The Davis Besse nuclear plant is among those covered by a proposed FirstEnergy settlement.

Marc Haserodt / Creative Commons

The Davis Besse nuclear plant is among those covered by a proposed FirstEnergy settlement.

Report: ‘Around market’ moves by Ohio utilities are part of larger trend

Efforts by Ohio utilities to guarantee income for affiliated coal and nuclear operations are part of a broader trend, according to a new report by legal analysts.

Starting in 2014, FirstEnergy, American Electric Power (AEP) and other companies sought to impose added fees on all customers of their Ohio utilities, in order to guarantee sales for certain power plants owned by affiliates of those companies. After federal regulators said they would require strict scrutiny of any power purchase agreements under those plans, FirstEnergy and AEP changed their proposals.

Both companies also announced an interest in seeking re-regulation of electricity generation in Ohio. If successful, that effort would reverse a 1999 law that gave customers the right to choose their own electricity generation supplier. That law also forbade utilities from favoring their own generation affiliates.

The Ohio companies’ actions are among the more aggressive “around market” efforts in a nationwide trend noted by report authors Raymond Gifford and Matthew Larson of Wilkinson Barker Knauer in Denver, Colorado. Those efforts coincide with the exit of multiple coal and nuclear plants from the market.

“This has gone from somewhere simmering on the back burner to a very broad trend,” Gifford said, noting that it involves a whole “series of state ‘around market’ initiatives that have popped up all within a fairly short time frame.”

If stakeholders and policy makers don’t develop workable market solutions, the Wilkinson report warns, the continued exit of baseload power plants could raise questions about reliability and lead to more re-regulation efforts.

Critics of so-called “bailout” plans disagree with the need for “around market” solutions.

“I’d like to call them what they are: They’re just subsidies for certain power plants,” said Joe Nichols at the Buckeye Institute in Columbus, Ohio.

A ‘very delicate’ question

Regulators and lawmakers decide whether to implement plans that do end-runs around markets. But, Gifford admitted, companies whose generation fleets are “losing money hand over fist” have a “really strong incentive to push for some sort of state measure to correct that.”

Thus, in Ohio and some other states, utilities have pushed regulators or lawmakers for action to bolster revenues for nuclear and coal facilities. The companies then face the challenge of persuading regulators or lawmakers why the state and its customers would benefit, Gifford said.

“We saw the same development coming out all across the country,” Larson noted.

In addition to the AEP and FirstEnergy proposals in Ohio, for example, Exelon sought support in Illinois for two of its nuclear generation plants. Meanwhile, the New York Public Service Commission has backed a system to provide short-term supplementary credits to keep certain nuclear power plants online. Texas has had a debate over what kind of capacity market, if any, is appropriate to support fossil fuel power plants, according to the Wilkinson report.

There is also now “plausible discussion” about re-regulation in Ohio, after the Federal Energy Regulatory Commission called for close scrutiny of deals between AEP’s and FirstEnergy’s utilities and their respective generation affiliates, Gifford said. Ohio’s situation has also been cited by opponents as a reason to avoid deregulation in Michigan, he said.

As an attorney who often represents investor-owned utilities, Gifford doesn’t think re-regulation would be a bad thing.

“I’m not sure anybody can honestly do better than it,” he said. “It seems to me the purpose of either a vertically integrated market or a restructured competitive wholesale market is to minimize error costs with these long-lived, highly capital intensive assets.”

But, he admitted, “grievous errors” can and have happened in regulated markets. “The answer is one of institutional design, and it’s a very delicate institutional design question.”

Managing markets

“It’s no surprise some state regulators dislike competition, which they can’t control,” said Dick Munson at the Environmental Defense Fund. “It’s also no surprise politically-powerful utilities want state subsidies to prop up their power plants that can’t compete in markets.”

Talk about re-regulation seems especially misplaced to critics who say Ohio’s utilities never fully separated their generation and transmission.

“Ohio policymakers should fully separate utilities’ generation business from the transmission and distribution business rather than continuing to allow utility companies to own affiliate power plants or, even worse, re-regulating,” said Nichols.

Although jobs and tax revenues from power plants in a state are “very visible” to state policymakers, Nichols does not think it’s necessary to give preferences to in-state power plants.

“Obviously power flows across state lines just as easily as it flows between counties within a state,” he explained. “And having this regional cooperation run by a grid operator really enhances reliability and provides a lot of reliability benefits.”

He agrees with the Wilkinson report’s conclusion that stakeholders and grid operators should consider how to best value baseload power plants in competitive capacity markets. But, he added, grid operator PJM has already taken steps. Its capacity auction now rewards resources that are perceived to be more reliable and penalizes ones that turn out to be less reliable.

“Rather than jumping the gun on these kinds of reforms and these kinds of studies, we should wait to see if they work,” Nichols stressed.

Even if there were a perceived problem with reliability, PJM can deal with that, by providing extra payments for specific plants, Nichols noted. FirstEnergy previously benefited from such an arrangement when PJM had it keep three coal plants running between 2012 and 2015.

“Regardless, there has simply been no showing that captive utility customers should be forced to bail out financially struggling merchant coal plants as new generation continues to come online both in Ohio and throughout PJM, which has a 22.4 percent reserve margin in the latest capacity auction,” said Shannon Fisk of Earthjustice. He represents the Sierra Club in the Ohio regulatory case dealing with FirstEnergy’s plan.

Nor is there any guarantee that “bailouts” would keep certain plants running, Fisk added. Under the latest version of FirstEnergy’s plan, a modified rider “would simply give FirstEnergy free money to do with what it pleases,” Fisk said.

Implications for renewable energy

Nichols said there are already some distortions in the marketplace, due to tax credits and standards for renewable energy. The Buckeye Institute is on record opposing renewable portfolio standards in Ohio.

As a general matter, supporters say such standards aim to encourage investment in and development of new technology, as well as to rein in pollution linked to health problems and climate change.

Coal and nuclear plants might otherwise be able to deal with those incentives, Nichols noted. In addition, though, those plants also face competitive pressure from cheap natural gas. The combination of the two may be too much for them, suggested Nichols.

Meanwhile, the Wilkinson report’s authors speculated about whether the plight of nuclear plants might make it harder to achieve targets under the Clean Power Plan or other programs.

“What does this mean for compliance with any potential future carbon goals, if you have zero emission baseload units exiting these markets?” Larson wondered.

One possibility raised by the Wilkinson report is that more fossil fuel generation might take its place.

In Ohio, half a dozen natural gas power plants were under construction or in the planning stages this summer. Natural gas power plants release greenhouse gases into the atmosphere, but the level is generally less than that for coal-fired power plants.

Another possibility would be expanded operation of existing coal-fired power plants.

Also unclear is whether additional retirements of coal-fired power plant would offset potential fossil fuel entries to replace nuclear generation, or whether more renewable energy could be brought online quickly enough to provide sufficient replacements, if necessary. Other technological improvements could become factors too, including expanded battery storage and advanced grid technology.

Environmental advocates who reviewed the Wilkinson report focused their comments on the way “around market” solutions seek to subsidize existing fossil fuel plants.

“We should be transitioning away from uneconomic coal units and focusing on creating a modern and clean energy system through investments in renewables, energy efficiency, demand response, and distribution modernization,” Fisk stated.

 

CORRECTION: An earlier version of this article had an error in the spelling of Wilkinson Barker Knauer.

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