AEP rebuts latest arguments against deal to save coal capacity in Ohio

Contentions by opposing parties like Dynegy (NYSE: DYN) that gas-fired power capacity can be built in Ohio to replace coal-fired capacity are unfounded, since there is no guarantee such new plants would actually be built in Ohio, said Ohio Power in a Feb. 8 reply brief filed at the Public Utilities Commission of Ohio.

Ohio Power, a subsidiary of American Electric Power (NYSE: AEP), was responding to recent arguments lodged by opponents of a December 2015 settlement it worked out with some of the parties to a case where it is seeking approval of power purchase agreements (PPAs) for some of its endangered coal-fired capacity, located mostly in Ohio. In this deregulated state, Ohio Power customers would take power for eight years under the PPAs from specific coal-fired capacity, thus ensuring those former Ohio Power facilities will run for that period. This capacity is now owned by the unregulated AEP Generation Resources (AEPGR).

The December 2015 deal, called the “Stipulation,” would require Ohio Power/AEP Ohio to enter into an eight-year PPA (ending May 31, 2024) for the capacity, energy and ancillary service output of AEP’s 2,671 MW ownership share of nine generating units and AEP Ohio’s 423 MW contractual share of Ohio Valley Electric Corp.‘s (OVEC) generation. The nine units are Cardinal Unit 1, Conesville Units 4, 5 and 6, Stuart Units 1-4 and Zimmer Unit 1. All of these units are fired by coal. OVEC, which is owned by several parties besides AEP, owns the coal-fired Kyger Creek and Clifty Creek plants.

The agreement includes significant environmental improvements to AEP-owned units, including converting Conesville Units 5 and 6 to co-fire natural gas by Dec. 31, 2017, subject to regulatory approval, and retiring, refueling or repowering Conesville Units 5 and 6 and Cardinal Unit 1 to only use natural gas by the end of 2029 and 2030, respectively.

Various parties, including Dynegy, a competing power generator, oppose this deal, with Dynegy saying it can build new capacity in Ohio that would be cheaper for ratepayers than this existing capacity.

In its Feb 8 reply, brief, Ohio Power said the Stipulation passes a commission three-part test because it: reflects serious bargaining among knowledgeable, capable parties; as a package benefits ratepayers and the public interest; and does not violate any important regulatory principles.

Said the Feb. 8 reply brief: “Some argue that the positive economic impact of any new plants should prevail. But even if there were some level of significant new construction, there is no guarantee it would be in Ohio in the areas that would be impacted by the closure of existing facilities. Dynegy holds itself out as a new large investor in Ohio and an expert on how markets should work. But Dynegy witness Ellis admitted that nearly all of its senior executives are based in Houston, Texas, a state without any Dynegy generation assets. More importantly, Dynegy does not believe that location of the generation assets within any particular state is an important issue; it is focused on the overall market footprint. Ohio deserves better.”

Notable is that already Dynegy owns over 5,300 MW of net installed capacity in Ohio, including both coal- and gas-fired generation units.

Ohio Power argues for stability of power supply in volatile market

Ohio Power also wrote in its 139-page reply brief: “The PPA Proposal is a creative and practical solution to the real-world rate volatility problem facing customers, grounded in the same principles of promoting both rate stability and competition. It is a valid and helpful solution within the current statutory paradigm to mitigate over-reliance on short-term market prices. In considering adoption of the Stipulation, the Commission should continue its trajectory of moving toward competition while being mindful of – and addressing – customer rate impacts and market price volatility through population of the PPA Rider with the Affiliated PPA and OVEC contractual entitlement.

“AEP witness Steve Fetter, former Chairman of the Michigan Public Service Commission, testified that it is far better to have a portfolio of different supply choices, using various types of fuels, spanning from long-term in-ground cost-based generation commitments to market-based alternatives. The vast majority of new construction is for gas-fired generation – five of the six dispatchable generation plants in various stages of construction are gas-fired. The rationale for greater fuel diversity is quite simple and straightforward. Any fuel source supply can experience temporary or prolonged system constraints. Keeping these PPA units, which will be coal-fired for the immediate future, gives Ohio a flexible generation portfolio.”

Ohio Power said that some opponents claim that continuation of these PPA units will chill innovation and investment in new generation facilities. “These arguments are wholly disconnected from AEP’s request of the Commission to keep the PPA units in operation,” the utility added. “Construction and operation of new generation facilities is an incredibly speculative process.”

Ohio Power argues against ‘Texas-based business plan’

Ohio Power also wrote: “The expectation by Opposing Intervenors that there will be new plants built in Ohio to replace the loss of these current community economic engines is not supported by the record. AEP Ohio exposed the true market opinion of unregulated generator Dynegy on the status of new construction at hearing. As summarized in AEP Ohio’s Initial Brief (at 57), Dynegy’s corporate position is again different from the position Dynegy provides the Commission in testimony. Dynegy’s corporate documents shared with investors state that the new build hype is overblown and that there are too many barriers to building in the present environment.

“Even if there were some level of significant new construction, there is no guarantee it would be in Ohio, in the areas that would be impacted by the closure of existing facilities. Dynegy holds itself as a new investor in Ohio and an expert on how markets should work. But the Commission and Ohio should look closely at the message they are really sending and their commitment to the market. As pointed out by Dynegy witness [Dean] Ellis, the market does not require that generation or real investment be made here within the state of Ohio. Dynegy is a Texas company. Mr. Ellis admitted that nearly all of its senior executives are based in Houston, Texas, a state without any Dynegy generation assets. More importantly, Dynegy does not believe that location of the generation assets within any particular state is an important issue; they are focused on the overall market footprint. His prefiled testimony stated that the laws of physics dictate that not all states can be net exporters of electricity.

