Competing power suppliers take shots at FirstEnergy’s power plant protection deal

Critics took Dec. 30 shots in testimony filed at the Public Utilities Commission of Ohio at a deal filed with the commission on Dec. 1 by FirstEnergy (NYSE: FE) that got several parties on its side in a case where FirstEnergy’s Toledo Edison, Ohio Edison and Cleveland Electric Illuminating subsidiaries would contract for power out of some coal and nuclear capacity.

Among those supplying Dec. 30 testimony was Dean Ellis, employed by Dynegy Inc. as Vice President, Regulatory Affairs. He wrote: “The Cleveland Electric Illuminating Company and The Toledo Edison Company (collectively the ‘Companies’) proposal in their initial application was to enter into a power purchase agreement coupled with Rider RRS to pass the risk through directly to retail customers (‘PPA’). The PPA was not openly bid but merely awarded to the unregulated affiliate of the Companies, FirstEnergy Solutions Corp. (‘FES’), for the generation output of two FES generating units (‘PPA units’) and FES’ Ohio Valley Electric Corporation (‘OVEC’) entitlement. The Companies in turn would net the revenues received from selling the output and capacity from the designated units against the costs incurred by FES including a fixed return on equity paid to FES. The Companies would then bill or credit its retail customers the difference between the costs and the revenues. Dynegy opposes the Stipulation as it does nothing to address the flaws demonstrated at trial concerning the PPA proposal including the Rider RRS mechanism.”

Ellis added: “If approved by the Commission, the Stipulation will have a direct impact for years on Dynegy’s ability to compete with FES and the Companies in the wholesale markets. Under the proposed PPA, FES will have all its costs covered plus receive a guaranteed 10.38% rate of return. All other merchant generators, including Dynegy, must compete for sales and bear the risk of lost revenues if they do not competitively price their generation output. The Stipulation provides FES with an advantage over other merchant generators, placing other existing merchant generators, jobs and tax revenues at risk. Further, because the design of the PPA remains cost plus, FES and the Companies have no financial incentive to act in an economically rational manner for the purchased output from the PPA units and the OVEC entitlement. Including the PPA units and the OVEC entitlement in the PPA rider will effectively encourage the continued operation of less efficient, less cost effective piants and discourage the modernization of generation sited in Ohio.”

This result would only be magnified if the Ohio commission approves a similar AEP Ohio proposal, in which this American Electric Power (NYSE: AEP) subsidiary seeks to populate its PPA Rider based on the costs and sales of output from certain coal units from its unregulated affiliate, AEP Generation Resources (AEPGR) and AEP Ohio’s OVEC entitlement, Ellis noted. Ellis had provided similar testimony to the commission on Dec. 28 opposing a stipulation in the AEP Ohio case.

The PPA rider construct in the AEP Ohio proceeding is very similar to the PPA rider construct in this FirstEnergy proceeding, in that AEP Ohio seeks to transfer the risk of 2,670 MW of AEPGR generation along with all of AEP Ohio’s OVEC entitlement (420 MW) from AEPGR to AEP Ohio’s ratepayers while providing AEPGR with a cost of service reimbursement plus a fixed return on equity, Ellis said. OVEC controls the coal-fired Kyger Creek and Clifty Creek power plants.

Ellis noted that according to FirstEnergy’s own publicly-available information, FirstEnergy cleared nearly all of its generation in the PJM Interconnection Capacity Performance auctions for delivery years 2016-2017, 2017-2018 and 2018-2019. This resulted in a total of $2.3 billion in capacity revenue for FirstEnergy over those three delivery years, which was $1.1 billion in excess of FirstEnergy’s projections, he added. He said there is no need to grant FirstEnergy the PPA, because: the generation is receiving significant revenue; FirstEnergy is obligated to deliver through to nearly the end ofthis decade; and the payment-penalty structure is more than adequate to ensure reliability.

If the FirstEnergy companies were truly interested in providing a financial hedge to consumers, there are other effective and less costly ways to do so, including issuing a request for proposal (RFP) for the capacity and energy over the period in question, said Ellis. The RFP could take on a variety of forms, including a fixed-price option, a variable-priced option, or a combination of both.

Witness for power supplier groups calls this a ‘bailout’ 

Also providing Dec. 30 testimony was Joseph P. Kalt, a senior economist with Compass Lexecon, an economics consulting firm. He was testifying on behalf of the PJM Power Providers Group (P3) and the Electric Power Supply Association (EPSA).

