Dynegy Inc. (NYSE: DYN) on Nov. 21 objected at the Public Utilities Commission of Ohio over a revised plan by Dayton Power & Light to protect mostly coal-fired generation from low power market prices.
Dean Ellis, employed by Dynegy as Senior Vice President, Regulatory, provided the testimony. Notable is that Dynegy is a co-owner with DP&L of the coal-fired Stuart, Zimmer, Miami Fort, Killen and Conesville power plants. Even though Dynegy co-owns generation units with DP&L, both companies compete separately in the wholesale energy and capacity markets, Ellis wrote. The co-owned generation units are commonly referred to as Joint Owned Units (JOUs) and are covered by Joint Operating Agreements (JOAs). Each owner bids its fractional share of each plant into the PJM Interconnection energy and capacity markets, and each owner receives its share of the market revenues.
In February 2016, DP&L proposed to the Ohio commission the Reliable Electricity Rider.Under that proposal, DP&L would enter into a power purchase agreement (PPA) between it and an affiliate, “Ohio Genco,” to acquire the generation output of five generating plants for which DP&L is currently a part owner but would soon be transferred to Ohio Genco, as well as DP&L’s entitlement of 103 MW of two coal-fired generating plants owned and operated by Ohio Valley Electric Corp. (OVEC). DP&L would have sold both the generational output of the five plants and the OVEC entitlement into the PJM markets, and would have netted the revenues received from these sales against the costs paid to Ohio Genco. The difference between the costs and revenues would have been credited or charged to DP&L’s ratepayers on a non-bypassable basis.
Ellis noted that the stated purpose of this rider was to promote the reliability of the electric supply and the stability and growth of Ohio’s economy. Eight months later, DP&L abandoned the Reliable Electricity Rider. In its October 2016 amended application, DP&L proposed the Distribution Modernization Rider (DMR). This new rider proposal does not rely on a PPA between DP&L and Ohio Genco, and DP&L will not sell the plants’ energy and capacity into the PJM markets. Instead, DP&L asks for $145 million per year for seven years and claims that without that revenue “both DP&L and its parent DPL Inc. (‘DPL’) would be unable to maintain their financial integrity.”
Ellis wrote: “In my experience, well-established cost-of-service rate-making principles require a regulatory body to establish rates and charges that enable the utility to recover its own reasonable costs and investments, and to provide the utility with an opportunity to earn a reasonable rate of return on investment. The proposed DMR violates these well-established ratemaking principles. Via the DMR, DP&L is asking its ratepayers to pay for the parent corporation’s debt and also allow the parent to make additional discretionary debt repayments. Because it is not truly intended to facilitate the utility’s cost-recovery, the DMR proposal runs afoul of established ratemaking principles and is nothing more than a cash infusion intended to benefit DP&L’s parent corporation. In other words, the rider would act as a subsidy for DPL and any generation units that DPL, DP&L or a competitive affiliate own.
“I believe that the DMR will act as an anti-competitive subsidy to DP&L and its parent. As mentioned above, there are three owners of the joint-owned PPA units. The ownership is fractional in nature, where each joint owner owns a share of the unit. Each owner offers (bids) its fractional share into the PJM energy and capacity markets, and each owner receives its share of the market revenues. On the cost side, the operations costs are split amongst each owner in proportion to their fractional ownership share. Should one owner receive an out-of-market subsidy such as revenues from the DMR, it will greatly distort the ownership arrangement and provide that owner with a competitive advantage. For example, if DP&L were to receive approval of the DMR, DP&L would receive guaranteed revenues that could boost its credit ratings and provide to DP&L a cash subsidy that could directly or indirectly benefit DP&L’s ability to compete in the wholesale markets against Dynegy. Likewise, because DP&L’s affiliate, AES Ohio Generation, holds peaking units that compete in the PJM markets against Dynegy, the DMR would act as a direct or indirect subsidy to DPL’s generation affiliate.
“The Commission should reject the DMR proposal as inconsistent with sound ratemaking principles. If the Commission disagrees and concludes that the DMR is needed for the entity that it regulates (DP&L), then the Commission should require DP&L to divest itself of all generation assets and limit the use of DMR revenue to only within DP&L.”
