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American Electric Power Co. Inc. (AEP)

The Wall Street Analyst Forum

August 16, 2007 11:50 am ET

Executives

Gerry Scott - President, Wall Street Analyst Forum

Michael Morris - Chairman, President and CEO

Presentation

Gerry Scott

I guess it's good morning for another 30 seconds, ladies and gentlemen. So I'll say, good morning and good afternoon at the same time. Ladies and gentlemen, I would like to introduce the next company in today's program for Utility and Power Companies.

As I alluded to earlier, really it was dominantly an Alternative Energy and Clean Technology Program yesterday and we decided to invite some of the utility and power companies to present as well, as the convergence continues to take place, not just between utility and power companies and alternative energy companies, but lighting companies working with utility and power companies, solar companies working with utility and power companies and even companies like British Petroleum playing a leading role in solar power, and even using Home Depot as a retailer in Florida for about 150 Home Depot stores selling BP products, consumer solar products, to the public and the networks. They are going to do that on a national basis.

We've seen this dramatic convergence of food industries and biomass and biofuels all converging into one. So for a conference bunch, we are trying to figure out whether you can converge those all into the same conference or not. So we did invite some of the utility and power companies to present and what is otherwise an alternative energy, clean tech conferences, as that convergence takes place.

American Electric Power is one of the largest electric utilities in United States, delivering electricity to more than five million customers in 11 states. AEP ranks among the nation's largest generators of electricity, owning more than 38,000 megawatts of transmission system, and nearly 39,000 miles of network, that includes 765 kilowatts, extra high voltage transmission lines, more than all other US transmission systems combined. AEP's headquarters are in Columbus, Ohio. So, with out any further introduction, I'll introduce Michael Morris, Chairman, President and Chief Executive Officer of the company.

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Michael Morris

Thank you very much. It's always nice to have an opportunity to share views of our company with folks who invest capital or lend capital to a company like ours. We appreciate your being here. So it's tough to be the last speaker before lunch and I'll try to do my best to keep in touch with all of those requirements. I think you are well familiar with this slide that takes some time.

What we have been trying to do of late is to share with the investment community what our upcoming plans are and you can see that we have yet this year two or three very important dates. I would focus you in on October 4, when we intend to share our view of the next three years going forward, earnings capacity of the company. Doing some international work mid-October, and then of course late October, the earnings call of the third quarter activity. And we will try to make that as thorough and transparent and concise as we always do.

Today, I want to talk a little bit about the footprint, although in the introduction you got some of that. But I really do want to focus in, on what we see as a very unique opportunity for American Electric Power and that's to enhance our current position in the high voltage transmission grid across the entire country. With tremendous investment opportunities, tremendous partnership opportunities, and at the end of the day, we believe, tremendous earnings opportunities for our customers.

When you think about American Electric Power, you can see the states wherein we do business. Many of you are familiar with this, some of the faces in the audience aren't as familiar to me. So I'll take just a moment to reiterate the comments. We are the second largest generator, we are the largest transmitter of electricity with the 765 grid as discussed, and of course the largest owner of distribution assets as well.

A very unique utility design with most of our power plants at the fuel source and we transmit electricity to our customers, which is different from a lot of the utilities constructed in the country, where many people build their power plants much nearer to the load centers.

It has proven to be an excellent opportunity for us over the years and has distinguished us from many of the others, because we are in a transport system mostly along the river systems in the upper Midwest. We have our own barge company. We have substantial real ownings, and do a great deal of our own coal transportation, which we think is an excellent way for us to take price advantage when they are available to us, for us to make certain of adequate energy supply at all of our coal-fired facilities. You can see from the small inset here, we are a dominant in coal utility, although we are the proud owners and operators at the DC Cook Nuclear Power Plant, over along the Lake Michigan.

As I mentioned, when we look at our strategic plan, we see tremendous capital infusion investment opportunities on the distribution system, on the transmission grid. Clearly inside of the generation fleet as well. Not only in environmental retrofits of the existing generation station, but going forward plans to build four new coal-fired facilities using the most environmentally aware technology to burn coal, going forward.

But today, I want to focus you in on the box that's highlighted here, trying to grow our transmission business. Something that we are quite excited about and something that we think AEP owns a unique space among its fellow utilities.

