to the AEP system are outlined below.

Clean Air Act Requirements

The CAA establishes a comprehensive program to protect and improve the nation’s air quality and control mobile and stationary sources of air emissions.  The major CAA programs affecting our power plants are described below.  The states implement and administer many of these programs and could impose additional or more stringent requirements.

The Acid Rain Program:  The 1990 Amendments to the CAA include a cap-and-trade emission reduction program for SO2 emissions from power plants.  By 2000, the program established a nationwide cap on power plant SO2 emissions of 8.9 million tons per year.  The 1990 Amendments also contain requirements for power plants to reduce NOx emissions through the use of available combustion controls.

The success of the SO2 cap-and-trade program encouraged the Federal EPA and the states to use it as a model for other emission reduction programs.  We continue to meet our obligations under the Acid Rain Program through the installation of controls, use of alternate fuels and participation in the emissions allowance markets.  Subsequent programs developed by Federal EPA have imposed more stringent SO2 and NOx emission reduction requirements than the Acid Rain Program on many of our facilities.  We have installed additional controls and taken other actions to achieve compliance with these programs.
 
 
5

 
National Ambient Air Quality Standards:  The CAA requires the Federal EPA to review the available scientific data for criteria pollutants periodically and establish a concentration level in the ambient air for those substances that is adequate to protect the public health and welfare with an extra safety margin.  Federal EPA also can list additional pollutants and develop concentration levels for them.  These concentration levels are known as national ambient air quality standards (NAAQS).

Each state identifies the areas within its boundaries that meet the NAAQS (attainment areas) and those that do not (nonattainment areas).  Each state must develop a state implementation plan (SIP) to bring nonattainment areas into compliance with the NAAQS and maintain good air quality in attainment areas.   All SIPs are submitted to the Federal EPA for approval.  If a state fails to develop adequate plans, the Federal EPA develops and implements a plan.  As the Federal EPA reviews the NAAQS and establishes new concentration levels, the attainment status of areas can change and states may be required to develop new SIPs.  In 2008, the Federal EPA issued revised NAAQS for both ozone and fine particulate matter (PM 2.5). The PM 2.5 standard was remanded by the D.C. Circuit Court of Appeals, and a new standard is under development.  In 2009 the Obama Administration reconsidered the ozone standard and proposed a more stringent standard, which is expected to be finalized in 2011.  Federal EPA has also adopted a new short-term standard for SO2, a lower standard for NO2,, and a lower standard for lead.  The states will develop new SIPs for these standards, which could result in additional emission reductions being required from our facilities.

In 2005, the Federal EPA issued the Clean Air Interstate Rule (CAIR), which requires additional reductions in SO2 and NOx emissions from power plants and assists states developing new SIPs to meet the NAAQS.  For additional information regarding CAIR, see Management’s Financial Discussion and Analysis under the headings entitled Environmental Matters—Clean Air Act Requirements.  In July 2010, the Federal EPA issued a proposed rule to replace CAIR (the Transport Rule) that would impose new and more stringent requirements to control SO2 and NOx emissions from fossil fuel-fired electric generating units in 31 states and the District of Columbia.  For additional information regarding the Transport Rule, see Management’s Financial Discussion and Analysis under the headings entitled Environmental Matters—Clean Air Act Requirements.

Hazardous Air Pollutants:  As a result of the 1990 Amendments to the CAA, the Federal EPA investigated hazardous air pollutant (HAP) emissions from the electric utility sector and submitted a report to Congress, identifying mercury emissions from coal-fired power plants as warranting further study.  In 2005, the Federal EPA issued a Clean Air Mercury Rule (CAMR) setting New Source Performance Standards (NSPS) for mercury emissions from new and modified coal-fired power plants and requiring all states to issue new SIPs including mercury requirements for existing coal-fired power plants.  For additional information regarding CAMR, see Management’s Financial Discussion and Analysis under the headings entitled Environmental Matters—Clean Air Act Requirements.

Regional Haze:  The CAA establishes visibility goals for certain federally designated areas, including national parks, and requires states to submit SIPs that will demonstrate reasonable progress toward preventing impairment of visibility in these areas (Regional Haze program).  In 2005, the Federal EPA issued its Clean Air Visibility Rule (CAVR), detailing how the CAA’s best available retrofit technology requirements will be applied to facilities built between 1962 and 1977 that emit more than 250 tons per year of certain pollutants in specific industrial categories, including power plants.  For additional information regarding CAVR, see Management’s Financial Discussion and Analysis under the headings entitled Environmental Matters—Clean Air Act Requirements.

In January 2009, the Federal EPA issued a determination that 37 states (including Indiana, Ohio, Oklahoma, Texas and Virginia) failed to submit SIP’s fulfilling the Regional Haze program requirements by the deadline, and commencing a 2-year period for the development of a Federal Implementation Plan (FIP) in these states.  Oklahoma subsequently submitted a proposed SIP to Federal EPA, but anticipates that Federal EPA will disapprove the plan and propose a FIP in early 2011.  We are unable to predict if or how the remand of CAIR or the development of a FIP to satisfy CAVR in certain states may affect our compliance obligations for the Regional Haze programs.

 
6

 
Greenhouse Gas Emissions:  In the absence of comprehensive climate change legislation, Federal EPA has taken action to regulate CO2 emissions under the existing requirements of the CAA.  Such actions are being legally challenged by numerous parties.  For additional information regarding Federal EPA action taken to regulate CO2 emissions, see Management’s Financial Discussion and Analysis under the headings entitled Environmental Matters—Clean Air Act Requirements.

Our fossil fuel-fired generating units are large sources of CO2 emissions.  If substantial CO2 emission reductions are required, there will be significant increases in capital expenditures and operating costs which would hasten the ultimate retirement of older, less-efficient, coal-fired units.  To the extent we install additional controls on our generating plants to limit CO2 emissions and receive regulatory approvals to increase our rates, return on capital investment would have a positive effect on future earnings.  Prudently incurred capital investments made by our subsidiaries in rate-regulated jurisdictions to comply with legal requirements and benefit customers are generally included in rate base for recovery and earn a return on investment.  We would expect these principles to apply to investments made to address new environmental requirements.  However, requests for rate increases reflecting these costs can affect us adversely because our regulators could limit the amount or timing of increased costs that we would recover through higher rates.  To the extent our costs are relatively higher than our competitors’ costs, such as operators of nuclear generation, it could reduce our off-system sales or cause us to lose customers in jurisdictions that permit customers to choose their supplier of generation service.

Several states have adopted programs that directly regulate CO2 emissions from power plants, but none of these programs are currently in effect in states where we have generating facilities.  Certain states, including Ohio, Michigan, Texas and Virginia, passed legislation establishing renewable energy, alternative energy and/or energy efficiency requirements.  We are taking steps to comply with these requirements.
 
Clean Water Act Requirements
 
Our operations are also subject to the Federal Clean Water Act, which prohibits the discharge of pollutants into waters of the United States except pursuant to appropriate permits, and regulates systems that withdraw surface water for use in our power plants.  In 2004, the Federal EPA issued a final rule requiring all large existing power plants with once-through cooling water systems to meet certain standards to reduce mortality of aquatic organisms pinned against the plant’s cooling water intake screen or entrained in the cooling water.  The standards varied based on the water bodies from which the plants draw their cooling water.

In July 2007, the Federal EPA suspended the 2004 rule, except for the requirement that permitting agencies develop best professional judgment (BPJ) controls for existing facility cooling water intake structures that reflect the best technology available for minimizing adverse environmental impact.  The result is that the BPJ control standard for cooling water intake structures in effect prior to the 2004 rule is used as the applicable standard by permitting agencies pending finalization of revised rules by the Federal EPA.

In April 2009, the U.S. Supreme Court issued a decision that allows the Federal EPA the discretion to rely on cost-benefit analysis in setting national performance standards and in providing for cost-benefit variances from those standards as part of the regulations.  We cannot predict if or how the Federal EPA will apply this decision to any revision of the regulations or what effect it may have on similar requirements adopted by the states.  We expect Federal EPA to issue revised rules in 2011.

Federal EPA is also engaged in rulemaking to update the technology-based standards that govern discharges from new and existing power plants under the Clean Water Act’s NPDES program.  These standards were last updated over 20 years ago, and EPA has issued two rounds of information collection requests to inform its rulemaking.  In October 2009, Federal EPA issued a final report for the power plant sector and determined that revisions to its existing standards are necessary, but EPA has not yet proposed any specific requirements.  Until new standards are proposed, we cannot predict the outcome or impact of these rules on our operations.
 
 
7

 
Coal Ash Regulation

Our operations produce a number of different coal combustion products, including flyash, bottom ash, gypsum, and other materials.  In December 2008, the breach of a dike at the Tennessee Valley Authority’s Kingston Station resulted in a spill of several million cubic yards of ash into a nearby river and onto private properties, prompting federal and state reviews of ash storage and disposal practices at many coal-fired electric generating facilities, including ours.  AEP operates 37 ash ponds and we manage these ponds in a manner that complies with state and local requirements, including dam safety rules designed to assure the structural integrity of these facilities.  We also operate a number of dry disposal facilities in accordance with state standards, including ground water monitoring and other applicable standards.  Federal EPA completed an extensive study of the characteristics of coal ash in 2000 and concluded that combustion wastes do not warrant regulation as hazardous waste.

In June 2010, the Federal EPA published a proposed rule to regulate the disposal and beneficial re-use of coal combustion residuals, including fly ash and bottom ash generated at coal-fired electric generating units.  For additional information regarding Federal EPA action taken to regulate the disposal and beneficial re-use of coal combustion residuals and the potential impact on our operations., see Management’s Financial Discussion and Analysis under the headings entitled Environmental Matters—Coal Combustion Residual Rule.

Global Warming

Position and strategy:  We continue to support a federal legislative approach to energy policy as the most effective means of reducing emissions of CO2 and other greenhouse gases (generally referred to as CO2) that recognizes that a reliable and affordable electricity supply is vital to economic recovery and growth. We do not believe regulating CO2 emissions under the Clean Air Act is the appropriate solution. During the past decade, we have taken voluntary actions to reduce and offset our CO2 emissions. Unfortunately, two of the voluntary programs that helped businesses such as AEP to set quantitative commitments no longer exist. The U.S. EPA’s Climate Leaders Program and the Chicago Climate Exchange both ended their reduction obligations at the end of 2010. However, through these programs and others, we voluntarily reduced our CO2 emissions by approximately 94 million metric tons during the 2003 to 2009 period. We expect our emissions to continue to decline over time as we diversify our generating sources and operate fewer coal units. The projected decline in coal-fired generation is due to a number of factors including the ongoing cost of operating older units, increasing environmental regulations requiring significant capital investments and changing commodity market fundamentals. Our strategy for this transformation is to protect the reliability of the electric system and reduce our emissions by pursuing multiple options. These include diversifying our fuel portfolio and generating more electricity from natural gas, supporting incentives to invest in more nuclear generation, carbon capture and storage and other advanced coal technologies, increasing energy efficiency and investing in renewable resources, where there is regulatory support. Meanwhile the U.S. EPA began regulating CO2 emissions from large stationary sources such as power plants in 2011 by issuing a series of rules under the NSR prevention of significant deterioration and Title V operating permit programs in the states.

For additional information on legislative and regulatory responses to global warming, including limitations on CO2 emissions, see Management’s Financial Discussion and Analysis under the headings entitled Environmental Matters – Global Warming. Specific steps taken to reduce CO2 emissions include the following:

Carbon Capture and Storage

The 20 MW CCS Validation Project at the Mountaineer Plant in West Virginia successfully captured over 27,000 metric tons of CO2 between 2009 and 2010 and stored over 17,000 metric tons underground.  In January 2011, we began preliminary engineering and design work for a second, commercial-scale coal-derived CO2 capture and storage system at the Mountaineer Plant. We are also updating our estimates for the costs related to the commercial scale project.  We will evaluate the updated estimates before any decision is made to seek the necessary regulatory approvals to build the commercial scale project.  The project will be partially funded through the U.S. Department of Energy’s Clean Coal Power Initiative. AEP was awarded federal grant funding of $334 million, which represents approximately half the expected cost of this project, exclusive of asset retirement obligations.
 
 
8

 
Renewable Sources of Energy

Some of our states have laws or commission orders that establish requirements or goals for renewable and/or alternative energy (Louisiana, Ohio, Arkansas, Michigan, West Virginia, Texas, Virginia and Oklahoma) and we are taking steps to comply with these rules in a timely fashion. A key sustainability commitment we made is to increase renewable power by an additional 2,000 MW from 2007 levels by 2011, subject to regulatory approval. By the end of 2010, AEP secured through power purchase agreements an additional 1,111 MW of renewable power.

End User Energy Efficiency

Energy efficiency is a high priority for AEP because it can be a cost-effective way to reduce energy demand and potentially delay the need for new power plants. We work collaboratively with regulators, technical experts, environmental groups and others to develop and implement efficiency and demand response programs. From 2008 through 2010, we have achieved approximately 321 MW and 1,072,000 MWh of demand and energy reductions, respectively. We have a company 2012 goal to reduce 1,000 MW of demand and 2,250,000 MWh of energy consumption. We expect to surpass our energy reduction target subject to regulatory approvals, appropriate cost recovery, and continued customer demand for programs. In 2010, we invested over $70 million throughout most of our service territory in energy efficiency initiatives.

gridSMART ®

AEP’s gridSMART ® initiative is designed to demonstrate the potential benefits of the smart grid by integrating advanced grid technologies into existing electric networks.  AEP is deploying smart grid technologies in several jurisdictions with regulatory support.

·  
AEP Ohio is deploying a comprehensive suite of smart grid technologies in an innovative demonstration project with 110,000 customers.  The $150 million project is being funded through a $75 million federal grant, PUCO cost recovery support, and vendor in-kind contributions.

·  
AEP Texas is deploying a 970,000 meter smart grid network, along with $1 million in energy use display devices for low income customers.  The $308 million project is targeted for completion by the end of 2013.  We are recovering the costs through an 11-year surcharge.

·  
I&M has deployed a smart grid network to 10,000 customers.  The $7 million project is initially being funded pursuant to a settlement agreement approved by the IURC.  Ongoing expenses will be considered in future rate cases.

·  
With partial cost recovery support from the OCC, PSO is deploying a 15,000 smart meter network.

Current and Projected CO2 Emissions: Our total CO2 emissions in 2009 (including our ownership in the Kyger Creek and Clifty Creek plants) were approximately 136 million metric tons.  We estimate that our 2010 emissions were approximately 140 million metric tons.  Emissions in 2011 and beyond will be affected by continued changes in our generation portfolio, market prices, the pace and scale of the economic recovery in our jurisdictions, available capital, weather, and other factors.  We expect overall increases in CO2 emissions during the next few years to be small, if at all realized, as our sales and generation rebound somewhat from recession lows in 2009. However, over much of the remainder of the decade we expect emissions to decline as modest sales growth is offset by retirements of older, less efficient coal-fired units and increased utilization of natural gas.

Corporate Governance: In response to a shareholder proposal several years ago, our Board of Directors created an ad hoc committee to evaluate our actions to mitigate the economic impact from future policies to reduce CO2 and other emissions. Our Board of Directors continually reviews the risks posed by and our actions in response to environmental issues and in connection with its assessment of our strategic plan. The Board of Directors is frequently informed of any new material environmental issues, including changes to regulations and proposed legislation. The Board’s Committee on Directors and Corporate Governance oversees the company’s annual Corporate Accountability Report, which includes information on environmental issues. Environmental planning and policy leadership are criteria incorporated into our executive compensation plan.
 
 
9

 
Other environmental issues and matters

·  
Litigation with the federal and/or certain state governments and certain special interest groups regarding regulated air emissions and/or whether emissions from coal-fired generating plants cause or contribute to global warming. See Management’s Financial Discussion and Analysis under the heading entitled Litigation - Environmental Litigation and Note 6 to the consolidated financial statements entitled Commitments, Guarantees and Contingencies, included in the 2010 Annual Reports, for further information.

·  
CERCLA, which imposes costs for environmental remediation upon owners and previous owners of sites, as well as transporters and generators of hazardous material disposed of at such sites.  See Note 6 to the consolidated financial statements entitled Commitments, Guarantees and Contingencies, included in the 2010 Annual Reports, under the heading entitled The Comprehensive Environmental Response Compensation and Liability Act (Superfund) and State Remediation for further information.

