APPALACHIAN POWER MAKES RATE FILING IN VIRGINIA; SEEKS FIRST BASE RATE INCREASE SINCE 1993

RICHMOND, Va., May 4, 2006 – Appalachian Power filed a request today with the Virginia State Corporation Commission (SCC) seeking approval for an increase of $198.5 million in customer rates.

If approved, the new rates will increase revenues in Virginia approximately 25 percent. The last time the company was granted a base rate increase by the Commission was in 1993.
 
Appalachian estimates implementation of the new rates will increase the monthly bill paid by a residential customer for 1,000 kilowatt-hours of electricity from the current amount of $61.57 to $75.23, excluding taxes—an increase of $13.66.
 
The company requested that the new rates be applied to electric service bills on an interim basis beginning 30 days after the filing. However, the SCC may suspend the new rates up to a maximum of 150 days, or in October, when the rates could be put into place subject to refund.
 
Appalachian President and COO Dana Waldo said, “The filing of a rate case of this magnitude is something we do not take lightly and we understand it will have an impact on our customers. For more than a decade we have stretched the innovative thinking and skills of our employees to the maximum. They have done a tremendous job—all without rate relief.
 
“Since 1993 Appalachian has implemented numerous programs to increase efficiency and reduce the cost of operations,” Waldo said. “We’ve taken advantage of technology to reduce costs even further and improve reliability of service for our customers.
 
“But, after years of capped rates,” he continued, “it is evident that the company’s revenues are not sufficient to cover its costs. Customer growth alone will not allow Appalachian the opportunity to recover its costs and earn its authorized return on equity (ROE).”
 
Appalachian is asking for an SCC-authorized ROE of 11.5 percent. Company reports to the SCC for the last two years show a critical downward trend in its actual ROE: 6 percent in 2004 and 5 percent last year.
 
Appalachian’s request includes significant cost increases affecting its operations such as compliance with environmental requirements and price jumps in the costs of supplies used for system growth and reliability. The company is investing more than $1.4 billion to build flue gas desulfurization units—scrubbers—needed to comply with mandated clean air laws at several power plants. Though expensive, the projects will result in cleaner air at the lowest possible cost.
 
In past rate cases, revenues reflected a credit for off-system sales (OSS). In today’s filing, the company seeks to move the OSS credits into the customer fuel factor where they may be adjusted annually and shared more accurately. Accordingly, removal of the credit from base rates, thereby increases the revenue requirement to $225.8 million. Since the credit of $27.3 million will now be reflected in the fuel clause, the net increase requested is $ 198.5 million.
 
The filing also requests updating and revision of policies dealing with issues such as underground service and extension of service to better reflect current practices and costs.
 
Appalachian Power ranks among the lowest-cost providers of electricity in Virginia and in U.S. comparisons. The most recent national survey of electric rates by the Jacksonville (Fla.) Electric Authority placed the company as third lowest of the 56 utilities surveyed. An Edison Electric Institute report issued in January listed Appalachian prices in Virginia as seventh lowest among 178 suppliers.
 
The company’s base rates in Virginia have been capped since 2000 but are subject to revision on a limited basis. For example, the existing fuel factor component of customer bills allows the company to recover and “true-up” fluctuating fuel costs used for power generation on an annual basis.
 
The filing today is the first under a Virginia statute that extended capped rates and delayed implementation of market pricing for electricity until 2011 under the Electric Utility Restructuring Act. It allows Appalachian Power to request a change in its capped rates prior to June 30, 2007.
 
Appalachian currently has a $21 million environmental and reliability cost recovery case pending before the SCC. It was filed in August 2005. Environmental and reliability costs addressed in the new filing are separate and not duplicative.
 
Appalachian Power provides electricity to 1 million customers in Virginia, West Virginia and Tennessee. It serves more than 500,000 customers in southwestern Virginia. It is a unit of American Electric Power (NYSE:AEP), one of the largest electric utilities in the United States, delivering electricity to more than 5 million customers in 11 states. AEP ranks among the nation’s largest generators of electricity, owning nearly 36,000 megawatts of generating capacity in the U.S.