When we look at the transmission grid, build in a historic sense to serve on a very localized level, almost an intra-state nature for the most part. As I mentioned earlier on, because of our nine miles location and the distance to our load centers, it was more appropriate for us to build transmission systems across multi-state jurisdictions.

That really leads to what we think is an incredible need to be developed on a more nationwide basis, and we are beginning to see a number of people continue to come along with that aspect. We think it's important that the country take advantage of the ability of the technology in today's marketplace to move tremendous volumes of cost-effective energy to marketplaces that today are constrained from having that energy, have the ability to get to that market because of congestion on the system.

We also believe that expanding the interstate transmission grid itself will allow for a better competitive wholesale marketplace, and importantly, will allow for renewable energy resources which are frequently located at great distances from the marketplace themselves, to get to the market.

We, as it was said in the introduction, own a 765 space in this country. The introducer, obviously, did the best he could, he said 765 kilowatt. Now, that's a pretty small system. You could put that on a pencil. This is 765 kilovolt system. It's the largest transmission system used in the United States, and actually in a practical application, the largest transmission system used in North America.

China, seeing the value of the logic of massive movement of kilovolts down a transmission grid, they are now beginning to develop in the 1000 plus KV range. And we've had a lot of dialogues with the Chinese transmission utilities, trying to make certain that we learn from them and they learn from us.

Some other things that we're doing, which speak to what we believe are the important reasons for 765, are that the new six conductor bundling allows us to have much less line loss on the system of moving energy from a long distance point A to long distance point B. Line loss is simply a cost of doing business, the less of that that you have, the better off that you are. You can raise some of the other technological breakthroughs.

I think they're really telling a story on this slide, however, it is the greenfield. You can see in the middle, that a single 765 two-phase system, can handle more energy or the equivalent volume of energy of the six systems single circuit, or a three system, double circuit, 345. The point to be made here is environmentally, this is a very important issue, it has right away become one of the most difficult barriers to put together a transmission grid. More importantly, that middle column moves the same amount of energy, that's either to the right or left at 30% of the cost of either of those systems that are right or left. We think that's a very important advantage when we look at other opportunities to do that.

There is in fact a growing legislative support for the whole concept of building out this interstate transmission grid that I'll continue to speak to, much of it through the Federal Energy Regulatory Commission, because it is an interstate aspect, no different than an oil pipeline or a gas pipeline, but quite honestly, a federal highway system. So at the end of the day what you are looking at is the ability as a Federal Energy Regulatory Commission, to give us the authority to build these multi-state, interstate undertakings.

At the state level, where there is some pushback, because this is something that they have felt is jurisdictionally theirs. And they are beginning to work in a much broader regional transmission approach to the issue. They do in fact have the first opportunity for citing, and under the 2005 Energy Policy Act, I am sure many of you are familiar, that if the states don't select or approve a route within a 12-month cycle, then the federal government can come in and in fact approve that route. So long as it's inside of the DoE, Department of Energy, a designated court order.

So again we think the opportunity to push this forward is happening and we think it's something that will continue to grow as we go.

Why AEP? Well, when you look at the transmission again, we lead the league in the extra high voltage technology today. We lead the league in the extra high voltage research and development today, and we continue to see ourselves as occupying the lead chair in that space. We think this investment opportunity has tremendous earnings growth potential for our shareholders and of course it serves the US economy very, very well. They have a more competitive electric opportunity in the buying market, so that we continue to keep an eye on the cost of electricity that's delivered to our customers across the country.

Now when we think about AEP and the projects that we think are very viable and really many of them, I have been talking to you. Those of you who are familiar with this business, surely understand these bubbles and what they stand for. PJM is the Pennsylvania, Jersey, Maryland Regional Transmission Operator. MISO is the Midwest System Operator as well. The Western Electric Cooperative, ERCOT is the transmission energy island in Texas. Southwest Power Pool is doing the same thing for the greater Southwest area in the south. And we either are working on or will begin to work on projects in each of these bubbles that I would like to take you through as we go forward.

I mentioned that we see this as a substantial capital investment opportunity. On the left are some of the major projects that we are working on, on the right some of the future things that we think can come to the floor. If you follow along the concept that we are trying to take forward here is the 50-50 partnership, most typically with utilities who are in the physical footprint of where we intend to de-bottleneck the transmission grid. A debt/equity ratio is well at 50/50, that leaves us with a return of equity of 11% to 13%, which we think are extremely achievable in this space, with earnings potential of $1 or greater, over an extended period of time, because none of this unfortunately happens overnight, even though it all probably should have happened a couple of years ago.

