Industry witnesses, not to mention environmental groups, were lining up Sept. 11 to take shots at a proposal by the Ohio Power unit of American Electric Power (NYSE: AEP) to effectively protect the futures of about 3,100 MW of coal-fired generation through a power purchase agreement (PPA) it wants approved by the Public Utilities Commission of Ohio.
Ohio is a deregulated state, and Ohio Power (also known as AEP Ohio) says this PPA will allow this coal-fired capacity to continue to be available to meet ratepayers needs at a time of uncertainty about the firmness of power supply capacity in the state. Obviously, any part of the power market carved out under the PPA for these plants is part of the market not available to other power generators. The costs of the PPA would be passed along to power customers in a rate rider.
In a Sept. 11 brief in this case, Lael Campbell, employed by Exelon Corp. (NYSE: EXC) as the Director of State Government and Regulatory Affairs, testified on behalf of Exelon subsidiaries that do business in Ohio and also for the Retail Energy Supply Association.
“My testimony will address concerns with AEP Ohio’s proposal to fund ratepayer guarantees for 3,100 MW of existing coal-fired generation owned by its non-regulated affiliate AEP Generation Resources, Inc. (‘AEPGR’),” wrote Campbell. “Because the PPA Rider is non-bypassable, the guaranteed return to AEPGR will be funded by all the AEP Ohio’s regulated retail customers, regardless of whether they receive their electric power supply from AEP Ohio via the Standard Service Offer or from a CRES provider. This ratepayer guarantee would be in place for the entire life of the applicable plants, at least one of which is not expected to retire until 2051. The AEP Ohio application, if implemented, threatens the retail market in the AEP Ohio service territory and the state of Ohio as a whole.
“There are significant problems associated with the proposed PPA Rider as it runs counter to the substantial progress that the State of Ohio, the Commission, and AEP Ohio have made towards the transition to full retail and wholesale competition. AEP Ohio seeks approval to enter into a new inter-affiliate PPA between AEP Ohio and AEPGR, through which AEP Ohio would purchase the output from more than 2,500 MW of coal-fired generating units owned by in part or in whole by AEPGR. In addition, AEP Ohio seeks to include in the PPA Rider its existing contractual entitlement to a share of the electrical output of two coal-fired generating units owned by the Ohio Valley Electric Corporation (‘OVEC’), bringing the amount of coal-fired generation covered under the PPA Rider to over 3,100 MW.
“Under the proposed PPA Rider, AEP Ohio seeks authority to pass through to customers the differential between revenues and costs including a return on and of equity for the included power plants. AEP Ohio will sell the PPA-acquired generation into the PJM Interconnection (‘PJM’) markets, and the non-bypassable PPA Rider will either credit or charge both shopping and non-shopping customers the difference between the cost of the inter-affiliate PPA and the revenues AEP Ohio receives for the generation and capacity in the market.
“The proposed term of the PPA Rider is for the life of the plants. The W.H. Zimmer plant has a remaining life of 36 years (2051) and the estimated lives of the other plants range from 18 to 23 years (2033-2038). AEP Ohio claims that the purpose of the proposed PPA Rider is to ‘stabilize rates’ for shopping and non-shopping customers and that the PPA Rider will provide these customers with a ‘safety net’ to volatile market prices. To the extent the PPA Rider will provide a rate-stabilizing hedge to the market, as will be discussed below, the recipient of that hedge is AEP Ohio’s merchant affiliate AEPGR, not the Ohio consumers who will be paying a higher price for electricity than the competitive market could otherwise offer. AEP Ohio has presented a proposal that will likely increase costs to both shopping and non-shopping customers for the foreseeable future, with the benefits going primarily to its merchant affiliate.”
These coal facilities covered under this proposal include AEPGR’s:
- 100% ownership interest in Cardinal Unit 1 (595 MW) located in Jefferson, Ohio;
- 43.5% ownership interest in Conesville Unit 4 (339 MW AEP share) located in Conesville, Ohio;
- 100% ownership interest in Conesville Units 5 and 6 (810 MW) located in Conesville, Ohio;
- 26% ownership interest in the Stuart plant (608 MW AEP share) located in Aberdeen, Ohio;
- 25.4% ownership interest in W.H. Zimmer (330 MW (AEP share) located in Moscow, Ohio; and
- also AEP’s 19.93% ownership interest (423 MW AEP share) in OVEC’s Kyger Creek and Clifty Creek plants.
Dynegy says this is an artificial constraint on an open market
Dean Ellis employed by Dynegy Inc. (NYSE: DYN) as Vice President of Regulatory Affairs, said in his own Sept. 11 testimony: “Dynegy believes in the efficient operation of markets, generally, and of markets for wholesale electric power and electric capacity, specifically. Dynegy opposes arrangements or constructs that are designed to distort the markets in a manner that assure benefits to one market participant and therefore inappropriately disadvantage other market participants. AEP Ohio’s proposal is just such a construct.
