Exelon companies protest Duke Energy Ohio’s coal protection plan

Exelon Generation Co. LLC and affiliate Constellation NewEnergy Inc. told the Public Utilities Commission of Ohio that a Duke Energy Ohio plan to protect coal-fired capacity at the Kyger Creek and Clifty Creek power plants is illegal and shouldn’t be allowed.

On May 29, the Duke Energy Ohio unit of Duke Energy (NYSE: DUK) filed an application with the PUCO to establish a new electric security plan (called “ESP III”), which would commence June 1, 2015, and end May 31, 2017 or 2018, at the election of Duke. In that plan is a proposed “Price Stability Rider” that would essentially charge customers to maintain Duke Energy Ohio’s share of Clifty Creek and Kyger Creek, which are under an entity known as Ohio Valley Electric Corp. (OVEC). The utility says this protection will mean stable prices and supply of electricity in the future in this deregulated state.

Duke Energy Ohio is entitied to about 9% of the capacity from OVEC, amounting to about 200 MW.

Said Exelon and Constellation in a Dec. 15 protest brief: “Currently, Duke sells all of the capacity and energy from its entitlement to the generation of the Ohio Valley Electric Corporation (‘OVEC’) into the PJM markets. Last year, it was a money-losing proposition, as the payments that Duke had to make to OVEC for two Eisenhower era coal plants (Kyger Creek Plant and Clifty Creek Plant) exceeded the revenue Duke received from the sale of OVEC capacity and energy. Under the proposed Rider PSR, if the OVEC costs for producing the power from the Kyger Creek generation plant in Ohio and the Clifty Creek power plant in Indiana exceed the net revenue from the sale of power into the PJM markets, then all Duke ratepayers will be obligated to pay Duke the difference via the new Rider PSR. Rider PSR insulates Duke from any commercial loss on its OVEC investment; the risk of the future profitability of the two 60-year old power plants via Rider PSR is transferred to the ratepayers.

“Although Duke did not present as part of its application any data to show the impact of Rider PSR, Duke has emphasized that Rider PSR will eventually turn positive and result in a credit to customers. Yet, Duke did not even do a study in developing its Rider PSR proposal, but instead has relied on projections developed post-application in June/July 2014, which are based significantly from data provided by OVEC. The PSR study however showed losses through the term of the ESP III, which is the scope of this hearing. Duke has asked that the Rider PSR run conterminous with the obligation of Duke to pay for OVEC capacity and energy. That obligation was entered into voluntarily by Duke and does not expire until 2040. Further, Duke has asked that Rider PSR be made non-bypassable for the whole 25-year period.

“In sum, the first question that the Commission should answer is who is the primary beneficiary of Rider PSR. When one considers that the term of Rider PSR is conterminous with the term Duke’s exposure to OVEC, the more certain projections of near-term losses for the retail customers versus the speculative projections of future profits; and the loss of certainty that retail customers with fixed prices enjoy, the primary beneficiary is clearly Duke. Duke has assured revenue stability for power plants that will be 85 years old by the time the customer obligation expires.”

Exelon and Constellation later added: “Further, because Duke will be guaranteed full cost recovery and will carry no market risk associated with the OVEC generation, there will be no incentive for Duke to manage costs and operate the plants efficiently and in the most cost-effective manner, eliminating one of the many benefits to Ohio electricity customers that competition brings to the marketplace.”

The two competing power providers pointed to losses at the federal court level sustained in the past couple of years by the states of Maryland and New Jersey when they tried to set aside new gas-fired capacity additions from the competitive marketplace. The lead plaintiff in those cases was PPL EnergyPlus.

“Both PPL EnergyPlus cases are factually very similar to Duke’s Rider PSR,” wrote Exelon and Constellation. “In all three cases, the financial risk of the wholesale generator was being transferred to state retail customers via an order of the state commission. In fact, the major difference between the PPL EnergyPlus cases and the Duke Rider PSR is that, in Maryland and New Jersey, the state sought to build a new, incremental power plant to improve reliability for retail customers. Similar to the situation in PPL EnergyPlus, because Duke will be receiving a full hedge and guaranteed cost return on the OVEC power, it has no incentive other than to offer this generation into the market as a ‘price taker.’ The Rider PSR arrangement, therefore, creates a circumstance that intrudes on the regulation of the wholesale market by the Federal Energy Regulatory Commission.”

Commission staff also opposes this plan

Said PUCO staff in a Dec. 15 brief: “Duke Energy Ohio has not been in the business of selling electric generation service since January 1, 2012, but rather, Duke is a ‘wires only’ company that no longer sells electricity to Ohio ratepayers. Duke, however, now asks to the Commission to reverse course and begin ‘reregulating’ some of Duke’s generation assets – its 9% stock-ownership interest in the Ohio Valley Electric Corporation (‘OVEC’), generation facilities originally built for the U.S. Department of Energy. The proposed PSR will move Duke in the opposite direction of market-based competition by providing Duke a guaranteed revenue stream for these generation assets, irrespective of market forces. The Inter-company Power Agreement (‘ICPA’) in effect is Duke’s purchase power agreement with OVEC. Under the ICPA, Duke is required to pay OVEC a traditional cost-based rate (including a return on investment). Regardless of the amount of power that Duke takes from OVEC, Duke is required to pay the embedded cost of the OVEC units. Because Duke is one of the owners of OVEC, its payment of a cost-based rate ensures that its investment is protected. Further, Duke would receive this non market-based cost recovery despite the fact it will no longer sell electricity to Ohio ratepayers.

“Given Staff’s recommendation to deny rider PSR, it is only fair to assign not only the risks but the potential rewards associated with Duke’s entitlement in the OVEC generation to the owners of Duke Energy Ohio. To accomplish this objective, Staff recommends that all expenses and revenues associated with Duke’s interests in the OVEC generating stations be excluded from the Significantly Excessive Earnings Test (‘SEET’) calculation.

“Staff is concerned that going down the PSR path may ultimately be a mistake. Not only would it defeat the whole point of Duke’s stipulated ESP II case, it will also invite the other Ohio EDU’s to seek guaranteed cost recovery for generation assets that are not committed to Ohio ratepayers and are not regulated by the Commission.”

The Ohio Consumers’ Counsel also filed a Dec. 15 opposing brief, saying Duke Energy Ohio shouldn’t be allowed to add these rider costs to already “overladen” consumer electricity bills. The Consumers’ Counsel pointed to the arguments of PUCO staff as supporting its position on this matter.

About Barry Cassell 20414 Articles
Barry Cassell is Chief Analyst for GenerationHub covering coal and emission controls issues, projects and policy. He has covered the coal and power generation industry for more than 24 years, beginning in November 2011 at GenerationHub and prior to that as editor of SNL Energy’s Coal Report. He was formerly with Coal Outlook for 15 years as the publication’s editor and contributing writer, and prior to that he was editor of Coal & Synfuels Technology and associate editor of The Energy Report. He has a bachelor’s degree from Central Michigan University.