So the projects themselves, the first one and it's an important one for us, is what we call the I-765 transmission grid, which will begin to bring very cost effective coal-generated electricity from the West Virginia coalfields into the demand centers of the East Coast all the way into mid New Jersey. We call that I-765, because we build it along the theory of President Eisenhower's interstate highway grid, when he came back from World War II. Sensing the need to be able to move commerce from border-to-border and coast-to-coast. We see that challenge electrically as being identical.

Today, as I mentioned, it's very difficult to move energy grid links and it is accomplishable and the more we have that thought in mind, the more likely we are to continue to have the opportunity to go forward and build this thing.

If you just think in terms of some of the benefits that are here, I think the third board under the benefits, that we are spiking out for you today, those of you in the Eastern Sea board or the Far East side of the PJM mostly, not New York State or the city, it's in its own power pool. But in the PJM Power pool last year, you paid about $2 billion in congestion costs. What that means is cheaper power plants that could have delivered energy into the PJM, simply weren't able to because the highway was too crowded, just think of I-95 on a weekend, you will know what I mean.

So if you take that concept and make that highway wider and allow greater energy to come across, you'd save about $2 billion in congestion. It's an intriguing undertaking, something that most people think as an excellent idea. Except those, who own power plants in those congested areas, because the last thing they want is to compete heads up with power produced out of a station like our Amos station, which is where this line originally began.

To-date the project from Amos to Kemptown, as shown here on this map, has been approved and we're in the process of continuing to work, add a partnership with Allegheny, who has a footprint inside that space as well.

The Federal Energy Regulatory Commission has already approved the project, that it is in fact in the public interest. They have at least in their preliminary orders, indicated that they would support the enhanced returns on equity that were part of their reaction to the 2005 Energy Policy Act. And we feel very comfortable about this particular project as you can see at the very bottom, coming online and adding to the earnings potential in the early part of next decade, which we think is a very important step for us.

There is an equally important phase going to the second part and you can see from Kemptown over to the Dean sub-station and that takes you into the middle of Jersey. And you can see by this map depiction of the incredible wired network that serves this particular part of the country.

765 again because of the benefits that I showed you on earlier slides would allow for a great deal of cost savings and additional energy to flow into this particular area as we go.

Other areas of the country that can surely be benefited by an enhancement in the transmission grid is the basic lower half of the lower peninsula in the state of Michigan, which today has a very tight opportunity to move energy from east to west in that lower tier. Our plan here, in a partnership with the Interstate Transmission Company, is to build out again a 765 grid, as you can see touching down into the Canton, Ohio area into Western Ohio area, over to our DC Cook Nuclear Power facility on the eastern shore of Lake Michigan, on the western banks of the state of Michigan itself.

Another very important project today, both, Detroit Edison planning a new nuclear station on the eastern side of that state, and Consumers Energy planning a massive coal plant on the western side of that state. A project like this would obviate the need for one of those two facilities to be built, save the customers in Michigan a tremendous amount of money, and again allow for a much more cost effective movement of power on that system itself.

Again, this project will be laid out in front of the MISO team later this summer, and we would like to believe that with appropriate approvals, this project has the opportunity to come on also early in next decade.

The next undertaking was an invitation by the Southwest Power Pool, who are very much power transmission constrained, to see to it again that the energy production facilities that are in the great Southwest area, have the opportunity to get to market. And in response to requests for information, we have made a filing for what we call the SPP-765 project. And they are in the process of going through the determination of those who would be successful in their process of selecting the project.

They have come out in their original work which is now just being shared with some of the interstate commissions, very much in support of a 765 grid in this area as well. Our plan here would be to go forward, arrange partnerships as we've done in other of the footprint opportunities, and hopefully build these facilities. This would be late next decade. However, before all of this would come to fruition and be passed, one of the projects that we are most excited about in the transmission space is inside of the ERCOT area of Texas. ETT is a partnership between American Electric Power and MidAmerican Energy, which is the Berkshire Hathaway entry into the utility business.

