2nd UPDATE: AEP Shares Fall After Ohio Regulators Reverse Rate Increases

American Electric Power Co. Inc. (AEP) shares fell as much as 5% after Ohio regulators reversed a previous decision that allowed the company's Ohio utility to raise rates and spin off its power plants.

In a highly unusual move, the Public Utilities Commission of Ohio revoked a December decision that had approved the rate increases under a settlement agreement that AEP Ohio had reached with customer and business groups. The commission's decision also reversed its earlier approval for the utility to spin off its Ohio power plants, a key move for AEP.

The commission ordered AEP Ohio to return its rates to December 2011 levels until a new rate plan is approved, and for AEP to modify its plans to separate its Ohio power plants from the utility.

Shares of AEP closed 4.8% lower at $37.91, paring earlier losses.

AEP Chief Executive Nick Akins said he was disappointed with the decision, which the company was still reviewing.

"We are concerned by the commission's reaction to what we believe were solvable issues on rehearing," Akins said in a statement. "We are currently evaluating our options and the potential financial and operational impacts on AEP Ohio."

The commission said it was compelled to reverse its decision after AEP changed its story with regard to how it plans to spin off its Ohio power plants, and after electricity rate increases for small-commercial customers turned out to be much larger than advertised.

In particular, the PUCO and some of the parties to AEP's rate settlement believed that AEP had agreed to transfer all its Ohio power plants to an AEP unit that would then offer the electricity from all the plants for sale at auctions held by the Mid-Atlantic grid operator, PJM Interconnection. A proposal AEP filed this month with the Federal Energy Regulatory Commission, from what the company agreed with Ohio groups, and suggested that the company might not offer all the power from its plants at the auction, the PUCO said.

"The complexity of the issues required us to take a step back," PUCO Chairman Todd Snitchler said in an interview. He added that he thinks the issue could be resolved in a relatively short period of time.

AEP Ohio has 30 days to modify its rate proposal before the commission reopens the case and sets a new schedule that would lead to a new decision.

Consumer advocates, who had opposed the rate settlement, lauded the PUCO decision.

"We've been against this plan from the get-go because it wasn't in the best interest of residential consumers," said Anthony Rodriguez, a spokesman for the Ohio Consumers Counsel.

AEP, based in Columbus, Ohio, predicted earlier this month that its Ohio operations would cost the company roughly 32 cents a share in 2012, on charges associated with customers switching to other utilities and with AEP's requirement to serve as Ohio's utility "of last resort" as that state deregulates its electricity market.

In addition to Ohio, AEP operates utilities in 10 other states and serves about 5 million customers.

The company plans to spend $5 billion to $6 billion from 2012 to 2020 to comply with new federal limits on emissions of mercury and other heavy metals and other air and water pollutants. As a result, AEP expects to shut down as much as 6,000 megawatts of aging coal-fired power plants, about half of which are in Ohio.

-By Cassandra Sweet, Dow Jones Newswires; 415-439-6468; [e-mail]