In July 2017, AEP filed a motion with the U.S. District Court for the Southern District of Ohiodistrict court seeking to modify the consent decree to eliminate an obligation to install future controls at Rockport Plant, Unit 2 if AEP does not acquire ownership of that unit, and to modify the consent decree in other respects to preserve the environmental benefits of the consent decree.  The other parties to the consent decree opposed AEP’s motion. The district court granted AEP’s request to delay the deadline to install SCRSelective Catalytic Reduction (SCR) technology at Rockport Plant, Unit 2 until June 2020. Construction of the SCR technology was completed by June 1, 2020, testing was conducted, and the unit was released for dispatch on June 5, 2020.

The CAA establishes a comprehensive program to protect and improve the nation’s air quality and control sources of air emissions. The states implement and administer many of these programs and could impose additional or more stringent requirements. The primary regulatory programs that continue to drive investments in AEP’s existing generating units include: (a) periodic revisions to the National Ambient Air Quality Standards (NAAQS)NAAQS and the development of SIPs to achieve any more stringent standards;standards, (b) implementation of the regional haze program by the states and the Federal EPA;EPA, (c) regulation of hazardous air pollutant emissions under the Mercury and Air Toxics Standards (MATS) Rule;MATS, (d) implementation and review of the Cross-State Air Pollution Rule (CSAPR), a FIP designed to eliminate significant contributions from sources in upwind states to nonattainment or maintenance areas in downwind statesCSAPR and (e) the Federal EPA’s regulation of greenhouse gas emissions from fossil-fueled electric generating unitsfossil generation under Section 111 of the CAA.

The Federal EPA issued a Clean Air Visibility Rule (CAVR), detailing how the CAA’s requirement that certain facilities install best available retrofit technology (BART) willwould address regional haze in federal parks and other protected areas.  BART requirements apply to facilities built between 1962 and 1977 that emit more than 250 tons per year of certain pollutants in specific industrial categories, including power plants.  CAVR will be implemented through SIPs or if SIPs are not adequate or are not developed on schedule, through FIPs.  In January 2017, the Federal EPA revised the rules governing submission of SIPs to implement the visibility programs, including a provision that postpones the due date for the next comprehensive SIP revisions until 2021. Petitions for review of the final rule revisions have been filed in the U.S. Court of Appeals for the District of Columbia Circuit.

In October 2016, the Federal EPA issued a final rule, was issuedthe CSAPR Update, to address the remand and to incorporate additional changes necessary to address the 2008 ozone standard. The final ruleCSAPR Update significantly reducesreduced ozone season budgets in many states and discountsdiscounted the value of banked CSAPR ozone season allowances beginning with the 2017 ozone season. The rule has been challenged inIn 2019, the courts and petitions for administrative reconsideration have been filed. In March 2018,appeals court remanded the U.S. Court of Appeals for the District of Columbia Circuit denied the petitions and other challengesCSAPR Update to the rule. Management has been complying withFederal EPA because it determined the more stringent ozone season budgets while these petitionsFederal EPA had not properly considered the attainment dates for downwind areas in establishing its partial remedy, and should have considered whether there were pending. In a related case,available measures to control emissions from sources other parties challenged in the U.S. Court of Appeals for the District of Columbia Circuit a final rule withdrawing Texas fromthan generating units. Any further changes to the CSAPR annual program and reaffirming that compliance with CSAPR remained better than compliance with BART. The U.S. Court of Appeals for the District of Columbia Circuit granted a motion in March 2018 to hold the case in abeyance until completion of the Federal EPA’s review of pending petitions for reconsideration of the Texas regional haze rule discussed above.will require additional rulemaking.

In 2012, the Federal EPA issued a rule addressing a broad range of HAPs from coal and oil-fired power plants.  The rule establishesestablished unit-specific emission rates for units burning coal on a 30-day rolling average basis for mercury, PM (as a surrogate for particles of nonmercurynon-mercury metals) and hydrogen chloride (as a surrogate for acid gases).  In addition, the rule proposesproposed work practice standards such as boiler tune-ups, for controlling emissions of organic HAPs and dioxin/furans.  Compliance wasfurans, with compliance required within three years. Management obtained administrative extensions for up to one year at several units to facilitate the installation of controls or to avoid a serious reliability problem.