Environmental Investments

Investments related to improving AEP System plants’ environmental performance and compliance with air and water quality standards during 2008, 2009 and 2010 and the current estimates for 2011, 2012 and 2013 are shown below, in each case excluding AFUDC or capitalized interest. Estimated construction expenditures are subject to periodic review and modification and may vary based on the ongoing effects of regulatory constraints, environmental regulations, business opportunities, market volatility, economic trends, and the ability to access capital.  AEP expects to make substantial investments in future years in addition to the amounts set forth below in connection with the modification and addition of facilities at generating plants for environmental quality controls.  Such future investments are needed in order to comply with air and water quality standards that have been adopted and have deadlines for compliance after 2011 or have been proposed and may be adopted.  Future investments could be significantly greater if emissions reduction requirements are accelerated or otherwise become more onerous or if CO2 becomes regulated. While we expect to recover our expenditures for pollution control technologies, replacement generation and associated operating costs from customers through regulated rates (in regulated jurisdictions) or market prices, without such recovery those costs could adversely affect future results of operations and cash flows, and possibly financial condition.  The cost of complying with applicable environmental laws, regulations and rules is expected to be material to the AEP System.  See Management’s Financial Discussion and Analysis under the heading entitled Environmental Matters and Note 6 to the consolidated financial statements, entitled Commitments, Guarantees and Contingencies, included in the 2010 Annual Reports, for more information regarding environmental expenditures in general.
 
Historical and Projected Environmental Investments
             
 
2008
2009
2010
2011
2012
2013
 
Actual
Actual
Actual
Estimate
Estimate
Estimate
(in thousands)
Total AEP System*
$886,800
$457,200
$303,800
$223,100
$340,300
$678,500
APCo
361,200
191,900
202,700
112,100
125,700
182,500
CSPCo
162,800
73,800
52,100
20,700
18,800
28,000
I&M
22,400
19,600
8,100
1,500
700
4,400
OPCo
311,800
151,000
45,300
50,300
69,000
193,700
PSO
5,000
1,000
1,200
7,400
6,100
5,100
SWEPCo**
12,000
10,700
(10,500)
10,300
28,000
89,200

*  Includes expenditures of the subsidiaries shown and other subsidiaries not shown. The figures reflect construction expenditures, not investments in subsidiary companies.  Excludes discontinued operations.

**  SWEPCo 2010 actual environmental cost includes reclassifications of project costs for suspended capital projects.
 
 
10

 
Electric and Magnetic Fields

EMF are found everywhere there is electricity. Electric fields are created by the presence of electric charges. Magnetic fields are produced by the flow of those charges. This means that EMF are created by electricity flowing in transmission and distribution lines, electrical equipment, household wiring, and appliances.  A number of studies in the past have examined the possibility of adverse health effects from EMF. While some of the epidemiological studies have indicated some association between exposure to EMF and health effects, none has produced any conclusive evidence that EMF does or does not cause adverse health effects.

Management cannot predict the ultimate impact of the question of EMF exposure and adverse health effects. If further research shows that EMF exposure contributes to increased risk of cancer or other health problems, or if the courts conclude that EMF exposure harms individuals and that utilities are liable for damages, or if states limit the strength of magnetic fields to such a level that the current electricity delivery system must be significantly changed, then the results of operations and financial condition of AEP and its operating subsidiaries could be materially adversely affected unless these costs can be recovered from customers.

UTILITY OPERATIONS

GENERAL

Utility operations constitute most of AEP’s business operations.  Utility operations include (i) the generation, transmission and distribution of electric power to retail customers and (ii) the supplying and marketing of electric power at wholesale (through the electric generation function) to other electric utility companies, municipalities and other market participants.  AEPSC, as agent for AEP’s public utility subsidiaries, performs marketing, generation dispatch, fuel procurement and power-related risk management and trading activities.

ELECTRIC GENERATION

Facilities

AEP’s public utility subsidiaries own or lease approximately 37,000 MW of domestic generation. See Item 2 — Properties for more information regarding AEP’s generation capacity.

AEP Power Pool

APCo, CSPCo, I&M, KPCo, OPCo, and AEPSC are parties to the Interconnection Agreement, which was originally approved by the FERC in 1951 and subsequently amended in 1951, 1962, 1975, 1979 (twice) and 1980.  This agreement defines how the member companies share the costs and benefits associated with their generating plants. This sharing is based upon each company’s “member load ratio.” The member load ratio is calculated monthly by dividing each company’s highest monthly peak demand for the last twelve months by the aggregate of the highest monthly peak demand for the last twelve months for all member companies. The member load ratio multiplied by the aggregate generation capacity of all the member companies determines each member company's capacity obligation.  The difference between each member company's obligation and its own generation capacity determines the capacity surplus or deficit of each member company.  The agreement requires the deficit companies to make monthly capacity equalization payments to the surplus companies based on the surplus companies' average fixed cost of generation.  Member companies that deliver energy to other member companies to meet their internal load requirements are reimbursed at average variable costs.  In addition, all member companies share off-system sales margins based upon each member company's member load ratio.  Consequently, the agreement provides a strong risk sharing and mitigation arrangement among the member companies.  As of December 31, 2010, the member-load-ratios were as follows:

 
Peak
Demand
(MW)
Member-Load
Ratio
(%)
APCo
7,623
32.8
CSPCo
4,289
18.5
I&M
4,474
19.3
KPCo
1,596
  6.9
OPCo
5,235
22.5
 
 
11

 
APCo, CSPCo, I&M, KPCo and OPCo are parties to the AEP System Interim Allowance Agreement (Allowance Agreement), which has been approved by the FERC and provides, among other things, for the transfer of SO2 emission allowances associated with transactions under the Interconnection Agreement.  The following table shows the net (credits) or charges allocated among the parties under the Interconnection Agreement during the years ended December 31, 2008, 2009 and 2010:

 
2008
2009
2010
 
(in thousands)
APCo
$575,300
$668,700
$757,900
CSPCo
233,200
257,600
230,400
I&M
(153,000)
(100,900)
(236,900)
KPCo
65,000
31,600
49,400
OPCo
(720,500)
(857,000)
(800,800)

Notification of Termination of the Power Pool

Much has changed since the Interconnection Agreement was originally executed in 1951. These changes include evolving environmental regulations; the introduction of “open access” to transmission facilities; the implementation of RTOs, including PJM, which is a robust generation power pool that has generating capacity of over 167,000 MWs, movement towards industry deregulation; increased competition in wholesale generation markets; and the effects of these changes on such things as costs, load and the array of supply and demand-side resources available to the AEP-East operating companies today.

Consequently, in December 2010, each Power Pool member gave written notice to the other members, and AEPSC, the Pool’s agent, of its decision to terminate the Interconnection Agreement, effective January 1, 2014 or such other date as approved by FERC, subject to state regulatory input. This decision to terminate is subject to ongoing evaluation by AEP.  Because the Interconnection Agreement is a rate schedule on file at FERC, its termination will not be effective until accepted for filing by FERC.  The Interim Allowance Agreement would also be terminated on the same date.

By giving notice to terminate the Interconnection Agreement and the Interim Allowance Agreement, the Power Pool members are providing a timeline within which all Power Pool members will decide how they will respond to the impacts from modifying or terminating the Interconnection Agreement.  The result of this process might be a modified or different type of Pool. Final resolution could involve bilateral contracts or sales of generating assets from surplus members to deficit members. If the Power Pool members do not reach a consensus, the Power Pool members could revoke their notices of termination and the Interconnection Agreement would remain in place.

CSW Operating Agreement

PSO, SWEPCo and AEPSC are parties to the CSW Operating Agreement, which has been approved by the FERC. The CSW Operating Agreement requires these public utility subsidiaries to maintain adequate annual planning reserve margins and requires the subsidiaries that have capacity in excess of the required margins to make such capacity available for sale to other public utility subsidiary parties as capacity commitments. Parties are compensated for energy delivered to the recipients based upon the deliverer’s incremental cost plus a portion of the recipient’s savings realized by the purchaser that avoids the use of more costly alternatives.  Revenues and costs arising from third party sales in their region are generally shared based on the amount of energy each west zone public utility subsidiary contributes that is sold to third parties.

The following table shows the net (credits) or charges allocated among the parties under the CSW Operating Agreement during the years ended December 31, 2008, 2009 and 2010:

 
2008
2009
2010
 
(in thousands)
PSO
$(57,000)
$(22,762)
$20,222
SWEPCo
   59,900
   22,762
   (20,222)

 
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Power generated by or allocated or provided under the Interconnection Agreement or CSW Operating Agreement to any public utility subsidiary is primarily sold to customers by such public utility subsidiary at rates approved by the public utility commission in the jurisdiction of sale. See Regulation — Rates under Item 1, Utility Operations.

Under both the Interconnection Agreement and CSW Operating Agreement, power that is not needed to serve the native load of our public utility subsidiaries is sold in the wholesale market by AEPSC on behalf of those subsidiaries.  See Risk Management and Trading, below, for a discussion of the trading and marketing of such power.

AEP’s System Integration Agreement provides for the integration and coordination of AEP’s East companies, PSO and SWEPCo. This includes joint dispatch of generation within the AEP System and the distribution, between the two zones, of costs and benefits associated with the transfers of power between the two zones (including sales to third parties and risk management and trading activities). It is designed to function as an umbrella agreement in addition to the Interconnection Agreement and the CSW Operating Agreement, each of which controls the distribution of costs and benefits for activities within each zone.

Risk Management and Trading

As agent for AEP’s public utility subsidiaries, AEPSC sells excess power into the market and engages in power, natural gas, coal and emissions allowances risk management and trading activities focused in regions in which AEP traditionally operates and in adjacent regions. These activities primarily involve the purchase and sale of electricity (and to a lesser extent, natural gas, coal and emissions allowances) under physical forward contracts at fixed and variable prices. These contracts include physical transactions, over-the-counter swaps and exchange-traded futures and options. The majority of physical forward contracts are typically settled by netting into offsetting contracts. These transactions are executed with numerous counterparties or on exchanges. Counterparties and exchanges may require cash or cash related instruments to be deposited on these transactions as margin against open positions. As of December 31, 2010, counterparties have posted approximately $28 million in cash, cash equivalents or letters of credit with AEPSC for the benefit of AEP’s public utility subsidiaries (while, as of that date, AEP’s public utility subsidiaries had posted approximately $172 million with counterparties and exchanges).  Since open trading contracts are valued based on market prices of various commodities, exposures change daily. See Management’s Financial Discussion and Analysis, included in the 2010 Annual Reports, under the heading entitled Quantitative and Qualitative Disclosures About Risk Management Activities for additional information.

Fuel Supply

The following table shows the sources of fuel used by the AEP System:

 
2008
2009
2010
Coal and Lignite
86%
88%
82%
Natural Gas
6%
6%
 8%
Nuclear
8%
5%
 9%
Hydroelectric and other
<1%
1%
<1%

Price increases in one or more fuel sources relative to other fuels may result in increased use of other fuels. Variations in the generation of nuclear power are primarily related to a 2008 forced outage caused by a low pressure turbine blade failure event.  The unit returned to service in December 2009.

        Coal and Lignite: AEP’s public utility subsidiaries procure coal and lignite under a combination of purchasing arrangements including long-term contracts, affiliate operations and spot agreements with various producers and coal trading firms.  Electric demand experienced a slight increase in 2010 which resulted in a slight increase in coal and lignite tons consumed.  In response to continued lower consumption rates at certain locations during 2010, AEP continued to work with coal suppliers to better match deliveries with consumption and minimize the impact on fuel inventory costs, carrying costs and cash.  System wide, inventory levels were reduced by 11 days in 2010.

 
13

 
Management believes that AEP’s public utility subsidiaries will be able to secure and transport coal and lignite of adequate quality and in adequate quantities to operate their coal and lignite-fired units.  Through subsidiaries, AEP owns, leases or controls more than 8,100 railcars, 672 barges, 17 towboats and a coal handling terminal with 18 million tons of annual capacity to move and store coal for use in our generating facilities.  See AEP River Operations for a discussion of AEP’s for-profit coal and other dry-bulk commodity transportation operations that are not part of AEP’s Utility Operations segment.

During 2010, spot market prices for coal generally increased throughout the year.  Among other things, these increases are due to higher international demand for U.S. coals, and increased mining costs related to regulatory and permitting issues. Most of the coal purchased by AEP is procured through term contracts.  The price we pay under a number of these contracts is often lower than the spot market price for similar coal.  As term contracts expire they are replaced with new agreements, often at higher prices.  The price we paid for coal delivered in 2010 decreased from the prior year, due in part to the expiration of several high spot market contracts that were entered into in 2007 and 2008 for 2009 and the reopening of some contracts to current market prices.

The following table shows the amount of coal and lignite delivered to the AEP System plants during the past three years and the average delivered price of coal purchased by AEP System companies:

 
2008
2009
2010
Total coal delivered to AEP System plants (thousands of tons)
77,054
75,909
64,614
Average price per ton of purchased coal
$47.14
$49.54
$44.82

    The coal supplies at AEP System plants vary from time to time depending on various factors, including, but not limited to, demand for electric power, unit outages, transportation infrastructure limitations, space limitations, plant coal consumption rates, availability of acceptable coals, labor issues and weather conditions which may interrupt production or deliveries. At December 31, 2010, the System’s coal inventory was approximately 50 days of full load burn.

In cases of emergency or shortage, AEP has developed programs to conserve coal supplies at its plants. Such programs have been filed and reviewed with federally approved electric reliability organizations.  In some cases, the relevant state regulatory agency has prescribed actions to be taken under specified circumstances by System companies, subject to the jurisdiction of such agency.

The FERC has adopted regulations relating, among other things, to the circumstances under which, in the event of fuel emergencies or shortages, it might order electric utilities to generate and transmit electric power to other regions or systems experiencing fuel shortages, and to ratemaking principles by which such electric utilities would be compensated. In addition, the federal government is authorized, under prescribed conditions, to reallocate coal and to require the transportation thereof, for the use at power plants or major fuel-burning installations experiencing fuel shortages.

   Natural Gas: Through its public utility subsidiaries, AEP consumed nearly 134 billion cubic feet of natural gas during 2010 for generating power. This represents a significant increase from 2009 due to lower natural gas prices and the addition of the 508 MW combined-cycle unit at SWEPCO’s J. Lamar Stall facility and the overall increased natural gas demand throughout AEP’s system. Many of the natural gas-fired power plants are connected to at least two pipelines, which allows greater access to competitive supplies and improves delivery reliability. A portfolio of long-term, monthly, seasonal firm and daily peaking purchase and transportation agreements (that are entered into on a competitive basis and based on market prices) supplies natural gas requirements for each plant, as appropriate.
 
     Nuclear: I&M has made commitments to meet the current nuclear fuel requirements of the Cook Plant. I&M has made and will make purchases of uranium in various forms in the spot, short-term, and mid-term markets. I&M also continues to lease a portion of its nuclear fuel requirements.
 
 
14

 
For purposes of the storage of high-level radioactive waste in the form of spent nuclear fuel, I&M completed modifications to its spent nuclear fuel storage pool more than 10 years ago. I&M anticipates that the Cook Plant has sufficient storage capacity for its spent nuclear fuel to permit normal operations through 2013.  I&M has entered into an agreement to provide for onsite dry cask storage.  Initial loading of spent nuclear fuel into the dry casks is tentatively scheduled to begin in 2012.
 
                        Nuclear Waste and Decommissioning

As the owner of the Cook Plant, I&M has a significant future financial commitment to dispose of spent nuclear fuel and decommission and decontaminate the plant safely. The cost to decommission a nuclear plant is affected by NRC regulations and the spent nuclear fuel disposal program.  In 2009, when the most recent study was done, the estimated cost of decommissioning and disposal of low-level radioactive waste for the Cook Plant ranged from $831 million to $1.5 billion in 2009 non-discounted dollars.  At December 31, 2010, the total decommissioning trust fund balance for the Cook Plant was approximately $1.2 billion.  The balance of funds available to decommission Cook Plant will differ based on contributions and investment returns.  The ultimate cost of retiring the Cook Plant may be materially different from estimates and funding targets as a result of the:

·  
Type of decommissioning plan selected;

·  
Escalation of various cost elements (including, but not limited to, general inflation and the cost of energy);

·  
Further development of regulatory requirements governing decommissioning;

·  
Technology available at the time of decommissioning differing significantly from that assumed in studies;

·  
Availability of nuclear waste disposal facilities; and

·  
Availability of a DOE facility for permanent storage of spent nuclear fuel.

