Ohio Commission Staff Recommends Against Approval of AEP Coal Plant Protection Plan

Ohio Commission Staff Recommends Against Approval of AEP Coal Plant Protection Plan

The staff of the Public Utilities Commission of Ohio is recommending against approval, at least in its current form, of an application by the Ohio Power subsidiary of American Electric Power (NYSE: AEP) to protect over 3,100 MW of coal-fired capacity through two power purchase agreements that ratepayers in this deregulated state would pay for.

The commission on Feb. 25 rejected an initial Ohio Power application for this power purchase agreement rate rider (called the "PPA Rider"), but did rule that it had the authority to approve such a cost passthrough mechanism. So that triggered a new application from Ohio Power and renewed opposition from various parties, including environmental groups and competing power suppliers like Exelon (NYSE: EXC) and Dynegy (NYSE: DYN). This new application (called the "expanded PPA Rider') added new power plants to the protected list.

Hisham Choueiki, representing commission staff, on Oct. 9 filed testimony advising the commission not to approve this plan. Choueiki is the Senior Energy Specialist in the Rates and Analysis Department.

Ohio Power, also known as AEP Ohio, has proposed a PPA with it its affiliate, AEP Generation Resources Inc. (AEPGR). According to the company, the purpose of the expanded PPA Rider is to provide a necessary hedge to AEP Ohio’s customers that will protect them from the impacts of market volatility, especially during periods of extreme weather, provide Ohio generators with a predictable source of revenue to maintain operations keeping jobs and taxes in the state, and promote economic development in Ohio by providing retail price certainty.

The extra generating capacity covered by this latest proposal is:

  • Cardinal Unit 1 is a coal-fired 592-MW facility located in Brilliant, Ohio. Cardinal 1 is owned by AEPGR but is operated by Cardinal Operating Co. Cardinal Operating also operates Cardinal generating Units 2 and 3 that are owned by Buckeye Power.
  • Conesville Units 4, 5 and 6 are located in Conesville, Ohio. They are coal-fired. Unit 4 is partially owned by AEPGR – 43.5% or 339 MW. Units 5 and 6 are fully owned by AEPGR, with each capable of generating 405 MW. The Conesville units are operated by AEPGR.
  • Stuart Units 1-4 are located in Aberdeen, Ohio. All four units are coal-fired. AEPGR is a partial owner – 26% or 150 MW of each of the four units. The Stuart units are operated by Dayton Power & Light.
  • The lone, coal-fired Zimmer unit is located in Moscow, Ohio. AEPGR owns 25.4% or 330 MW. The Zimmer unit is operated by Dynegy.

This expanded PPA Rider will consist of two power purchase agreements: the Ohio Valley Electric Corp. (OVEC) PPA as proposed in the case from earlier this year; and the new PPA as proposed in this latest rider application. Both agreements will be under the jurisdiction of the Federal Energy Regulatory Commission.

Ohio Power would purchase the output of the listed units at cost plus a return on investment, and will add the costs associated with its contractual entitlement in the OVEC generating units. Ohio Power will then sell all that output in the PJM Interconnection capacity, energy and ancillary services markets, and use 100% of the revenues earned to cover the given units’ costs, plus the associated return on investment. The difference between the revenues and the costs will be netted as a credit or a charge in the expanded PPA Rider.

The covered OVEC generating units are at two coal-fired plants: Kyger Units 1-5, in Cheshire, Ohio; and Clifty Creek Units 1-6 near Madison, Indiana. Ohio Power is entitled to 19.93% or 440 MW of the OVEC units. The expanded PPA includes 3,111 MW, which is 440 MW from OVEC, plus the capacity from Cardinal, Conesville, Stuart and Zimmer.

Ohio Power states that the expanded PPA Rider should be non-bypassable to avoid having consumers migrate in or out of the standard service offer (SSO) based upon whether the expanded PPA Rider is a credit or a charge, respectively. This behavior, in the company’s opinion, would trigger an increase in the risk premiums that prospective participants would include in their bids during commission-administered SSO auctions, Choueiki noted.

PUCO staff finds that Ohio Power didn't meet certain conditions

Choueiki said that PUCO staff does not believe that the company has satisfied the necessary conditions identified by the commission for the following reasons:

  • With respect to a demonstration of the financial need for the units owned, or partially owned, by AEPGR, the company and AEPGR assumed a 50%/50% capital structure and a Return on Equity (ROE) of 11.24%. Staff believes the proposed ROE is excessive.
  • The company did not provide an independent assessment of the impact of the closures of Cardinal 1, Conesville 4-6, Stuart 1-4, and Zimmer on grid reliability. The company simply provided an internal assessment, conducted by AEP Transmission, of the impact of such closures on the grid should AEPGR retire the plants.
  • The company and AEPGR did not commit to a rigorous commission oversight of the expanded PPA Rider. Rather, the company offered several statements about the commission having jurisdiction to conduct financial audits and accessing information. To the extent there are issues with prudency or concerns about rates, the company states that the commission would have to pursue such issues at FERC. This commitment is vague and does not satisfy the definition of a rigorous commission oversight, Choueiki said.
  • The company and AEPGR did not commit to full information sharing. The company did commit to sharing “all pertinent aspects of the PPA contract with AEPGR.” This, in staff’s opinion, does not satisfy a commission condition.
  • Ohio Power and AEPGR did not, in staff’s opinion, commit to sharing the financial risk associated with the PPA Rider with its distribution customers.
  • The company did not commit to the severability provision identified by the commission. The company simply committed to a process that is quite vague and that could ultimately lead to the company withdrawing the plan involving the OVEC capacity.