In April 2014, the U.S. Court of Appeals for the District of Columbia Circuit denied all of the petitions for review of the April 2012 final rule. Industry trade groups and several statesVarious intervenors filed petitions for further review in the U.S. Supreme Court and the court granted those petitions in November 2014.Court.

In June 2015, the U.S. Supreme Court reversed the decision of the U.S. Court of Appeals for the District of Columbia Circuit. The U.S. Court of Appeals for the District of Columbia Circuitcourt remanded the MATS rule for further proceedings consistent with the U.S. Supreme Court’s decision thatto the Federal EPA was unreasonable in refusing to consider costs in its determinationdetermining whether to regulate emissions of HAPs from power plants. TheIn 2016, the Federal EPA issued notice of a supplemental finding concluding that, after considering the costs of compliance, it iswas appropriate and necessary to regulate HAP emissions from coal-firedcoal and oil-fired units. Management submitted comments on the proposal. In April 2016, the Federal EPA affirmed its determination that regulation of HAPs from electric generating units is necessary and appropriate. Petitions for review of the Federal EPA’s April 2016 determination have beenwere filed in the U.S. Court of Appeals for the District of Columbia Circuit. Oral argument was scheduled for May 2017, but in April 2017In 2018, the Federal EPA requestedreleased a revised finding that oral argument be postponedthe costs of reducing HAP emissions to facilitate its reviewthe level in the current rule exceed the benefits of those HAP emission reductions. The Federal EPA also determined that there are no significant changes in control technologies and the rule. Theremaining risks associated with HAP emissions do not justify any more stringent standards. Therefore, the Federal EPA proposed to retain the current MATS standards without change. In April 2020, the Federal EPA released a final rule remainsadopting the conclusions set forth in effect.the proposal and retaining the existing MATS standards.

The Federal EPA also published proposed “model” rules that could be adopted by the states that would allow sources within “trading ready” state programs to trade, bank or sell allowances or credits issued by the states. These rules would also be the basis for any federal plan issued by the Federal EPA in a state that fails to submit or receive approval for a state plan. In June 2016, the Federal EPA issued a separate proposal for the Clean Energy Incentive Program (CEIP) that was included in the model rules.

In this same filing,2018, the Federal EPA also presented a motion to hold the litigation in abeyance until 30 days after the conclusion of review of any resulting rulemaking. The District of Columbia Circuit granted the Federal EPA’s motion in part and has requested periodic status reports. In October 2017, the Federal EPA issuedfiled a proposed rule repealingrevising the CPPstandards for new sources and withdrawingdetermined that partial carbon capture and storage is not the legal memoranda issued in connection with the rule. The Federal EPA has re-examined its legal interpretation of the “bestbest system of emission reduction”reduction because it is not available throughout the U.S. and found that based on the statutory text, legislative history, use of similar terms elsewhere in the CAA and its own historic implementation of Section 111 that a narrower interpretation of the term limits itis not cost-effective. Management continues to those designs, processes, control technologies and other systems that can be applied directly to or at the source. Since the primary systems relied on in the CPP are not consistent with that interpretation, the Federal EPA proposes that the rule be withdrawn. The comment period on the proposed repeal has been extended to April 2018. In December 2017, the Federal EPA issued an advanced notice of proposedactively monitor these rulemaking seeking information that should be considered by the Federal EPA in developing guidelines for state programs. Management is actively monitoring these rulemakings and participating in the development of any new guidelines.activities.

In April 2015, the Federal EPA published a final rule to regulate the disposal and beneficial re-use of coal combustion residuals (CCR),CCR, including fly ash and bottom ash generated atcreated from coal-fired electric generating units and also FGD gypsum generated at some coal-fired plants.  The final rule has been challenged in the courts.

In December 2016,a challenge to the U.S. Congress passed legislation authorizing statesfinal 2015 rule, the parties initially agreed to submit programs to regulate CCR facilities, andsettle some of the Federal EPA to approve such programs if they are no less stringent thanissues.  In 2018, the minimum federal standards. The Federal EPA may also enforce compliance with the minimum standards until a state program is approved or if states fail to adopt their own programs. In September 2017, the Federal EPA granted industry petitions to reconsider the CCR rule and asked that litigation regarding the rule be held in abeyance. The U.S. Court of Appeals for the District of Columbia Circuit heard oral argumentaddressed or dismissed the remaining issues in November 2017. In March 2018,its decision vacating and remanding certain provisions of the 2015 rule.  The provisions addressed by the court’s decision, including changes to the provisions for unlined impoundments and legacy sites, will be the subject of further rulemaking consistent with the court’s decision.