Accordingly, management is unable to provide assurance that the ultimate cost of decommissioning the Cook Plant will not be significantly different than current projections.  We will seek recovery from customers through our regulated rates if actual decommissioning costs exceed our projections.  See Note 6 to the consolidated financial statements, entitled Commitments, Guarantees and Contingencies under the heading Nuclear Contingencies, included in the 2010 Annual Reports, for information with respect to nuclear waste and decommissioning.

Low-Level Radioactive Waste: The LLWPA mandates that the responsibility for the disposal of low-level radioactive waste rests with the individual states. Low-level radioactive waste consists largely of ordinary refuse and other items that have come in contact with radioactive materials. Michigan does not currently have a disposal site for such waste available. I&M cannot predict when such a site may be available, but Utah licenses a low-level radioactive waste disposal site which currently accepts low-level radioactive waste from Michigan.  I&M ships some of its low level waste to a facility in Utah. There is currently no set date limiting I&M’s access to the Utah facility.   I&M stores the remaining type of low-level waste onsite.  In order to have capacity for the duration of its licensed operation of Cook Plant for onsite storage of waste not shipped to Utah, I&M will have to modify its existing facilities sometime in the next ten to fifteen years.

Structured Arrangements Involving Capacity, Energy, and Ancillary Services

In January 2000, OPCo and NPC, an affiliate of Buckeye, entered into an agreement relating to the construction and operation of a 510 MW gas-fired electric generating peaking facility to be owned by NPC, called the Mone Plant.  OPCo is entitled to 100% of the power generated by the Mone Plant, and is responsible for the fuel and other costs of the facility through May 2012, as extended. Following that, NPC and OPCo will be entitled to 80% and 20%, respectively, of the power of the Mone Plant, and both parties will generally be responsible for their allocable portion of the fuel and other costs of the facility.
 
 
15

 
Certain Power Agreements

I&M: The Unit Power Agreement between AEGCo and I&M, dated March 31, 1982, provides for the sale by AEGCo to I&M of all the capacity (and the energy associated therewith) available to AEGCo at the Rockport Plant. Whether or not power is available from AEGCo, I&M is obligated to pay a demand charge for the right to receive such power (and an energy charge for any associated energy taken by I&M).  The agreement will continue in effect until the last of the lease terms of Unit 2 of the Rockport Plant has expired (currently December 2022) unless extended in specified circumstances.

Pursuant to an assignment between I&M and KPCo, and a unit power agreement between KPCo and AEGCo, AEGCo sells KPCo 30% of the capacity (and the energy associated therewith) available to AEGCo from both units of the Rockport Plant. KPCo has agreed to pay to AEGCo the amounts that I&M would have paid AEGCo under the terms of the Unit Power Agreement between AEGCo and I&M for such entitlement. The KPCo unit power agreement expires in December 2022.

CSPCo: The Unit Power Agreement between AEGCo and CSPCo, dated March 15, 2007, provides for the sale by AEGCo to CSPCo of all the capacity and associated unit contingent energy and ancillary services available to AEGCo at the Lawrenceburg Plant that are scheduled and dispatched by CSPCo.  CSPCo is obligated to pay a capacity charge (whether or not power is available from the Lawrenceburg Plant), and the fuel, operating and maintenance charges associated with the energy dispatched by CSPCo, and to reimburse AEGCo for other costs associated with the operation and ownership of the Lawrenceburg Plant.  The agreement will continue in effect until December 31, 2017 unless extended as set forth in the agreement.

OVEC: AEP and several unaffiliated utility companies jointly own OVEC.  The aggregate equity participation of AEP in OVEC is 43.47%.  Until 2001, OVEC supplied from its generating capacity the power requirements of a uranium enrichment plant near Portsmouth, Ohio owned by the DOE.  The sponsoring companies are entitled to receive and are obligated to pay for all OVEC capacity (approximately 2,200 MW) in proportion to their respective power participation ratios.  The aggregate power participation ratio of APCo, CSPCo, I&M and OPCo is 43.47%.  The proceeds from the sale of power by OVEC are designed to be sufficient for OVEC to meet its operating expenses and fixed costs and to provide a return on its equity capital.  The Inter-Company Power Agreement, which defines the rights of the owners and sets the power participation ratio of each, will expire by its terms in March 2026.  Negotiations are in process among the owners to extend this agreement until 2040.  AEP and the other owners have authorized environmental investments related to their ownership interests.  As of December 2010, OVEC’s Board of Directors has authorized capital expenditures totaling approximately $1.35 billion in connection with the engineering and construction of flue gas desulfurization projects and the associated scrubber waste disposal landfills at its two generating plants.  OVEC has completed the financing of approximately $950 million for these projects through debt issuances and would expect to finance the remaining cost by issuing additional debt.

ELECTRIC TRANSMISSION AND DISTRIBUTION

General

AEP’s public utility subsidiaries (other than AEGCo) own and operate transmission and distribution lines and other facilities to deliver electric power. See Item 2—Properties for more information regarding the transmission and distribution lines. Most of the transmission and distribution services are sold, in combination with electric power, to retail customers of AEP’s public utility subsidiaries in their service territories.  These sales are made at rates approved by the state utility commissions of the states in which they operate, and in some instances, approved by the FERC.  See Item 1 –Utility Operations - Regulation—Rates. The FERC regulates and approves the rates for wholesale transmission transactions. See Item 1 –Utility Operations - Regulation—FERC.  As discussed below, some transmission services also are separately sold to non-affiliated companies.
 
 
16

 
AEP’s public utility subsidiaries (other than AEGCo) hold franchises or other rights to provide electric service in various municipalities and regions in their service areas.  In some cases, these franchises provide the utility with the exclusive right to provide electric service.  These franchises have varying provisions and expiration dates.  In general, the operating companies consider their franchises to be adequate for the conduct of their business.  For a discussion of competition in the sale of power, see Item 1 –Utility Operations - Competition.

AEP Transmission Pool

Transmission Agreement: APCo, CSPCo, I&M, KPCo and OPCo operate their transmission lines as a single interconnected and coordinated system in the AEP East transmission zone and are parties to the Transmission Agreement (TA), defining how they share the costs and benefits associated with their relative ownership of the bulk transmission system (lines operated at 138kV and above and stations containing extra high voltage equipment). The TA has been approved by the FERC. Sharing under the TA is based upon each company’s “member-load-ratio.”  The member-load-ratio is calculated monthly by dividing such company’s highest monthly peak demand for the last twelve months by the aggregate of the highest monthly peak demand for the last twelve months for all east zone operating companies.  The respective peak demands and member-load-ratios as of December 31, 2010 are set forth above in the section titled ELECTRIC GENERATION – AEP Power Pool and CSW Operating Agreement.

In October 2010, the FERC approved our request to amend the TA effective November 1, 2010.  KgPCo and WPCo were added as parties to the TA.  In addition, the amendments generally provide for the allocation of PJM transmission costs on the basis of the TA parties’ 12-month coincident peak and reimburse transmission revenues based on individual cost of service instead of the member-load ratio method previously used.

The following table shows the net (credits) or charges allocated among the parties to the TA during the years ended December 31, 2008, 2009 and 2010:

 
2008
2009
2010
 
(in thousands)
APCo
$(29,000)
$(12,500)
$(16,000)
CSPCo
55,000
51,300
42,500
I&M
(37,000)
(38,400)
(25,200)
KPCo
(2,000)
(8,800)
(8,000)
OPCo
13,000
8,400
6,700

Transmission Coordination Agreement, OATT, and ERCOT Protocols: PSO, SWEPCo, TNC and AEPSC are parties to the TCA.  Under the TCA, a coordinating committee is charged with the responsibility of (i) overseeing the coordinated planning of the transmission facilities of the parties to the agreement, including the performance of transmission planning studies, (ii) the interaction of such subsidiaries with independent system operators and other regional bodies interested in transmission planning and (iii) compliance with the terms of the OATT filed with the FERC and the rules of the FERC relating to such tariff.  Pursuant to the TCA, AEPSC has responsibility for monitoring the reliability of their transmission systems and administering the  OATT on behalf of the other parties to the agreement. The TCA also provides for the allocation among the parties of revenues collected for transmission and ancillary services provided under the OATT.  These allocations have been determined by the FERC-approved OATT for the SPP (with respect to PSO and SWEPCo) and PUCT-approved protocols for ERCOT (with respect to TCC and TNC).

The following table shows the net (credits) or charges allocated pursuant to the TCA, SPP OATT and ERCOT protocols as described above during the years ended December 31, 2008, 2009 and 2010:

 
2008
2009
2010
 
(in thousands)
PSO
$8,200
$11,000
$10,500
SWEPCo
(8,200)
(11,000)
(10,500)
TCC
1,500
1,700
2,100
TNC
(1,500)
(1,700)
(2,100)

 
17

 
Transmission Services for Non-Affiliates: In addition to providing transmission services in connection with their own power sales, AEP’s public utility subsidiaries through RTOs also provide transmission services for non-affiliated companies. See Item 1 –Utility Operations – Electric Transmission and Distribution - Regional Transmission Organizations, below. Transmission of electric power by AEP’s public utility subsidiaries is regulated by the FERC.

Coordination of East and West Zone Transmission: AEP’s System Transmission Integration Agreement provides for the integration and coordination of the planning, operation and maintenance of the transmission facilities of AEP East and AEP West companies. The System Transmission Integration Agreement functions as an umbrella agreement in addition to the TA and the TCA. The System Transmission Integration Agreement contains two service schedules that govern:

·  
The allocation of transmission costs and revenues and

·  
The allocation of third-party transmission costs and revenues and System dispatch costs.

The System Transmission Integration Agreement contemplates that additional service schedules may be added as circumstances warrant.

Regional Transmission Organizations

The AEP East Companies are members of PJM, and SWEPCo and PSO are members of the SPP (both FERC-approved RTOs).  RTOs operate, plan and control utility transmission assets in a manner designed to provide open access to such assets in a way that prevents discrimination between participants owning transmission assets and those that do not. The remaining AEP West companies (TCC and TNC) are members of ERCOT. See Note 4 to the consolidated financial statements, entitled Rate Matters, included in the 2010 Annual Reports under the heading entitled Regional Transmission Rate Proceedings at the FERC for additional information regarding RTOs.

REGULATION

General

Except for transmission and/or retail generation sales in certain of its jurisdictions, AEP’s public utility subsidiaries’ retail rates and certain other matters are subject to traditional cost-based regulation by the state utility commissions.  AEP’s subsidiaries are also subject to regulation by the FERC under the FPA with respect to wholesale power and transmission service transactions as well as certain unbundled retail transmission rates mainly in Ohio.  I&M is subject to regulation by the NRC under the Atomic Energy Act of 1954, as amended, with respect to the operation of the Cook Plant.  AEP and its public utility subsidiaries are also subject to the regulatory provisions of EPACT, much of which is administered by the FERC.  EPACT provides the FERC limited “backstop” transmission siting authority as well as increased utility merger oversight.

Rates

Historically, state utility commissions have established electric service rates on a cost-of-service basis, which is designed to allow a utility an opportunity to recover its cost of providing service and to earn a reasonable return on its investment used in providing that service. A utility’s cost of service generally reflects its operating expenses, including operation and maintenance expense, depreciation expense and taxes. State utility commissions periodically adjust rates pursuant to a review of (i) a utility’s adjusted revenues and expenses during a defined test period and (ii) such utility’s level of investment. Absent a legal limitation, such as a law limiting the frequency of rate changes or capping rates for a period of time, a state utility commission can review and change rates on its own initiative. Some states may initiate reviews at the request of a utility, customer, governmental or other representative of a group of customers. Such parties may, however, agree with one another not to request reviews of or changes to rates for a specified period of time.
 
 
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Public utilities have traditionally financed capital investments until the new asset was placed in service.  Provided the asset was found to be a prudent investment, it was then added to rate base and entitled to a return through rate recovery.  Given long lead times in construction, the high costs of plant and equipment and difficult capital markets, we are actively pursuing strategies to accelerate rate recognition of investments and cash flow.  AEP representatives continue to engage our state commissioners and legislators on alternative ratemaking options to reduce regulatory lag and enhance certainty in the process.  These options include pre-approvals, a return on construction work in progress, rider/trackers, securitization, formula rates and the inclusion of future test-year projections into rates.

In many jurisdictions, the rates of AEP’s public utility subsidiaries are generally based on the cost of providing traditional bundled electric service (i.e., generation, transmission and distribution service). In the ERCOT area of Texas, our utilities have exited the generation business and they currently charge unbundled cost-based rates for transmission and distribution service only.  In Ohio, rates for electric service are unbundled for generation, transmission and distribution service.  Historically, the state regulatory frameworks in the service area of the AEP System reflected specified fuel costs as part of bundled (or, more recently, unbundled) rates or incorporated fuel adjustment clauses in a utility’s rates and tariffs. Fuel adjustment clauses permit periodic adjustments to fuel cost recovery from customers and therefore provide protection against exposure to fuel cost changes.

The following state-by-state analysis summarizes the regulatory environment of certain major jurisdictions in which AEP operates. Several public utility subsidiaries operate in more than one jurisdiction.  See Note 4 to the consolidated financial statements, entitled Rate Matters, included in the 2010 Annual Reports, for more information regarding pending rate matters.

Indiana: I&M provides retail electric service in Indiana at bundled rates approved by the IURC, with rates set on a cost-of-service basis.  Indiana provides for timely fuel and purchased power cost recovery through a fuel cost recovery mechanism.

Ohio: CSPCo and OPCo provide “default” retail electric service to customers at unbundled rates pursuant to the Ohio Act.  CSPCo and OPCo exclusively provide distribution and transmission services to retail customers within their service territories at cost-based rates approved by the PUCO.  Transmission services are provided at OATT rates based on rates established by the FERC.  CSPCo and OPCo’s generation/supply rates are subject to their Electric Security Plans that the PUCO modified and approved in a March 2009 order.   The order established standard service offer rates in effect through 2011.  The order also provides a fuel adjustment clause for the three-year period of the ESP.  The order has been appealed by various parties to the Supreme Court of Ohio.  Although the Supreme Court of Ohio has rejected or dismissed a number of procedural and other challenges to the order, the order remains on appeal with that Court with oral arguments scheduled in February 2011.  In January 2011, CSPCo and OPCo filed an application with the FERC requesting approval for CSPCo to merge into OPCo, effective in October 2011.  Decisions are pending from the PUCO and the FERC.  Approval of the merger will not affect their rates until such time as the PUCO approves new rates.

Oklahoma: PSO provides retail electric service in Oklahoma at bundled rates approved by the OCC.  PSO’s rates are set on a cost-of-service basis. Fuel and purchased energy costs above or below the amount included in base rates are recovered or refunded by applying a fuel adjustment factor to retail kilowatt-hour sales. The factor is generally adjusted annually and is based upon forecasted fuel and purchased energy costs. Over or under collections of fuel costs for prior periods are returned to or recovered from customers in the year following when new annual factors are established.

Texas: Retail customers in TCC’s and TNC’s ERCOT service area of Texas are served through non-affiliated Retail Electric Providers (“REPs”).  TCC and TNC provide transmission and distribution service on a cost-of-service basis at rates approved by the PUCT and wholesale transmission service under tariffs approved by the FERC consistent with PUCT rules.  Effective September 2009, competition in the SPP area of Texas has been delayed until certain steps defined by statute and by PUCT rule have been accomplished. As such, the PUCT continues to approve base and fuel rates for SWEPCo’s Texas operations on a cost of service basis.
 
 
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Virginia: APCo currently provides retail electric service in Virginia at unbundled rates approved by the VSCC.  Virginia generally allows for timely recovery of fuel costs through a fuel adjustment clause.  Transmission services are provided at OATT rates based on rates established by the FERC.  APCo is permitted to retain a minimum of 25% of the margins from its off-system sales with the remaining margins from such sales credited against its fuel adjustment clause factor with a true-up to actual.  In addition to base rates and fuel cost recovery, APCo is permitted to recover a variety of costs through rate adjustment clauses.

