美國電力 (AEP) 2008 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the American Electric Power first quarter 2008 earnings conference. At this time all lines are in a listen-only mode. Later there'll will an opportunity for questions, and instructions will be given at that time. (OPERATOR INSTRUCTIONS) And as reminder this conference is being recorded.

I'll turn the conference over to Julie Sherwood, director of investor relations. Please go ahead.

Thanks, Kathy. Good morning and thank you you for joining us today to discuss AEP's 2008 first quarter earnings. If you've not seen the press release issued earlier today, it's available on our webpage at AEP.com. In addition to the financial schedules included in the press release, the webcast of this call will include visuals of charts and graphics referred to by AEP management during the call. An investor information packet is also available at AEP.com, that includes the consolidated balance sheet and statement of cash flows, as well at full income statement for your utility operations, MEMCO operations, generation, marketing, and parent and all other.

The earnings release and other matters that may be discussed on the call today contain forward-looking statements and estimates that are subject to various risks and uncertainties. Please refer to the SEC filings, including the most-recent annual report on Form 10-K and quarterly reports on Form 10-Q, for a discussion of factors that may causes result to differ from management projections forecasts, estimates, and expectations. Also on the call, we will discuss the measures about Company performance, that is on-going earnings, versus reported earnings, that differ from those recognized by Generally Accepted Accounting Principles, or GAAP. You can find the ciliation of these non-GAAP measures on our investor relations versus website at AEP.com.

I will now turn the proceedings over to Mike Morris, Chairman, President and CEO of the Company, to lead an open presentation and then we will have time for your questions.

Thanks a lot, unfortunately, Julie. Unfortunately Julie Sloat isn't here with us today. I am sure she is on the phone with us. She's home with a high fever and wishes that she could be here. I know that you've seen the press release and the data. It's easy for us to say that we've had an excellent first quarter 2008. We feel like we're off to a very, very solid start and that makes us feel comfortable about reaffirming our guidance for 2008 of between $3.10 to $3.30 a share.

We have had, as many as you know from meetings we've held all along, a productive regulatory first quarter, receiving $481 million of the $518 million worth of rate adjustments that we had forecasted for the year. Ohio, Texas, Virginia, West Virginia, Oklahoma are all reflective of new rates put in effect as of the first quarter 2008. That leaves Kentucky and Indiana, which are both pending, so we feel very comfortable about where we stand in the rate arena. As -- I'll skip the Ohio developments because I want to spend more time talking about it at the end of the slide that they've provided me to talk from. The fact of the matter is, in the new generation world the Turk plant continues to move forward. We have had a series of discussions in the open forum with the Texas Public Utility Commission. We filed additional papers with them and they will have some additional hearings on the Turk plan and we would expect an order sometime in the month of May from the commission itself. Again, we feel relatively comfortable about where we stand there.

Obviously, the air permit in Arkansas is of great issue and importance to us, and we expect to receive a favorable air permit authority sometime yet in 2008, and to move forward with the ultra super critical coal plant that will satisfy SWEPCO's energy needs. As you know, in the first quarter on the integrated gas combined cycle we have been on the roller coaster with a very, very favorable West Virginia order to go forward with the plant that's intended to be added to the footprint at Mountaineer. And then somewhat of a disappointing order out of the Virginia Corporation Commission, where they were not comfortable with the technology -- the cost of the technology or the assuredness of the price of that technology going forward. It's our intention to petition for a rehearing in Virginia to try to layout a clearer path for them in the state of Virginia and see if we can't receive a more favorable ruling from them yet this year to go forward with the integrated gas plant there.

I think all of you know from conversations we have had that the Ohio existing integrated gas combined cycle application is back in front of the commission on remand from the Ohio Supreme Court. Transmission activities continue to encourage the $14.3 return on equity granted to our partnership with Allegheny and the project we now call Path is very supportive of the plans that we have in place. We are working on alignments and filings that would be required at the state level to receive siting authority and continue to move forward on that project, as well. Other partnership in Michigan, in SVP, and other areas continue to be developed and we had talk about those as they get more concrete in the very near term.