Prior to the court’s decision, the Federal EPA issued the July 2018 rule that modifies certain compliance deadlines and other requirements in the 2015 rule.  In December 2018, challengers filed a proposed rule to modify certain provisionsmotion for partial stay or vacatur of the solid waste management standards and provide additional flexibilityJuly 2018 rule. On the same day, the Federal EPA filed a motion for partial remand of the July 2018 rule. The court granted the Federal EPA’s motion. In November 2019, the Federal EPA proposed revisions to facilities regulated under approved state programs.implement the

court’s decision regarding the timing for closure of unlined surface impoundments along with impoundments not meeting the required distance from an aquifer. The comment period is open until the end of April 2018. Management supports the adoption of more flexible compliance alternatives subject toclosed in January 2020. In December 2019, the Federal EPA or state oversight.proposed a federal permit program, implementing the Water Infrastructure Improvements for the Nation Act, that would apply in states that do not have an approved CCR program.

Other utilities and industrial sources have been engaged in litigation with environmental advocacy groups who claim that releases of contaminants from wells, CCR units, pipelines and other facilities to ground watersgroundwaters that have a hydrologic connection to a surface water body representsrepresent an “unpermitted discharge” under the Clean Water Act.CWA. Two cases were accepted by the U.S. Supreme Court for further review of the scope of CWA jurisdiction. In April 2020, the Supreme Court issued an opinion remanding one of these cases to the Ninth Circuit based on its determination that discharges from an injection well that make their way to the Pacific Ocean through ground water may require a permit if the distance traveled through ground water, length of time to reach the surface water and other factors make it “functionally equivalent” to a direct discharge from a point source. The second case was also remanded to the lower court. Prior to the Supreme Court’s decision, the Federal EPA has opened a rulemaking docket to solicit information to determine whether it should provide additional clarification of the scope of Clean Water ActCWA permitting requirements for discharges to ground water. Commentsgroundwater, and issued an interpretive statement finding that discharges to groundwater are due in May 2018.not subject to NPDES permitting requirements under the CWA. Management is unable to predict the outcomeimpact of these cases on the Federal EPA’s rulemaking, but they could impose significant additional costsdevelopments on AEP’s facilities.

Because AEP currently uses surface impoundments and landfills to manage CCR materials at generating facilities, significant costs will be incurred to upgrade or close and replace these existing facilities at some pointand conduct any required remedial actions. Closure and post-closure costs have been included in ARO in accordance with the requirements in the future asfinal rule. Additional ARO revisions will occur on a site-by-site basis if groundwater monitoring activities conclude that corrective actions are required to mitigate groundwater impacts, which could include costs to remove ash from some unlined units.

In March 2020, Virginia’s Governor signed House Bill 443 (HB 443), effective July 2020, requiring APCo to close certain ash disposal units at the new rule is implemented. Managementretired Glen Lyn Station by removal of all coal combustion material.  As a result, in June 2020, APCo recorded a $95$199 million revision to increase in asset retirement obligations in 2015 primarily dueestimated Glen Lyn Station ash disposal ARO liabilities.  The closure is required to be completed within 15 years from the publicationstart of the final rule.excavation process.  HB 443 provides for the recovery of all costs associated with closure by removal through the Virginia environmental rate adjustment clause (E-RAC).  APCo may begin recovering these costs through the E-RAC beginning July 1, 2022.  APCo is permitted to record carrying costs on the unrecovered balance of closure costs at a weighted average cost of capital approved by the Virginia SCC. HB 443 also allows any closure costs allocated to non-Virginia jurisdictional customers, but not collected from such non-Virginia jurisdictional customers, to be recovered from Virginia jurisdictional customers through the E-RAC.

If removal of ash is required without providing similar assurances of cost recovery in regulated jurisdictions, it would impose significant additional operating costs on AEP, which could lead to increased financing costs and liquidity needs. Other units in Virginia, Ohio, West Virginia, and Kentucky already have been closed in place in accordance with state law programs. Management will continue to evaluate the rule’s impactparticipate in rulemaking activities and make adjustments based on operations.new federal and state requirements affecting its ash disposal units.