West Virginia: APCo and WPCo provide retail electric service at bundled rates approved by the WVPSC, with rates set on a cost-of-service basis. West Virginia generally allows for timely recovery of fuel costs through an expanded net energy clause which trues-up to actual expenses.

Other Jurisdictions: The public utility subsidiaries of AEP also provide service at cost based regulated bundled rates in Arkansas, Kentucky, Louisiana and Tennessee and regulated unbundled rates in Michigan.  These jurisdictions provide for the timely recovery of fuel costs through fuel adjustment clauses that true-up to actual expenses.
 
 
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The following table illustrates certain regulatory information with respect to the states in which the public utility subsidiaries of AEP operate:

 
 
Jurisdiction
 
Percentage of
AEP System
Retail
Revenues (1)
 
Percentage of OSS Profits
Shared with Ratepayers
 
AEP Utility
Subsidiaries
Operating in
that Jurisdiction
 
Authorized
Return on
Equity (2)
 
 
 
 
 
 
 
 
 
 
Ohio
32%
No sharing included in ESPs
OPCo
(3)
 
CSPCo
(3)
 
 
 
 
 
 
 
Texas
12%
Not Applicable in ERCOT
TCC (4)
9.96%
 
TNC (4)
9.96%
 
90% in SPP
SWEPCo
10.33%
 
 
 
 
 
 
 
Virginia
12%
75%
APCo
10.53%
 
 
 
 
 
 
 
West Virginia
11%
100%
APCo
10.50%
 
WPCo
10.50%
 
 
 
 
 
 
 
Oklahoma
10%
75%
PSO
10.15%
 
 
 
 
 
 
 
Indiana
9%
50% after certain level (5)
I&M
10.50%
 
 
 
 
 
 
 
Kentucky
5%
60% below and above certain level (6)
KPCo
10.50%
 
 
 
 
 
 
 
Louisiana
4%
50% to 100% after certain levels (7)
SWEPCo
10.57%
 
 
 
 
 
 
 
Arkansas
2%
50% to 100% after certain levels (8)
SWEPCo
10.25%
 
 
 
 
 
 
 
Michigan
2%
75%
I&M
10.35%
 
 
 
 
 
 
 
Tennessee
1%
Not Applicable
KgPCo
12.00%

(1)  
Represents the percentage of revenues from sales to retail customers from AEP utility companies operating in each state to the total AEP System revenues from sales to retail customers for the year ended December 31, 2010.
(2)  
Identifies the predominant authorized return on equity and may not include other, less significant, permitted recovery.  Actual return on equity varies from authorized return on equity.
(3)  
CSPCo’s and OPCo’s generation revenues are governed by its Electric Security Plans (ESPs) filed and approved by the PUCO.  Starting in January 2009, the ESPs became effective which authorized rate increases during the ESP period, subject to caps that limit the 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 the cap limitations.  The ESPs also provided for a fuel adjustment clause for the three-year period of the ESP.
(4)  
Operating in the ERCOT region of Texas and consists of distribution and transmission functions.  Generation operations were divested in compliance with the Texas electric restructuring.
(5)  
There is an annual $37.5 million credit established for off-system sales in base rates.  If the off-system sales profits exceed the amount built into base rates, I&M reimburses ratepayers 50% of the excess.
(6)  
Starting in July 2010, there is an annual $15.3 million credit established for off-system sales in base rates.  If the monthly off-system sales profits do not meet the monthly level built into base rates, ratepayers reimburse KPCo 60% of the shortfall.  If the monthly off-system sales profits exceed the monthly level built into base rates, KPCo reimburses ratepayers 60% of the excess.
(7)  
Below $874,000, 100% is shared with customers; from $874,001 to $1,314,000, 85% is shared with customers; above $1,314,000, 50% is shared with customers.
(8)  
Below $758,600, 100% is shared with customers; from $758,601 to $1,167,078, 85% is shared with customers; above $1,167,078, 50% is shared with customers.

 
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FERC

Under the FPA, the FERC regulates rates for interstate power sales at wholesale, transmission of electric power, accounting and other matters, including construction and operation of hydroelectric projects. The FERC regulations require AEP to provide open access transmission service at FERC-approved rates. The FERC also regulates unbundled transmission service to retail customers.  The FERC also regulates the sale of power for resale in interstate commerce by (i) approving contracts for wholesale sales to municipal and cooperative utilities and (ii) granting authority to public utilities to sell power at wholesale at market-based rates upon a showing that the seller lacks the ability to improperly influence market prices.  Except for wholesale power that AEP delivers within its control area of the SPP, AEP has market-rate authority from the FERC, under which much of its wholesale marketing activity takes place.  The FERC requires each public utility that owns or controls interstate transmission facilities to, directly or through an RTO, file an open access network and point-to-point transmission tariff that offers services comparable to the utility’s own uses of its transmission system. The FERC also requires all transmitting utilities, directly or through an RTO, to establish an OASIS, which electronically posts transmission information such as available capacity and prices, and requires utilities to comply with Standards of Conduct that prohibit utilities’ transmission employees from providing non-public transmission information to the utility’s marketing employees.

The FERC oversees RTOs, entities created to operate, plan and control utility transmission assets. Order 2000 also prescribes certain characteristics and functions of acceptable RTO proposals.  The AEP East Companies are members of PJM. SWEPCo and PSO are members of SPP.

The FERC has jurisdiction over the issuances of securities of most of our public utility subsidiaries, the acquisition of securities of utilities, the acquisition or sale of certain utility assets, and mergers with another electric utility or holding company.  In addition, both the FERC and state regulators are permitted to review the books and records of any company within a holding company system.  EPACT gives the FERC limited “backstop” transmission siting authority as well as increased utility merger oversight.

COMPETITION

Under current Ohio legislation, electric generation is sold in a competitive market in Ohio, and our native load customers in Ohio have the ability to switch to alternative suppliers for their electric generation service.  Competitive power suppliers are targeting retail customers by offering alternative generation service.   A growing number of CSPCo's commercial retail customers have switched to alternative generation providers while additional Ohio customers have provided notice of their intent to switch.  In 2010, CSPCo lost about 3% of its total load due to customer switching.  These evolving market conditions will continue to impact CSPCo’s results of operations.  To date, OPCo’s customer losses have been insignificant.   In February 2010, the PUCO granted a retail supply subsidiary of AEP a certificate to operate as a competitive retail electric service provider in Ohio.

The public utility subsidiaries of AEP, like the electric industry generally, face competition in the sale of available power on a wholesale basis, primarily to other public utilities and power marketers. The Energy Policy Act of 1992 was designed, among other things, to foster competition in the wholesale market by creating a generation market with fewer barriers to entry and mandating that all generators have equal access to transmission services. As a result, there are more generators able to participate in this market. The principal factors in competing for wholesale sales are price (including fuel costs), availability of capacity and power and reliability of service.

AEP’s public utility subsidiaries also compete with self-generation and with distributors of other energy sources, such as natural gas, fuel oil and coal, within their service areas. The primary factors in such competition are price, reliability of service and the capability of customers to utilize sources of energy other than electric power. With respect to competing generators and self-generation, the public utility subsidiaries of AEP believe that they generally maintain a favorable competitive position. With respect to alternative sources of energy, the public utility subsidiaries of AEP believe that the reliability of their service and the limited ability of customers to substitute other cost-effective sources for electric power place them in a favorable competitive position, even though their prices may be higher than the costs of some other sources of energy.

 
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Significant changes in the global economy have led to increased price competition for industrial customers in the United States, including those served by the AEP System. Some of these industrial customers have requested price reductions from their suppliers of electric power. In addition, industrial customers that are downsizing or reorganizing often close a facility based upon its costs, which may include, among other things, the cost of electric power. The public utility subsidiaries of AEP cooperate with such customers to meet their business needs through, for example, providing various off-peak or interruptible supply options pursuant to tariffs filed with, and approved by, the various state commissions. Occasionally, these rates are negotiated with the customer, and then filed with the state commissions for approval.

SEASONALITY

The sale of electric power is generally a seasonal business. In many parts of the country, demand for power peaks during the hot summer months, with market prices also peaking at that time. In other areas, power demand peaks during the winter. The pattern of this fluctuation may change due to the nature and location of AEP’s facilities and the terms of power sale contracts into which AEP enters. In addition, AEP has historically sold less power, and consequently earned less income, when weather conditions are milder. Unusually mild weather in the future could diminish AEP’s results of operations and may impact its financial condition.  Conversely, unusually extreme weather conditions could increase AEP’s results of operations.

AEP RIVER OPERATIONS

Our AEP River Operations Segment transports coal and dry bulk commodities primarily on the Ohio, Illinois, and lower Mississippi rivers.  Almost all of our customers are nonaffiliated third parties who obtain the transport of coal and dry bulk commodities for various uses.  We charge these customers market rates for the purpose of making a profit.  Depending on market conditions and other factors, including barge availability, we permit AEP utility subsidiary affiliates to use certain of our equipment at rates that reflect our cost.  Our affiliated utility customers procure the transport of coal for use as fuel in their respective generating plants.  We charge affiliated customers rates that reflect our costs.  AEP River Operations includes approximately 2,581 barges, 45 towboats and 26 harbor boats that we own or lease. These assets are separate from the barges and towboats dedicated exclusively to transporting coal for use as fuel in our own generating facilities discussed under the prior segment.  See Item 1 – Utility Operations - Electric Generation —Fuel Supply—Coal and Lignite.

Competition within the barging industry for major commodity contracts is intense, with a number of companies offering transportation services in the waterways we serve. We compete with other carriers primarily on the basis of commodity shipping rates, but also with respect to customer service, available routes, value-added services (including scheduling convenience and flexibility), information timeliness and equipment. The industry continues to experience consolidation.   The resulting companies increasingly offer the widespread geographic reach necessary to support major national customers.  Demand for barging services can be seasonal, particularly with respect to the movement of harvested agricultural commodities (beginning in the late summer and extending through the fall).  Cold winter weather and inefficient older river locks operated by others may also limit our operations when certain of the waterways we serve are closed.

Our transportation operations are subject to regulation by the U.S. Coast Guard, federal laws, state laws and certain international conventions.  Legislation has been proposed that could make our towboats subject to inspection by the U.S. Coast Guard.

GENERATION AND MARKETING

Our Generation and Marketing Segment consists of non-utility generating assets and a competitive power supply and energy trading and marketing business.  We enter into short and long-term transactions to buy or sell capacity, energy and ancillary services primarily in the ERCOT market, and to a lesser extent Ohio in PJM and MISO.  As of December 31, 2010, the assets utilized in this segment included approximately 310 MW of company-owned domestic wind power facilities, 177 MW of domestic wind power from long-term purchase power agreements and 377 MW of coal-fired capacity which was obtained through an agreement effective through 2027 that transfers TNC’s interest in the Oklaunion power station to AEP Energy Partners, Inc.  In 2006, TNC transferred
 
 
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its coal-fired generation capacity to comply with the separation requirements of the Texas Act.  The power obtained from the Oklaunion power station is marketed and sold in ERCOT.  We are regulated by the PUCT for transactions inside ERCOT and by the FERC for transactions outside of ERCOT.  While peak load in ERCOT typically occurs in the summer, we do not necessarily expect seasonal variation in our operations.  In 2010, we started operations of a retail energy business in the State of Ohio.  The purpose of this operation is to sell competitive power supply to residential, commercial and industrial customers in the deregulated areas of Ohio.

ITEM 1A.                            RISK FACTORS

General Risks of Our Regulated Operations

We may not be able to recover the costs of our substantial planned investment in capital improvements and additions.   (Applies to each registrant.)

Our business plan calls for extensive investment in capital improvements and additions, including the installation of environmental upgrades and retrofits, construction and/or acquisition of additional generation units and transmission facilities, modernizing existing infrastructure as well as other initiatives. Our public utility subsidiaries currently provide service at rates approved by one or more regulatory commissions.  If these regulatory commissions do not approve adjustments to the rates we charge, we would not be able to recover the costs associated with our planned extensive investment.  This would cause our financial results to be diminished.  While we may seek to limit the impact of any denied recovery by attempting to reduce the scope of our capital investment, there can be no assurance as to the effectiveness of any such mitigation efforts, particularly with respect to previously incurred costs and commitments.

We may not fully recover all of the investment in and expenses related to the Turk Plant.  (Applies to AEP and SWEPCo)

SWEPCo is in the process of building the John W. Turk Plant (the “Turk Plant”) in southwest Arkansas and holds a 73% ownership interest in the planned 600MW coal-fired generating facility.  Its construction and anticipated operation has resulted in numerous legal challenges, including:

·  
the validity of the air permit issued by the Arkansas Pollution Control and Ecology Commission in connection with the operation of the Turk Plant;
·  
the validity of the wetlands permit issued by the U.S. Army Corps of Engineers in connection with the construction and operation of the Turk Plant;
·  
the validity of the authority granted by the APSC to build three transmission lines and facilities needed to transmit power from the Turk Plant;
·  
whether SWEPCo is required to obtain APSC approval to construct the Turk Plant without pursuing authority to seek recovery of the originally approved 88 MW portion of Turk Plant costs in Arkansas retail rates; and
·  
a complaint filed in the Federal District Court for the Western District of Arkansas against SWEPCo, the U.S. Army Corps of Engineers, the U.S. Department of Interior and the U.S. Fish and Wildlife Service seeking a temporary restraining order and preliminary injunction to stop construction of the Turk Plant asserting claims of violations of various federal and state laws.

If SWEPCo is unable to complete the Turk Plant construction and place the Turk Plant in service or if SWEPCo cannot recover all of its investment in and expenses related to the Turk Plant, it would materially reduce future net income and cash flows and materially impact financial condition.
 
 
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Our request for rate recovery in Ohio for distribution service may not be approved in its entirety.  (Applies to AEP, CSPCo and OPCo)

In January 2011, CSPCo and OPCo filed a notice of intent with the PUCO to file for an annual increase in distribution rates of $34 million and $59 million, respectively, either as individual companies, or, if their proposed merger is approved, as a single merged entity.  The increase is based upon an 11.15% return on common equity to be effective January 2012. If the PUCO denies all or part of the requested rate recovery, it could reduce future net income and cash flows.

Our request for rate recovery in Ohio for generation service may not be approved in its entirety.  (Applies to AEP, CSPCo and OPCo)

In January 2011, CSPCo and OPCo filed an application with the PUCO to approve the new ESP that includes a standard service offer pricing for generation effective with the first billing cycle of January 2012 through the last billing cycle of May 2014.  The requested increase in 2012 is $54 million and in 2013 is $106 million.  If the PUCO denies all or part of the requested rate recovery, it could reduce future net income and cash flows.

Ohio may require us to refund revenue that we have collected. (Applies to AEP, CSPCo and OPCo)

Ohio law requires that the PUCO determine on an annual basis if rate adjustments included in prior orders resulted in significantly excessive earnings.  If the rate adjustments result in significantly excessive earnings, the excess amount could be returned to customers.  In September 2010, CSPCo and OPCo filed their 2009 significantly excessive earnings filings with the PUCO.  In January 2011, the PUCO ruled that CSPCo generated approximately $43 million in significantly excessive earnings during 2009. The ruling is subject to rehearing by the PUCO and could be appealed in the courts.  If rehearing or a final appeal, if any, results in findings of additional significantly excessive earnings, then further amounts will be returned to customers. CSPCo and OPCo must file their 2010 significantly excessive earnings filings with the PUCO. If the PUCO determines that CSPCo’s and/or OPCo’s 2010 earnings were significantly excessive, CSPCo and/or OPCo may be required to return a portion of their revenues to customers.
 
Ohio may require us to refund fuel costs that we have collected. (Applies to OPCo)

The PUCO selected an outside consultant to conduct an audit of recovery under the fuel adjustment clause for the period of January 2009 through December 2009.  The audit report included a recommendation that the PUCO should review whether any proceeds from a 2008 coal contract settlement agreement which totaled $72 million should reduce OPCo’s under-recovery balance.  Of the total proceeds, approximately $58 million was recognized as a reduction to fuel expense prior to 2009 and $14 million reduced fuel expense in 2009 and 2010.  If the PUCO orders any portion of the $58 million or other future adjustments be used to reduce the current year fuel adjustment clause deferral, it would reduce future net income and cash flows and impact financial condition.