Let me move to Ohio and try to get you our view of what the legislature has placed in front of Governor Strictland. I can appreciate that when we get to the Qs and As there will probably be considerably more interest in this. . I think you've all had an opportunity to read it and be involved in much of the give and take of the process. We're encouraged by the concept that there are two options. The market rate option, which is a blend of some percent of your current fleet going to market, and the remainder of your fleet being blended in at the then RSP rate adjusted for fuel and other issues that one might file in an R -- in an MRO filing. The ESP approach would start out with the RSP rate that we know, add adjustments for prudently-incurred fuel costs and another factor that you would file to cover any other cost that you see going forward.

Clearly, as we look at the two paths, we find positives in each of them, and it well might be because we are duty bound to file an ESP, and that we may, in fact, file both of those approaches as we go, which is to say the option that says you can not only have an ESP, but you can top it off with a market-rate option filing as well. When we look at the pluses over the minuses of the overall legislation it's clear that under the MRO you can move to market over that five-year period. You can also, of course -- on the ESP path it allows for significant flexibility, reduced regulatory lag on many capital investments that need to be made in generation, transmission and distribution, and of course, an automatic tracker of your fuel cost as you go forward.

There is a price cap mechanism on what is now in Ohio called the Advanced Energy Requirement, which is very different from renewable portfolio standards that you're seeing in other jurisdictions, and should you find an impact from adding those activities to your overall cost that bump up again the cap, you're relieved from going forward and doing those kinds of issues. We're very encouraged by the inclusion of rate deferrals and securitization, should you get to a point where the regulators believes that you have bumped up against what are reasonable increases in the cost of energy for your customers here in Ohio. As you know, that is something that American Electric Power has been very much in favor of all along as we go. We're also encouraged by the fact that the law moves forward, trying to encourage utilities to make additional capital investments in Ohio. We think that's healthy.

On the negative side there's no question that the PUCO has been given wide-ranging authority to make adjustments as you implement in the second and third and fourth years of your plan. That is a bit disquieting, but something that we feel comfortable we could work around as we make the filings in the first instance. And then, of course, there 's an excess earnings test. The excess earnings test, which was developed with a lot of thought, and a pretty wide-ranging test is there and it is of concern and should be of concern. However, we think that it's tempered a great deal by the comparables. Make no mistake that some people are misreading the excess earnings test to simply say that it is similarly situated utilities when in fact the language is clear that it is publicly-traded companies (including utilities). We think that that cadray of comparables with risk profile and capital adjustments would make comfortable a room for an equity earnings comparator in the high teens without much difficulty.

So the bottom line of how we see the legislation in Ohio, which we understand the governor's office is prepared to sign in the not-to-distant future, is that it gives us some comfort to continue to stay with our guidance that we gave to you last October for calendar year '08, '09 and 2010. However we won't really know much about the latter of those years, including 2011, until we see how the filing that we make in the near term, so that we fall inside the time line for the commission to deal with our applications in calendar year '08 for implementation into 1/1/09, that we won't be able to give you much more clarity about that. As you know, should we pass the calendar year and there is no implementation, you can simply move forward and implement another cycle on your current rate stabilization plan, so we don't fall into never-never land if we don't finish our materials by 12/31/09

So with that I'll turn it over for a little more granularity on the first to Holly and then we're surely going to be prepared to address the issues that are of concern to you. Thanks.

And in the interest of getting quickly to the Q&A, I'll cover at a high level the quarterly financial performance at page 4. We did have, yet, another terrific quarter. As Mike covered, we've had rate increases that have contributed a total of $0.12 year on year at nearly every jurisdiction, Load growth has been up in every jurisdiction, save for Texas, where we are a wires-only business. Generation performance year on year is terrific. An additional 4,300 gigawatt hours were dispatched from the fleet, of which 2,500 went into the wholesale market where we saw higher prices in both the peak and off peak in the range of $10 to $15 higher across the period. So better volumes, better prices, better revenue.

As you'll see, our operation and maintenance expense appears to be down considerably. We are continuing with disciplined cost control, but I should point out that last year, we had a number of tie-in outages, which contributed to our lower generation and higher O&M, and had the first of our two PSO ice storms. This year the O&M compensation is lower by the amount of the benefit -- the rate relief that Mike covered in the first quarter, approximately $80 million. So year on year, on a normal basis, we're up about 3%. Depreciation and amortization, despite the additions to plant, is down because of amortization that's lower of regulatory assets in Ohio, as planned, as well as depreciation reductions associated with rate cases that were pursued last year. Finally, taxes are flat year on year, MEMCO is struggling against tough river conditions, which we are seeing turn around, and we expect a very solid second half of the year. And the bottom line is, it was a terrific first quarter.