In 2014, the Federal EPA issued a final rule setting forth standards for existing power plants that is intended to reduce mortality of aquatic organisms pinned against a plant’s cooling water intake screen (impingement)impinged or entrained in the cooling water.  Entrainment is when small fish, eggs or larvae are drawn into the cooling water system and affected by heat, chemicals or physical stress.  The final rule affects all plants withdrawing more than two million gallons of cooling water per day. The rule offers seven technology options to comply withwas upheld on review by the impingement standard and requires site-specific studies to determine appropriate entrainment compliance measures at facilities withdrawing more than 125 million gallons per day. Additional requirements may be imposed as a resultU.S. Court of consultation with other federal agencies to protect threatened and endangered species and their habitats. Facilities with existing closed cycle recirculating cooling systems, as defined inAppeals for the rule, are not expected to require any technology changes. Facilities subject to both the impingement standard and site-specific entrainment studies will typically be given at least three years to conduct and submit the results of those studies to the permit agency.Second Circuit. Compliance timeframes will then beare established by the permit agency through each facility’s NPDES permit for installation of any required technology changes, as those permits are renewed over the next fiveand have been incorporated into permits at several AEP facilities. Additional AEP facilities are reviewing these requirements as their wastewater discharge permits are renewed and making appropriate adjustments to eight years. Petitions for review of the final rule were filed by industry and environmental groups and are currently pending in the U.S. Court of Appeals for the Second Circuit.their intake structures.

In addition,2015, the Federal EPA developed revisedissued a final rule revising effluent limitation guidelines for electricity generating facilities. A finalThe rule was issued in November 2015. The final rule establishesestablished limits on FGD wastewater, fly ash and bottom ash transport water and flue gas mercury control wastewater to be imposed as soon as possible after November 2018 and no later than December 2023. These new requirements willwould be implemented through each facility’s wastewater discharge permit. The rule has beenwas challenged in the U.S. Court of Appeals for the Fifth Circuit. In March 2017, industry associations filed a petition for reconsideration of the rule with the Federal EPA. In April 2017, the Federal EPA granted reconsideration ofannounced its intent to reconsider and potentially revise the rule and issued a stay of the rule’s future compliance deadlines, which has now expired. In April 2017, the U.S. Court of Appeals for the Fifth Circuit granted a stay of the litigation for 120 days. In June 2017, the Federal EPA also issued a proposal to temporarily postpone certain compliance deadlines in the rule. A final rule revising the compliance deadlinesstandards for FGD wastewater and bottom ash transport waterwater. The Federal EPA postponed the compliance deadlines for those wastewater categories to be no earlier than 2020, was issuedto allow for reconsideration. In April 2019, the Fifth Circuit vacated the standards for landfill leachate and legacy wastewater, and remanded them to the Federal EPA for reconsideration.  In November 2019, the Federal EPA proposed revisions to the guidelines for existing generation facilities. The comment period ended in September 2017.January 2020. Management submitted comments supporting the proposed postponement. Management continues to assessis assessing technology additions and retrofits to comply with the rule and the impacts of the Federal EPA’s recent actions on facilities’ wastewater discharge permitting. Management is actively participating in the reconsideration proceedings.

In June 2015, the Federal EPA and the U.S. Army Corps of Engineers jointly issued a final rule to clarify the scope of the regulatory definition of “waters of the United States” in light of recent U.S. Supreme Court cases. Various parties challenged the 2015 rule in different U.S. District Courts, which resulted in a patchwork of applicability of the 2015 rule and its predecessor. In December 2018, the Federal EPA and the U.S. Army Corps of Engineers proposed a replacement rule. In September 2019, the Federal EPA repealed the 2015 rule. The final replacement rule was published in the Federal Register in April 2020 and became effective in June 2020. The final rule limits the scope of CWA jurisdiction to four categories of waters, and clarifies exclusions for ground water, ephemeral streams, artificial ponds and waste treatment systems. Challenges to the final rule and requests for a preliminary injunction have been brought by states and other groups in multiple U.S. District Courts. At this time, none of the jurisdictions in which AEP operates are impacted by a stay. Management is monitoring these various proceedings but is unable to predict the actions of the various courts.