Ohio may require us to refund rider revenue that we have collected. (Applies to CSPCo and OPCo)

The PUCO approved recovery of an Economic Development Rider (EDR) by CSPCo and OPCo.  An intervenor in that proceeding has filed a notice of appeal of that award with the Supreme Court of Ohio.  As of December 31, 2010, CSPCo and OPCo have incurred $38 million and $30 million, respectively, in EDR costs including carrying costs.  If CSPCo and OPCo are not ultimately permitted to recover their deferrals it would reduce future net income and cash flows and impact financial condition.

 
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Our request for rate recovery in West Virginia may not be approved in its entirety.  (Applies to AEP and APCo)

In May 2010, APCo and WPCo filed a request with the WVPSC to increase annual base rates by $156 million based on an 11.75% return on common equity to be effective March 2011.  If the WVPSC denies all or part of the requested rate recovery, it could reduce future net income and cash flows.

Oklahoma may require us to refund fuel costs that we have collected. (Applies to PSO)

In July 2009, the OCC initiated a proceeding to review PSO’s fuel and purchased power adjustment clause for the calendar year 2008 and also initiated a prudence review of the related costs.  In March 2010, the Oklahoma Attorney General and an intervenor recommended the fuel clause adjustment rider be amended to decrease the shareholder’s portion of off-system sales margins from 25% to 10%.  That intervenor also recommended that the OCC conduct a comprehensive review of all affiliate transactions during 2007 and 2008.  In July 2010, additional testimony regarding the 2007 transfer of ERCOT trading contracts to AEP Energy Partners was filed.  Included in this testimony were unquantified refund recommendations relating to re-pricing of contract transactions.  If the OCC were to issue an unfavorable decision, it would reduce future net income and cash flows and impact financial condition.

Our future access to assets used to serve a major customer is in question.  (Applies to I&M)

Since 1975 I&M has leased certain energy delivery assets from the City of Fort Wayne, Indiana under a long-term lease that expired on February 28, 2010.  As a result of a court-sponsored mediation process, I&M agreed to purchase the leased assets from Fort Wayne.  The agreement was signed in October 2010 and is subject to approval by the IURC.  If the IURC does not approve the agreement or the recovery of the costs resulting from the agreement or the lease, it could reduce future net income and cash flows.

We may not recover costs incurred to begin construction on projects that are canceled.   (Applies to each registrant)

Our business plan for the construction of new projects involves a number of risks, including construction delays, nonperformance by equipment and other third party suppliers, and increases in equipment and labor costs. To limit the risks of these construction projects, we enter into equipment purchase orders and construction contracts and incur engineering and design service costs in advance of receiving necessary regulatory approvals and/or siting or environmental permits. If any of these projects is canceled for any reason, including our failure to receive necessary regulatory approvals and/or siting or environmental permits, we could incur significant cancellation penalties under the equipment purchase orders and construction contracts. In addition, if we have recorded any construction work or investments as a regulatory asset we may need to impair that asset in the event the project is canceled.

Rate regulation may delay or deny full recovery of capital improvements, additions and other costs.   (Applies to each registrant.)

Our public utility subsidiaries currently provide service at rates approved by one or more regulatory commissions.  These rates are generally regulated based on an analysis of the applicable utility’s expenses incurred in a test year.  Thus, commission-approved rates may or may not match a utility’s expenses at any given time.  There may also be a delay between the timing of when these costs are incurred and when these costs are recovered.  Traditionally, we have financed capital investments and improvements until the new asset was placed in service.  Provided the asset was found to be a prudent investment, the asset was then added to rate base and entitled to a return through rate recovery.  Long lead times in construction, the high costs of plant and equipment and difficult capital markets have heightened the risks involved in our capital investments and improvements. While we are actively pursuing strategies to accelerate rate recognition of investments and cash flow, including pre-approvals, a return on construction work in progress, rider/trackers, formula rates and the inclusion of future test-year projections into rates, there can be no assurance that these will be adopted, that the applicable regulatory commission will judge all of our costs to have been prudently incurred or that the regulatory process in which rates are determined will be done in a timely manner.

 
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Certain of our revenues and results of operations are subject to risks that are beyond our control.   (Applies to each registrant.)

Our operations are structured to comply with all applicable federal and state laws and regulations and we take measures to minimize the risk of significant disruptions.  Material disruptions at one or more of our operational facilities, however, could negatively impact our revenues, operating and capital expenditures and results of operations.  Such events may also create additional risks related to the supply and/or cost of equipment and materials.  We could experience unexpected but significant interruption due to several events, including:

·  
major facility or equipment failure;
·  
an environmental event such as a serious spill or release;
·  
fires, floods, droughts, earthquakes, hurricanes or other natural disasters;
·  
wars, terrorist acts or threats and other catastrophic events;
·  
significant health impairments or disease events, and;
·  
other serious operational problems.

We are exposed to nuclear generation risk. (Applies to AEP and I&M.)

Through I&M, we own the Cook Plant.  It consists of two nuclear generating units for a rated capacity of 2,191 MW, or 8-9% of the electricity we generate.  We are, therefore, subject to the risks of nuclear generation, which include the following:

·  
the potential harmful effects on the environment and human health resulting from the operation of nuclear facilities and the storage, handling and disposal of radioactive materials such as spent nuclear fuel;

·  
limitations on the amounts and types of insurance commercially available to cover losses that might arise in connection with our nuclear operations;

·  
uncertainties with respect to contingencies and assessment amounts if insurance coverage is inadequate (federal law requires owners of nuclear units to purchase the maximum available amount of nuclear liability insurance and potentially contribute to the losses of others); and,

·  
uncertainties with respect to the technological and financial aspects of decommissioning nuclear plants at the end of their licensed lives.

There can be no assurance that I&M’s preparations or risk mitigation measures will be adequate if and when these risks are triggered.

The NRC has broad authority under federal law to impose licensing and safety-related requirements for the operation of nuclear generation facilities.  In the event of non-compliance, the NRC has the authority to impose fines or shut down a unit, or both, depending upon its assessment of the severity of the situation, until compliance is achieved.  Revised safety requirements promulgated by the NRC could necessitate substantial capital expenditures at nuclear plants such as ours.  In addition, although we have no reason to anticipate a serious nuclear incident at our plants, if an incident did occur, it could harm our results of operations or financial condition.  A major incident at a nuclear facility anywhere in the world could cause the NRC to limit or prohibit the operation or licensing of any domestic nuclear unit.  Moreover, a major incident at any nuclear facility in the U.S. could require us to make material contributory payments.

 
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Costs associated with the operation (including fuel), maintenance and retirement of nuclear plants continue to be more significant and less predictable than costs associated with other sources of generation, in large part due to changing regulatory requirements and safety standards, availability of nuclear waste disposal facilities and experience gained in the operation of nuclear facilities.  Costs also may include replacement power, any unamortized investment at the end of the useful life of the Cook Plant (whether scheduled or premature), the carrying costs of that investment and retirement costs.  Our ability to obtain adequate and timely recovery of costs associated with the Cook Plant is not assured.

The different regional power markets in which we compete or will compete in the future have changing market and transmission structures, which could affect our performance in these regions.  (Applies to each registrant.)

Our results are likely to be affected by differences in the market and transmission structures in various regional power markets.  The rules governing the various regional power markets, including SPP and PJM, may also change from time to time which could affect our costs or revenues.  Because the manner in which RTOs will evolve remains unclear, we are unable to assess fully the impact that changes in these power markets may have on our business.

The amount we charged third parties for using our transmission facilities is subject to refund.  (Applies to AEP, APCo, CSPCo, I&M and OPCo.)

In July 2003, the FERC issued an order directing PJM and MISO to make compliance filings for their respective tariffs to eliminate the transaction-based charges for through and out (T&O) transmission service on transactions where the energy is delivered within those RTOs.  To mitigate the impact of lost T&O revenues, the FERC approved temporary replacement seams elimination cost allocation (SECA) transition rates beginning in December 2004 and extending through March 2006.  Because intervenors objected to this decision, the SECA fees we collected ($220 million) are subject to refund.  Some claims for refund have been settled, and we have recorded a provision for estimated settlement refunds for the remaining unsettled $108 million of gross SECA revenues collected.  Any payments in excess of the reserve balance could harm our results of operations and financial position.

We could be subject to higher costs and/or penalties related to mandatory reliability standards. (Applies to each registrant.)

As a result of EPACT, owners and operators of the bulk power transmission system are subject to mandatory reliability standards promulgated by the North American Electric Reliability Corporation and enforced by the FERC. These standards, which previously were being applied on a voluntary basis, became mandatory in June 2007. The standards are based on the functions that need to be performed to ensure the bulk power system operates reliably and is guided by reliability and market interface principles. Compliance with new reliability standards may subject us to higher operating costs and/or increased capital expenditures. While we expect to recover costs and expenditures from customers through regulated rates, there can be no assurance that the applicable commissions will approve full recovery in a timely manner.  If we were found not to be in compliance with the mandatory reliability standards, we could be subject to sanctions, including substantial monetary penalties, which likely would not be recoverable from customers through regulated rates.

At times, demand for power could exceed our supply capacity.   (Applies to each registrant.)

We are currently obligated to supply power in parts of eleven states.  From time to time, because of unforeseen circumstances, the demand for power required to meet these obligations could exceed our available generation capacity.  If this occurs, we would have to buy power from the market.  This would increase the pressure on our short-term debt financing capacity in times of tight liquidity.  We may not always have the ability to pass these costs on to our customers, and the time lag between incurring costs and recovery can be long.  Since these situations most often occur during periods of peak demand, it is possible that the market price for power at that time would be very high. Even if a supply shortage were brief, we could suffer substantial losses that could reduce our results of operations.
 
 
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Risks Related to Market, Economic or Financial Volatility

If we are unable to access capital markets on reasonable terms, it could have an adverse impact on our net income, cash flows and financial condition.  (Applies to each registrant)

We rely on access to capital markets as a significant source of liquidity for capital requirements not satisfied by operating cash flows.  Volatility and reduced liquidity in the financial markets could affect our ability to raise capital and fund our capital needs, including construction costs and refinancing maturing indebtedness.  In addition, if capital is available only on less than reasonable terms or to borrowers whose creditworthiness is better than ours, capital costs could increase materially.  Restricted access to capital markets and/or increased borrowing costs could have an adverse impact on net income, cash flows and financial condition.

Downgrades in our credit ratings could negatively affect our ability to access capital and/or to operate our power trading businesses.  (Applies to each registrant)

The credit ratings agencies periodically review our capital structure and the quality and stability of our earnings.  Any negative ratings actions could constrain the capital available to us and could limit our access to funding for our operations.  Our business is capital intensive, and we are dependent upon our ability to access capital at rates and on terms we determine to be attractive.  In periods of market turmoil, access to capital is difficult for all borrowers.  If our ability to access capital becomes significantly constrained, our interest costs will likely increase and our financial condition could be harmed and future results of operations could be adversely affected.

Our power trading business relies on the investment grade ratings of our individual public utility subsidiaries’ senior unsecured long-term debt.  Most of our counterparties require the creditworthiness of an investment grade entity to stand behind transactions.  If those ratings were to decline below investment grade, our ability to operate our power trading business profitably would be diminished because we would likely have to deposit cash or cash-related instruments which would reduce our profits.

Our pension plan will require additional significant contributions. (Applies to each registrant.)

The performance of the capital markets affects the value of the assets that are held in trust to satisfy future obligations under our defined benefit pension plan.  The volatility of the capital markets in the past years has led to a decline in the market value of these assets. Also, a decline in interest rates on corporate bonds in 2010 has impacted the benchmark discount rate in a way that results in a higher calculated pension liability. Accordingly, our future required contributions to fund obligations under our defined benefit plan could increase significantly.

AEP has no income or cash flow apart from dividends paid or other obligations due it from its subsidiaries.  (Applies to AEP.)

AEP is a holding company and has no operations of its own.  Its ability to meet its financial obligations associated with its indebtedness and to pay dividends on its common stock is primarily dependent on the earnings and cash flows of its operating subsidiaries, primarily its regulated utilities, and the ability of its subsidiaries to pay dividends to, or repay loans from, AEP.  Its subsidiaries are separate and distinct legal entities that have no obligation (apart from loans from AEP) to provide AEP with funds for its payment obligations, whether by dividends, distributions or other payments. Payments to AEP by its subsidiaries are also contingent upon their earnings and business considerations. In addition, any payment of dividends, distributions or advances by the utility subsidiaries to AEP could be subject to regulatory restrictions.  AEP indebtedness and common stock dividends are structurally subordinated to all subsidiary indebtedness and preferred stock obligations.
 
 
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Our operating results may fluctuate on a seasonal or quarterly basis and with general economic conditions.  (Applies to each registrant.)

Electric power generation is generally a seasonal business.  In many parts of the country, demand for power peaks during the hot summer months, with market prices also peaking at that time.  In other areas, power demand peaks during the winter.  As a result, our overall operating results in the future may fluctuate substantially on a seasonal basis.  The pattern of this fluctuation may change depending on the terms of power sale contracts that we enter into.  In addition, we have historically sold less power, and consequently earned less income, when weather conditions are milder.  Unusually mild weather in the future could diminish our results of operations and harm our financial condition.  Conversely, unusually extreme weather conditions could increase AEP’s results of operations in a manner that would not likely be sustainable.

Further, deteriorating economic conditions generally result in reduced consumption by our customers, particularly industrial customers who may curtail operations or cease production entirely, while an expanding economic environment generally results in increased revenues.  As a result, our overall operating results in the future may fluctuate on the basis of prevailing economic conditions.

Failure to attract and retain an appropriately qualified workforce could harm our results of operations. (Applies to each registrant.)

Certain events, such as an aging workforce without appropriate replacements, mismatch of skillset or complement to future needs, or unavailability of contract resources may lead to operating challenges and increased costs. The challenges include lack of resources, loss of knowledge and a lengthy time period associated with skill development. In this case, costs, including costs for contractors to replace employees, productivity costs and safety costs, may rise. Failure to hire and adequately train replacement employees, including the transfer of significant internal historical knowledge and expertise to the new employees, or the future availability and cost of contract labor may adversely affect the ability to manage and operate our business.  If we are unable to successfully attract and retain an appropriately qualified workforce, our results of operations could be negatively affected.

Parties we have engaged to provide construction materials or services may fail to perform their obligations, which could harm our results of operations.  (Applies to each registrant.)

Our business plan calls for extensive investment in capital improvements and additions, including the installation of environmental upgrades, construction of additional generation units and transmission facilities as well as other initiatives.  We are exposed to the risk of substantial price increases in the costs of materials used in construction.  We have engaged numerous contractors and entered into a large number of agreements to acquire the necessary materials and/or obtain the required construction related services.  As a result, we are also exposed to the risk that these contractors and other counterparties could breach their obligations to us. Should the counterparties to these arrangements fail to perform, we may be forced to enter into alternative arrangements at then-current market prices that may exceed our contractual prices and almost certainly cause delays in that and related projects.  Although our agreements are designed to mitigate the consequences of a potential default by the counterparty, our actual exposure may be greater than these mitigation provisions. This would cause our financial results to be diminished, and we might incur losses or delays in completing construction.

Changes in commodity prices and the costs of transport may increase our cost of producing power or decrease the amount we receive from selling power, harming our financial performance.  (Applies to each registrant.)

We are exposed to changes in the price and availability of coal and the price and availability to transport coal because most of our generating capacity is coal-fired.  We have contracts of varying durations for the supply of coal for most of our existing generation capacity, but as these contracts end or otherwise are not honored, we may not be able to purchase coal on terms as favorable as the current contracts.  Similarly, we are exposed to changes in the price and availability of emission allowances.  We use emission allowances based on the amount of coal we use as fuel and the reductions achieved through emission controls and other measures.  According to our estimates, we have procured sufficient emission allowances to cover nearly all of our projected needs for the next two years as well as a majority of our needs beyond that timeframe.  At some future point, additional costs may be incurred if forthcoming regulation changes require supplemental allowances for compliance.  If and when we obtain additional allowances those purchases may not be on as favorable terms as those currently obtained.
 
