SNL: PUCO explains support for AEP, FirstEnergy generation subsidies

Posted by Laura Arnold  /   April 01, 2016  /   Posted in American Electric Power (AEP)  /   No Comments

By  Darren Sweeney

The Public Utilities Commission of Ohio on March 31 unanimously approved modified, yet controversial eight-year subsidy plans from AEP Ohio and FirstEnergy Corp.'s utilities designed to guarantee income for primarily coal-fired generation.

Opponents of the plans and related settlements have said they amount to "handouts" ranging from $1.9 billion for AEP Ohio and almost $4 billion for FirstEnergy.

"Although the non-signatory parties have raised numerous concerns regarding the stipulation, we are persuaded that the stipulation, as a package, benefits ratepayers and the public interest," PUCO said in its March 31 order.

AEP Ohio, the trade name of American Electric Power Co. Inc. unit Ohio Power Co., filed a settlement agreement in December 2015 with PUCO seeking an eight-year income guarantee for its share of two Ohio Valley Electric Corp. coal plants and four coal-fired assets owned in part by competitive subsidiary AEP Generation Resources. (Case Nos. 14-1693-EL-RDR, 14-1694-EL-AAM)

AEP's revised PPA, which includes a 10.38% ROE, will begin June 1, 2016, and end May 31, 2024. It will guarantee income for the capacity, energy and ancillary service output of its ownership share in the OVEC units, as well as Cardinal unit 1, Conesville units 4 through 6, J.M. Stuart units 1 through 4 and W.H. Zimmer unit 1.

The settlement states that AEP will retire, refuel or repower Conesville units 5 and 6 and Cardinal unit 1 to only use natural gas by the end of 2029 and 2030, respectively. The PUCO order prevents the company from seeking any recovery from ratepayers for these costs through the PPA rider or any other cost recovery mechanism.

The approved stipulation also includes a commitment for AEP Ohio to procure 500 MW of wind capacity and 400 MW of solar capacity over the next five years.

SNL Image

FirstEnergy Corp.'s Davis-Besse Nuclear Power Station is part of its approved PPA rider.

Source: FirstEnergy Corp.

PUCO said that the record "demonstrates a projected net credit to customers of $37 million over the current ESP term through May 31, 2018, or $214 million through May 31, 2024, under the term of the PPA rider."

The commission directed AEP Ohio to limit customer rate increases tied to the PPA rider to 5% for the remainder of the current ESP plan.

AEP Ohio's original PPA plan was rejected by PUCO in February 2015, but regulators left the door open for future approval of a "reasonable PPA rider proposal" that demonstrated the financial need of the generation, was open to rigorous commission oversight and balanced the financial risk between the company and its ratepayers, among other factors.

FirstEnergy

As part of a settlement, FirstEnergy agreed to reduce its proposed income guarantee for the 2,210 MW W.H. Sammis coal plant and 908-MW Davis-Besse nuclear plant to eight years from 15 years and cut its ROE to 10.38%. It also promised at least $100 million in customer credits. The retail rate stability rider runs from June 1, 2016, through May 31, 2024. (Case No. 14-1297-EL-SSO)

Under the plan, FirstEnergy's Ohio utilities will buy the power from the plants owned by competitive subsidiary FirstEnergy Solutions Corp., as well as the company's stake in the OVEC plants, and then sell the output into PJM Interconnection LLCwholesale energy and capacity markets. Customers will receive rate credits or charges to offset power purchase costs.

PUCO said the record in the FirstEnergy case indicates that its rider will generate $256 million in net revenue over the eight-year term of its electric security plan.

The commission also implemented a mechanism to ensure that average customer bills do not increase through May 31, 2018, "taking into account any seasonal rate differential and any over and under recoveries of Rider RRS for prior periods."

The utilities base distribution rates will remain frozen for the eight-year term of the ESP.

Commissioners

PUCO Chairman Andre Porter and other commissioners defended their votes during the meeting.

"Retail electricity prices are down due partially to new fuels and resources being discovered, [including] in the vast Marcellus and Utica shale regions. Prices are also down because demand has decreased," Porter said. "While such low prices present benefits for consumers, they present challenges for those providing utility services. While there is much to the debate, I hope that we can all agree that we want for consumers to benefit from safe, reliable and cost effective electric services."

Commissioner Lynn Slaby emphasized his "belief in the free open markets competition is not compromised with this order."

"First, we should look at the market to provide competition, innovation and solutions for the retail electric service without intervention. There are times, however, when outside factors may dictate some intervention into a perfect world. This is especially true when an immediate response is necessary for protection of the public health and safety," Slaby said.

"If I had a crystal ball, this job certainly would be much easier," he added. "Without generation that can be called upon immediately, we would not have a basic, reliable utility grid."

A 'bad' deal?

Dick Munson, Midwest director of clean energy for the Environmental Defense Fund, said before the ruling that he expected the plans to be approved. He said EDF would be contemplating next steps.

"My observation is [these PPAs are] bad for consumers, bad for the environment, it's bad for markets," Munson said. "So, I guess the campaign will quickly pivot [to FERC and the Ohio Supreme Court]. I think that there's sympathy in reviewing such state-based subsidies as being contrary to competitive wholesale markets and my guess is … they'll get overturned pretty quickly."

PUCO spokesman Matt Schilling said intervenors may file motions for rehearing to the commission within 30 days of the order. After a final entry on rehearing from the commission, the intervenors may appeal to the Supreme Court of Ohio within 60 days.

"The consideration of that court, however, is whether the PUCO acted responsibly," Munson said. "And I think that you could make the case that they did not because there are better offers on the table from say Dynegy Inc. or Exelon Corp. The Supreme Court, typically, gives a lot of deference to state regulatory agencies, so I'd be somewhat surprised if anything happens there."

Munson, however, noted that there are already complaints against the proposals before FERC.

The AEP subsidiary and FirstEnergy have been battling with competitive power providers that threatened legal action if Ohio regulators did not reject the deal and filed a complaint with FERC seeking commission review of the PPA.

"We will join those," he said. "And then there will be filings before the federal court as well."

While the Sierra Club signed on to AEP's plan, citing its commitment to move away from coal, it still opposes FirstEnergy's rider.

"We intend to continue fighting FirstEnergy's illegal bailout, which is a terrible deal for customers," Earthjustice attorney Michael Soules, who represented the Sierra Club at the hearings, said in a news release. "Today's decision flies in the face of the evidence, which shows that this bailout would saddle customers with the financial risks of aging coal and nuclear plants, while providing FirstEnergy shareholders a hefty profit. FirstEnergy customers deserve better."

Original article: https://www.snl.com/web/client?auth=inherit#news/article?id=35788948&KeyProductLinkType=0&cdid=A-35788948-10530

Article updated at 5:33 p.m. ET on March 31, 2016, to include additional information. Article amended at 8:46 a.m. ET on April 1, 2016, to clarify the rehearing process.

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