Choueiki said that staff agrees with the company that the energy prices in the PJM footprint have been quite volatile recently, especially during certain hours in January and February of 2014 (the Polar Vortex period). But staff prefers the staggering and laddering approach that the commission has adopted in administering past SSO procurement auctions for mitigating price volatility.

Additionally, unless a particular customer is a very large energy user that has on staff professional energy experts that can purchase energy in the day-ahead and real-time hourly markets, customers that shop often hedge their risk by purchasing fixed rate contracts for a one-year, or longer, period. These fixed rate contracts help customers reduce their exposure to the high volatility that may be observed in the day-ahead and real-time hourly markets, Choueiki pointed out.

Conditions recommended if the commission does approve this plan

Should the commission approve the expanded PPA Rider, staff recommends that it condition its approval on terms that could mitigate these concerns. These conditions include:

  • Limiting the Term of the expanded PPA Rider: Staff recommends that the term of this rider should be no longer than the term of the original OVEC request.
  • Rigorous Review of the expanded PPA Rider: The fixed and variable cost components will be included in wholesale contracts between the Ohio Power and OVEC or between Ohio Power and AEPGR. These two contracts would be under the jurisdiction of the FERC. As a result, if the Ohio commission believed that certain future fixed cost components or variable cost components were not prudent, the commission would have to file at FERC challenging these cost components, and the burden of proof would be on the PUCO to demonstrate its case. A method to mitigate this concern would be for Ohio Power and AEPGR to accept that all future cost components (fixed and variable) will be audited annually by PUCO staff and for the company and AEPGR to accept an Ohio commission finding to the extent there is a disagreement between the company or AEPGR and staff and a hearing is conducted.
  • Full Information Sharing: Ohio Power and AEPGR should commit to providing access to information on all the generation fleet of AEPGR. As an example, if staff is assessing the reasonableness of a specific cost item for one of the Conesville generating units and deems it appropriate to compare such a cost item to a cost item of another plant, such as one of the Gavin coal units (which are not covered by the rider), Ohio Power and AEPGR should make such information available to staff.
  • Sharing Mechanism of the Risk Associated with the expanded PPA Rider: Ohio Power and AEPGR would have to develop a sharing mechanism whereby AEPGR commits to be responsible for a portion of the costs associated with the expanded PPA Rider in exchange for a portion of the revenues associated with the expanded PPA Rider. Alternatively, the commission may wish to include an appropriate charge and credit caps on the expanded PPA Rider.
  • Independent Assessment of the Impact on Reliability and Economic Development: Ohio Power would have to commit to use investor dollars for an independent reliability and economic analysis conducted by a third party of the Ohio commission’s choosing.
  • Severability Provision: Ohio Power would have to commit fully to the severability provision should a court of competent jurisdiction invalidate the expanded PPA Rider “in whole or in part.”

Plan has run into heavy outside opposition

As mentioned, this plan has run into opposition from other parties. For example:

  • Dean Ellis, employed by Dynegy as Vice President of Regulatory Affairs, said in Sept. 11 testimony: "Dynegy believes in the efficient operation of markets, generally, and of markets for wholesale electric power and electric capacity, specifically. Dynegy opposes arrangements or constructs that are designed to distort the markets in a manner that assure benefits to one market participant and therefore inappropriately disadvantage other market participants. AEP Ohio’s proposal is just such a construct."
  • Lael Campbell, employed by Exelon as the Director of State Government and Regulatory Affairs, testified in Sept. 11 testimony on behalf of Exelon and the Retail Energy Supply Association: "Because the PPA Rider is non-bypassable, the guaranteed return to AEPGR will be funded by all the AEP Ohio’s regulated retail customers, regardless of whether they receive their electric power supply from AEP Ohio via the Standard Service Offer or from a [competitive retail electric service] provider. This ratepayer guarantee would be in place for the entire life of the applicable plants, at least one of which is not expected to retire until 2051. The AEP Ohio application, if implemented, threatens the retail market in the AEP Ohio service territory and the state of Ohio as a whole."
  • Joseph E. Bowring, the Independent Market Monitor for PJM, through his job as the President of Monitoring Analytics LLC, said in Sept. 11 testimony: "The purpose of the PPA Rider is to transfer the costs and market risks associated with the PPA Rider Units from AEP’s shareholders to AEP’s ratepayers. AEP has not demonstrated and cannot demonstrate why customers should bear these costs and take these risks, if a well informed generation owner is not willing to do so."

This article was republished with permission.

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