Turning to cash flow, again, right in line with expectations, strong net income. I would point out for you that we did see some pretty big swings that tended to offset one another between our changes in components of working capital and other assets and liabilities. On the working capital side we do have lower payables this year, associated in major part to those construction programs and the ice storm that occurred in the first quarter last year. For the other assets and liabilities, that's the line where we reflect all of our regulatory deferrals, as well as deferred fuel. As you know, we have active fuel clauses in all of our jurisdictions, with the exception of Ohio, and we'll have a fuel clause in Ohio under the new law beginning in January next year. So we should see a pretty solid balance on this line in an era of rising prices: Under investing activities, proceeds on sale of assets are slightly lower due to, last year, the sale of Oakley Union, the Texas Central interest in Oakley Union, as well as Centrica. This year we sold a few mothball gas plants in Texas.

And finally, other investing net is up considerably due to the procurement of nuclear fuel at our coke plant. The bottom line is our cash balance for the quarter this year ended at $155 million, in line with expectations. And finally on capitalization, our adjusted debt to cap is 57.7% at the end of the quarter, once again, in line with our target of remaining below 60%. Mike? We can turn it back to you for questions.

Thanks a lot. Kathy, I guess we're ready to go to the Q&A phase.

(OPERATOR INSTRUCTIONS) First question is from the line of Ashar Khan with SAC Capital. Go ahead.

Good morning, and congrats on a great quarter.

Thanks, Asher.

Mike, I just wanted to agree you on the -- that you might be allowed a high teen number. My only concern was coming is if I read Columbus Southern's financials, they are earning a healthy ROE, and how do we go about providing space towards that subsidiary in terms of growth going forward?

Well, it's clear that among the AEP Ohio family of companies there is a difference between the earns at Ohio Power and Columbus Southern, and that's something we'll take a long, hard look at as we go forward and we make our filing. It makes more sense in the long term to combine those two companies as we go, and we're not exactly sure how we'll go about attacking that issue, Asher, but the real benefit from Columbus Southern, of course, is the revenues that it receives from the pool being a net seller in a long position, and the impact of that is that Ohio Power, being a net buyer of the short position, if you balance those two out -- if you balance those two out, you would find a lot of room inside of AEP Ohio to be treated under the ESP and that may be well one of the things that we make in our filing.

Okay. Thank you very, very much.

You're welcome. Kathy?

Yes, we'll go next to Paul Patterson with Glenrock Associates. Please go ahead.

Good morning, guys.

Morning, Paul.

Just wanted to -- first of all, when you talk about the high teens you're talking about a ROE, is that pretty much a return on equity that you --?

Yes,.

Okay. And then secondly, I guess the excessive earnings test would apply to either the MRO or the ESP, is that correct?

Yes, there is an excessive earnings clause in all three of the sections, whether you do an ESP that's three years or less, or whether you do an CSP that is three years or more, and there's a language in the MRO.

So even if you go to market, or get to market, there's still some restriction in terms of being able to make considerably more than, let's say, in the high teens?

I think that that's at least accurate, but we just won't know until we go ahead and see how the filings are put together. As you know, if you're going to do a three year or longer horizon, you're going to forecast in that period what the earnings will be and the commission will determine -- we think up front -- as to whether or not that is or isn't excessive and then they'll review it after each year to see if, in fact, that had happened. As you know, prices can move around, the earnings that you thought you were going to make may be more constructive, or they may be less than you had thought they were going to be. It is intriguing issue, but it has been written and there was much give and take, conversations with the speaker, conversations with the president of the senate, conversations with the governor and his staff on these issues, and I think that everybody tried to find a balance that would allow for a fair and balanced review, both before and after the fact. But remember, again, the comparables are corporate America, including utilities,so that's why we think that the compare are really going to put you in a pretty comfortable range.

With significant risk profiles, I guess. And then, just in general, it sounds like you guys -- what would be the benefit going to an MRO versus an ESP? It sound like from a financial perspective, you'd be indifferent.

