Michigan utility says Ohio ‘bailouts’ make case against deregulation

Michigan’s second-largest utility says the recent approval of income-guarantee deals in Ohio makes the case for restructuring the electricity market in its home state.

Consumers Energy — one of the two largest investor-owned utilities in Michigan — says Ohio regulators’ decision to guarantee income for struggling coal and nuclear plants there should be a warning to advocates pushing to deregulat e Michigan’s electric market. Opponents have called the Ohio deals “bailouts.”

“Consumers Energy, DTE Energy and our allies here have been pointing out the dangers and concerns about electric deregulation for quite some time,” Consumers spokesman Dan Bishop told Midwest Energy News. “Ohio’s abrupt reversal is really a poster child for why electric deregulation is a failed experiment and why states are returning to the safer and more predictable harbors of electric regulation.”

On March 31, the Public Utilities Commission of Ohio unanimously approved requests by FirstEnergy and AEP to guarantee income for eight years for certain coal plants and a nuclear plant. 

The PUCO’s decision set off a storm of opposition from a variety of entities and interest groups that have pledged to fight the decisions by appeal and through the courts. Among the complaints, opponents have said the decision effectively re-regulates that portion of AEP’s and FirstEnergy’s businesses.

“A fair-minded observer would look at this and say, ‘This is an odd situation,’” Bishop said. “Utility power plants are being spun off, apparently competing in the wild west world of electric deregulation. Then, a few years later that decision is abruptly reversed, and now you’re re-regulating those facilities. There’s a zig-zag, volatile quality to this business model that just does not make a lot of sense.”

Meanwhile, regulated Michigan utilities have been pushing state lawmakers for over a year to eliminate the state’s hybrid electric choice market, which allows up to 10 percent of a utility’s customer load to shop for electricity from alternative suppliers.

They have been up against alternative suppliers and some lawmakers who continue to push for full deregulation, or at least staying at the 10 percent cap.

The most recent legislative proposals from House and Senate Republicans call for maintaining the cap but adding requirements that would make it more difficult to enter and exit the choice market. Alternative suppliers and free-market advocates say those requirements would ultimately end Michigan’s choice market through attrition. Meanwhile, thousands of customers are on a waiting list to participate in electric choice.

A spokesman for DTE Energy, which operates a separate business in Ohio’s wholesale power market, could not be reached for comment.

Regulatory, not market problem

Laura Chappelle, an attorney and former chair of the Michigan Public Service Commission who advocates on behalf of alternative suppliers, said the scenario that has played out in Ohio is a regulatory problem, not a market problem.

She says the Ohio situation is not an indictment of deregulated markets, but rather “imperfect regulation.”

“With the complaint that markets don’t work — you’d have to ignore what (grid operator) PJM did over the past two years to redo their market that properly values baseload plants,” Chappelle said. “Unfortunately, the regulatory regime is what failed the customers.”

Chappelle added that the various legal challenges underscore her point about the regulatory decision.

“I’m in the camp saying those orders will not survive at least a federal challenge because the state overreached in the wholesale power market,” she said. “If Ohio wanted to end electric choice, that’s what they should do instead of having these convoluted schemes.”

‘A policy choice’

Among the opponents of the PUCO decisions is the Cleveland-based Institute for Energy Economics and Financial Analysis.

“It locks in ratepayers paying for the coal plants that are basically uneconomic in competitive energy markets,” said Cathy Kunkel, an IEEFA energy analyst.

While AEP and FirstEnergy say the decisions will cost ratepayers up front but ultimately lead to savings, the IEEFA projected in February that the deals would ultimately cost Ohio ratepayers $4 billion over the next eight years.

“It seems to be a major subsidy to these old coal-fired generators, and also nuclear,” she said. “If Ohio was serious about having a deregulated market, this clearly interferes with competition there. It clearly seems to be pushing Ohio away from pure deregulation.”

However, Kunkel said she’s unsure whether Ohio’s experience makes the case one way or the other for regulated electric markets.

“It certainly highlights a real dynamic going on in the power industry right now. Older coal and nuclear plants are having trouble competing in deregulated markets. Low natural gas prices are driving down wholesale power prices, combined with relatively flat electric demand and growing renewables.

“Here, the PUCO is making a choice to say it’s important to have those coal plants around, so we’re going to subsidize them. It’s a policy choice.”

One thought on “Michigan utility says Ohio ‘bailouts’ make case against deregulation

  1. Laura Chapelle is correct. Deregulation has been pretty successful in Ohio, if you ignore the terrible failure of the original deregulation law passed in 1998 (Ohio Senate Bill 3) which was sponsored by the Industrial Energy Users’ group, and which put 15% of Ohio’s industrial energy users out of business (couldn’t have happened to a nicer bunch) in the next two years.

    The 2008 law (SB 221) got it right, and Ohio has been moving along well since then. The correct reading of the Ohio situation is that FirstEnergy bungled the move to market-based price setting, and has enough currency with the Ohio republican leadership that they could get the PUCO to approve a settlement which doesn’t even comply with Ohio law, much less with Federal law.

    Once it became obvious that the PUCO was going to consider giving FirstEnergy a bailout, AEP decided prudently to jump on the bandwagon for free money. Although their hearings went first, they did not initiate the bailout case until well after FE did. Now DP&L and Duke are trying to follow the same path, although Duke has been given some grief by the PUCO. Neither of these utilities have strong cases, and neither of them will hurt ratepayers much if they succeed.

    Although FE has its “guarantee” the decision does nothing to control the PJM market. Ohio republicans want to take Ohio out of the wind energy business, but the rest of the nation is not going to pass up the huge economic opportunity now that wind is cheaper than natural gas or coal. And so the premise of the bailout cases is going to prove to be false. The announced new natural gas construction projects are probably bad ideas too, but they certainly make it easy to shut Davis Besse.

    The biggest negative here is that Ohio regulators have given up all pretense of doing their job. The coincidence of the Boich contribution of $1 million to Kasich’s campaign should make that clear to everyone who isn’t blinded by the political circus.