 
30

 
We also own natural gas-fired facilities, which increases our exposure to market prices of natural gas.  Natural gas prices tend to be more volatile than prices for other fuel sources.  Our ability to make off-system sales at a profit is highly dependent on the price of natural gas.  As the price of natural gas falls, other market participants that utilize natural gas-fired generation will be able to offer electricity at increasingly competitive prices relative to our off-system sales prices, so the margins we realize from sales will be lower and, on occasion, we may need to curtail operation of marginal plants.

Prices for coal, natural gas and emission allowances have shown material upward and downward swings in the recent past.  Changes in the cost of coal, emission allowances or natural gas and changes in the relationship between such costs and the market prices of power will affect our financial results.  Since the prices we obtain for power may not change at the same rate as the change in coal, emission allowances or natural gas costs, we may be unable to pass on the changes in costs to our customers.

In addition, actual power prices and fuel costs will differ from those assumed in financial projections used to value our trading and marketing transactions, and those differences may be material.  As a result, our financial results may be diminished in the future as those transactions are marked to market.

Risks Relating to State Restructuring

Our customers have recently begun to select alternative electric generation service providers, as allowed by Ohio legislation. (Applies to AEP and CSPCo)
 
Under current Ohio legislation, electric generation is sold in a competitive market in Ohio, and our native load customers in Ohio have the ability to switch to alternative suppliers for their electric generation service.  Competitive power suppliers are targeting retail customers by offering alternative generation service.   A growing number of CSPCo's commercial retail customers have switched to alternative generation providers while additional Ohio customers have provided notice of their intent to switch.  In 2010, CSPCo lost about 3% of its total load due to customer switching.  To date, OPCo’s losses have not been significant.  These evolving market conditions will continue to impact CSPCo's results of operations.

There is uncertainty as to our recovery of stranded costs resulting from industry restructuring in Texas.  (Applies to AEP.)

Restructuring legislation in Texas required utilities with stranded costs to use market-based methods to value certain generating assets for determining stranded costs.  We elected to use the sale of assets method to determine the market value of TCC’s generation assets for stranded cost purposes.  In general terms, the amount of stranded costs under this market valuation methodology is the amount by which the book value of generating assets, including regulatory assets and liabilities that were not securitized, exceeds the market value of the generation assets, as measured by the net proceeds from the sale of the assets.  In May 2005, TCC filed its stranded cost quantification application with the PUCT seeking recovery of $2.4 billion of net stranded generation costs and other recoverable true-up items.  A final order was issued in April 2006.  In the final order, the PUCT determined TCC’s net stranded generation costs and other recoverable true-up items to be approximately $1.475 billion.  We have appealed the PUCT’s final order seeking additional recovery consistent with the Texas Restructuring Legislation and related rules, other parties have appealed the PUCT’s final order as unwarranted or too large.  Management cannot predict the ultimate outcome of any future court appeals or any future remanded PUCT proceeding.

Collection of our revenues in Texas is concentrated in a limited number of REPs.  (Applies to AEP.)

Our revenues from the distribution of electricity in the ERCOT area of Texas are collected from REPs that supply the electricity we distribute to their customers.  Currently, we do business with approximately one hundred REPs.  In 2010, TCC’s largest customer accounted for 25% of its operating revenue and its second largest customer accounted for 13% of its operating revenue; TNC’s largest customer (a non-utility affiliate) accounted for 29% of its operating revenues and its second largest customer accounted for 16% of its operating revenues.  Adverse economic conditions, structural problems in the Texas market or financial difficulties of one or more REPs could impair the ability of these REPs to pay for our services or could cause them to delay such payments.  We depend on these REPs for timely remittance of payments.  Any delay or default in payment could adversely affect the timing and receipt of our cash flows and thereby have an adverse effect on our liquidity.

 
31

 
Risks Related to Owning and Operating Generation Assets and Selling Power

Our costs of compliance with existing environmental laws are significant.  (Applies to each registrant)

Our operations are subject to extensive federal, state and local environmental statutes, rules and regulations relating to air quality, water quality, waste management, natural resources and health and safety.  Approximately 90% of the electricity generated by the AEP system is produced by the combustion of fossil fuels.  Emissions of nitrogen and sulfur oxides, mercury and particulates from fossil fueled generating plants are potentially subject to increased regulations, controls and mitigation expenses.  Compliance with these legal requirements requires us to commit significant capital toward environmental monitoring, installation of pollution control equipment, emission fees and permits at all of our facilities.  These expenditures have been significant in the past, and we expect that they will increase in the future.  Costs of compliance with environmental regulations could adversely affect our net income and financial position, especially if emission and/or discharge limits are tightened, more extensive permitting requirements are imposed, additional substances become regulated and the number and types of assets we operate increase.  While we expect to recover our expenditures for pollution control technologies, replacement generation and associated operating costs from customers through regulated rates (in regulated jurisdictions) or market prices, without such recovery those costs could reduce our future net income and cash flows, and possibly harm our financial condition.

Regulation of CO2 emissions, either through legislation or by the Federal EPA, could materially increase costs to us and our customers or cause some of our electric generating units to be uneconomical to operate or maintain.  (Applies to each registrant)

In June 2009, the U.S. House of Representatives passed the American Clean Energy Security Act (ACES).  ACES is a comprehensive energy and global warming bill that includes a number of provisions that would directly affect our business, including energy efficiency and renewable electricity standards, funding for carbon capture and sequestration demonstration projects, CO2 emission standards, and an economy-wide cap and trade program for large sources of CO2 emissions that would reduce emissions by 17% in 2020 and just over 80% by 2050 from 2005 levels.  Costs of compliance with the proposed legislation could adversely affect our net income and financial position.  This legislation did not become law.

Separately, in December 2009, the Federal EPA issued a final endangerment finding under the CAA regarding emissions from motor vehicles.  Several groups have filed challenges to the endangerment finding.  The endangerment finding will lead to regulation of CO2 and other gases under existing laws.  Management believes some policy approaches being discussed would have significant and widespread negative consequences for the national economy and major U.S. industrial enterprises, including us and our customers.

If CO2 and other emission standards are imposed, the standards could require significant increases in capital expenditures and operating costs which would impact the ultimate retirement of older, less-efficient, coal-fired units.  While we expect that costs of complying with new CO2 and other GHG emission standards will be treated like all other reasonable costs of serving customers and should be recoverable from customers as costs of doing business, without such recovery those costs could reduce our future net income and cash flows and harm our financial condition.

Courts adjudicating nuisance and other similar claims against us may order us to limit or reduce our CO2 emissions.  (Applies to each registrant)

In 2004, eight states and the City of New York filed an action in Federal District Court for the Southern District of New York against AEP, Cinergy Corp, Xcel Energy, Southern Company and Tennessee Valley Authority.  The Natural Resources Defense Council, on behalf of three special interest groups, filed a similar complaint against the same defendants.  The actions allege that CO2 emissions from the defendants’ power plants constitute a public nuisance under federal common law due to impacts of global warming, and sought injunctive relief in the form of specific emission reduction commitments from the defendants.  The Second Circuit Court of Appeals reinstated this lawsuit on appeal after the lower court had dismissed it.  The U.S. Supreme Court has agreed to hear the defendants’ request for appeal.

 
32

 
The trial court adjudicating the reinstated nuisance claims may order the defendants, including us, to limit or reduce CO2 emissions.  This or similar remedies could require us to purchase power from third parties to fulfill our commitments to supply power to our customers.  This could have a material impact on our costs.  While management believes such costs should be recoverable from customers as costs of doing business, without such recovery those costs could reduce our future net income and cash flows and harm our financial condition.

If these or other future actions are resolved against us, substantial modifications of our existing coal-fired power plants could be required.  In addition, we could be required to invest significantly in additional emission control equipment, accelerate the timing of capital expenditures, pay penalties and/or halt operations.  Moreover, our results of operations and financial position could be reduced due to the timing of recovery of these investments and the expense of ongoing litigation.

We may not fully recover the costs of repairing or replacing damaged equipment in Cook Plant Unit 1 and may be required to pay additional accidental outage insurance proceeds to ratepayers.  (Applies to AEP and I&M)

Cook Plant Unit 1 is a 1,084 MW nuclear generating unit located in Bridgman, Michigan.  In September 2008, I&M shut down Cook Plant Unit 1 (Unit 1) due to turbine vibrations, caused by blade failure, which resulted in significant turbine damage and a small fire on the electric generator.  This equipment, located in the turbine building, is separate and isolated from the nuclear reactor.  The turbine rotors that caused the vibration were installed in 2006 and were within the vendor’s warranty period.  The warranty provides for the repair or replacement of the turbine rotors if the damage was caused by a defect in materials or workmanship.  Repair of the property damage and replacement of the turbine rotors and other equipment could cost up to approximately $395 million.  Management believes that I&M should recover a significant portion of these costs through the turbine vendor’s warranty, insurance and the regulatory process.  I&M repaired Unit 1 and it resumed operations in December 2009 at slightly reduced power.  If the ultimate costs of the incident are not covered by warranty, insurance or through the regulatory process or if any future regulatory proceedings are adverse, it could have an adverse impact on net income, cash flows and financial condition.

Our revenues and results of operations from selling power are subject to market risks that are beyond our control.  (Applies to each registrant.)

We sell power from our generation facilities into the spot market and other competitive power markets on a contractual basis.  We also enter into contracts to purchase and sell electricity, natural gas, emission allowances and coal as part of our power marketing and energy trading operations.  With respect to such transactions, the rate of return on our capital investments is not determined through mandated rates, and our revenues and results of operations are likely to depend, in large part, upon prevailing market prices for power in our regional markets and other competitive markets.  These market prices can fluctuate substantially over relatively short periods of time.  Trading margins may erode as markets mature and there may be diminished opportunities for gain should volatility decline.  In addition, the FERC, which has jurisdiction over wholesale power rates, as well as RTOs that oversee some of these markets, may impose price limitations, bidding rules and other mechanisms to address some of the volatility in these markets.  Power supply and other similar agreements entered into during extreme market conditions may subsequently be held to be unenforceable by a reviewing court or the FERC.  Fuel and emissions prices may also be volatile, and the price we can obtain for power sales may not change at the same rate as changes in fuel and/or emissions costs.  These factors could reduce our margins and therefore diminish our revenues and results of operations.
 
 
33

 
Volatility in market prices for fuel and power may result from:

·  
weather conditions;
·  
outages of major generation or transmission facilities;
·  
seasonality;
·  
power usage;
·  
illiquid markets;
·  
transmission or transportation constraints or inefficiencies;
·  
availability of competitively priced alternative energy sources;
·  
demand for energy commodities;
·  
natural gas, crude oil and refined products, and coal production levels;
·  
natural disasters, wars, embargoes and other catastrophic events; and
·  
federal, state and foreign energy and environmental regulation and legislation.

Our power trading (including coal, gas and emission allowances trading and power marketing) and risk management policies cannot eliminate the risk associated with these activities.  (Applies to each registrant.)

Our power trading (including coal, gas and emission allowances trading and power marketing) activities expose us to risks of commodity price movements. We attempt to manage our exposure by establishing and enforcing risk limits and risk management procedures. These risk limits and risk management procedures may not work as planned and cannot eliminate the risks associated with these activities. As a result, we cannot predict the impact that our energy trading and risk management decisions may have on our business, operating results or financial position.

We routinely have open trading positions in the market, within guidelines we set, resulting from the management of our trading portfolio. To the extent open trading positions exist, fluctuating commodity prices can improve or diminish our financial results and financial position.

Our power trading and risk management activities, including our power sales agreements with counterparties, rely on projections that depend heavily on judgments and assumptions by management of factors such as the future market prices and demand for power and other energy-related commodities. These factors become more difficult to predict and the calculations become less reliable the further into the future these estimates are made. Even when our policies and procedures are followed and decisions are made based on these estimates, results of operations may be diminished if the judgments and assumptions underlying those calculations prove to be inaccurate.

Our financial performance may be adversely affected if we are unable to operate our electric generating facilities successfully.  (Applies to each registrant.)

Our performance is highly dependent on the successful operation of our electric generating facilities. Operating electric generating facilities involves many risks, including:

·  
operator error and breakdown or failure of equipment or processes;
·  
operating limitations that may be imposed by environmental or other regulatory requirements;
·  
labor disputes;
·  
fuel supply interruptions caused by transportation constraints, adverse weather, non-performance by our suppliers and other factors; and
·  
catastrophic events such as fires, earthquakes, explosions, hurricanes, terrorism, floods or other similar occurrences.

A decrease or elimination of revenues from power produced by our electric generating facilities or an increase in the cost of operating the facilities would adversely affect our results of operations.
 
 
34

 
Parties with whom we have contracts may fail to perform their obligations, which could harm our results of operations.  (Applies to each registrant.)

We are exposed to the risk that counterparties that owe us money or power could breach their obligations. Should the counterparties to these arrangements fail to perform, we may be forced to enter into alternative hedging arrangements or honor underlying commitments at then-current market prices that may exceed our contractual prices, which would cause our financial results to be diminished and we might incur losses. Although our estimates take into account the expected probability of default by a counterparty, our actual exposure to a default by a counterparty may be greater than the estimates predict.

We rely on electric transmission facilities that we do not own or control. If these facilities do not provide us with adequate transmission capacity, we may not be able to deliver our wholesale electric power to the purchasers of our power.  (Applies to each registrant.)

We depend on transmission facilities owned and operated by other unaffiliated power companies to deliver the power we sell at wholesale. This dependence exposes us to a variety of risks. If transmission is disrupted, or transmission capacity is inadequate, we may not be able to sell and deliver our wholesale power. If a region’s power transmission infrastructure is inadequate, our recovery of wholesale costs and profits may be limited. If restrictive transmission price regulation is imposed, the transmission companies may not have sufficient incentive to invest in expansion of transmission infrastructure.

The FERC has issued electric transmission initiatives that require electric transmission services to be offered unbundled from commodity sales. Although these initiatives are designed to encourage wholesale market transactions for electricity and gas, access to transmission systems may in fact not be available if transmission capacity is insufficient because of physical constraints or because it is contractually unavailable. We also cannot predict whether transmission facilities will be expanded in specific markets to accommodate competitive access to those markets.

We do not fully hedge against price changes in commodities.  (Applies to each registrant.)

We routinely enter into contracts to purchase and sell electricity, natural gas, coal and emission allowances as part of our power marketing and energy and emission allowances trading operations. In connection with these trading activities, we routinely enter into financial contracts, including futures and options, over-the counter options, financially-settled swaps and other derivative contracts. These activities expose us to risks from price movements. If the values of the financial contracts change in a manner we do not anticipate, it could harm our financial position or reduce the financial contribution of our trading operations.

We manage our exposure by establishing risk limits and entering into contracts to offset some of our positions (i.e., to hedge our exposure to demand, market effects of weather and other changes in commodity prices). However, we do not always hedge the entire exposure of our operations from commodity price volatility. To the extent we do not hedge against commodity price volatility, our results of operations and financial position may be improved or diminished based upon our success in the market.

Financial derivatives reforms could increase the liquidity needs and costs of our commercial trading operations.  (Applies to each registrant.)

In July 2010, federal legislation was enacted to reform financial markets that significantly alter how over-the-counter (OTC) derivatives are regulated.  The law increased regulatory oversight of OTC energy derivatives, including (1) requiring standardized OTC derivatives to be traded on registered exchanges regulated by the Commodity Futures Trading Commission (CFTC), (2) imposing new and potentially higher capital and margin requirements and (3) authorizing the establishment of overall volume and position limits.  The law gives the CFTC authority to exempt end users of energy commodities which could reduce, but not eliminate, the applicability of these measures to us and other end users.  These requirements could cause our OTC transactions to be more costly and have an adverse effect on our liquidity due to additional capital requirements.  In addition, as these reforms aim to standardize OTC products it could limit the effectiveness of our hedging programs because we would have less ability to tailor OTC derivatives to match the precise risk we are seeking to manage.

 
35

 

ITEM 1B.                            UNRESOLVED STAFF COMMENTS

None.

