Monday, March 2, 2015

Ohio PUC Refuses to Gamble Ratepayer Money on Coal Plant Cost Stability

By Amelia Schlusser, Staff Attorney

The Public Utilities Commission of Ohio (PUCO) recently issued an order granting conditional approval for American Electric Power Ohio’s (AEP) electricity rate plan. PUCO declined, however, to approve AEP’s proposal to transfer excess costs or revenues from the utility’s coal-fired power sales onto ratepayers. The PUCO decision may represent a growing regulatory reluctance to subsidize high-risk fossil fuel plants with ratepayer dollars.

AEP’s Proposal

AEP Ohio sought PUCO approval to implement a Power Purchase Agreement (PPA) Rider that would require ratepayers to pay for any revenue shortfalls the utility incurred through its sales of coal-fired power. This rider centered on AEP’s ownership interest in two Ohio coal plants that were constructed in the 1950s. Under AEP’s proposal, the utility would sell power from these coal plants into the PJM Interconnection’s wholesale electricity market. AEP would deduct its operating costs from power sales revenues, then pass the difference onto the utility’s ratepayers. Thus, if the revenues exceeded the utility’s costs, ratepayers would receive a credit on their electricity bills. If the utility’s costs exceeded the revenues, ratepayers would be charged extra to make up the difference.

AEP argued that this PPA rider would “be used as a hedge against future market volatility, in order to stabilize customer rates.” According to the utility, the coal plants’ fixed costs are relatively stable in comparison to wholesale electricity costs. Therefore, when market prices rise (and AEP’s revenues are high), AEP’s ratepayers would receive a credit on their bills. When market prices drop, AEP’s ratepayers would be on the hook for the utility’s revenue shortfalls. The PPA rider would thus serve as a hedge against price volatility in the wholesale market, and in AEP’s view, ratepayers would benefit from more stable electricity rates.

PUCO’s Conclusion

PUCO acknowledged that the proposed rider would reduce ratepayer vulnerability to market volatility to some extent. However, the commission questioned whether AEP’s proposal would actually benefit ratepayers. In answering this question, PUCO noted that AEP’s ratepayers would not actually receive any of the power from the two coal plants. The PPA rider would therefore only provide a financial hedge against price volatility, and ratepayers would not directly benefit from the facilities’ power generation.  

PUCO then assessed whether this financial hedge was likely to benefit or harm ratepayers. The commission noted that the utility’s own projections on the rider’s rate impacts were inconsistent, ranging from an estimated $52 million net cost to an $8.4 million net benefit. The PUCO concluded that while the rider’s potential impacts were highly uncertain, the potential costs to consumers outweighed the potentially negligible benefits. The Commission ultimately found AEP’s arguments unpersuasive and was unable to conclude that the rider would actually promote rate stability or was within the public interest. Citing “considerable uncertainty with respect to pending PJM market reform proposals, environmental regulations, and federal litigation,” PUCO found that it was inappropriate to approve AEP’s rider proposal.

A Transparent Attempt to Pass Risks onto Ratepayers

AEP’s rider proposal appears to be a thinly veiled attempt to hedge itself against potential economic losses associated with its coal-fired generation. Both the 1.1 gigawatt (GW) Kyger Creek coal plant and the 1.3 GW Clifty Creek coal plant will celebrate their 60th birthdays this year. At the time these plants were constructed, their heat rates were approximately 9,100 BTUs per kilowatt-hour of generation, According to the facilities’ respective websites, these were the two most efficient coal plants in the U.S. in 1955. Under the EPA’s proposed Clean Power Plan, however, Ohio coal plants are expected to improve their heat rates by 4–6%. During AEP’s rate plan proceedings, PUCO staff argued that ratepayer benefits from the proposed rider would be highly dependent on cost stability at these two coal plants, and noted that these costs “could increase significantly over the next few years as a result of additional capital expenditures, increases in coal prices, and environmental regulations.”

A number of environmental and industry interveners raised concerns that AEP’s rider aimed to force ratepayers to subsidize the utility’s aging coal plants and protect AEP’s investors from risks presented by future carbon and environmental regulations. These arguments may have influenced PUCO’s decision to reject the PPA rider. The Commission admonished AEP for attempting to maintain discretion to discontinue the rider after a two-year period, finding it “evident from AEP Ohio's testimony that the Company has made no offer to ensure that customers receive the alleged long-term benefits of the PPA rider.”

According to the U.S. Energy Information Administration, “Ohio is the third largest coal-consuming state in the nation after Texas and Indiana.” The PUCO’s apparent willingness to protect ratepayers from the risk of rising coal costs at the expense of utility profits may thus represent a sea change in the utility regulatory arena. On the other hand, the decision may simply stem from the PUCO’s reluctance to capitulate to overt utility self-dealing at ratepayer expense. In either case, it seems inevitable that these types of schemes will become increasingly common as coal power profits wane, and the PUCO should be commended for rejecting AEP’s rider proposal.

For more information on the PUCO decision, see EnergyWire’s coverage of the topic.

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