Two large industrial power customers also object to the Dayton plan
Other critical Nov. 21 testimony came from Lane Kollen, a utility rate and planning consultant holding the position of Vice President and Principal with the firm of Kennedy and Associates. He was testifying on behalf of The Ohio Energy Group (OEG). OEG members participating in this intervention are Cargill Inc. and General Motors LLC.
Kollen noted that based on its revised financial forecasts, DP&L now plans to retain its unregulated generating assets in the utility compared to its plan to transfer them to an unregulated affiliate by Jan. 1, 2017. The commission ordered that sale and the company has not yet sought or obtained authorization to retain its unregulated generating assets beyond Jan. 1, 2017, Kollen added.
Kollen said: “In the Amended Application, the Company abandoned any pretense of potential or actual customer benefits in the latter years of the ESP if and when the market revenues for capacity and energy exceed the costs of the unregulated generation assets. Instead, the Company now seeks an absolute increase in non-bypassable distribution charges to provide credit support for DPL Inc. and DP&L, improve the financial metrics for DPL Inc. and DP&L, and subsidize the unregulated generation assets. The Company proposes to collect the non-bypassable DMR regardless of whether it continues to own those assets, sells them to a third party, or transfers them to an unregulated affiliate, and regardless of whether the market revenues increase over the term of the ESP.
“I recommend that the Commission reject the Company’s proposed DMR and the collection of $145 million annually, or $1.015 billion in total, from retail customers over the seven-year term of the DMR and ESP. The DMR is a credit support rider intended to improve the financial metrics for AES Corporation, DPL Inc., and DP&L. The Commission should require AES Corporation to address and resolve the financial distress at both DPL Inc. and DP&L instead of approving a financial bail-out of AES Corporation through the DMR. AES Corporation is directly and solely responsible for the financial health of DPL Inc. and DP&L and is the proximate cause of their financial distress. The retail customers did not cause, nor are they responsible for the financial distress at DPL Inc. and DP&L. AES Corporation can solve the financial distress at both companies immediately through additional equity investments and the use of that cash to make concomitant reductions in outstanding debt.
“When it acquired DPL Inc., AES Corporation intentionally assumed all market price and other business risks of the unregulated generating assets, including those owned by DPL Inc. through its subsidiaries AES Ohio Generation, LLC and DP&L. AES Corporation compounded those unregulated generation business risks through payment of an acquisition premium and the issuance of $1.25 billion in additional debt at DPL Inc. to finance the cost of the acquisition, including the acquisition premium.”
PJM monitor says this plan would have ‘price suppressive effects’ in the power markets
Joseph E. Bowring, the Market Monitor for PJM and the President of Monitoring Analytics LLC, filed his own Nov. 21 objections. He noted that DP&L is requesting commission approval of an electric security plan (ESP) for a term of Jan. 1, 2017, through Dec. 31, 2023. DP&L’s ESP includes a Distribution Modernization Rider (DMR) that would require customers to pay, via a nonbypassable charge, $145 million per year, or a total of $1.015 billion over the seven year term. DP&L’s ESP includes a Reconciliation Rider, initially set at $10.5 million per year, to pay for a shortfall in wholesale power market revenues related to the costs of generation from OVEC, or a total of $73.5 million over the seven-year term. DP&L’s ESP also includes a Clean Energy Rider that would require customers to pay, via a nonbypassable charge, unquantified environmental compliance costs and decommissioning costs associated with generation owned by DP&L.
Bowring pointed out: “The DMR is intended to offset the factors that threaten the company’s financial integrity. At least two of the four key factors cited in DP&L’s filing are related to the ownership of generation assets. The filing cites low capacity market prices and low gas prices that reduce the profits of coal fired generation.”
Bowring added: “The proposed ESP is not consistent with competition in the PJM wholesale power market. The elements of the ESP associated with the ownership of wholesale market generation, including the DMR, the Reconciliation Rider and the Clean Energy Rider, would constitute a subsidy to DPL generation. The proposed ESP would shift responsibility for costs associated with DP&L’s generation assets from the shareholders to the distribution customers of the company. DP&L is requesting that all Ohio distribution customers of DP&L be required to pay for costs associated with the generation assets owned by DP&L. In addition, DP&L’s position is that customers should not receive a credit under the DMR even if the company experiences significantly excessive earnings under the Ohio SEET test that result in part from the DMR.