ITEM 2.                      PROPERTIES

GENERATION FACILITIES

UTILITY OPERATIONS

At December 31, 2010, the AEP System owned (or leased where indicated) generating plants, all situated in the states in which our electric utilities serve retail customers, with net power capabilities (winter rating) shown in the following table:

Company
 
Stations
 
Coal
MW
   
Natural Gas
MW
   
Nuclear
MW
   
Lignite
MW
   
Hydro
MW
   
Oil
MW
   
Total
MW
 
AEGCo
    2  
(a)
    1,310       1,186                               2,496  
APCo
    17  
(b)(c)
    5,093       516                   677             6,286  
CSPCo
    7  
(d)
    2,388       1,347                           3       3,738  
I&M
    9  
(a)
    2,305               2,191 (e)           15               4,511  
KPCo
    1         1,078                                             1,078  
OPCo
    8  
(b)(c)
    8,482                             26               8,508  
PSO
    8  
(f)
    1,026       3,554                             25       4,605  
SWEPCo
    11  
(g)
    1,848       2,668               850                       5,366  
TNC
    6  
(f)(h)
    377       262                               8       647  
System Totals
    69         23,907       9,533       2,191       850       718       36       37,235  
Percentage of System Totals
              64.2       25.6       5.9       2.3       1.9       0.1          

(a)
Unit 1 of the Rockport Plant is owned one-half by AEGCo and one-half by I&M. Unit 2 of the Rockport Plant is leased one-half by AEGCo and one-half by I&M. The leases terminate in 2022 unless extended.

(b)
Unit 3 of the John E. Amos Plant is owned one-third by APCo and two-thirds by OPCo.

(c)
APCo owns Units 1 and 3 and OPCo owns Units 2, 4 and 5 of Philip Sporn Plant, respectively.

(d)
CSPCo owns generating units in common with Duke Ohio and DP&L. Its percentage ownership interest is reflected in this table.

(e)
Cook Unit 1 currently is not operating at the full capacity set forth here.  For further information, see Cook Nuclear Plant below.

(f)
PSO and TNC, along with Oklahoma Municipal Power Authority and The Public Utilities Board of the City of Brownsville, Texas, are joint owners of the Oklaunion power station. PSO and TNC’s ownership interest is reflected in this portion of the table.  TNC has transferred its interest to a non-utility affiliate through 2027.

(g)
SWEPCo owns generating units in common with Cleco Corporation and other unaffiliated parties. Only its ownership interest is reflected in this table.

(h)
TNC’s gas-fired and oil-fired generation has been deactivated.
 
        
 
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    Cook Nuclear Plant

The following table provides operating information relating to the Cook Plant.

 
Cook Plant
 
Unit 1
 
Unit 2
Year Placed in Operation
1975
 
1978
Year of Expiration of NRC License
2034
 
2037
Nominal Net Electrical Rating in Kilowatts
1,084,000
 
1,107,000
Net Capacity Factors
     
2010
82.2%(a)
 
80.8%
2009
2.8%(a)
 
83.1%
2008
59.2%(a)
 
96.6%
2007
                 97.4%
 
83.8%
       
(a)  
 Unit 1 Net Capacity Factor for 2008 through 2010 was impacted by a 2008 forced outage caused by a low pressure turbine blade failure event. The reduced capacity repaired turbine is projected to be replaced with a full capacity turbine in late 2011.

New Generation

SWEPCo is currently constructing the Turk Plant, a new base load 600 MW pulverized coal ultra-supercritical generating unit in Arkansas, which is expected to be in-service in 2012.  SWEPCo owns 73% of the Turk Plant and will operate the completed facility.  AEGCo is currently constructing the Dresden Plant, a new 580 MW combined-cycle natural gas generating unit in Ohio, which is expected to be in-service in 2012.  We resumed work on the Dresden Plant  in the first quarter of 2011.

GENERATION AND MARKETING

In addition to the generating facilities described above, AEP has ownership interests in other electrical generating facilities. Information concerning these facilities at December 31, 2010 is listed below.

 
Facility
Fuel
Location
Capacity
Total MW
       
Desert Sky Wind Farm
Wind
Texas
161
       
Trent Wind Farm
Wind
Texas
150
Total
 
311

 
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TRANSMISSION AND DISTRIBUTION FACILITIES

The following table sets forth the total overhead circuit miles of transmission and distribution lines of the AEP System and its operating companies and that portion of the total representing 765kV lines:

 
Total Overhead Circuit Miles of
Transmission and Distribution Lines
 
Circuit Miles of
765kV Lines
AEP System  (a)
224,703
(b)
 
2,116
 
APCo
52,233
   
734
 
CSPCo (a)
15,697
   
 
I&M
22,005
   
615
 
KgPCo
1,358
   
 
KPCo
11,087
   
258
 
OPCo
30,754
   
509
 
PSO
21,126
   
 
SWEPCo
21,759
   
 
TCC
29,686
   
 
TNC
17,289
   
 
WPCo
1,708
   
 

(a)
Includes 766 miles of 345,000-volt jointly owned lines.
(b)
Includes 73 miles of overhead transmission lines not identified with an operating company.

TRANSMISSION INITIATIVES

We continue our pursuit of transmission opportunities throughout the U.S.  In 2009, we announced that our recently formed transmission company, AEP Transmission Company, LLC, will pursue new transmission investments within our retail service territories.  Through joint ventures with various other companies, we have existing and/or planned transmission projects and opportunities outside of our retail service territories.  We plan to invest approximately $273 million in these projects in 2011.  See Management’s Financial Discussion and Analysis included in the 2010 Annual Reports under the heading Transmission Initiatives, for more information.

TITLES

The AEP System’s generating facilities are generally located on lands owned in fee simple. The greater portion of the transmission and distribution lines of the System has been constructed over lands of private owners pursuant to easements or along public highways and streets pursuant to appropriate statutory authority. The rights of AEP’s public utility subsidiaries in the realty on which their facilities are located are considered adequate for use in the conduct of their business. Minor defects and irregularities customarily found in title to properties of like size and character may exist, but such defects and irregularities do not materially impair the use of the properties affected thereby. AEP’s public utility subsidiaries generally have the right of eminent domain which permits them, if necessary, to acquire, perfect or secure titles to or easements on privately held lands used or to be used in their utility operations.  Recent legislation in Ohio and Virginia has restricted the right of eminent domain previously granted for power generation purposes.

SYSTEM TRANSMISSION LINES AND FACILITY SITING

Laws in the states of Arkansas, Indiana, Kentucky, Louisiana, Michigan, Ohio, Texas, Tennessee, Virginia, and West Virginia require prior approval of sites of generating facilities and/or routes of high-voltage transmission lines. We have experienced delays and additional costs in constructing facilities as a result of proceedings conducted pursuant to such statutes, and in proceedings in which our operating companies have sought to acquire rights-of-way through condemnation.  These proceedings may result in additional delays and costs in future years.
 
 
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CONSTRUCTION PROGRAM
 
With input from its state utility commissions, the AEP System continuously assesses the adequacy of its generation, transmission, distribution and other facilities to plan and provide for the reliable supply of electric power and energy to its customers. In this assessment process, assumptions are continually being reviewed as new information becomes available, and assessments and plans are modified, as appropriate.  AEP forecasts approximately $2.5 billion of construction expenditures for 2011, excluding the debt and equity components of AFUDC and assets acquired under leases.  Estimated construction expenditures are subject to periodic review and modification and may vary based on the ongoing effects of regulatory constraints, environmental regulations, business opportunities, market volatility, economic trends, and the ability to access capital.

CONSTRUCTION EXPENDITURES

The following table shows construction expenditures (including environmental expenditures) during 2008, 2009 and 2010 and a current estimate of 2011 construction expenditures.  Actual amounts for 2008, 2009 and 2010 exclude the equity component of AFUDC and assets acquired under leases.  Budgeted amounts for 2011 exclude the debt and equity components of AFUDC and assets acquired under leases. 

   
2008
Actual
   
2009
Actual
   
2010
Actual
   
2011
Estimate (b)
 
   
(in thousands)
 
Total AEP System (a)
  $ 3,800,000     $ 2,792,000     $ 2,345,000     $ 2,506,000  
APCo
    696,767       543,587       534,334       450,100  
CSPCo
    433,014       302,699       235,901       186,900  
I&M
    352,335       332,775       333,238       304,900  
OPCo
    706,315       417,601       276,736       264,100  
PSO
    285,826       175,122       194,896       169,200  
SWEPCo
    692,162       596,581       420,485       441,500  

(a)  
Includes expenditures of other subsidiaries not shown. The figures reflect construction expenditures, not investments in subsidiary companies.  Excludes discontinued operations.
      (b)
Excludes Sabine Mining.

The System construction program is reviewed continuously and is revised from time to time in response to changes in estimates of customer demand, business and economic conditions, the cost and availability of capital, environmental requirements and other factors. Changes in construction schedules and costs, and in estimates and projections of needs for additional facilities, as well as variations from currently anticipated levels of net earnings, Federal income and other taxes, and other factors affecting cash requirements, may increase or decrease the estimated capital requirements for the System’s construction program.

POTENTIAL UNINSURED LOSSES

Some potential losses or liabilities may not be insurable or the amount of insurance carried may not be sufficient to meet potential losses and liabilities, including liabilities relating to damage to our generating plants and costs of replacement power. Unless allowed to be recovered through rates, future losses or liabilities which are not completely insured could have a material adverse effect on results of operations and the financial condition of AEP and other AEP System companies. For risks related to owning a nuclear generating unit, see Note 6 to the consolidated financial statements entitled Commitments, Guarantees and Contingencies under the heading Nuclear Contingencies for information with respect to nuclear incident liability insurance.
 
 
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ITEM 3.                      LEGAL PROCEEDINGS

For a discussion of material legal proceedings, see Note 6 to the consolidated financial statements, entitled Commitments, Guarantees and Contingencies, incorporated by reference in Item 8.

ITEM 4.                  REMOVED AND RESERVED

EXECUTIVE OFFICERS OF THE REGISTRANTS

AEP.  The following persons are, or may be deemed, executive officers of AEP.  Their ages are given as of February 1, 2011.

Name
 
Age
 
Office (a)
Michael G. Morris
 
64
 
Chairman of the Board and Chief Executive Officer
Nicholas K. Akins
 
50
 
President
Carl L. English
 
64
 
Vice Chairman
D. Michael Miller
 
63
 
Senior Vice President, General Counsel and Secretary
Robert P. Powers
 
56
 
President-AEP Utilities
Brian X. Tierney
 
43
 
Executive Vice President and Chief Financial Officer
Susan Tomasky
 
57
 
President – AEP Transmission

(a)  
All of the executive officers have been employed by AEPSC or System companies in various capacities (AEP, as such, has no employees) for the past five years.  Mr. Akins became an executive officer of AEP in June 2006, Mr. English in August, 2004, Mr. Miller in July 2010, Mr. Powers in October 2001, Mr. Tierney in January 2008 and Ms. Tomasky in January 2000.  All of the above officers are appointed annually for a one-year term by the board of directors of AEP.

APCo, OPCo, PSO and SWEPCo.  The names of the executive officers of APCo, OPCo, PSO and SWEPCo, the positions they hold with these companies, their ages as of February 1, 2011, and a brief account of their business experience during the past five years appear below. The directors and executive officers of APCo, OPCo, PSO and SWEPCo are elected annually to serve a one-year term.

Name
 
Age
 
Position
 
Period
Michael G. Morris (a)(b)
 
64
 
Chairman of the Board, Chief Executive Officer and Director of AEP
 
2004-Present
       
Chairman of the Board, Chief Executive Officer and Director of APCo, OPCo, PSO and SWEPCo
 
2004-Present
Nicholas K. Akins (a)
 
50
 
President of AEP
Executive Vice President of AEP, Vice President
 
2011-Present
 
       
and Director of APCo, OPCo, PSO and SWEPCo
 
2006-Present
       
President and Chief Operating Officer of SWEPCo
 
2004-2006
Carl L. English (a)
 
64
 
Vice Chairman
 
2010 - Present
       
Chief Operating Officer
 
2008-2010
       
President-AEP Utilities of AEP
 
2004-2007
       
Director and Vice President of APCo, OPCo, PSO and SWEPCo
 
2004-Present
D. Michael Miller (c)
 
63
 
Senior Vice President, General Counsel and Secretary of AEP
Deputy General Counsel of AEPSC
Director of APCo, OPCo, PSO and SWEPCo
 
2010-Present
2002-2010
2010-Present
Robert P. Powers (a)
 
56
 
President-AEP Utilities of AEP
 
2008-Present
       
Executive Vice President of AEP
 
2004-2007
       
Director and Vice President of APCo and OPCo
 
2001-Present
       
Director and Vice President of PSO and SWEPCo
 
2008-Present
Brian X. Tierney (a)
 
43
 
Executive Vice President
 
2008-Present
       
Chief Financial Officer
 
2009-Present
       
Director and Vice President of APCo and OPCo
 
2008-Present
 
 
40

 
       
Director and Vice President of PSO and SWEPCo
 
2009-Present
       
Senior Vice President—Commercial Operations of AEPSC
 
2005-2007
Susan Tomasky (a)
 
57
 
President-AEP Transmission
 
2008-Present
       
Executive Vice President of AEP
 
2004-Present
       
Chief Financial Officer of AEP
 
2001-2006
       
Vice President and Director of APCo, OPCo, PSO and SWEPCo
 
2000-Present

(a)
Messrs. Morris, Akins, English, Powers and Tierney and Ms. Tomasky are directors of CSPCo and I&M.
 
(b)
Mr. Morris is a director of Alcoa, Inc. and The Hartford Financial Services Group, Inc.
 
(c)
Mr. Miller is a director of CSPCo.
 

The persons listed below are the Presidents, and therefore are also executive officers, of APCo, OPCo, PSO and SWEPCo, respectively.
 
APCo:
 
Name
 
Age
 
Position
 
Period
Charles R. Patton  
51
  President and Chief Operating Officer of APCo  
2010-Present
        Executive Vice President of AEP  
2009-2010
        Senior Vice President-Regulatory and Public Policy of AEP  
2008-2009
        President and Chief Operating Officer of TCC and TNC  
2004-2008
        Director and Vice President of PSO and SWEPCo   2009-2010
 
OPCo:
Name
 
Age
 
Position
 
Period
Joseph Hamrock
 
47
 
President and Chief Operating Officer of CSPCo and OPCo
 
2008-Present
       
Senior Vice President and Chief Information Officer of AEPSC
 
2003-2007

PSO:
Name
 
Age
 
Position
 
Period
Stuart Solomon
 
49
   President and Chief Operating Officer of PSO    2004-Present

SWEPCo:
Name
 
Age
 
Position
 
Period
 
Venita McCellon-Allen     50    President and Chief Operating Officer of SWEPCo    2010-Present  
         Executive Vice President of AEP    2008-2010  
         Director and Vice President of APCo and OPCo    2009-2010  
         Director and Vice President of PSO and SWEPCo    2008-2009  
         President and Chief Operating Officer of SWEPCo    2006-2008  
         Senior Vice President-Shared Services of AEPSC    2004-2006  
         Director of APCo, OPCo and SWEPCo    2004-2006  
 
41

 

PART II

ITEM 5.               MARKET FOR REGISTRANTS’ COMMON EQUITY,
RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES

AEP. In addition to the discussion below, the remaining information required by this item is incorporated herein by reference to the material under AEP Common Stock and Dividend Information and Note 14 to the consolidated financial statements entitled Financing Activities under the heading Dividend Restrictions in the 2010 Annual Report.

APCo, CSPCo, I&M, OPCo, PSO and SWEPCo. The common stock of these companies is held solely by AEP. The information regarding the amounts of cash dividends on common stock paid by these companies to AEP during 2008, 2009 and 2010 are incorporated by reference to the material under Statements of Changes in Common Shareholder’s Equity and Comprehensive Income (Loss) and Note 14 to the consolidated financial statements entitled Financing Activities under the heading Dividend Restrictions in the 2010 Annual Reports.

During the quarter ended December 31, 2010, neither AEP (nor its publicly-traded subsidiaries) purchased equity securities that are registered by AEP (or its publicly-traded subsidiaries) pursuant to Section 12 of the Exchange Act.
 
ITEM 6.                      SELECTED FINANCIAL DATA

CSPCo and I&M.  Omitted pursuant to Instruction I(2)(a).

AEP, APCo, OPCo, PSO and SWEPCo.  The information required by this item is incorporated herein by reference to the material under Selected Consolidated Financial Data in the 2010 Annual Reports.

