PJM files testimony in connection with AEP case in Ohio

PJM Interconnection filed testimony Dec. 28 with the Public Utilities Commission of Ohio (PUCO) about the proposed American Electric Power (NYSE: AEP) settlement concerning power purchase agreements for power plants in Ohio.

PJM does not take a position on the settlement as a whole. However, PJM proposes that, if the PUCO approves the settlement, it should make a key clarification to ensure the settlement preserves the state’s interest in healthy, competitive wholesale electricity markets to attract new investment and meet the economic development needs of Ohio.

PJM Senior Vice President of Markets F. Stuart Bresler III filed testimony in connection with Ohio Power Co.’s proposal to enter into an affiliate power purchase agreement for inclusion in the Power Purchase Agreement Rider in Case No. 14-1693-EL-RDR and Case No. 14-1694-EL-AAM.

An AEP subsidiary had filed a stipulated agreement with PUCO in mid December related to buying power on behalf of ratepayers from several coal-fired power plants in part owned by an unregulated arm of AEP. The agreement will be signed or unopposed by 11 parties, while others have voiced opposition.

In the Dec. 28 testimony, PJM pointed to Paragraph III.A(5)(a) of the stipulation, which says: “AEP Ohio agrees to participate in annual compliance reviews before the Commission to ensure that actions taken by the Company when selling the output from generation units included in the PPA Rider into the PJM market were not unreasonable. AEP Ohio, not its customers, would be responsible for the adjustments made to the PPA Rider based on actions deemed unreasonable by the Commission, including any costs (after proper consideration of such costs and netting of any bonus payments) associated with performance requirements in PJM’s markets. Any determination that the costs and revenues included in the PPA Rider are unreasonable shall be made in light of the facts and circumstances known at the time such costs were committed and market revenues were received. In addition, the calculation of PPA Rider will be based on the sale of power into PJM.”

Said the PJM filing about that passage and its need to intervene in this case because of it: “PJM has an important but targeted interest in this proceeding—namely addressing the meaning of Paragraph III.A(5)(a) of the Stipulation and seeking clarification as to its terms. Clarification of Paragraph III.A(5)(a) is needed to ensure that AEP’s actions in bidding the affected units into the PJM market (and the Commission’s reviews of same pursuant to Paragraph III.A(5)(a) is undertaken in a manner which continues to support an efficient competitive wholesale market in Ohio and continues to incent the development of new generation in the state to meet the state’s economic development needs. Through testimony, PJM proposes clarifications in this regard in the testimony of F. Stuart Bresler, which is pre-filed concurrently with this motion. Since PJM alone administers the wholesale market in the PJM region and administers the tariffs which AEP utilizes to bid into the PJM market (which actions of AEP are the subject to the Commission review process set forth in Paragraph III.A(5)(a), no other party can adequately protect PJM’s substantial interest in these proceedings in ensuring that the proposed process in the Stipulation is compatible with those tariff provisions as well as Ohio’s stated goals relative to procurement of power through the PJM wholesale markets.”

Bresler wrote that by its terms, Paragraph III.A(5)(a) contemplates an after-the-fact prudence-type review by the Ohio commission of, among other things, the sale of the output of the generators covered by the PPA Rider. PJM is not suggesting that its proposed clarification should empower the PUCO to oversee, in real time, AEP’s day- to-day bidding actions. Rather, the clarification is suggested as a means for the commission to provide guidance to all parties as to the PUCO’s expectations in implementing the oversight authority that AEP and the other signatory parties have encouraged the PUCO to undertake through Paragraph III.A(5)(a).

Bresler added: “Without taking a position on whether the Commission should adopt the Stipulation, should it do so, PJM believes that, the Commission should clarify that for purposes of the PUCO reasonableness reviews undertaken pursuant to Paragraph III.A(5)(a), it should be considered a reasonable bidding practice for the units covered by the PPA to bid into PJM’s markets no lower than their actual costs consistent with how the term ‘costs’ is defined in the PJM Tariff and Manuals without consideration of the offsetting revenues to be provided by Ohio retail customers through the PPA Rider. Bidding at actual cost, consistent with the definition of acceptable costs included in the PJM Tariff and Manuals and ensures that the PPA does not have the effect of artificially suppressing prices in any of PJM’s markets.”

