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Ohio electric utilities seek to push risk to customers

By: Benjamin Lanka |

Should Ohio’s electric customers essentially also serve as investors, with the potential gains and losses to follow?

That is one of the main questions in front of the Public Utilities Commission of Ohio as it decides whether to allow three of the state’s largest electric utilities to assess riders to help finance failing power plants.

American Electric Power, FirstEnergy and Duke Energy have all asked the state for the ability to charge the rider, which the utilities argue will help stabilize prices and provide a constant source of power for customers. Opponents, however, say the plan is essentially a bailout for the companies looking to maximize profits while avoiding risk in an unregulated electricity market.

Some of the utilities’ power plants are losing money, including the AEP operation in Conesville and FirstEnergy’s Davis-Besse Nuclear Power Station along Lake Erie, as a result of falling energy prices driven by a boom in the natural gas supply. To keep the plants operating, the companies would attach a rider to consumers’ bills that would fluctuate based on the profitability of the power plants. As power prices, and theoretically profits, increase, the rider could actually serve as a credit on the bill.

Having consumers play roles as investors would be the first of its kind in Ohio, which is likely the reason the state commission is taking its time in rendering a decision. AEP filed the first request in December 2013.

Michael Zimmer, executive in residence for the Voinovich School of Leadership and Public Affairs at Ohio University, said the shift of putting risk more to customers instead of shareholders is unusual and not one broadly seen nationwide. He said the decision by the commission will set the precedent for such requests into the future.

“It is really making ratepayers function as a shareholder, as an investor,” he said.

The commission is expected to announce its decision on AEP’s initial request any day.

Sharing risk, rewards

The riders would cost utility customers initially. AEP estimated it would cost $2 per month at first and FirstEnergy said it would be an additional $3.50 per month during the first year.

Where it goes from there is up for considerable debate. AEP officials estimate the plan would save its customers $224 million over a decade, and FirstEnergy said its plan would save customers $2 billion over 15 years.

Opponents, however, said those estimates are grossly misleading. A consultant for the Ohio Consumers’ Counsel, for example, estimated the FirstEnergy plan would cost customers $3.1 billion to $3.2 billion over that same span. Opponents argue the AEP plan will cost customers $240 million.

The companies say the fees are needed to generate revenue for power plants that are struggling to compete in a competitive energy marketplace. Donald Moul, vice president of commodity operations at FirstEnergy, testified the Davis-Besse nuclear plant and the W.H. Sammis coal plant along the Ohio River were losing money.

“The economic viability of the plants is in doubt,” he said.

Customers have long financially supported power plants, according to AEP spokeswoman Terri Flora, but the difference in those plans is that they present an opportunity for those customers to recoup some of the profits.

“In reality, if we had the (plan) in 2014, AEP would have given back approximately $90 million in profits to customers from the first quarter alone,” she said.

She previously said the cost to produce power at Conesville far exceeds the money the company can sell that power for in the open market.

Projecting profits and losses based on energy prices a decade out is highly speculative, Zimmer said, and a business would typically want to keep such profits for themselves versus sharing them with its customers.

“The fact that they aren’t is telling you something,” he said.

Opponents largely question why such profitable businesses can’t simply finance the short-term losses themselves. AEP reported 2014 profit of $1.6 billion, up from $1.5 billion in the prior year. FirstEnergy’s profits for the first nine months of 2014 were $605 million, a jump from $250 million for the first nine months of the previous year.

Bigger benefits

The utility plans, however, go beyond just whether customers will pay more or less. The utilities say keeping the power plants open will help provide a constant source of energy to Ohioans and provide price stability should natural gas or other fuel costs spike.

Moul testified that during the 2014 polar vortex, natural gas resources were highly constrained and having coal and nuclear generation — whose fuel is available on the plant’s site — is essential to prevent dramatic spikes in costs and reduce power outages. He said plants fired by natural gas accounted for more than 45 percent of the outages in the system at the peak of the cold weather last winter.

But America’s Natural Gas Alliance rebuffed that criticism in a letter to the commission. Amy Farrell, vice president of market development for the group, wrote there was “a lot of misleading rhetoric about natural gas” to support nuclear and coal energy. She said all streams were interrupted by the extreme cold causing equipment breakdowns, and she said the availability of natural gas was not a major issue.

“The reliability of natural gas in Ohio is well established and will only improve with the ongoing investment in the delivery system,” she wrote.

AEP’s Flora said opponents often ignore the economic development benefit the proposal would bring by stabilizing electric prices and jobs.

For example, Ottawa County Commissioner Steve Arndt said he has heard from many larger industrial facilities that have had to reduce manufacturing operations because of a lack of power. During the polar vortex, the county was notified there would be rolling brownouts. Eliminating more plants and making power less stable would not bode well for the area’s ability to attract new manufacturing facilities, he said.

The Ohio Manufacturers’ Association, however, opposes the plan because it could mean higher electricity rates for manufacturers. Edward Hill testified for the organization against the FirstEnergy proposal, saying it would essentially be a “massive subsidy” from customers to the company. He said the fact some plants could close is not a concern to his businesses.

“There is ample generation in the … region to meet Ohio’s generation requirements for the near term,” he testified.

Local losses

Whether the closure of power plants would hurt the state is in question, but there is no doubt such closures would be damaging to the local communities where they reside.

The Conesville Plant in Coshocton County employs about 260 people plus 150 contractors, bringing in $18.5 million in combined income to the rural county, according to a letter from its commissioners.

“The Appalachian region of Ohio has seen significant plant closures over the past several years,” they wrote the state commission. “Our community cannot continue to endure these types of potential losses.”

The plant generates millions of dollars in property taxes, of which the largest beneficiary is the River View Local Schools. But more importantly, Superintendent Dalton Summers, said, the plant provides many good jobs for the community, allowing residents to own homes and pay property taxes to the district and others.

The Davis-Besse plant in Ottawa County employes about 700 people with an annual payroll of roughly $65 million. Commissioner Arndt said the loss would hurt the community, but he said the overall loss of power and its effect on manufacturing would be more damaging.

The utilities haven’t flatly said they will close the plants if their plans are rejected, but they have stressed that the plants simply aren’t making money. Shuttering them temporarily also isn’t an option, FirstEnergy’s Maul said.

“Once these plants are retired, they are very costly and difficult (if not impossible) to restart. They likely would be gone forever,” he testified.

Since 2006, 25 electric generation sites have been closed in Ohio, according to the state commission. That includes three of the generators at Conesville.

Scott Miller, Consortium for Energy, Economics and the Environment director at the Voinovich School, said plant closings are difficult decisions with potential pain for communities. But the utilities are businesses and the question before the commission is whether all customers should have to pay more to prop up a currently failing enterprise.

“Are you going to have those costs passed along hyper-locally (through plant closures), or are we going to spread those costs over the entire rate base?” he said.