“AEP Ohio’s principal justification for its proposed PPAs and the related distribution charge it wishes to impose is its stated concern with system reliability in the event that generation units are retired in the future. To a somewhat lesser extent, AEP Ohio purports to express concerns on behalf of the State of Ohio and of localities within Ohio regarding the potential loss of employment and tax revenues.
“But AEP exaggerates the importance of a number of facts and minimizes the importance of others, all with the obvious purpose of attempting to lend credibility to its expressed concerns and thereby supporting its anti-market proposals. For example, its concern with system reliability largely overlooks the existing excess capacity within PJM, which well exceeds the PJM-required reserve margin for capacity. At the same time, AEP Ohio ignores new generation that is under development, and even approximately 2,800 MW of new generation that has been announced for development within Ohio itself.
“A principal threat to AEP’s stated concern with maintaining system reliability comes from AEP itself. AEP threatens that absent the PPA construct it may have to shut down generation that it operates. At best, this is an exaggerated threat. AEP Ohio simply cannot unilaterally retire anywhere near the volume of generation capacity that it claims is at risk in its application. AEP Ohio then exaggerates concerns regarding the robustness of PJM’s transmission system and the ability of that system to ensure power and capacity to the residents of Ohio. In doing so, it minimizes or overlooks PJM initiatives undertaken to ensure the robustness of that system – even though AEP itself has described PJM as the operator of the largest wholesale electricity market in the world, and as the best-established RTO in North America with a ‘proven performance record.’
“Reliability issues do not necessarily mean system collapse, of course, and AEP Ohio is quick to also point to market volatility to justify its application. Again, however, AEP Ohio grossly exaggerates claims of market volatility, which simply cannot be supported by the historic evidence.”
PJM’s market monitor also opposes the AEP plan
Speaking of PJM, Joseph E. Bowring, the Independent Market Monitor for PJM, through his job as the President of Monitoring Analytics LLC, said in Sept. 11 testimony: “The proposed PPA Rider would transfer, from AEP (AEPGR) to the ratepayers of AEP on a non bypassable basis, all responsibility for paying to AEP all costs associated with the PPA Units through the retirement dates of each and any post-retirement period for each, including paying retirement costs and any residual value.
“Under the proposed PPA Rider, AEP would offer the energy, ancillary services and 16 capacity from the assets into the PJM markets. The proposed PPA Rider would credit the market revenues against the costs and charge the net costs to the ratepayers of the Company.
“The purpose of the PPA Rider is to transfer the costs and market risks associated with the PPA Rider Units from AEP’s shareholders to AEP’s ratepayers. AEP has not demonstrated and cannot demonstrate why customers should bear these costs and take these risks, if a well informed generation owner is not willing to do so.
“The proposed PPA Rider is not consistent with competition in the PJM wholesale power market. The proposed PPA Rider would constitute a subsidy analogous to the subsidies previously proposed in New Jersey and Maryland, both of which were found to be inconsistent with competition in the wholesale power markets.
“The proposed PPA Rider would shift responsibility from AEP for all costs associated with the PPA assets to the ratepayers of the company. AEP is requesting that the plants and the contracts be returned to the cost of service regulation regime that predated the introduction of competitive wholesale power markets.
“The proposed PPA Rider would constitute a subsidy which is inconsistent with competition in the PJM wholesale power markets. The proposed PPA Rider should be rejected for that reason.”
Gas company says new gas supplies doom any arguments for old coal plants
Matthew White, employed by Interstate Gas Supply Inc. (IGS Energy) as General Counsel, Legislative and Regulatory Affairs, noted in his Sept. 11 testimony that IGS Energy has over 25 years experience serving customers in Ohio’s competitive markets. In Ohio, IGS currently serves electric customers in the AEP, Duke Energy Ohio, FirstEnergy and the Dayton Power & Light service territories.
White said the reasons this PPA proposal should not be approved include:
- The technologies that have led to increased shale natural gas production have fundamentally altered the economics of electric generation such that coal generation has become much less competitive related to natural gas generation – and this trend is only likely to become stronger;
- Compounding the difficult economics of coal is the U.S. Environmental Protection Agency’s Clean Power Plan which is likely to make coal even less economical with respect to renewable and natural gas generation;
- Reliability concerns also do not justify adoption of the PPA Proposal as new electric generation is getting built in Ohio and PJM’s reserve margin have gone up in the 2018/2019 capacity auction;
- The economic impact of the PPA Units also does not justify adoption of the PPA Proposal because approval of AEP’s proposal will cost Ohio more jobs than it can expect to create.
White wrote: “All of the PPA Units generate electricity using coal as the feedstock. The mechanics of AEP’s PPA Proposal work such that AEP ratepayers will pay all of the costs associated with these coal generating units, plus a rate of return, to AEPGR (an unregulated AEP affiliate). Further, all of the electricity and capacity from the PPA Units would be sold into wholesale electric markets and the revenue generated from those sales would offset the costs to AEP ratepayers. So necessarily Ohio ratepayers will only receive a positive price benefit from the PPA Proposal if the PPA Units somehow manage to become more competitive than other sources of electric generation in the market.”