“This type of subsidy is inconsistent with competition in the wholesale power markets because of its price suppressive effects. With a guaranteed revenue stream of more than $145 million dollars per year and insulation from environmental risks, DP&L would not need to recover it costs through wholesale markets as its unsubsidized competitors do. DP&L would have an incentive to continue to offer noneconomic resources into the PJM markets in a way that its unsubsidized competitors cannot.”
Sierra Club highlights plunging values for the co-owned coal plants
Tyler Comings, a Senior Associate with Synapse Energy Economics Inc., in Nov. 21 testimony filed on behalf of the Sierra Club, said that a financial analysis of publicly-available data from plant co-owners like American Electric Power (NYSE: AEP) and Dynegy shows that the book values of the subject coal plants are being slashed.
Comings said: “Co-owners of the Company’s coal generation are taking significant write-offs or considering selling their shares in the plants due to the low value and poor reliability of these plants. AEP and Dynegy have a more realistic view of the value of these coal plants, though for Conesville at least the Company agrees with its co-owners that this plant is worth $0.”
He said that AEP’s merchant coal generation includes shares in the Conesville, Stuart and Zimmer plants (with DP&L) as well as shares in the Cardinal and Oklaunion plants. AEP recently ran a cash flow analysis on these five plants (which it refers to as the “Merchant Coal-Fired Generation Assets”) using its own forecasts of capacity and energy prices as well as assumptions for future capital investments. AEP’s analysis resulted in projected negative cash flows. Based on this result, coupled with the significant capital investments necessary to comply with environmental rules to allow the Merchant Coal-Fired Generation Assets to operate to the end of their currently estimated depreciable lives and the joint-ownership structure of these facilities, AEP management determined the fair value of these assets was $0. AEP had previously valued its merchant coal fleet at $2.14 billion—including its share of the Conesville, Stuart and Zimmer plants. Thus it took a substantial “asset impairment” of the entire value of these plants.
Comings added that DP&L agrees with AEP regarding the value of Conesville. In 2013, it took a $26 million asset impairment after it determined the plant “to have zero fair value using discounted cash flows under the income approach.” However, unlike AEP, it has not offered a recent public assessment of Stuart and Zimmer.
Dynegy owns a share of all five of DP&L’s coal plants. Dynegy has determined that the Stuart plant is worth $0, Comings said. Dynegy’s conclusion that the Stuart plant was valued at $0 led it to adopt an asset impairment of $55 million. Dynegy has indicated that it is interested in owning the Miami Fort and Zimmer plants outright while giving up its interest in the Conesville, Killen and Stuart plants, Comings added.
Dayton says this plan needed to ensure financial stability
DP&L said in its Oct. 11 amended application that the cash flow from the DMR will be used to: pay interest obligations on existing debt at DPL and DP&L; make discretionary debt prepayments at DPL and DP&L; and allow DP&L to make capital expenditures to modernize and/or maintain the company’s transmission and distribution infrastructure. “The Commission should approve DP&L’s request for a DMR so that it can maintain its financial integrity and continue to provide safe and stable service to customers,” the utility added.
As part of its ESP plan, DP&L is proposing to maintain 100% competitive bidding for its standard service offer load, in essentially the same process that exists currently. Two auctions will be conducted for procurement in the first period, June 1, 2017 to May 31, 2018. One auction will be held for subsequent 12 month periods with varying product lengths of 7, 12, 19, 24, 31, 36, and 43 months, for a total of eight auctions in the ESP. The 12-month delivery periods will align with the PJM calendar, with delivery period beginning on June 1st of each year and ending on May 31st of the following year, with an exception in the final period which will be June 1, 2023 to December 31, 2023.
DP&L plans for winning bidders of its auctions to supply Renewable Energy Credits sufficient to cover their obligation relating to the amount of SSO load that winning bidders are obligated to supply. The Oct. 11 application said: “The Commission should approve DP&L’s plan because it is reasonable for the entity supplying the generation to supply the associated Renewable Energy Credits, given that DP&L is no longer supplying generation for SSO load.”