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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