FirstEnergy argues for rate protection for coal and nuclear capacity in Ohio

Three subsidiaries of FirstEnergy (NYSE: FE) on Feb. 16 filed with the Public Utilities Commission of Ohio their post-hearing brief in a contentious case where they are trying to protect for the next eight years coal and nuclear capacity in the state through a power purchase agreement that would be paid for by their ratepayers.

The FirsEnergy plan is similar to one also being pursued at the PUCO by the Ohio Power/AEP Ohio unit of American Electric Power (NYSE: AEP), which is trying to protect some of its own in-state coal capacity.

Ohio Edison, Cleveland Electric Illuminating and Toledo Edison initiated this proceeding in August 2014, seeking approval of their fourth Electric Security Plan. Said their Feb. 16 brief: “While customers have enjoyed the benefits of relatively low and stable market-based retail prices for several years, it is widely recognized that retail prices will increase and become more volatile in the future, potentially to a significant degree. When this market risk is coupled with anticipated reliability challenges arising from an increasing reliance on a volatile and interruptible generation fuel source, proactive Commission action is required.”

They said a key component of a settlement in this case among some of the parties is an eight-year Economic Stability Program that will help safeguard customers from rising market prices and retail rate volatility. The Economic Stability Program consists of the proposed Retail Rate Stability rider (Rider RRS), and numerous significant benefits, including stable retail rates, a forecasted $561 million in savings and fuel and resource diversity necessary for reliable service, which will contribute to Ohio’s economic vitality. 

Under an eight-year FERC-jurisdictional power purchase agreement (PPA), these FirstEnergy companies will purchase from FirstEnergy Solutions Corp. (FES) all of FES’s rights in the capacity of the Davis-Besse Nuclear Power Station, the W.H. Sammis coal plant, and FES’s 4.85% entitlement from the Ohio Valley Electric Corp. (OVEC), which operates the coal-fired Kyger Creek and Clifty Creek power plants. Notable is that AEP’s separate plan includes protections for its own share of OVEC. Notable is that all of this capacity is in Ohio, except for Clifty Creek, which is in nearby Indiana.

Said the Feb. 16 brief from these FirstEnergy utilities: “These baseload coal and nuclear plants have stable cost structures and will serve as the basis for a hedge against expected increasing and more volatile retail electric energy prices. Over the term of Stipulated ESP IV, if the anticipated price increases are realized, Rider RRS will provide customers net credits of $561 million. If prices increase by more than the Companies’ forecast, the credit to customers should exceed $561 million. And under a hypothetical scenario where prices stay at historically low levels (a scenario raised by some, but lacking any support in the record here), customers will nevertheless benefit from having insurance against the risk of price increases.

“By supporting the continued operation of the Plants through the current short-term market turmoil, the Economic Stability Program also provides reliability benefits to customers and the state of Ohio by preserving resource diversity. The future of the Plants – akin to many others – is uncertain because of financial challenges faced over the past several years and near-term market challenges. In fact, over 6,500 MW of coal-fired generation has retired in Ohio since 2010, and nuclear plants across the region – valuable zero-carbon resources – are at risk of retirement. Retirements of baseload coal and nuclear plants have left the market increasingly reliant on natural gas-fired generation and the potential for price volatility and reliability concerns attendant to such reliance. For example, during both the ‘Polar Vortex’ of 2014 and the ‘Siberian Express’ of 2015, natural gas-fired plants disproportionately experienced forced outages. During the Polar Vortex in particular, the Plants and other baseload units with on-site fuel capability were critical to staving off severe disruptions and load shedding; the entirety of PJM at one point had only 500 MW of synchronous reserves available (roughly 1/6 of the power the Plants provide).”

Sammis, located in Jefferson County, Ohio, is a 2,220-MW coal plant with state-of-the-art pollution controls, generating an average of 34,100 MWh of electricity per day in any season. Davis-Besse, located in Ottawa County, Ohio, on Lake Erie, is a 908-MW nuclear facility with zero emissions that can generate enough electricity to serve approximately 715,000 households. These plants have significant onsite fuel storage that enables them to continue running through all conditions, including extreme weather events which have interrupted the operation of natural gas plants, the companies argued.

Filing briefs on Feb. 16 with the commission in this case were various other parties, including competing power providers who oppose the FirstEnergy plan (and the one from AEP, as well).

Exelon Generation Co LLC and Constellation NewEnergy Inc.

These Exelon (NYSE: EXC) subsidiaries said in their Feb. 16 brief that they advocate rejecting the Rider RRS and the ratepayer guarantees for the Davis-Besse and Sammis plants, as well as the entitlement of power purchased from OVEC.

“Should the Commission determine that Rider RRS is nevertheless in the interest of Ohio electricity customers, Exelon recommends that a public competitive bidding process be conducted,” they added. “Exelon has stated that if such a competitive process were held, it would bid a fixed-price, guaranteed eight-year offer (the ‘Exelon Offer’) from 100% emissions-free power units. In comparison to the proposed arrangement between the Companies and FES, the Exelon offer would provide well over $2 billion in savings to Ohio families and businesses. From both an economic as well as an environmental standpoint, the Exelon Offer provides a superior alternative to the purported hedge that the Companies are seeking to impose on ratepayers.