Kalt wrote: “I was asked by the P3 Group and EPSA to provide an economic analysis of the Electric Security Plan (‘ESP’) filed by FirstEnergy Corp.’s (‘FirstEnergy’) three Ohio monopoly transmission and distribution utilities: Ohio Edison Company, The Cleveland Electric Illuminating Company, and The Toledo Edison Company (the ‘Companies’). As detailed in my previous testimonies, the Companies initially proposed to implement an ESP which would entail a long-term Power Purchase Agreement (‘PPA’) whereby they would purchase generating unit-contingent power for 15 years from their Federal Energy Regulatory Commission (‘FERC’) regulated affiliate company, FirstEnergy Solutions Corporation (‘FES’).

“The proposed PPA represents a scheme by which the Companies’ captive ratepayers would be required to effectively guarantee the Companies that they will be able to recover the costs plus a full return to their debt and equity investors associated with their affiliate FES’ Davis-Besse (nuclear-fueled) and Sammis (coal-fueled) generating units (together, the ‘Plants’), as well as FES’ 4.85% entitlement in Ohio Valley Electric Corporation (‘OVEC’).”

Kalt later said that the proposed plan would shift very large risks from FES’ debt and equity investors onto the companies’ captive ratepayers. It would do this without any compensating benefits or return to the general ratepaying public. “The plan, in short, is what is commonly called a ‘bailout,'” he added.

The Dec. 1 stipulation outlines an eight-year rate provision associated with a PPA. The rate provision will help protect customers against rising retail price increases and market volatility, while helping preserve vital baseload power plants that serve Ohio customers and provide thousands of family-sustaining jobs in the state, said FirstEnergy. The PPA includes: the Davis-Besse Nuclear Power Station in Oak Harbor, Ohio; the W.H. Sammis Plant (fired by coal) in Stratton, Ohio; and a portion of the output of OVEC units in Gallipolis, Ohio, and Madison, Ind. (at the Kyger Creek and Clifty Creek coal plants).

The agreement, among other things, establishes a goal to reduce carbon dioxide (CO2) emissions across the company’s six-state footprint by at least 90% below 2005 levels by 2045. This goal represents a potential reduction of more than 80 million tons of CO2 emissions, and is among the most aggressive targets in the utility industry.

Sammis is among the largest coal-fired plants in Ohio. Its seven coal units collectively produce 2,220 MW. Units 6 and 7 are designed to be baseload units rated at 1,200 MW in total, and Units 1-5 are load-following units rated at 1,020 MW in total. The plant uses an average of 18,000 tons of coal daily for an annual average of 6.6 million tons, including coal from Ohio mines.

Davis-Besse is a nuclear plant in northern Ohio along the shore of Lake Erie designed to be a baseload unit rated at 908 MW.

The Dec. 1 stipulation was signed by 16 parties, including the PUCO staff, EnerNOC, an energy management solutions provider, and Ohio Partners for Affordable Energy, a low-income customer advocacy group.

PJM monitor also opposed to this plan

Joseph E. Bowring, the President of Monitoring Analytics LLC, which serves as the Independent Market Monitor for PJM, said in Dec. 30 testimony opposing this deal: “The December 1st Stipulation does not fundamentally change the nature or purpose of the proposed Rider RRS which is to shift costs and risks from shareholders to customers, to remove FirstEnergy’s incentives to make competitive offers in the PJM Capacity Market and to provide FirstEnergy incentives to make offers below the competitive level in the PJM Capacity Market.”

Bowring noted that PJM rules currently include a Minimum Offer Price Rule (MOPR) designed to address the impact on competitive markets of subsidies to most new gas-fired generating units by requiring that such new units with subsidies offer at a level no lower than the cost of new entry. The actions of FirstEnergy in this case highlight the fact that the MOPR needs to be expanded to address all cases where subsidies create an incentive to offer capacity into the PJM Capacity Market at less than an unsubsidized, competitive offer. This would include offers from all new and existing units that receive subsidies.

If the MOPR were expanded, said Bowring, to include all new or existing units receiving subsidies, it would require FirstEnergy to make competitive offers in the PJM Capacity Market rather than offering at levels below the competitive offer level including offers at or close to zero. If FirstEnergy were required to offer the units at the competitive level and the units do not clear in the capacity market as a result of a competitive offer, there would be no market revenues and customers would receive no offset to the costs they would be required to pay under the Rider RRS. In addition to the other costs and risks, the proposed FirstEnergy Rider RRS would shift this significant regulatory risk of an improved MOPR from shareholders to customers, he added.

Bowring concluded: “The proposed Rider RRS would constitute a subsidy which provides incentives for non-competitive offers and is inconsistent with competition in the PJM wholesale power markets. The proposed Rider RRS should be rejected for that reason.”

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.