This project and partnership has already gone through its formative stages and has gone through the original hearing in front of the PUCT. We believe that the Texas Commission will hopefully come out in full support of the partnership which will allow us to bring about $200 million worth of assets into the Texas partnership, and then augment that with other projects that will take its capital investments up to about the $1 billion range and we hope again that this has the potential to add benefits, in an earning sense as early as the turn of the next decade, and we feel very comfortable with our partnership here in capital capacity that the Berkshire team brings to the project as well as the technical capacity that AEP Texas and AEP bring to the project as well.

We see this Texas Transco joint venture as a perfect place for us to continue to build that relationship and step out into other reaches to do additional work. One of the great things about the transmission project in Texas is once done, up and operating, you immediately begin to receive your rates of return on the equity capital invested, as well as some provision for the capital invested as you go forward.

We think that ERCOT has the model right, not unlike ISO New England and other regions here in the country, and we think it's a very important place for us to have this investment opportunity.

As you know, Texas is leading the nation now in wind production and continues to have a tremendous wind production opportunity. They have asked us and others to join in their CREZ, which is the legislative designation of Competitive Renewable Energy Zones, many of them being far distant from the population centers in Texas, and needing a highway, an electric highway that is, to bring that energy to market.

We again are in the midst of putting and in fact have put in front of the Texas regulators the railroad commission concepts. That ultimately would help bring that wind to market. Chair Hudson of the PUCT again has been extremely supportive of the concept that we are bringing forward, and we hope that that will add value to the renewable portfolio standard requirements in the state of Texas, and of course add value to our shareholders by this incredible capital investment opportunity with very near-term returns on net equity capital and earnings strength, as we look at our next handful of years going forward.

We have also taken, what we think is a relatively bold step to meet with the Texas Commission and ERCOT to lay out what really would be an extremely logical, cost effective, long-term strategy for making sure that all of Texas generation has an opportunity to physically and cost effectively reach the market consumption prices in Texas as we go.

We see this as a two-decade undertaking, but at the end of the day all Texans would be glad that they did this, and this would give them a real ability to move all of that energy from point A to point B and take advantage of incredible wind resource that they have in the western regions and central regions of Texas.

So to just sum up this small subset of what AEP may mean to an investor or a debt provider, we see this as a very ,very strong opportunity to enhance the earnings potential that is already, we think is already there inside of our current footprint. It gives us an opportunity to stretch the earnings strength of this company. It gives us the opportunity to take forward the technological advancement that we believe we have, as compared to any of our colleagues. And I don't mean that in a derogatory sense, I just simply mean when you today have 39,000 miles of transmission, and that is more than anyone else by an incredible margin, it does speak to the notion that we have been at this a long time.

Over the last 40 years working with 765 transmission, we have probably put more technological advancements on the transmission grid than any other company, not only in this country, but say one or two foreign Eastern or Western European countries, unarguably, we probably lead the league in that sense.

We feel very comfortable in this space. We do need to create this model of an interstate highway grid that's regulated by the FERC and pass along more conveniently at the state level to the retail rate customer, and that isn't an easy push, but it's something that we feel very strongly that needs to be done. And as I mentioned before from being a soloist singing the song some years ago, we at least now have become a part of something much larger than a core debt. We are not up to the choir size yet, but we won't stop singing the song, because it's so rational and so logical. And I guess that maybe one of the reasons why it hasn't already happened is because it is so rational and so logical.

With that, we've adequate time for questions and I would look forward to any that you have, not only on this concept, but many other things that are going on. I have the pleasure of sitting, to pitch and hear some of the questions as they pertain to Ohio and other things and I'm obviously happy to address any issues you might want to chat about.

Thank you very much for being here and thanks for your attention. Yes, sir.

Question-and-Answer Session

Unidentified Audience Member

(Question Inaudible).

Michael Morris

Drawing wire meaning in the sense of pulling wire and creating wire, got it.

Unidentified Audience Member

(Question Inaudible).

Michael Morris

As you surely should be. The question is, what do we do in this process? Well, at the end of the day, without a company like American Electric Power to bring forward the project from point A to point B, there is no need for the vendor suppliers. But you might not understand everything that we in fact do do. We do our own design, we do our own engineering, we do all of our own technical work in that sense. And then we bid it out typically in a package. Names that are familiar, to some of you. Quantis, in particular are one of the big builders and they've done a lot of work with us and for us. Suppliers of transformers and tower steel, names not familiar to me at the top of my head, but they would obviously get the benefit of all of that.