In April 2020, the U.S. District Court for the District of Montana issued a decision vacating the U.S. Army Corps of Engineers’ (Corps) General Nationwide Permit 12 (NWP 12), which provides for federal jurisdiction over “navigable waters” defined as “thestandard conditions governing linear utility projects in streams, wetlands and other waters of the United States.” This jurisdictional definition appliesStates having minimal adverse environmental impacts. The Court found that in reissuing NWP 12 in 2017, the Corps failed to all CWA programs, potentially impacting generation, transmission and distribution permitting and compliance requirements. Among those programs are permits for wastewater and storm water discharges, permits for impacts to wetlands and water bodies and oil spill prevention planning. The final definition continues to recognize traditional navigable waterscomply with Section 7 of the Endangered Species Act (ESA), which requires the Corps to consult with the U.S. as jurisdictional as well as certain exclusions.Fish and Wildlife Service regarding potential impacts on endangered species. The ruleCourt remanded the permit back to the Corps to complete its ESA consultation, and also containsenjoined the Corps from authorizing any dredge or fill activities under NWP 12 pending completion of the consultation process. The Department of Justice filed a numbermotion to stay the injunction and tailor the remedy imposed by the Court. In May 2020, the Court revised its order lifting the injunction for non-oil and gas pipeline construction activities and routine maintenance, inspection and repair activities on existing NWP 12 projects. The Department of new specific definitions and criteria for determining whether certain other waters are jurisdictional because of a “significant nexus.” Management believes that clarity and efficiency inJustice appealed the permitting process is needed. Management remains concerned thatCourt’s decision to the rule introduces new concepts and could subject more of AEP’s operations to CWA jurisdiction, thereby increasing the time and complexity of permitting. The final rule is being challenged in both courts of appeal and district courts. The U.S. Court of Appeals for the SixthNinth Circuit granted a nationwideand moved for stay pending appeal, which was denied. In June 2020, the Department of the rule pending jurisdictional determinations. In February 2016, the U.S. Court of Appeals for the Sixth Circuit issued a decision holding that it has exclusive jurisdiction to decide the challenges to the “waters of the United States” rule. Industry, state and related associations filed petitions for a rehearing of the jurisdictional decision. In April 2016, the U.S. Court of Appeals for the Sixth Circuit denied the petitions. In January 2017, the decision was appealedJustice submitted an application to the U.S. Supreme Court which granted certiorari to review the jurisdictional issue. Oral argument was heard in October 2017. In January 2018, the U.S. Supreme Court ruled that challenges to the definition of “watersrequesting a stay of the United States” must be filed in the federal district court, and remanded the case to the U.S. Court of Appeals for the Sixth Circuit with directions to dismiss the petitions for review for lack of jurisdiction. The stay has been liftedDistrict Court’s Order, and the Sixth Circuit case has been dismissed. ChallengesCourt granted the request with respect to all oil and gas pipelines except the rule will proceed in federal district courts.Keystone Pipeline. Management is monitoring the litigation and evaluating other permitting alternatives, but is currently unable to predict the impact of future proceedings on current and planned projects.

SEGMENTS

AEP’s primary business is the generation, transmission and distribution of electricity.  Within its Vertically Integrated Utilities segment, AEP centrally dispatches generation assets and manages its overall utility operations on an integrated basis because of the substantial impact of cost-based rates and regulatory oversight.  Intersegment sales and transfers are generally based on underlying contractual arrangements and agreements.

AEP’s reportable segments and their related business activities are outlined below:

The remainder of AEP’s activities isare presented as Corporate and Other. While not considered a reportable segment, Corporate and Other primarily includes the purchasing of receivables from certain AEP utility subsidiaries, Parent’s guarantee revenue received from affiliates, investment income, interest income and interest expense and other nonallocated costs.

The following discussion of AEP’s results of operations by operating segment includes an analysis of Gross Margin, which is a non-GAAP financial measure. Gross Margin includes Total Revenues less the costs of Fuel and Other Consumables Used for Electric Generation as well as Purchased Electricity for Resale and Amortization of Generation Deferrals as presented in the Registrants statements of income as applicable. Under the various state utility rate making processes, these expenses are generally reimbursable directly from and billed to customers. As a result, they do not typically impact Operating Income or Earnings Attributable to AEP Common Shareholders. Management believes that Gross Margin provides a useful measure for investors and other financial statement users to analyze AEP’s financial performance in that it excludes the effect on Total Revenues caused by volatility in these expenses. Operating Income, which is presented in accordance with GAAP in AEP’s statements of income, is the most directly comparable GAAP financial measure to the presentation of Gross Margin. AEP’s definition of Gross Margin may not be directly comparable to similarly titled financial measures used by other companies.

The following table presents Earnings (Loss) Attributable to AEP Common Shareholders by segment: