Parties line up for and against AEP deal in Ohio to protect coal capacity

A number of parties, including competing power generators, on Feb. 1 filed with the Public Utilities Commission of Ohio their post-hearing briefs opposing a December 2015 deal that the Ohio Power subsidiary of American Electric Power (NYSE: AEP) worked out with other parties to a proceeding where AEP is looking to protect certain coal-fired capacity for the next eight years.

The deal, called the “Stipulation,” calls for a power purchase agreement (PPA) that Ohio Power ratepayers would pay for and covers capacity out of coal-fired capacity that is no longer regulated in Ohio’s deregulated utility market.

The stipulated agreement, expected to be ruled on by the PUCO early this year, 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 generating units include 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. AEP Ohio also committed to develop at least 900 MW of wind and solar energy projects in Ohio over the next five years; continue its strong support of energy efficiency programs; move forward with grid modernization efforts, including the installation of smart meters, distribution automation and Volt-VAR optimization; and provide up to $100 million in customer credits during the term of the agreement.

Here is a look at some of the Feb. 1 arguments by company/entity:

Retail Energy Supply Association/Exelon Generation/Constellation NewEnergy

“After years of hard work by the Ohio Legislature and the Publie Utilities Commission of Ohio (‘Commission’), as well as the eleetric distribution utilities and competitive market participants, the Commission is facing another request to reverse course and re-arrange Ohio’s regulatory framework to the advantage of an electric distribution utility, the Ohio Power Company (‘AEP Ohio’). AEP Ohio is asking the Commission to take four actions in this proceeding: Declare it prudent for AEP Ohio to enter into a specific power purchase agreement (‘PPA’) with its affiliate, AEP Generation Resources, Inc. (‘AEPGR’) and thus purchase generation, capacity and ancillary services over a specified period of time and pursuant to the various terms and conditions in the agreement; Allow AEP Ohio to recover the net costs it will incur under the AEPGR-AEP Ohio PPA through a non-bypassable rider entitled ‘Rider PPA’; Allow AEP Ohio to recover through Rider PPA the net costs for the purchase of generation, capacity and ancillary services pursuant to a separate existing agreement that it has with the Ohio Valley Electric Corporation (‘OVEC’); and Approve the proposed Joint Stipulation and Recommendation (‘Stipulation’).

“AEP Ohio’s PPA Proposal will saddle the ratepayers with substantial risks and costs that AEP Ohio’s parent company no longer wants its subsidiaries (AEP Ohio and AEPGR) to bear. AEP Ohio had been alone in this case for many months in advocating for the PPA Proposal but was able to enter into the Stipulation with other parties by including a host of promises and favors that are unrelated to the PPA Proposal. Even with the Stipulation, the PPA Proposal remains unlawful and not beneficial, reasonable or in the public interest.

“The PPA Proposal is not going to stabilize retail rates for customers. This is because the PPA Proposal itself, and in the context of the other stipulated terms, will make the ratepayers pay for all net generation costs plus a healthy return on equity for AEPGR’s share of nine generation plants (with 20 units) for numerous years. While AEP Ohio and others may try to point to specific terms in the Stipulation as being beneficial, nothing in the Stipulation makes the heart of the stipulation – the PPA Proposal – lawful, beneficial, reasonable or in the public interest.” 

The Retail Energy Supply Association was founded in 1990 and is a broad and diverse group of more than twenty retail energy suppliers. Exelon Generation, part of Exelon (NYSE: EXC), is one of the largest competitive power generators in the U.S., with more than 30,000 MW of owned capacity. Exelon has sold power to Ohio’s electric distribution utilities (EDUs) pursuant to competitive wholesale procurement events overseen by the commission. Constellation NewEnergy is a subsidiary of Exelon Generation, and it provides electricity and/or energy-related services to retail customers in Ohio as well as in every other state in the Continental U.S. and the District of Columbia.

Dynegy Inc.

“An overlooked fact in this proceeding is that AEP Generation Resources, Inc. (‘AEPGR’) is not the only merchant generator in Ohio. Dynegy Inc. owns over 5,300 megawatts of net installed capacity in Ohio, including both coal and gas generation units. Dynegy also co-owns units with AEPGR and The Dayton Power & Light Company (‘DP&L’). Ignoring other Ohio merchant generators, Ohio Power Company (‘AEP Ohio’) proposes an 8.5-year power purchase agreement (‘PPA’) with its affiliate, AEPGR, which rewards AEPGR with minimal risk, guaranteed cost recovery and a guaranteed return on and of equity equal to 10.38 percent. All other merchant generators, including Dynegy, must compete in the wholesale market 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 the PPA proposal as incorporated into the December 14, 2015 stipulation in this proceeding, AEPGR will no longer face those competitive pressures. Instead, AEP Ohio’s ratepayers will bear AEPGR’s market risks, including the risk of capacity performance penalties. Moreover, because the design of the PPA remains cost plus, AEPGR and AEP Ohio will have no financial incentive to act rationally, in an economic sense, for the purchased output from the PPA units or the Ohio Valley Electric Corporation (‘OVEC’) entitlement that will also be netted under the PPA Rider. Including the PPA units and the OVEC entitlement in the PPA Rider will effectively encourage the continued operation of less efficient, less cost effective plants and discourage the modernization of generation sited in Ohio.

