In a unanimous vote, the Public Utilities Commission of Ohio (PUCO) moved March 31 to accept  modified plans from investor-owned utilities FirstEnergy Corp. and American Electric Power Ohio that amount to requiring Ohioans to subsidize unprofitable power plants. The practical implications will be higher bills, restricted customer choice and less competitive markets.
The decision runs squarely counter to the public interest and transfers costs and risks from FirstEnergy and AEP Ohio to captive ratepayers. Fortunately, consumers and the company’s competitors still have a chance to challenge the agreements in the courts and before the Federal Energy Regulatory Commission (FERC).
The plans promise rate stability as an insurance policy against potentially even higher electricity prices in the future. The only way the insurance policy pays off is if natural-gas prices rise sharply, which is highly unlikely. Hydraulic fracturing and horizontal drilling have opened up massive new natural-gas reserves. Industry forecasts of natural-gas prices stand well below the negative outcome against which the policy theoretically would act as a hedge.
The value that a ratepayer would assign for the ability to enjoy stable rates will vary quite a bit from individual to individual. For those willing to pay for it, Ohio ratepayers already have the option to contract for multiyear rate stability. The retail choice market thus best matches ratepayers with the plans that suit them.
The PUCO decision instead mandates a one-size-fits-all policy, forcing ratepayers to pay billions for a hedge they don’t need. The agreements include commitments from AEP and FirstEnergy to invest in grid modernization and wind and solar power, promises the companies used as bargaining chips to earn the support of particular interest groups.
The subsidies will interfere with competitive electricity markets. Ohio is a member of PJM  Interconnection LLC, a regional transmission organization through which electricity generators compete in a marketplace that spans 13 states and the District of Columbia. The market allows investment signals to be sent that reflect market fundamentals, such as how low natural-gas prices signal the need to retire older coal and nuclear units when new natural-gas-fired generation costs less. PJM’s independent market monitor testified before PUCO that AEP and FirstEnergy’s proposals would disrupt how the PJM market functions and would have a negative effect on future reliability.
There’s still hope for a rational outcome. Precisely because it is so unreasonable, the decision may be overturned by the Ohio Supreme Court. Competing proposals  from Dynegy Inc. and Exelon Corp. offer evidence that the AEP and FirstEnergy agreements include excessive and unnecessary costs.
The best chance to reject the plans quickly lies at FERC. The agreements constitute sales between utilities and their unregulated affiliates. An industry group, headed up the Electric Power Supply Association, correctly contend s that these violate restrictions on affiliate transactions by forcing Ohio ratepayers to fund the agreements. The group argues in a complaint before FERC that this is unjust, unreasonable and unduly discriminatory. FERC would have to act swiftly to reject the agreements. The next PJM capacity auction , which sends long-term electricity-resource investment signals, will run in May.
Rejecting the PUCO decision would set a vital precedent in defense of competitive markets. Aging generation plants and inexpensive natural gas will continue to send market signals for more retirements of old power plants. Some owners of these plants will undoubtedly do what AEP and FirstEnergy have done – engage in rent-seeking behavior to protect their assets at others’ expense. Rate-stability plans sound tempting in this transition period, but do not justify interfering in competitive markets. This is a critical time for regulators to stand by fair and competitive principles and to resist political favoritism.
- “accept”: http://www.cleveland.com/business/index.ssf/2016/03/puco_approves_firstenergy_and.html
- “PJM”: http://www.pjm.com/
- “Competing proposals”: http://www.rstreet.org/2016/03/01/aep-and-firstenergy-proposals-undercut-competition-and-ratepayers/
- “contend”: http://www.epsa.org/forms/uploadFiles/3736900000014.filename.AEP_FE_Affiliate_Waiver_Complaint_FINAL_MAR92016.pdf
- “PJM capacity auction”: http://www.pjm.com/markets-and-operations/rpm.aspx