ITEM 7.                      MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION
AND RESULTS OF OPERATION

CSPCo and I&M.  Omitted pursuant to Instruction I(2)(a). Management’s narrative analysis of the results of operations and other information required by Instruction I(2)(a) is incorporated herein by reference to the material under Management’s Financial Discussion and Analysis in the 2010 Annual Reports.

AEP, APCo, OPCo, PSO and SWEPCo.  The information required by this item is incorporated herein by reference to the material under Management’s Financial Discussion and Analysis in the 2010 Annual Reports.

ITEM 7A.                          QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK

AEP, APCo, CSPCo, I&M, OPCo, PSO and SWEPCo. The information required by this item is incorporated herein by reference to the material under Management’s Financial Discussion and Analysis—Quantitative and Qualitative Disclosures about Market and Credit Risk  in the 2010 Annual Reports.

ITEM 8.                      FINANCIAL STATEMENTS
AND SUPPLEMENTARY DATA

AEP, APCo, CSPCo, I&M, OPCo, PSO and SWEPCo. The information required by this item is incorporated herein by reference to the financial statements and financial statement schedules described under Item 15 herein.

 
42

 
ITEM 9.                      CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

AEP, APCo, CSPCo, I&M, OPCo, PSO and SWEPCo.       None.

ITEM 9A.                      CONTROLS AND PROCEDURES

During 2010, management, including the principal executive officer and principal financial officer of each of American Electric Power Company, Inc., Appalachian Power Company, Columbus Southern Power Company, Indiana Michigan Power Company, Ohio Power Company, Public Service Company of Oklahoma and Southwestern Electric Power Company (each a “Registrant” and collectively the “Registrants”) evaluated each respective Registrant’s disclosure controls and procedures.  Disclosure controls and procedures are defined as controls and other procedures of the Registrants that are designed to ensure that information required to be disclosed by the Registrants in the reports that they file or submit under the Exchange Act are recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms.  Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Registrants in the reports that they file or submit under the Exchange Act is accumulated and communicated to each Registrant’s management, including the principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

As of December 31, 2010, these officers concluded that the disclosure controls and procedures in place are effective and provide reasonable assurance that the disclosure controls and procedures accomplished their objectives.  The Registrants continually strive to improve their disclosure controls and procedures to enhance the quality of their financial reporting and to maintain dynamic systems that change as events warrant.

There have been no changes in the Registrants’ internal control over financial reporting (as such term is defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act) during the fourth quarter of 2010 that materially affected, or are reasonably likely to materially affect, the Registrants’ internal control over financial reporting.

Management is required to assess and report on the effectiveness of its internal control over financial reporting as of December 31, 2010. As a result of that assessment, management determined that there were no material weaknesses as of December 31, 2010 and, therefore, concluded that each Registrant’s internal control over financial reporting was effective.

Additional information required by this item of the Registrants is incorporated by reference to Management’s Report on Internal Control over Financial Reporting, included in the 2010 Annual Report of each Registrant.

ITEM 9B.                      OTHER INFORMATION

None.
 
 
43

 
PART III

ITEM 10.                      DIRECTORS, EXECUTIVE OFFICERS
AND CORPORATE GOVERNANCE

CSPCo and I&M. Omitted pursuant to Instruction I(2)(c).

AEP:

Directors, Director Nomination Process and Audit Committee.   Certain of the information called for in this Item 10, including the information relating to directors, is incorporated herein by reference to AEP's definitive proxy information statement (which will be filed with the SEC pursuant to Regulation 14A under the Exchange Act) relating to 2011 Annual Meeting of Shareholders including under the captions “Election of Directors,” “Section 16(a) Beneficial Ownership Reporting Compliance,” “AEP's Board of Directors and Committees,” “Directors,” "Involvement by Mr. Hoaglin in Certain Legal Proceedings" and “Shareholder Nominees for Directors.”

Executive Officers.  Reference also is made to the information under the caption Executive Officers of the Registrants in Part I, Item 4 of this report.

Code of Ethics.  AEP’s Principles of Business Conduct is the code of ethics that applies to AEP’s Chief Executive Officer, Chief Financial Officer and principal accounting officer. The Principles of Business Conduct is available on AEP’s website at www.aep.com. The Principles of Business Conduct will be made available, without charge, in print to any shareholder who requests such document from Investor Relations, American Electric Power Company, Inc., 1 Riverside Plaza, Columbus, Ohio  43215.
 
If any substantive amendments to the Principles of Business Conduct are made or any waivers are granted, including any implicit waiver, from a provision of the Principles of Business Conduct, to its Chief Executive Officer, Chief Financial Officer or principal accounting officer, AEP will disclose the nature of such amendment or waiver on AEP’s website, www.aep.com, or in a report on Form 8-K.

Section 16(a) Beneficial Ownership Reporting Compliance.  The information required by this item is incorporated herein by reference to information contained in the definitive proxy statement of AEP for the 2011 annual meeting of shareholders.

APCo, OPCo, PSO and SWEPCo:

Directors and Executive Officers.   Certain of the information called for in this Item 10, including the information relating to directors, is incorporated herein by reference to the definitive information statement for each company (which will be filed with the SEC under the Exchange Act) relating to 2011 Annual Meeting of Shareholders under the captions “Election of Directors” and “Director Nomination Process.”

Audit Committee.  Each of APCo, OPCo, PSO and SWEPCo is a controlled subsidiary of AEP and does not have a separate audit committee.

Code of Ethics.  AEP’s Principles of Business Conduct is the code of ethics that applies to the Chief Executive Officer, Chief Financial Officer and principal accounting officer of  APCo, OPCo, PSO and SWEPCo The discussion of AEP’s Principles of Business Conduct above is incorporated herein by reference.  If any substantive amendments to the Principles of Business Conduct are made or any waivers are granted, including any implicit waiver, from a provision of the Principles of Business Conduct, to the Chief Executive Officer, Chief Financial Officer or principal accounting officer of APCo, OPCo, PSO and SWEPCo, as applicable, that company will disclose the nature of such amendment or waiver on AEP’s website, www.aep.com, or in a report on Form 8-K.
 
 
44

 
ITEM 11.                      EXECUTIVE COMPENSATION

CSPCo and I&M.  Omitted pursuant to Instruction I(2)(c).

AEP. The information called for by this Item 11 is incorporated herein by reference to AEP's definitive proxy statement (which will be filed with the SEC pursuant to Regulation 14A under the Exchange Act) relating to the 2011 Annual Meeting including under the captions “Compensation Discussion and Analysis,” “Executive Compensation” and “Director Compensation”. The information set forth under the subcaption “Human Resources Committee Report” should not be deemed filed nor should it be incorporated by reference into any other filing under the Securities Act of 1933, as amended, or the Exchange Act except to the extent we specifically incorporate such report by reference therein.

APCo, OPCo, PSO and SWEPCO.  Certain of the information called for in this Item 11 is incorporated herein by reference to the definitive information statement for each company (which will be filed with the SEC under the Exchange Act) relating to 2011 Annual Meeting of Shareholders including under the captions “Compensation Discussion and Analysis,” “Executive Compensation” and “Director Compensation”. The information set forth under the subcaption “Human Resources Committee Report” should not be deemed filed nor should it be incorporated by reference into any other filing under the Securities Act of 1933, as amended, or the Exchange Act except to the extent we specifically incorporate such report by reference therein.

ITEM 12.                      SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS

CSPCo and I&M. Omitted pursuant to Instruction I(2)(c).

AEP.  The information relating to Security Ownership of Certain Beneficial Owners is incorporated herein by reference to  AEP's definitive proxy statement (which will be filed with the SEC pursuant to Regulation 14A under the Exchange Act) relating to 2011 Annual Meeting of Shareholders under the caption “Share Ownership of Certain Beneficial Owners and Management" and "Share Ownership of Directors and Executive Officers".

APCo, OPCo, PSO and SWEPCO. The information relating to Security Ownership of Certain Beneficial Owners is incorporated herein by reference to the definitive information statement for each company (which will be filed with the SEC under the Exchange Act) relating to the 2011 Annual Meeting under the caption “Share Ownership of Certain Beneficial Owners and Management" and "Share Ownership of Directors and Executive Officers".
 
 
45

 
EQUITY COMPENSATION PLAN INFORMATION
 
The following table summarizes the ability of AEP to issue common stock pursuant to equity compensation plans as of December 31, 2010:

 
 
 
 
 
Plan Category
 
 
Number of securities to be issued upon exercise of outstanding options warrants and rights
(a)
 
 
Weighted average exercise price of outstanding options, warrants and rights
(b)
 
 
Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))(2)
(c)
Equity compensation plans approved by security holders(1)
 
 
1,557,813
 
$32.88
 
18,836,851
Equity compensation plans not approved by security holders
 
0
 
0
 
0
Total
 
1,557,813
 
$32.88
 
18,836,851

 
(1) Consists of shares to be issued upon exercise of outstanding options granted under the Amended and  Restated American Electric Power System Long-Term Incentive Plan.
 
(2) AEP deducts equity compensation granted in stock units that are paid in cash, rather than AEP common shares, such as AEP's performance units and deferred stock units, from the number of shares available for future grants under the Amended and Restated American Electric Power System Long-Term Incentive Plan.  The number of shares available under this plan would be 1,185,633 higher if equity compensation that is paid in cash were not deducted from this column.
 
ITEM 13.                      CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

CSPCo and I&M:  Omitted pursuant to Instruction I(2)(c).

AEP:  The information called for by this Item 13 is incorporated herein by reference to AEP's definitive proxy statement (which will be filed with the SEC pursuant to Regulation 14A under the Exchange Act) relating to the 2011 Annual Meeting under the captions “Transactions with Related Persons” and “Director Independence.”

APCo, OPCo, PSO and SWEPCo:    Certain Relationships and Related Transactions.  There were no related person transactions involving APCo, OPCo, PSO or SWEPCo.  All of those companies' directors are not independent by virtue of being directors, officers or employees of AEP or  APCo, OPCo, PSO or SWEPCo.

ITEM 14.                      PRINCIPAL ACCOUNTING FEES AND SERVICES

AEP.  The information called for by this Item 14 is incorporated herein by reference to AEP's definitive proxy statement (which will be filed with the SEC pursuant to Regulation 14A under the Exchange Act) relating to the 2011 Annual Meeting under the captions “Audit and Non-Audit Fees,” "Audit Committee Report" and “Policy on Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of the Independent Auditor.”

APCo, OPCo, PSO and SWEPCo.  The information called for by this Item 14 is incorporated herein by reference to the definitive information statement for each company (which will be filed with the SEC under the Exchange Act) relating to the 2011 Annual Meeting under the captions “Independent Registered Public Accounting Firm,” and “AEP's Policy on Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of the Independent Auditor.”
 
 
46

 
CSPCo and I&M.

Each of the above is a wholly-owned subsidiary of AEP and does not have a separate audit committee. A description of the AEP Audit Committee pre-approval policies, which apply to these companies, is contained in the definitive proxy statement of AEP for the 2011 annual meeting of shareholders. The following table presents directly billed fees for professional services rendered by Deloitte & Touche LLP for the audit of these companies’ annual financial statements for the years ended December 31, 2009 and 2010, and fees directly billed for other services rendered by Deloitte & Touche LLP during those periods.  Deloitte & Touche LLP also provides additional professional and other services to the AEP System, the cost of which may ultimately be allocated to these companies though not billed directly to them. For a description of these fees and services, see the description of principal accounting fees and services for AEP, above.

 
CSPCo
I&M
 
2010
2009
2010
2009
Audit Fees
$871,146
$1,038,130
$1,393,624
$1,612,867
Audit-Related Fees
6,500
25,994
6,500
37,851
Tax Fees
9,000
25,536
12,000
39,304
TOTAL
$886,646
$1,089,660
$1,412,124
$1,690,022

 
 
47

 
 PART IV

ITEM 15.                      EXHIBITS, FINANCIAL STATEMENT SCHEDULES

 
The following documents are filed as a part of this report:

 
Page
1.      Financial Statements:
 
The following financial statements have been incorporated herein by reference pursuant to Item 8.
 
AEP and Subsidiary Companies:
 
Reports of Independent Registered Public Accounting Firm; Management’s Report on Internal Control over Financial Reporting; Consolidated Statements of Income for the years ended December 31, 2010, 2009 and 2008; Consolidated Balance Sheets as of December 31, 2010 and 2009; Consolidated Statements of Cash Flows for the years ended December 31, 2010, 2009 and 2008; Consolidated Statements of Changes in Equity and Comprehensive Income (Loss) for the years ended December 31, 2010, 2009 and 2008; Notes to Consolidated Financial Statements.
 
APCo, CSPCo and I&M:
 
Consolidated Statements of Income for the years ended December 31, 2010, 2009 and 2008; Consolidated Statements of Changes in Common Shareholder’s Equity and Comprehensive Income (Loss) for the years ended December 31, 2010, 2009 and 2008; Consolidated Balance Sheets as of December 31, 2010 and 2009; Consolidated Statements of Cash Flows for the years ended December 31, 2010, 2009 and 2008; Notes to Financial Statements of Registrant Subsidiaries; Report of Independent Registered Public Accounting Firm.
 
OPCo and SWEPCo:
 
Consolidated Statements of Income for the years ended December 31, 2010, 2009 and 2008; Consolidated Statements of Changes in Equity and Comprehensive Income (Loss) for the years ended December 31, 2010, 2009 and 2008; Consolidated Balance Sheets as of December 31, 2010 and 2009; Consolidated Statements of Cash Flows for the years ended December 31, 2010, 2009 and 2008; Notes to Financial Statements of Registrant Subsidiaries; Report of Independent Registered Public Accounting Firm.
 
PSO:
 
Statements of Operations for the years ended December 31, 2010, 2009 and 2008; Statements of Changes in Common Shareholder’s Equity and Comprehensive Income (Loss) for the years ended December 31, 2010, 2009 and 2008; Balance Sheets as of December 31, 2010 and 2009; Statements of Cash Flows for the years ended December 31, 2010, 2009 and 2008; Notes to Financial Statements of Registrant Subsidiaries; Report of Independent Registered Public Accounting Firm.
 
   2.   Financial Statement Schedules:
 
         Financial Statement Schedules are listed in the Index to Financial Statement Schedules (Certain   schedules have been omitted because the required information is contained in the notes to financial statements or because such schedules are not required or are not applicable). Reports of Independent Registered Public Accounting Firm
S-1
3.      Exhibits:
 
Exhibits for AEP, APCo, CSPCo, I&M, OPCo, PSO and SWEPCo are listed in the Exhibit Index beginning on page E-1 and are incorporated herein by reference
E-1

 
48

 
SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 
American Electric Power Company, Inc.
     
     
 
By:
/s/   Brian X. Tierney
   
(Brian X. Tierney, Executive Vice President
   
and Chief Financial Officer)

Date: February 25, 2011

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Signature
 
Title
 
Date
         
(i)           Principal Executive Officer:
       
         
/s/   Michael G. Morris
 
Chairman of the Board,
 
February 25, 2011
(Michael G. Morris)
 
Chief Executive Officer and Director
   
         
         
(ii)           Principal Financial Officer:
       
         
/s/   Brian X. Tierney
 
Executive Vice President and
 
February 25, 2011
(Brian X. Tierney)
 
Chief Financial Officer
   
         
(iii)           Principal Accounting Officer:
       
         
/s/   Joseph M. Buonaiuto
 
Senior Vice President, Controller and
 
February 25, 2011
(Joseph M. Buonaiuto)
 
Chief Accounting Officer
   
         
(iv)           A Majority of the Directors:
       
         
*E. R. Brooks
       
*Donald M. Carlton
       
* James F. Cordes
       
*Ralph D. Crosby, Jr.
       
*Linda A. Goodspeed
       
*Thomas E. Hoaglin
       
*Lester A. Hudson, Jr.
       
*Lionel L. Nowell, III
       
*Richard L. Sandor
       
*Kathryn D. Sullivan
       
*Sara Martinez Tucker
       
*John F. Turner
       
         
           
*By:
/s/   Brian X. Tierney
     
February 25, 2011
 
(Brian X. Tierney, Attorney-in-Fact)
       

 
49

 

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. The signature of the undersigned company shall be deemed to relate only to matters having reference to such company and any subsidiaries thereof.

 
Appalachian Power Company
 
Columbus Southern Power Company