Ohio’s fight to preserve energy competition and choice
Ohio regulators recently approved a problematic, watered-down subsidy for investor-owned utility FirstEnergy Corp. amounts to corporate welfare to protect captive ratepayers of its monopoly utility segment from the poor management of the company’s competitive generation portfolio. But the real fight is yet to come.
FirstEnergy announced plans to join American Electric Power Ohio (AEP) in lobbying the state Legislature to re-regulate its generation assets. This would backtrack groundbreaking reforms enacted last decade that opened up the Ohio power industry to competition and enabled customers to choose their supplier. Worse, it would set a dangerous precedent of destroying market institutions to rescue fledgling companies at the expense of successful competitors and consumers.
The Public Utilities Commission of Ohio (PUCO) approved the new subsidy plan for FirstEnergy in October. The potential $600 million electric rate plan is a fraction of the $4 billion FirstEnergy requested. The company’s request simply reformulated a plan to subsidize unprofitable power plants that PUCO previously approved in March, but was struck by the Federal Energy Regulatory Commission in April (a similar plan for AEP was also rejected).
According to PUCO’s chairman, the primary purpose of the revised plan is “to ensure that FirstEnergy retains a certain level of financial health and creditworthiness.” This rationale flies in the face of what electricity competition is supposed to do – leave markets to determine the health of power companies. Shifts in economic fundamentals create investment risk. Those risks are socialized under the regulated monopoly utility model, but are supposed to be shifted to the private sector under a market regime. This improves how the private sector manages risk and drives performance improvements. Subsidizing poor performers completely undercuts incentives to perform, socializes risk and damages competitors.
PUCO’s decision highlights a potential problem with Ohio’s power industry structure, where the financial health of a power company’s competitive arm (i.e., generation) affects that of its regulated arm (i.e., distribution, which is a monopoly utility). PUCO noted that the infusion of capital it permitted would ensure FirstEnergy had the financial health to make future investments in grid modernization (FirstEnergy’s bond rating is barely investment grade status). In plain language, this is corporate welfare to protect captive ratepayers of the distribution utility from the poor management of the company’s competitive arm.
A company that can subsidize its competitive generation segment through its regulated distribution segment raises major competitive concerns in the generation market. In such a case, economics tells us that “rival generation firms, without recourse to such subsidies, might go out of business even if they were actually more efficient generators, to the detriment of consumers.” Full separation of the competitive and monopoly functions would eliminate the rationale for corporate welfare and avoid market distortions.
As the pursuit of ratepayer-backed subsidies largely backfired, FirstEnergy and AEP are going for the competition’s jugular. They’re teaming-up to push re-regulation of their generation assets. Exactly how this structure would look is unknown, but it would, at the least, severely limit or kill customer choice. It would undoubtedly cause customer rates to rise by keeping unprofitable plants in operation at ratepayers’ expense, as well as harm competitive generation owners who still play by the rules. As the independent monitor of the wholesale electricity market noted: “Ohio customers have nothing to gain from paying above market prices to preserve aging and obsolete assets.”
Todd Snitcher, the former chair of the Public Utilities Commission of Ohio, called this “crony capitalism at its worst.” At its best, it’s rent-seeking behavior that undermines consumers, innovation and the environment. But the worst implications are the precedent it could set in other states, where losers of the low-price natural gas era see an opportunity to claw profit via government assistance.
Fortunately, the two-year drag of multiple regulatory disputes over subsidies enabled proponents of competition and choice to organize. The Alliance for Energy Choice formed and provides a voice for customers and competitive suppliers hurt by diminished competition. The Environmental Defense Fund has taken a leadership role in recognizing that protecting competition and the environment are one and the same. Ohio conservatives, such as the state’s Buckeye Institute, increasingly are alarmed by the anti-market games of AEP and FirstEnergy.
This debate comes at a time when the consumer benefits of competition and choice are becoming increasingly clear. Low-priced natural gas benefits customers in restructured markets more, and the investment risks it presents are better managed by competitive generation owners than monopoly utilities. Competitive wholesale electric markets have increased generation efficiency and innovation. As the market monitor put it “competition remains [the] best choice for Ohio customers.” Furthermore, the competitive wholesale market that includes Ohio has seen strong emissions reductions, in part connected to the incentives competition creates to use fuel more efficiently.
When it comes down to it, companies should excel based on their market positions, not political ones. The dynamism of capitalism can only be captured by letting markets pick winners and losers. That requires political discipline.
Ohio was a pioneer for competition and choice. That’s a legacy Buckeyes should hang their hat on. They now face a challenge that would move capitalism backward. Ohio policymakers must protect the integrity of their market principles and the reputation of the Buckeye State.
Image by Joseph Sohm