Yes, and that's part of what we're looking at right now. The MRO at the end of the day will leave you after that ten year cycle with your stations at market rates, ESP might well leave you to the end of a three or four-year file period with yet another filing to be made and another process to go through. The law allows the flexibility in the MRO for adjusting the amount of your fleet that actually is at market or your load that is at market. However, it does not call for them to truncate and at the end of that ten-year cycle you clearly will have your generation fleet in that standing. So again, as I said at the outset, as we evaluate, it's highly likely that you'll see us with an option to file them both. You're duty bound to file an ESP, but we may join that with a MRO.

But financially it may not make that big a difference either way?

That's true, that's very true.

Thank you very much.

You bet.

Next question is from John Kiani with Deutsche Bank. Go ahead, please.

Good morning, Mike. In your response to one of the earlier question, you talked about the potential for eventually collapsing -- or combining Columbus Southern and Ohio Power and obviously, one is net long and one is slightly short from an off-systems sales perspective. Regardless of if those two are combined or not, do you believe that off-system sales will be included in any type of earnings test?

There is the potential for that, there's a part of the law that speaks in terms of evaluating other benefits and it doesn't describe what those are. It says that you should take a look at credits that may have been monetised, you should look at tax changes that maybe realized and other benefits, and it doesn't really save, that's on the adjustment side. However, one of the things that all of us may be losing sight of -- and it's my fault for having not mentioned it -- if there's some fear that you're going to find -- the excess earnings really has a lot to do with the rate spikes in the marketplace itself, and if you combine that with a regulatory deferral, which the law calls for, and offer a securitization for that, you might find a way to temper some of the impact that would have. So again, I think there are enough levers in the legislation for all of us to find a balance between not only, seeing to it that our shareholders are respected, but that our customers in the marketplace in Ohio receives fair and balanced rates going forward. And as you know, that has always been one of the goals of American Electric Power.

That's helpful, Mike. And then as far as -- maybe this question is better for Holly. As far as off-system sales are concerned, Holly, back when you all originally gave your new 2009 and also 2010 earnings guidance, can you talk about what level of power prices or perhaps what gas prices you were assuming in the off-system sales portion? Obviously, gas prices are substantially higher in the out years relative to when you originally gave that guidance. Heat rates have collapsed to some extent, but it looks like power prices are net-net, still meaningfully higher than when you gave that guidance. Are you talk about what was embedded in your original guidance and what you see in that outlook today?

Certainly, for the balance of the year, I think we're right on track. The point you made, which is heat rates have come in, mitigates the fact that gas has gone through the roof, and coal prices are higher. So, our realizations, our margins that we're seeing are in line with what we were forecasting and I think we are on track for the balance of the year.

Okay, that's helpful. And then what about in '09 and '10 relative to what you originally used from a forecasting perspective. Would you say that's directly better, worse or the same?

Neutral to possibly slightly better if you think this pricing environment can persist, but I think we are seeing some pretty lofty prices and it would be a bit hasty to adjust anything at this time.

Okay. Thanks, Holly.

Okay.

Thanks, John.

Kathy, are there anymore questions?

Yes, we have Anthony Crowdel with Jeffries. Please go ahead.

Hi, Mike. I'm wondering if you have been seeing off peak -- higher coal prices being passed through in the off-peak pricing in Ohio? We keep hearing about higher commodity costs, has that the off-peak pricing in the state of Ohio?

It surely has. We're seeing a pretty respectful clearing of fuel prices both on and off-peak.

Thank you.

Thanks, Anthony.

Thank you. And next we'll go to Michael Lapides with Goldman Sachs. Go ahead, please.

Congratulations on a great quarter and a start to the year.

Thanks a lot, Michael.

Have a couple of questions. First, on the excessive earnings test, can you talk a little bit about how that process would work from just a regulatory proceeding, meaning does it look like a rate case or does it look like something entirely different? That's the first question, and the second question's totally unrelated to Ohio, on Turk, where do you stand with the Louisiana PSC in terms of getting Turk approval, what's left in Louisiana for that, and what's the pro -- what's the remaining hearing or proceedings related to the Arkansas air permit?

Let me try to take those. I don't think the excess earnings test will look anything like a rate case, it will be specifically to the issue of their -- of the comparators that you use going in to where you are today. The burden of proof, of course, in every utility proceeding, as you know, is on the utility. And it is a motion of the commission, so it isn't as though anybody can file a paper and say we think there've been excess earnings here. The commission would have to make that conclusion themselves and begin the proceeding that you'd go under. So procedurally, they'll have to write the rules on how they'll go about doing that, which of course will take some time, and we'll all have an opportunity to at least weigh in as best we can, as will others. But I don't think it'll look like a classic rate case. It'll have a very unique evaluation.

And the argument will be, did you use reasonable comparators. Our interstate natural gas pipeline companies -- master limited partnership companies who have risk profiles not unlike ours, do they inclu -- are they included in that? The independent transmission companies regulated by the FDRC, are they a reasonable comparator? Is General Electric with a capital adjustment, or the -- the insurance industry with a capital adjustment, are those fair comparators? We feel very comf -- if you just look at the S&P, the overall rate of return on equity is 20+ %, so that's why you're hearing us say things about high teens, that we just feel comfortable that the cadray that law allows you to be compared to. So I don't think it'll look a lot like a rate case in that sense, but burden of proof is on us and that's to be expected.

As to the Turk plant, we are approved in Louisiana, by the full commission. We are approved in Arkansas, as you know. We are in Texas with a staff recommendation in the negative, s imply because the staff did not want to include the long-term wholesale contracts that SWEPCO Texas has been serving for decades, which we think is somewhat short-sighted. And the commission has asked for some additional information which has now been submitted to them and we'll have a couple of hearings, one late April, one early May, and the commission itself will opine on that.

As to the air permit from the Arkansas DEQ, we have complied 100% with the legal requirements of the DEQ's authority and responsibilities. They are going through some additional review of data that comes out of some of the Clean Air Act requirements, and some of the associated impact on nearby wildlife areas and national forests and those kind of things, but we feel very comfortable we're in very reasonable shape there. It's just going through a standard paper trail hearing process now, and as I said, we expect -- because we are well within the confines and in full compliance with the law, we expect to receive that permit a little later in the year.

Great, thank you. One last time, at what point would you likely be in a position to incorporate any Ohio-related rate increases related to this legislation into your long-term guidance?

Well, unfortunately, Michael, because we -- I don't expect that we'll get much clarity on what we're going to file until very late in the year, and as soon as the order were to come forward and we can see the effect that hat'll have on Ohio going forward, then we'll come out with our three-year forecast of the way we see that unfolding. So it's going to be a little different for us because we feel very comfortable and I know how much you appreciate the notion of us stepping out in three-year forecast in October.

That is probably not going to happen this particular cycle, because we won't, I don't think, have clarity by October of the way the commission will handle our report -- or our filings. As you know, there's a 150-day window for them to look at the ESP piece. There's a 90-day window for them to determine that your MRO approach at least is an acceptable approach. So even if you jointly review those, and they will, you're still going to bump into a calendar problem. But as soon as we have some clarity on what Ohio looks like, because if we do, the ESP route -- to Paul's question earlier -- it clearly will be three years as a minimum. The MRO will have the same factor in it, actually with a longer timeline on it, so the minute we get clarity on that we'll give you a forecast of '09, 2010, 2011.

Great, thank you, and congrats.

Thanks a lot, Michael.

We now have a question from Shalini Mahajan with UBS. Go ahead, please.

Thank you. Mike, carbon remains a big unknown and hopefully we should get some clarity by '09 or '10, as you look at the ESP or MRO option in Ohio, how do you handicap that? And to clarify, if you do choose a three-year ESP option to begin with, do you still have the option to pursue an MRO at the end of three years?

You're raising a really intriguing question and as part of the process that I said we were looking at both of these options and trying to understand them, on the ESP side of things carbon would become a regulated capital investment on the existing fleet. As you know, there are provisions in the law for new plants to be held in a different category, which would really look a lot like a traditional regulatory compact power plant. So that's something that we'll look at, and that will be part of the determinant as to which of the two approaches we took. Now you are always free at the end of your ESP period to shift to an MRO if that is your intent. However, once you select an MRO approach you are no longer allowed to come back to an ESP undertaking, and understand that that's under the current law.

And I say that, only to say that SB3 was the law and now we have substituted Bill 221, and if the state of Ohio finds itself at the end of a three or four-year cycle in a very, very short power position, it surely isn't beyond the realm of what's logical that somebody might pass yet another piece of legislation to rectify that situation, and you're seeing that, as you know, in jurisdictions around the country. Let's face it, Virginia is a very different regulatory model than it was just two years ago. California is a distant regulatory model from what it was about a decade ago when they started down the path illogically of changing the rules out there. So I'm not trying to create uncertainty, I'm only simply saying if we find ourselves in a very awkward position in Ohio you can rest assured that somebody will want to take a revisit of substitute Bill 221.

That's very helpful, Mike. And Holly, I think you probably addressed that in one of the Q&As, but I'm still not clear why the realization of off-systems sales is down year over year, given that you're seeing such a stronger commodity environment this year?

Well, as we talked in the past that realization includes not only prices we're seeing in the market, but also the net trading profits that are flowing through earnings in the current quarter. And so the revenue number reflects the total bulk of business, the volume number reflect the output from the plant, and it's an exercise in division for us and it isn't really indicative of market prices, per se. It's really net income divided by output.

Okay. Okay, great. Thanks, Holly.

You're welcome.

Thank you.

Next question is from Paul Ridzon with KeyBanc. Go ahead, please.

Morning, Paul.

Morning, how are you?

I'm fine, thanks.

In a very high-priced commodity environment, if a few years down the road got draconian what optionality do you have with regards to the ability to a corporate -- corporate separation of your generation? Is that door closed or how would that work?

No, the Ohio law provides for a separation of the generation fleet if that's the approach you'd like to take. You'd need to get the state of Ohio approval to do that and that has been the history in Ohio forever, but for the period that senate bill 3 were, in fact, in force.

It's an option but it would be tough to do because you'd need (inaudible) approval?

I don't think it'd be tough to do. You'd obviously -- you created the scenario of a draconian environment of one sort or another, so it well -- it would well be a hearing in front of the commission, like any other hearing, and if you had every legal right to do it and and they, in some unjust, unreasonable way withheld the authority to do that, as you know in Ohio, you would appeal that to the supreme court. And if they were beyond their authority or what they had done was not supported by fact, then you'd have a victory anyway. So I don't think it's anymore -- it's no different than it has been historically, as I said, but for the period that SB3 were in effect.

Just as a follow-up to the last question, Holly, is there some way we can look at gross margin X trading impact year over year?

The information that would allow you to back into a proxy for that is in the 10-Q, but it's not really disclosed in any detail. Another point to make on that is this year in the high-priced environment particularly high off-peak prices, some of our units that are on the margin -- as you know, the most expensive units are what shows up in off-system sales. The least expensive gets dedicated or delivered to our regulated operating companies, those swing units -- a lot of the subcritical units ran quite a bit harder, and that's what contributed to the additional 2,500 gigawatt hours of energy put into the market. So our lower margin units running higher contributed to the lower realizations.

And that's why it is -- as Holly said, to the answer of the question that Shalini had asked, it isn't just a calculation of, gosh, we're seeing off -- we're seeing PGM prices of $100 a megawatt hour and you're producing it at 40 (inaudible) since you're delta 60, it is the compilation of all those activities as how I just pointed out.

Thank you.

You bet.

Thank you. Our next question is from Elizabeth Parrella with Merrill Lynch. Go ahead, please.

Thank you. Mike, just following up on part of your answer to another question, can you just elaborate a little on how the law treats new generation. Is there a requirement that there be some type of competitive bid situation or the utilities can propose it as long as it's approved by the commission, and how then it's treated going forward in terms of recovering that investment? And does any of this -- and does that maybe -- one last question on the top, does any of this affect how you think the commission considers the remand from the supreme court on IGCC?

Well, Elizabeth, as you frequently do, that's a loaded question, so let me try to address it. The law provides for an application for capital investment in new facilities, either retrofit environmental facility or new generating stations. It allows for construction work in progress, it allows for an ultimate non-bypassable recovery of the capital for the life of the station once it's approved by the commission. They need to determine the need, once they get to that point you're allowed to go forward and build the station, and again, the cost recovery is, as I suggested, non-bypassable. However, they also as they do that will have a classic hearing on it, as well. So we think that it covers those issues comfortably. It needs to be -- it doesn't need to be competitively bid so it's our choice to file what it is that we would like to build, but you have to have competitively bid the construction of the facility, which, of course, we would do. And at the end of the day, it then go as I suggested. And I guess in all that answer, I've already lost the second train of thought you were after.

The IGCC remand.

Yes, yes, I'm sorry. I must be getting too old. The IGCC remand intriguingly might be well affected by this, but that is up to the commission. What the Ohio supreme court said -- and a lot of people missed this -- is that we're not sure that polar authority wouldn't accommodate this, we're just not comfortable that you gave us enough of the logic that you put behind this. So, the question for the PUCO is to evaluate the new law and maybe touch on some of those stones as they send this back to us by way of order, which somebody clearly would probably contest, and then we'd go in front of the supreme court again.