“Dynegy’s position is that ‘as long as customers are being served safely and reliable, it is most beneficial to provide energy via the most competitive, cost effective manner.’ When pressed at hearing on why the location within a state might matter, he stated that there could be cost components or other technical reasons to locate generation in certain areas, such as voltage support. Noticeably absent from Dynegy’s Texas-based business plan was the impact on towns and families here in Ohio. Any new generation plant will be built by new generators like Dynegy focused on the most profitable location anywhere within the PJM system. Dynegy’s focus ignored the real impacts here in Ohio. AEP Ohio’s evidence, testimony and proposal are focused on the retail impact for customers and the economy here at home in Ohio.”

Ohio Power addressed another point brought by parties including Oregon Clean Energy Center LLC, which is developing a gas-fired power project in Ohio: “Dynegy and Oregon complain that the PPA Proposal will give AEPGR an advantage over Dynegy, Oregon, and other independent plants. But Dynegy and Oregon already must compete with numerous other generators in PJM that receive cost-based compensation, and when Dynegy and Oregon decided to purchase or build generation in PJM, they knew that cost-based compensation was already commonplace in the market and in no way prohibited by existing PJM rules.”

Dynegy points out that three gas-fired plants in Ohio are already in construction

Dynegy, in its own Feb. 8 reply brief, said that AEP has “waved the white flag” by first transferring these generating assets from Ohio Power to AEPGR, then now saying it may divest them. “While AEP’s retreat is a predictable reaction to the pressures of operating in a competitive environment, AEP cannot simply use its regulated subsidiary, AEP Ohio, to return generation units back to a cost plus recovery construct that has not been authorized by the Ohio General Assembly and that will harm ratepayers and merchant generators including the other owners of the co-owned PPA units,” Dynegy said.

Ohio Power implies that the AEPGR units and OVEC units may close or retire without this PPA protection, leaving Ohio without the certainty of the PPA proposal, Dynegy noted. It said the reality is that the PPA units are not going to close, and new generation build is coming to Ohio. The fact that AEP Ohio cannot unilaterally retire 1,692 MW of capacity included in the PPA proposal further establishes that the PPA units will not close, it said. AEPGR owns 100% of only three PPA units – the Conesville Units 5 and 6 and Cardinal Unit 1. The rest of the AEPGR units are co-owned with Dynegy and Dayton Power and Light (DP&L), and each owner has a right of veto over any request to close the units.

“Because it cannot close these units, AEP Ohio will either sell them or continue to invest in them,” Dynegy argued. “Likewise, AEP Ohio cannot unilaterally close the OVEC plants and is highly unlikely to close the Conesville Units 5-6 and Cardinal Unit 1. … Conesville Units 5-6 and Cardinal Unit 1 are part of generation plants that involve other owners, including Dynegy, DP&L and Buckeye Power (Cardinal Units 2 and 3). Those owners have a vested interest in spreading the costs of their respective shared plant facilities across all units, minimizing if not eliminating any risk of a unilateral closing by AEPGR.”

Dynegy said that AEP Ohio acknowledges that generation units are being constructed in Ohio, but it claims that the number is low and is not equivalent to the 3,100 MW included in the PPA proposal. AEP Ohio also claims that there is a “lack of future generation” being built in Ohio. But, these AEP Ohio claims are not supported by the record, Dynegy added. The current gas-fired projects in Ohio, as classified by Dynegy, are:

  • Carroll County Energy, 742 MW, located in Carroll County, Under construction;
  • Oregon Clean Energy, 799 MW, located in Oregon (a Toledo suburb), Under construction;
  • Middletown Energy, 540 MW, located in Middletown, Under construction;
  • Lordstown Energy Center, 800 MW, located in Trumbull County, approved in September 2015 by Ohio Power Siting Board;
  • South Field Energy, 1,100 MW, located in Columbiana County, subject to application at the Ohio Power Siting Board.

As the table indicates, 2,081 MW of new capacity is under construction in Ohio, which is only 1,008 MW less than the capacity included in the PPA proposal, Dynegy said. In fact, it exceeds the 1,402 MW of capacity at the Cardinal Unit 1 and Conesville Units 5-6 by 679 MW, which are the only units that AEPGR can unilaterally close. The state of Ohio thus has sufficient capacity coming online to hypothetically “insure” against the minimal risk that Cardinal Unit 1 and the Conesville Units 5- 6 might close, Dynegy added. Moreover, all new generation units under construction or in development will total 3,981 MW in the aggregate – well over the 3,100 MW that AEPGR has included in the PPA proposal.

Dynegy also tangentially addressed the fact that it is an out-of-state company by implying that AEP may sell this capacity to a party or parties also not located in Ohio. “While Dynegy intends to use its Ohio units to compete in the PJM markets, AEP Ohio is considering divesting its Ohio units. Toby Thomas, the Vice President of Competitive Generation at AEPGR, acknowledged this fact, explaining that ‘our executive leadership including Mr. Akins has decided to begin a strategic review of the entire competitive business to look at whether or not it’s best for the shareholders of American Electric Power to keep the business, to put the business or spin the business into its own company or spin-merge with another company or divest.'”

The “Akins” referred to is Nick Akins, chairman, president and chief executive officer of American Electric Power.

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.