But the real value-add I think for AEP of course is that at the end of the day the regulator and the state, they have to look at the players to make certain these things get done and get done right. The original slide was the building last year of our Wyoming Ferry Jacksons project, a 90 mile 765 kV project that was done almost all by helicopter. Our people are construction managers on the project themselves. So, there is a tremendous value added by having our system involved in projects like this, particularly on cost control and all of that. But to your point, others are the basic manufacturers of the goods.

Unidentified Audience Member

(Question Inaudible).

Michael Morris

Well, that's a very good question. The politics, the question is that the politics must be horrendous, because the whole notion of utilities and state regulatory has always been so intertwined. How do you work this miracle? And it is difficult. I wouldn't call it a miracle, but I would say that it is difficult if we won't turn this water into wine, but we surely are trying to get people to appreciate this.

If you look at a bundled kilowatt of electricity delivered to the typical customer and if you live in New York City, you are not a typical customer. Let's just say it's $0.08 a kilowatt hour, maybe about half of what you guys typically pay. But you love to live in the city and I don't blame you, this is a great place to live. Out of that $0.08 about $0.04 of it is generation, about $0.035 of it is distribution and about half a penny is transmission.

So the logic that you try to share with an in-state regulator is based on why should you worry about a half cent of the overall cost of the bundled kilowatt hour when in fact, letting that Federal Energy Regulatory Commission have grace over that particular piece, will allow for a much better wholesale competition and therefore lower costs for the in-state consumer, who you as a regulator really are looking out for.

The other piece that in-state regulators typically are very worried about is not just the reliability of the grid itself, but the actual availability of generation to satisfy economic development and economic demand by the executive officer of the state. In an enhanced interstate transmission grid, no different than the way commerce works today on the highway system would add value to everybody's economic opportunity.

So the sale at the state level is not as tough as you might think. Some get caught up on the notion of why in the state of X, if we have cost effective generation, would I want to export it to the state of Y. And the answer to that is I have always thought, although I used to argue with Attorney General Blumenthal in Connecticut, I never got anywhere. If you couldn't export the product of the electric boat, the Connecticut River will be full of submarines.

So the fact remains for any state to have the opportunity to export their product into a much broader marketplace, allows for that particular production facility to be that much more cost effective. Anytime you take a big capital intensive asset, the higher its capacity utilization, the more logical it is for everybody and if you build a new power plant on a coalfield in West Virginia for energy to be consumed in New Jersey, you have coal development mine jobs, all very, very high and paying jobs as well as the infrastructure build on the tax base. So it's a tough sell, but we'll get there because it's exactly how the interstate gas model works, it's exactly how the interstate oil model works, and we'll ultimately get there. Yes, sir.

Unidentified Audience Member

(Question Inaudible).

Michael Morris

The question is, if you remove Ohio and off-system sales revenue, the peers, though many of the utilities are under earning, and the answer to that is that some are, but not all of them and a couple of them particularly. So, and they are in the rate proceedings right now. You've heard me say that many times before, the Texas facilities are under-earning, although the settlement of Texas North will help a great deal in that regard.

Texas Central, as you know is just going though a rate review. We are awaiting a commission order later this month. Public Service of Oklahoma, and in fact we are waiting for a rate decision, we have an administrative law judge's decision. And that will move the returns on equity up in environment as well.

So, as you would expect us to do, we keep a sharp eye on the returns on equity of the operating companies. We particularly, as you look at capital allocation, want to make certain that you do those capital allocations in those jurisdictions, where the regulatory returns are stronger and more supportive.

As you know, those of you who spent time with us, it's incredibly important to us, we spend, at least personally about a third of my time interfacing with the executive office and the chairs of the commissions where we do business in.

Going back to the operating company model that we did in 2004 has also helped a great deal, particularly when you get out to the far reaches of the system. The regulators in the State of Virginia don't want to try to track somebody down in Columbus, Ohio. The regulators in Texas, they'd rather have somebody who is located inside their boundary as the person they go to when they have a question to ask there, interested in trying to track me down in Columbus, Ohio.

So, I think that that has served us well. And as you've seen from 2004, 2005, 2006 and well in to 2007, the rate case process of the American Electric Power has been very supportive for the most part, some places incredibly so, somebody places acceptably so.