The needs of AEP’s customers in Ohio cannot be served wholly from the output of the coal units covered by the PPA, Bresler added. “In fact, the units covered by the PPA together total substantially less than the total AEP Ohio peak load of approximately 10,500 MW. Although one could claim that the workings of the PPA Rider argues for the PUCO allowing these particular units to bid below their costs, to the extent this has a repressive effect on prices, new generation resources (which will be critical to meeting Ohio’s future needs and economic development) will be discouraged from investing in Ohio. The impacts of that disincentive to new investment for Ohio far outweigh the short term gain that may be realized by customers from below cost bidding and guaranteed clearing by this particular narrow subset of the AEP generation fleet. As a result, it is appropriate for the PUCO to recognize in any Order approving the Stipulation: (1) that its interests in a healthy competitive wholesale market with prices that accurately reflect going forward costs of competing units has not changed as a result of the Stipulation; and (2) that in reviewing the ‘reasonableness’ of AEP’s bidding practices the PUCO will consider whether AEP’s actions are complementing that goal or working counter to it.”

PJM monitor says this stipulation is a bad idea and should be rejected

Joseph E. Bowring, the President of Monitoring Analytics LLC and the Independent Market Monitor for PJM, pulled no punches in his Dec. 28 testimony and said this AEP deal should be rejected.

The proposed PPA Rider would transfer, from AEP Generation Resources (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 May 31, 2024 (approximately eight and a half years) with the option to extend or modify the PPA Rider. The PPA units are coal-fired units: Cardinal Unit 1; Conesville Units 5 and 6, which are 100% owned by AEPGR, and the AEPGR share of Conesville Unit 4; Stuart Units 1–4; and Zimmer Unit 1. In addition, the proposed PPA Rider would transfer, from AEPGR to the ratepayers of AEP, all responsibility for paying for AEP’s share of the two coal-fired generating plants owned and operated by Ohio Valley Electric Corp.; Kyger Creek in Cheshire, Ohio, and the Clifty Creek Plant in Madison, Indiana.

Wrote Bowring: “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 a version of the cost of service regulation regime that predated the introduction of competitive wholesale power markets.

“The proposed PPA Rider would require that the ratepayers of AEP subsidize the costs of the plants to the benefit of AEP. The logical offer price for these resources in the PJM Capacity Market, under these conditions, would be zero. A zero offer would be rational because this would maximize the revenue offset to the customers who would be required to pay 100 percent of the costs of this capacity and bear all of the performance risks. Offers at or near zero would have an anti-competitive, price suppressive effect on the PJM Capacity Market as would any offers at less than the competitive offer level. The proposed PPA Rider would create strong incentives for AEP to offer this capacity as less than the competitive offer level.

“This type of subsidy is inconsistent with competition in the wholesale power markets because of its price suppressive effects. Such effects would make it difficult or impossible for generating units without subsidies to compete in the market. Competition depends on units making competitive offers that reflect their costs and the risk of paying penalties and/or receiving benefits (e.g. the offer cap for Capacity Performance resources) and on recovering revenues only from the markets and not from subsidies. Such subsidies would negatively affect the incentives to build new generation in Ohio and elsewhere in PJM and if adopted by others would likely result in a situation where only subsidized units would ever be built.”

About Wayne Barber 4201 Articles
Wayne Barber, Chief Analyst for the GenerationHub, has been covering power generation, energy and natural resources issues at national publications for more than 20 years. Prior to joining PennWell he was editor of Generation Markets Week at SNL Financial for nine years. He has also worked as a business journalist at both McGraw-Hill and Financial Times Energy. Wayne also worked as a newspaper reporter for several years. During his career has visited nuclear reactors and coal mines as well as coal and natural gas power plants. Wayne can be reached at wayneb@pennwell.com.