“The record in this case shows no evidence of retail rate instability. There is no evidence that customers or the Ohio Consumers’ Counsel or the Staff complained about volatile retail rates. What the record does show is that Rider RRS began with a request from FES to the Companies to sell the output of FES’ plants. On its face, such a request seems questionable. If FES is in the business of being a merchant generator and has operated these two units and the OVEC entitlement for several years, why is FES unwilling to continue to bear the risks and rewards associated with these units, as does any other wholesale generator in a competitive state?

“Further, if in fact the ‘out’ years of the proposed eight-year PPA are so lucrative, why would FES’ parent, or a commercial financing partner, not fund the units during the next few years? Ratepayers should not be made involuntary investors of private merchant generation plants.”

Dynegy Inc.

Dynegy (NYSE: DYN) said in its Feb. 16 brief that an overlooked fact in this proceeding is that FES is not the only merchant generator in Ohio. “Dynegy Inc., for example, owns over 5,300 megawatts of net installed capacity in Ohio, including both coal and gas generation units,” it added. “Ignoring other Ohio merchant generators, the FirstEnergy Corp. Ohio utilities (the ‘Companies’) propose using an eight-year Rider RRS to reward their affiliate, FES, with minimal risk, guaranteed cost recovery and a guaranteed return on and of equity equal to 10.38 percent, for sales made through a proposed power purchase agreement (the ‘Affiliate PPA’) for the generation output of the Sammis and Davis-Besse generation plants (the ‘Affiliate PPA Units’) along with FES’ Ohio Valley Electric Corporation (‘OVEC’) entitlement into the PJM markets.

“All other merchant generators, including Dynegy, must compete in these wholesale markets for sales and bear the risk of lost revenues if they do not competitively price their generation output and operate in a reliable, cost-effective manner. Under Rider RRS and the proposed Affiliate PPA, FES will no longer face those competitive pressures. Instead, the Companies’ ratepayers will bear FES’ market risks, including the risk of capacity performance penalties. Moreover, because the design of the proposed Affiliate PPA remains cost plus, FES and the Companies will have no financial incentive to act rationally, in an economic sense, with regard to the Affiliate PPA units and the purchased output.

“Including the Affiliate PPA units in Rider RRS will encourage the continued operation of less efficient, less cost effective plants and discourage the modernization of generation sited in Ohio. This type of construct is not in the public interest and will distort the markets in a manner that assures benefits to one market participant and inappropriately disadvantages other market participants. Simply put, the Commission should not be in the business of picking winners and losers in the wholesale capacity and energy markets.”

Dynegy owns a number of coal-fired and gas-fired generating units in Ohio totaling 5,332 MW of net capacity. That total includes Dynegy’s proportionate share of the Stuart facility in Aberdeen, Ohio; the Miami Fort facility in North Bend, Ohio; the Zimmer plant in Moscow, Ohio; the Conesville plant in Conesville, Ohio; and the Killen plant in Manchester, Ohio. All of these are coal-fired plants.

PJM Power Providers Group and Electric Power Supply Association

The PJM Power Providers Group (P3) and the Electric Power Supply Association (EPSA) in their Feb. 16 brief urged the commission to reject this plan. “Specifically, the Commission should find that the Retail Rate Stability Rider (‘Rider RRS’) as proposed would violate state law, place an undue risk on all ratepayers for non-utility competitive assets, harm both the Ohio competitive wholesale and retail markets and destabilize as oppose to stabilize retail electric rates.

“Rider RRS is being touted by FE as necessary for retail rate stability. But the history of its beginnings is quite different. The idea for Rider RRS originated from FirstEnergy Solutions Corp. (‘FES’), a merchant generator and competitive retail electric service (‘CRES’) provider, with a weak balance sheet looking for ‘certainty in return for [its] plants.’ FES approached FE and asked if FE would buy the output of all of its generation plants. FE could not take all of the output because its customer load was much smaller. Instead, FES and FE settled on the output from the Davis-Besse 908-megawatt (‘MW’) nuclear plant and the Sammis 2,220 MW coal units, along with FES’ 4.85% entitlement to the output from the combined 116 MW Ohio Valley Electric Corporation (‘OVEC’) coal plants. That is how Rider RRS was conceived.

Although it divested itself of generation assets long ago, FE has added FES’ proposal for a no-bid long-term power purchase agreement (the ‘Affiliate PPA’) at a cost-plus price to its proposed electric security plan (‘ESP IV’). Copying AEP Ohio’s approach, FE asks this Commission to approve Rider RRS which would implement FES’ business initiative to sell all the output of the Sammis and Davis-Besse plants and the OVEC entitlement to FE which in turn would sell the output into the wholesale markets. FE would then net all wholesale revenues (and charges) against payments made to FES under the Affiliate PPA and the resulting charge or credit will be collected through Rider RRS.

“FE claims that if power prices go up, FE will be able to pass through profits to its ratepayers that, according to FE, would be counter cyclical to a rising retail power market. What is left unsaid is that FES’ proposed 8-year long-term hedge to FE (and its ratepayers) has no upside. Instead, it will impose hundreds of millions of dollars of risk and net harm on FE’s captive ratepayers in order to provide certainty to FES, the only winner in this business deal.”

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.