Unidentified Audience Member

Is there any update, I think Virginia right now for the first $100 million you offered to sell, it goes right to the rate there? There is very little sharing, it often excites me. I think there is a legislature or something where you'll get the first $25 million, if I understand it correctly?

Michael Morris

You do understand it correctly. The legislation has been passed. We filed the rate case in Virginia on July the 13th, and for that very reason are beginning to keep 25% of the off-system transmission revenues for the shareholders, for the system and Appalachian Power. And that was a very important part of the legislative discussions that we had and it worked out. We think, not as fair as the 50-50 in my last comment. The governor came before he signed the law was in my world sharing as 50-50. And he said well, in his world sharing was 75-25, and he is the governor. So we took that.

But remember, the other parts of the Virginia legislation allowed for enhanced returns on equity, and we filed the case to share the Integrated Gas Combined Cycle plant in Virginia at the same time, and asked for in fact the 2% kicker on the return on equity that one gets for building an enhanced coal plant. And we thought that was very important as well. So, on balance we are very pleased with the environmental and reliability tracker case that you have in Virginia. And if you look at the rate case itself, you could easily say, disappointing. You are going for a couple of hundred million and come out with $24 million. But if you looked at the decision that came out on that, much of what wasn't recovered in that case was set up for next cases to be filed and those have all been filed; the ENR case was filed early July as well, looking for I think another $60 million ENR adjustment. So, we feel pretty comfortable about where we are regulatorily in Virginia.

Unidentified Audience Member

Now, moving in -- I guess part of Northwest to Ohio. I didn't know who was there. Tony, had come out today. I think that or maybe something different. You may not have an RSP for the entire state, but you may have different rates I guess for different zones in the state, the investment that you are thinking. But I think Columbus has one of the lowest G-Rate write down in the state. Everyone goes in like, a better way, in Columbus everything is upside. But do you see a partition in the state relating to G-Rate?

Michael Morris

Well, the question is, will Ohio have different G-Rates -- generation rates, sorry, throughout the state. And the answer to that is probably yes, simply because if you look at our current structures of the RSPs that we have filed, we all have different not only generation rates, but we also all have different D-Rates, distribution, and T-Rates, transmission. So, it is in fact a compendium of those three cost centers that go delivered into the customer.

If Ohio were to come out with a single statewide rate, your point is well made. Columbus Southern is not among the cheapest, it is by far the cheapest, and that we would see tremendous benefit from that. Is that politically achievable, I am not certain. Is it good for Ohio to have a simple rate for the entirety of the state? I am not certain that's the case. Ohio was a very unique state, one of the few that has any one of a number of major population centers. So, Clevelandites don't think that much of folks in Columbus and people in Columbus don't think much of folks in Cincinnati, that we will all be happy with a single statewide rate.

For us, the important thing to do is to make certain that we have the opportunity to bring to the advantage of our investors, market based rates. And we have, as you know, constantly talked to the notion, set the market base rates, but we will wave them in over a few years and create a regulatory asset that would need to be securitized, which is really different from subprime lending securitization. But nonetheless would need to be securitized.

We think that's a reasonable way to go. Off late, there has been some movement, the things are happening, the governor is in fact in contemplation of putting something out late this month we have heard. We, just like Duke, Ohio, spent a great deal of time in consultation and conversation along with the governor, about the leadership of the house. And certainly remember this is the first time in 16 years that Ohio hasn't had a three party or a single party line up over the three principle offices. So we have a democratic governor, republican senate president, republican house speaker and they are all trying to get used to each other and find a way to come to answer.

If in fact nothing does come to past, remember that we have the 1999 law, that says go to market, setup some kind of market clearing price, either beg it, auction it, create it somehow. The law does not define exactly how one gets the market price, but in fact does say that come 1109, you have to be at a market rate.

So to say today in front of you, how that's going to unfold, it's difficult for me to say. But we do have a law and the law is still on the books and American Electric Power, if it can't find some reasonable-resolution, it will no doubt go with that process.

Unidentified Audience Member

(Question Inaudible).

Michael Morris

Sure. The question is can I give you some feeling on how we are doing with the coal power problems? I'd call them coal power opportunities. We have over the last four or five years, we're well through a $4.1 billion investment undertaking to be in compliance with the Clean Air Act and the Clean Air Act Amendments. All of those assets have either been rolled into the base rates of the operating companies or have been covered by rate adjustments in the State of Ohio, as those of you who are familiar under the current rate stabilization plan, our rates step up by 3% and 7% at each of the operating companies on an annual basis.