“Dynegy owns a number of coal- and gas-fired generating units in Ohio totaling 5,332 megawatts 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.”

PJM Power Providers Group (P3)/Electric Power Supply Association (EPSA)

“Despite Ohio law enacted in 1999 that requires Ohio’s electric utilities to separate generation assets from their non-competitive retail electric service and despite this utility’s 2012 commitment to fully separate its generation assets by transferring those generation assets to another entity, Ohio Power Company (‘AEP Ohio’ or ‘Company’) has not fully divested and has filed with the Public Utilities Commission of Ohio (‘Commission’) yet another proposal that will entangle AEP Ohio in those very same generation assets for at least eight more years.

“AEP Ohio’s proposal in this case comes on the heels of the Commission’s refusal to shift the responsibility for AEP Ohio’s entitlement to output from the Ohio Valley Electric Corporation (‘OVEC’) units from the Company’s shareholders to its ratepayers. More specifically, in the Company’s third electric security plan proceeding (‘ESP III’), AEP Ohio sought to establish a power purchase agreement (‘PPA’) rider that it claimed would act as a hedge and provide its ratepayers with rate stability. The Commission agreed to establish a ‘placeholder’ rider with no rates (‘PPA Rider’) for the term of AEP Ohio’s ESP III (June 2015 through May 2018), but the Commission rejected AEP Ohio’s OVEC-only PPA rider proposal because it would not ‘provide customers with sufficient benefit from the rider’s financial hedging mechanism or any other benefit that is commensurate with the rider’s potential cost.’

“AEP Ohio’s proposal is an attempt to shift the generation risk of AEPGR and AEP Ohio’s parent company to AEP Ohio’s ratepayers so that the parent company’s self-interest is satisfied. The purpose of this proposal is not to establish rate stability for the AEP Ohio ratepayers. The PPA proposal will not provide ratepayers with a sufficient hedging benefit (or rate stability) or any other benefit that is commensurate with the potential costs and risks. It is not lawful, reasonable or in the public interest.

“The reasons why the Application should be denied are many and obvious, putting this Commission at a crossroads in its tenure. Does it follow Ohio law and what is best for Ohio ratepayers, or does it allow AEP Ohio and its affiliates to profit at the expense of Ohio’s captive ratepayers? The PJM Power Providers Group (‘P3’) and the Electric Power Supply Association (‘EPSA’) respectfully submit that AEP Ohio’s proposal will harm AEP Ohio’s captive ratepayers and the sanctity of the wholesale markets.”

P3 is a non-profit organization whose members are energy providers in the PJM Interconnection region, conduct business in the PJM balancing authority area, and are signatories to various PJM agreements. Altogether, P3 members own over 84,000 MWs of generation assets. EPSA is a national trade association representing leading competitive power suppliers, including generators and marketers.

PJM Interconnection 

“PJM Interconnection, L.L.C. (‘PJM’) submits this Amicus Brief to the Public Utilities Commission of Ohio (‘Commission’) both to provide information to the Commission and to urge the Commission, in its Opinion and Order in this matter, to include certain clarifications with respect to the Commission’s understanding and intentions relative to paragraph III(A)(5)(a) (‘PUCO Oversight Provision’) of the Stipulation and Recommendation (‘Stipulation’) filed by AEP Ohio and other parties on December 15, 2015 in this proceeding.

“PJM submits this Amicus Brief as the regional transmission organization (‘RTO’) and administrator of the wholesale power markets in Ohio. The Commission’s interpretation and clarification of the PUCO Oversight Provision in any Order approving the Stipulation is critical in order to send the right signal as to Ohio’s interest in attracting competitive generation to meet the state’s future economic development needs. Silence on this issue will only make it harder for investors in new generation to view Ohio as a place where their investment is welcome and can compete fairly with existing legacy generation of the sort covered by the Stipulation.”

PUCO Staff 

“The Stipulation presented in this case enhances the benefits to rate payers identified in the Ohio Power (AEP Ohio or Company) Company’s Amended Application and addresses the concerns raised by the Staff of the Public Utilities Commission of Ohio (Staff) and other parties in this proceeding. The Stipulation is supported by a broad and diverse group of 22 stakeholders. The plan represents compromises by AEP Ohio and the other Signatory Parties and provides for a balanced outcome for all stakeholders. Approval would give the stakeholders what is needed, stability today and predictability for tomorrow.”