As we have said all along, the integrated gas combined cycle technology is essential for this country, quite honestly for the world, and we think we're the best suited to move one of the projects forward and very much would like to do that. The timelines are just horrendous when you think about how long it is from start to finish on any of these break-through technologies. You didn't ask, but when you read the Virginia Corporation Commission order, it's clear that they were quite complimentary at the end of our effort, but we are fearful of no one having built an integrated station at 630 megawatts. And again, the same question back on the unknowability today of what the carbon regime will be let alone the cost of the carbon regime.

Okay. Thank you.

Yes, you bet, thanks.

Thank you. Our next question is from John Alli with ZLP. Please go ahead

Good morning.

Morning, John.

Great quarter, guys.

Thanks.

Quick question, and I guess a lot of this is yet to be determined and it'll be up for debate, I'm sure, but the ROE that PUC will test is definitely a GAAP ROE, it's not a regulated ROE, correct?

To tell you the truth I'm not certain how they'll go about doing that.

Okay. And then I noticed -- this isn't your utility's problem, but if a utility was to say north of 20, would the commission have to basically force them to spend to bring that down or how do you think that would get dealt with? And I know you're talking about a mid to high teens as being fine.

Yes, sure, if you -=- over the years -- as I know most of you on the phone know of boringly so I've been at this game a long while -- you can control your returns on equity by additional capital spends to the extent that you were fearful. There are two or three ways you can handle that, as I mentioned before. You could defer, you could securitize, you can control the amount of spend, you can control the thickness of your equity, there's a number of different levers that one would look at as you go forward and forecast what you think the returns would be, so -- it is an essential part of the law that was sought by the executive office of the state. It has been written in a broad term so that all of us who might be affected by it felt as though -- it had balance to it, and it gave everybody a reasonable chance of being successful in a review of the commission, believing that you had excess returns on equity capital.

Right. And just the other question was kind of the same vent. If you don't ask for an increase -- or another utility didn't ask for an increase, and they want to continue RSP, would they still be subject to the same rules and tests?

Well, of course you would.

Okay, I was just a little vague in how that would --?

Because remember, even if your plan is just to continue your RSP, you at least have to file that as your electric security plan, and that then gets you into the tests.

That's when you --

And you might, I think -- not that I need to do anyone's bidding for them, but I think Dayton, because their current RSP runs through 2010, So long as they don't make any adjustments to it they're not subject to that review for a calendar year '09, calendar year 2010. Should they add a filing to additionally extend their current plan, then it would fall under the ESP as I read law.

Okay, great. Thank you guys, appreciate it.

You bet. Thank you.

Thank you. (OPERATOR INSTRUCTIONS). And we do have a follow up from the line of Michael Lapides. Please go ahead.

Hi, one question. Related to fuel costs, can you frame for us how big of an impact the fuel clause component of the legislation in Ohio would have? Which year do we use as the starting year for fuel costs that that will be tested upon?

Well, Michael, that's again a very open question. The last time that we had a viable fuel clause in operation and approval by the commission was 2002. One could argue that that would make a reasonable point of beginning -- I guess maybe even earlier than that, as early as year 2000. But we will try to find an appropriate period of time to begin a fuel clause and make the adjustments going forward, again, using whatever tools are in the law to soften the blow of that, if that need be. So I think that that's pretty much an open field to bring in to the either an MRO blended filing because of the 90% that will be under the blended definition of a MRO, or, of course, the ESP where you would file the fuel as well. So I think that is relatively wide open area. There'll be discussions and there will be debates about what's the appropriate place, but at least if you just take the base of the last time you had a commission-approved rate, you would begin in a 2000, 2002 range.

Okay, thank you.

You bet. Thanks, Michael.

Thank you. And speakers, we have no further questions, go ahead with any closing remarks

Thanks, Kathy, and thanks for all of you being with us this morning. I know that the law is fresh and you're all reading it. A lot of the materials (inaudible) had been put out by the various organizations are very accurate, well worth reading. I think the legislature has given all of us an opportunity to find a place that satisfies our shareholders' needs as well as our customer' desires. Thanks for being with us and we look forward to seeing you all on the highway,

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