We think that today, to save this global warming issue, we don't think, in fact we know that our plants are operating well in excess of the requirements of Clean Air Act. We felt very good about that. We are long, when you look at credits in the out years, because of the implementation of that retrofit program, we are beginning to see in '07, downward pressure on the price of coal, because we are buying high on softer coal now that we have the implementation devices to capture SO2 as we go forward. And we continue to see that as a huge advantage for our customers.

Now, the unknown challenge, going forward is what about global warming? And what about the timeline when Congress in fact does do something. Our biggest fear is that not unlike Sarbanes-Oxley, there will be a gross over reaction to the event and will come with this idiotic piece of legislation. And in essence, is driving coal out of the equation for this country, which I would argue would bring forward the US economic brownout, which I would then argue would bring forward the worldwide economic brownout.

Remember that this issue is global warming, it's not U.S. warming, so there has to be a way to address the global nature of it. American Electric Power along with great support from its union, the International Brotherhood of Electrical Workers and many, many, many other unions including the AFL-CIO, I have brought forward a World Trade Organization clearing opportunity to make certain of the developing nations of the world, who are part of WTO, comply with some kind of global warming effort, rather than a Kyoto. I pledge and I'll try to do the best I can, if I don't, I don't. Really it's very important that we have that going forward.

So we see coal as a great opportunity. It's cost effective without question. Retrofitting any one of our existing facilities, you are still going to be making kilowatt hours for probably $0.05, $0.055, maybe $0.06, it is a very, very cost effective generation rate compared to any other opportunities. I also believe that new nuclear has to play as does the existing nuclear fleet. As I mentioned we're the proud owners of two very, very efficient nuclear stations. I hope you all saw today that Florida Power and Light came out with an intended expansion of their Turkey Point at $4,000 a kilowatt. That's probably the first real price we've seen for new nuclear in the marketplace and that's '07 prices. So, if that plant gets built in 2020, when I think it would finally be approved, that money will be certainly north of that. That just says coal means the same, and that coal will be economically better than any other source of supply.

Unidentified Audience Member

(Question Inaudible).

Michael Morris

That was his intent; he is quite a salesperson.

Unidentified Audience Member

But that's falling off the page for AEP and I don't think that's an opportunity right now, or the upsides on these current numbers in transmission. I mean, ITCC, do I think if it has [received] every politician waiting for another politician to be the first one that will approve it?

Michael Morris

No, I wouldn't view it that way. The question is, it looks like it's off of the earning strength horizon that we laid out, that everything. It looks like transmission and logic for that, was that today I wanted to focus in only on the transmission opportunity. We have filed in West Virginia, our plant is $3500 a kilowatt, that's all in owner's cost, that's coal handling facilities, that's transmission out of the station, that's a substation to step up the power from the power plant to the grid requirement. It's a very conservative and very real number forecasted in the timeline, that we think that plant will come on line, which is probably still in the first half of next decade.

The West Virginia Commission has begun its process. We have extended the timeline again to accommodate their needs for full evaluation. They ask a question, that we supply them with data, the percentage rate impact on West Virginians if in fact that plant were built. It's about 16% increase. Today the average West Virginian's energy bill is about $68 a month, 16% increase isn't going to break the bank.

For some it's a tough goal, I understand that. We made that same filing in Virginia as I mentioned and asked for kicker rate of return. The only reason again today we're focusing in only on the transmission opportunity, because we thought this was a different audience that wasn't so familiar with the things we are doing in American Electric Power.

And if you look at what we shared with you a year ago on '07, '08 and '09 earnings, those plants won't begin to return on equity and impact the earning strength of the company. But they are there. So, again, when you think of AEP and you think of the distribution investment, infrastructure upgrades, intellectual upgrades with smart meters and the smart system. When you think not only of the law transmission play in the areas that I am taking you through today, but you think in terms of upgrading the intellect on the existing grid, 39,000 mile grid, there is tremendous distribution transmission and generation investment. And that really is the story with AEP.

