FirstEnergy Corp. and American Electric Power (AEP) are looking to undo Ohio’s electricity market reforms in an effort to extract more revenue from Ohio ratepayers.

The companies’ proposals, which currently sit before the Public Utility Commission of Ohio (PUCO), seek power purchase agreements (PPA) that keep old coal and nuclear power plants in operation, effectively subsidizing expensive power plants under the guise of consumer protection. If approved, this “reregulation” likely would add billions of dollars to customers’ bills.

Historically, regulated electric utilities were able to socialize the risk of their power investments by convincing regulators to approve monopoly rates that allowed them to recover their costs and enjoy a guaranteed rate of return on investments, regardless of changing market conditions. Needless to say, this model failed to encourage risk-savvy investment.

Ohio’s electricity reforms of the late 1990s and early 2000s – known as “restructuring” or “deregulation” – shifted the risk of power investments from ratepayers to the private sector. This model ensures market signals drive resource decisions. It’s a welcome departure from regulated electric utilities that typically had poor track records for asset management. Restructuring has encouraged power suppliers to control costs, innovate and minimize risk, while empowering customers to decide between multiple power providers, who in turn are motivated by competition to put their best deals forward.

Competitive electricity markets have enabled Ohioans to benefit from the extraordinary breakthroughs in natural gas shale production. The prices of natural gas and electricity have plummeted thanks to these innovations in horizontal drilling and hydraulic fracturing. The shift signals the retirement of some units that don’t use natural gas. This reflects a healthy marketplace.

AEP and FirstEnergy’s coal-fired and nuclear generation fleet profited handsomely from the high natural gas prices of the 2000s, but shale gas dramatically shifted market forces in favor natural gas-fired power plant construction. AEP and FirstEnergy own some of these now unprofitable units. Rather than follow market signals, they now seek ratepayer subsidies to counteract market forces and keep their plants online. This leaves ratepayers on the hook to pay above-market rates to protect AEP and FirstEnergy’s interests. The Ohio Consumers Counsel and Northeast Ohio Public Utilities Council estimated the initial FirstEnergy deal would cost consumers $3 billion.

Several alternative forms of the PPA deals also are on the table, but none would reflect market-based outcomes that serve the public interest. The Sierra Club negotiated a settlement with AEP that supports AEP’s deal but adds the acquisition of 900 MW of renewable power to offset keeping coal units online. This adds additional out-of-market expenses to consumers in the name of a green compromise.

Clean energy is an important part of Ohio’s future, but it needs to be done through competitive markets that reflect the environmental costs of pollution, such as carbon pricing.

Exelon and Dynegy each have made clear their ability to sell equivalent power to Ohio consumers at more than $2 billion less than the FirstEnergy PPA. This demonstrates the excessive cost of the FirstEnergy deal. While a competitive PPA process is preferable to one that isn’t competitive, even PPAs that are less costly would reopen the door to state-controlled rates that undermine consumer choice and competitive markets.

AEP and FirstEnergy pitch their deals as “protection” for ratepayers against volatile natural gas prices. The concern has some limited merit, but it’s really protection for themselves. If AEP and FirstEnergy thought natural gas prices would return to high levels, they would leave their units exposed in the marketplace. Their pursuit of market protections reflects their own outlook: natural gas will be cheap for a long time.

Equities research firms confirm this; they see these AEP and FirstEnergy units hurting from cheap natural gas but project a nice stock bump if the PUCO deals go through. They also expect the deals to deliver a stock hit for their competitors, reflecting the market distortion that occurs from such out-of-market interventions.

Natural gas price changes are precisely the type of risk that competitive markets are best positioned to handle. This is a test of whether Ohio will stand by competitive market principles or cave to corporate welfare and poor bureaucratic judgment. Ohioans are smart enough to recognize a bad deal that undercuts their choices and benefits from the gas revolution. Let’s hope the PUCO does, too.

Featured Publications