PUCO Rules Against Competitive Markets

On March 31, the Public Utility Commission of Ohio (PUCO) issued orders approving power purchase agreements (PPA) with FirstEnergy (FE) and American Electric Power (AEP) owned coal and nuclear plants, sending ripple effects of controversy throughout stakeholders in the 13-state PJM grid footprint.

The 8-year term PPA’s would rely on ratepayer support to guarantee income for a collection of economically distressed Ohio power plants including nine of AEP’s coal-fired units (totaling over 2,600 megawatts), FE’s 2,200 MW Sammis coal plant, FE’s Davis-Besse 908 MW nuclear plant, plus portions of FE and AEP’s contractual output from the Ohio Valley Electric Corp’s power stations in Ohio and Indiana.

The PPA’s are structured so that ratepayers would pay a nonbypassable (meaning they must pay) rider on the distribution portion of their electricity bill meant to guarantee a level of income to the applicable FE and AEP units.  The units would bid services into applicable PJM wholesale market auctions and the rider would charge ratepayers for any shortfalls (or share in any gains) between the total of the various market revenues (e.g. capacity, energy, ancillary) and the costs (plus profit margin) to run the units.

PJM and its independent market monitor (among many others) have objected to the PPA’s asserting they will negatively impact competitive wholesale markets.  Critics point out that FE and AEP recognize the units in question are on the verge of being uneconomic (i.e. they can’t clear competitive markets) and are at risk for retirement, hence the effort to obtain the PPAs. 

Opponents maintain the PPA’s transfer this economic risk from the plant owner/shareholder to the ratepayers.  Moreover, it is expected that as a result of the subsidies FE and AEP will choose to place zero bids for their units into PJM markets.  For example, a unit typically bids its marginal cost into PJM’s markets (e.g. energy or capacity) and the market clears based on PJM choosing the least cost resources needed to meet its demand or reserve needs.  Submitting below-cost bids, such as a zero bid, makes the units more competitive by increasing the likelihood it will clear in market auctions thus ensuring a revenue stream for the unit.  However, critics argue this will suppress market prices for all other resources, threatening the economics of existing non-subsidized units and failing to send accurate price signals for construction of new generation.

Unfortunately, one potential solution (other than rejecting the PPAs) to this problem – namely extending existing rules (i.e. minimum offer pricing rules) to require these units to bid in certain base costs – would shift greater risk onto ratepayers by increasing the likelihood these marginally economic units fail to clear the markets.

Aside from distorting competitive markets, consumer advocates claim these deals amount to a $6 billion ratepayer bailout for old plants and technologies that already received stranded cost compensation from ratepayers years ago during the transition to deregulation.  (Recall that deregulation was initially pursued to impose cost-lowering competition onto generation units that had become operationally and cost inefficient due to overreliance on guaranteed ratepayer support.) Environmentalists opposed support for dirty coal technologies that if retired would likely be replaced by cleaner capacity, while other Ohio generators touted their ability to provide the same generation benefits at lower costs.

AEP and FE maintain these orders are positive for consumers, helping preserve critical power supplies and safeguarding customers against rising energy prices when natural gas prices rise.  They also cite commitments agreed upon as part of settlement deals, including: converting some coal plants to natural gas, developing solar and wind projects, making grid modernization investments, advancing company-wide carbon reduction goals, contributing to low-income and customer assistance, limiting bill increases, temporarily freezing rates, sharing savings with customers and other actions.

Next up, a large swath of opponents (including PJM and the Ohio Consumers’ Counsel) have lined up appeals to the Federal Energy Regulatory Commission (FERC) requesting quick decisions on a variety of actions aimed at overturning PUCO’s decision.  Legal actions are also being planned by AEP and FE’s competitors.

The forthcoming U.S. Supreme Court decision in the two Talen cases – where state power plant subsidies are in question due to impacts on wholesale electricity markets under federal jurisdiction – may also be applicable.

Christina Simeone

Kleinman Center Senior Fellow

Christina Simeone is a senior fellow at the Kleinman Center for Energy Policy and a doctoral student in advanced energy systems at the Colorado School of Mines and the National Renewable Energy Laboratory, a joint program.