So, the whole question is how will the regulator tolerate all of that over time? And we feel very comfortable about where we're today, we are the lowest cost provider and every jurisdiction where we serve our company, our customers, and I would argue that going forward because everyone has to spend that same kind of capital, some not near as dramatic as us, and we will continue to be either the lowest or at least among the lowest. Yes sir?

Unidentified Audience Member

(Question Inaudible).

Michael Morris

600?

Unidentified Audience Member

We would expect then the Michigan announcement probably in the next one month which was outlined, what your investment would be on that project?

Michael Morris

Yes sir.

Unidentified Audience Member

Great. So let's say the $2 billion project, I don't know what the number could be, say 700 to 800 million?

Michael Morris

Probably more like a billion.

Unidentified Audience Member

No net number in the next month or so?

Michael Morris

Yes, that's correct.

Unidentified Audience Member

And then, in Texas, when could we get a good information on what the size could be over there for you guys?

Michael Morris

Two things. One, when we get the first determination that ETT is a Texas-regulated utility which we expect in the very near future. Say again?

Unidentified Audience Member

But, okay. I'm just trying to figure that out?

Michael Morris

I mean, I herein concluded just a couple of weeks ago, and --

Unidentified Audience Member

That should be going up pretty well.

Michael Morris

We hope this month or early next month. And that will allow us to begin to put the $200 million of assets into that operating entity and allow us to continue to build out under the current ERCOT system. And you'll begin to see capital deployed in ETT very quickly as soon as we get the authority to do that.

Unidentified Audience Member

(Question Inaudible).

Michael Morris

Yes, indeed.

Unidentified Audience Member

(Question Inaudible).

Michael Morris

That's correct.

Unidentified Audience Member

(Question Inaudible).

Michael Morris

Well, I don't think there is any question that the transmission investment opportunity will begin to add to the growth side of our equation as we go forward. In the near term in Texas, again followed then by the first phase of I-765 in Michigan, that will take you into the very early next decade, 2010, '11, '12. The driver in '09, '10 and '11 is going to be whatever the ultimate outcome in Ohio is, as we get to the end of requirement. If our plan were to be implemented, where we would have the opportunity to move to market or a peg to market, that's going to give us strong earnings potential in '09 and beyond.

Remember as we shared with you last year's 5% to 7% growth at the basic business, we included nothing in '09 except the continuation of the three and seven current rate stabilization adjustments in the two operating companies in Ohio. We expect that not to be the case. We expect there to be some upside to that and other things there, what we intend to share with you, come the 4th of October.

Unidentified Audience Member

(Question Inaudible).

Michael Morris

Well, the question really goes to are there are other strategic opportunities, merger, acquisitions still in kinds of the adds to AEP footprint. You may have noticed in the original photo there, there is connector, it's a firm transmission facility of 250 megawatts through the Amarin System. So we are electrically connected back in the old public utility holding company, at days you had to demonstrate that to clear the SEC requirements and in fact we did.

At the end of the day, mergers and acquisitions for US utilities are something that is currently kind of on hold; say one or two opportunities that are very unique in this phase, Iberdrola buying Energy East is a very, very unique undertaking. Short of that, post the Peggy-Exelon merger not working out, and the Florida Power & Light-Constellation merger not working out. I think there is a lot of angst among my colleagues to move forward in that space.

Buying a utility at a premium is a very difficult thing because different from many other industries you aren't allowed the opportunity to recover that premium and anything other than cost savings, and then typically you're sharing those cost savings as part of the regulatory bargain to get it approved. And if you get there that's fine, but it's a difficult place to be.

Merger of equals without a premium, those kinds of things probably do make sense. And if you look at the US utilities, even the largest among us, and we are in that yolk, but not an Exelon type market cap in the $40 billion range, and we have around the $20 billion range for the index where it is today, 18, 17. But at any rate, none of us were big enough to really step forward and do a lot of what needs to be done. I hear people talk about 30 new nuclear stations by 2020 or 2030, and no one has the balance sheet to build 30 nuclear stations. So unless somebody else enters that space, who sees there is a tremendous upside opportunity, there is a logic that says you have to have additional consolidation in the US utilities space. Hard to do. It's back to your earlier point about politics, that statement of all being so intertwined and if you were the state owner of Cincinnati Gas & Electric, that's now headquartered in Charlotte, North Carolina, you've lost something. It's just that simple.

Thank you very much, for being here.

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