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THE APPLICATION OF KENTUCKY POWER

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THE APPLICATION OF KENTUCKY POWER ( the-application-kentucky-power )

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Property Tax Insurance O&MServices $54 Asset Management $15 Total AxedOBMCosts $10.9 $06 $01 $02 $00 $38 $38 $38 $38 $50 $52 $49 $49 $15 $15 $15 $15 $10.9 $10.5 $10.4 $10.1 $03 $09 $0 1 $03 $00 $51 $51 $5 7 $57 $51 $83 $17 $19 $75 $14 Table 50 Combined-cycle Fixed O&M Costs CONEArea CONEArea 1234512345 IMAAC SWMAAC RTO WMAAC DOM EMAAC SWMAAC RTO W I A A C DOM ($Iw~) ($I~I(Y) ($I?I/~)($/~/y) ($111/y) ($/A W-y) ($/It W-y) ($/AWy) ($AW-y) ($AW-y) $02 $ 3 8 Sourcesarid Notes Property tax, insurance, and asset iiianagenient costs estiinated in Section V O&M services estimated by Wood Group (2011) c . L E V E L I Z E CDO S T O F N E W E N T R Y As discussed in Section IV.A.3 of our concurrently prepared 2011 RPM perfoimance review (“2011 RPM translating investment costs into annualized costs for the purpose of setting annual capacity prices requires an assuinption about how net revenues are received over time to recover capital and annual fixed costs. Level-nominal cost recovery assumes that net revenues will be constant in nominal teiins (Le., decreasing in real dollar, inflation-adjusted terins) over the 20-year economic life of the plant. A level-real cost recovery path starts at a lower level then increases at the rate of inflation (ie,constant in real dollar teims). As we explain in our 2011 RPM Repoi-t, we find that level real is more consistent with our expected trajectoiy of operating margins froin hture capacity and net E&AS revenue^.^' As discussed in the 2011 RPM Report, we recommend that PJM and its stakeholders transition toward using a level-real CONE for MOPR pui-poses, and we conditionally recommend the same for defining the VRR curve. We recoinmend maintaining level nominal for the VRR cui-ve until our recormendations to increase the VRR cui-ve cap and calibrate the administrative E&AS offset are adopted. Until then, using the higher level-nominal CONE will help mitigate soine of the RPM performance risks we identified. Table 51 and Table 52 show suinmaries of our capital costs, annual fixed costs, and levelized CONE estimates for the gas CT and CC reference plants for the 2015/16 delivery year. Our levelization calculation, after accounting for financing costs, depreciation, and IDC, results in a capital charge rate of 11.9% to 12.2% for the CC on a level-real basis (14.8% to 15.0% level nominal) AND 12.9% to 13.1% for the CT on level-real basis (15.8% to 16.0% level n ~ i n i n a l ) . ~ ~ For comparison, the tables also repoi-t the results of the CONE studies used as the basis for PJM’s cuirent parameters after escalating at inflation to a 2015/16 delivery year. We also report the most recent 201445 PJM administrative CONE parameters, inflation-adjusted for the 20 15/16 delivery year. See Pfeifenberger and Newell, et al. (2011). Historically, the average CT cost inflation exceeded CPI by 60 basis points while heatrate improvements saved approximately 50 basis points, for a net growth rate in net operating revenues approximately equal to general inflation. Id. The capital charge rate is defined as the levelized CONE (without FOM) divided by the overnight capital costs. ” 52 44 $23 $23 $16.7 $16.6 $2 3 $16.0 $2 3 $15.8 $2 3 $15.4

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