Staff noted that signatories to this deal include the Ohio Energy Group, the Ohio Hospital Association, competitive retail electric suppliers (Interstate Gas Supply, Direct Energy Services LLC and First Energy Solutions Corp.), environmental groups including the Sierra Club, and Buckeye Power. Buckeye Power owns the two other coal units at the Cardinal plant. “The signatories are a listing of the major users of power in the AEP Ohio service territory and the Staff,” said the PUCO staff brief. “The signatory parties have an extensive history of participation and experience in matters before the Commission. In addition, the Industrial Energy Users-Ohio (IEU) has filed a letter in the docket stating that it will not oppose the Stipulation and that IEU’s ‘non-opposition position recognizes that substantive terms in the PPA Stipulation that benefits its customers.'”

AEP Ohio

“This case presents a unique opportunity for the Commission to exercise its statutory authority to promote rate stability while simultaneously facilitating continued development of the competitive markets and protecting the interests of retail consumers and the Ohio economy. Specifically, Ohio Power Company (‘AEP Ohio’ or the ‘Company’) and the Signatory Parties to the December 14, 2015 Joint Stipulation and Recommendation (‘Stipulation”), including the Commission Staff, propose a plan to populate the previously approved PPA Rider. If approved, the population of the rider will provide an effective hedge against volatile market conditions to the benefit of Ohio retail customers. The offering of the hedge carries with it the benefit of maintaining key economic drivers for different Ohio communities.

“The Stipulation provides even more benefits including but not limited to commitments by the Company to take specific future actions that help transform AEP Ohio into a utility of the future, pro-competitive incentives for the competitive retail electric service market in Ohio, a significant set of new environmental options for the Commission to consider in its generation portfolio, enhancements to the energy efficiency and peak demand reduction programs, and various other provisions.

“As supported in the AEP Ohio’s Stipulation testimony and as will be further explained through the AEP Ohio’s briefs, the PPA Proposal is a lawful and reasonable way to address all of these concerns and promote rate stability while fully preserving competition and retail choice. AEP Ohio submits that the purpose of the PPA Proposal is to stabilize rates for both shopping customers and SSO customers alike – by passing through to customers the differential between PJM market prices and a cost-based contractual price, in this case the cost-based prices of the Affiliate and OVEC PPAs.

“The Stipulation was developed through intense negotiations among knowledgeable and capable parties including the Commission’s Staff. It not only resolves the issues raised in the Amended Application, but it also addresses related ESP matters and makes other commitments and agreements; the settlement constitutes a robust package of terms and conditions that convey benefits to customers and advance the public interest. In short, the Stipulation fulfills the well-established test adopted by the Commission and the Supreme Court of Ohio for use in evaluating adoption of contested settlements – as will be demonstrated in detail below.” 

Advanced Power Services/Carroll County Energy/South Field Energy 

Advanced Power Services, Carroll County Energy LLC and South Field Energy LLC (the ‘Joint Movants’) respectfully renew their joint motion for leave to file a joint amicus curiae brief in this matter. The Joint Movants are related companies currently constructing and developing over 1,900 megawatts of natural gas fired generation in Ohio at a cost of over $1.9 billion. As more fully discussed in the accompanying memorandum, the Joint Movants seek leave to file a joint amicus curiae brief to address the policy implications of three issues that exist in this proceeding and that are now heightened given the December 14, 2015 stipulation.

“The three issues will affect the development and siting of new generation in Ohio and are: (i) the lack of an open solicitation process on the proposed power purchase agreement (‘PPA’) coupled with a reduction in term of the proposed PPA (from the life of the units to 8.5 years), (ii) providing a special subsidy to a merchant generator (AEP Generation Resources, Inc.) along with cost recovery for adding natural gas co-firing to certain of the PPA units, and (iii) the ability of new natural gas fired generation in Ohio to reduce carbon dioxide emissions rather than relying on the Stipulation’s carbon reduction commitments and heat input limitations for certain units.

“Advanced Power Services (‘Advanced Power’) is a privately owned developer of independent power generation projects. Since 2006, Advanced Power and its affiliates have developed or put into construction more than 7,000 megawatts (‘MW’) of generation in the United States and Europe. Advanced Power is currently constructing or developing four projects in the eastern United States, totaling 3,000 MW—including two projects in Ohio through Carroll County Energy LLC and South Field Energy LLC, which are both within Advanced Power’s corporate organizational structure.

“Advanced Power’s two Ohio projects are well underway. Carroll County Energy LLC is developing and constructing the Carroll County Energy Eacility, an $899 million, 750-MW state-of-the-art combined-cycle natural gas turbine electric generation facility in Carroll County, Ohio. Construction for this project is progressing on schedule and commercial operations will start in the second-half of 2017. South Field Energy EEC is developing the South Field Energy Facility, an over $1 billion, 1,100 MW dual fuel combined-cycle generating facility to be located in Columbiana County, Ohio, near Wellsville. This plant is scheduled to become commercially operational in 2020.

“None of the parties to this proceeding are currently developing new generation facilities in Ohio of the size and magnitude that Carroll County Energy and South Field Energy are developing. Advanced Power, Carroll County Energy and South Field Energy, thus, present a unique perspective on the significant adverse consequences that the Application as modified by the Stipulation will have on these new Ohio generation plants and similarly situated generation plants under development that seek to participate in the PJM markets.”

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.