A power utility in Ohio is attempting to shaft its own customers in a manner so shameless as to defy description. Yet describe it we must, for it represents everything backward and perverse in the electricity sector and reveals that the interests of the institutions that provide electricity have come fundamentally out of sync with the interests of the citizens who depend on it.
Plus it's pretty funny, in a morbid sort of way. You almost have to admire the chutzpah. But to understand it takes a little explaining. Here's the TL;DR version:
- FirstEnergy, a power company that serves 6 million customers in Ohio, Pennsylvania, West Virginia, Virginia, Maryland, New Jersey, and New York, owns a handful of big nuclear and coal power plants that are no longer competitive in power markets. Rather than shut down the plants, the company is asking Ohio regulators to force customers to buy the plants' power for the next 15 years, an enormous subsidy that would ensure FirstEnergy shareholders a steady, predictable profit even as its ratepayers get hosed.
FirstEnergy supported markets until markets got competitive
A quick bit of background.
Let's recall that US power utilities come in two basic flavors. Most Americans are still served by vertically integrated utilities, meaning utilities that own the entire electricity supply chain, from power plants to transmission lines to transformers to local distribution lines. They generate the power, transport it, and deliver it to customers. This is the traditional regulated-monopoly utility model, which has been around for more than a century.
In the 1990s and early 2000s, there was a wave of "deregulation," whereby power distribution utilities — the ones that send you your bill and repair your power lines — were split off from power generation utilities. The idea was that the latter would compete in open wholesale power markets, while the former would buy the cheapest power available on those markets.
Deregulation stampeded through about 15 states (Ohio among them) and then, after the California Enronpocalypse of 2000, froze, where it remains more or less the same to this day. Here's the state of play as of 2012:
Until quite recently, FirstEnergy was a big fan of deregulation. It is a "utility holding company," which means it owns lots of utilities on both the distribution and generation sides. With deregulation it spun off its best generation assets — mostly big coal plants — into independent companies that made big money on wholesale power markets. As a bonus, in the process of deregulation it secured a $6.9 billion subsidy from customers to cover assets it risked having "stranded" in competitive markets. (Customers protecting FirstEnergy shareholders from the risks of competition turns out to be a running theme here.)
For years, those big power plants made money as expected, and shareholders were happy, though rates in Ohio continued to climb.
Lately, however, something has happened in power markets that FirstEnergy finds most disturbing: competition. Natural gas has gotten very cheap even as electricity demand has stagnated. It's undercutting both nuclear and coal, even as coal plants undergo expensive retrofits to comply with new public health regulations.
So FirstEnergy has seen its generation companies take a beating.
It isn't the only utility holding company in the same predicament. As I wrote last week, trouble on the generation side is what has energy giant Exelon wanting to eat up distribution utilities like Pepco, where it can find safer, less volatile revenue streams.
What FirstEnergy really wants is to return to regulated markets and end this competition nonsense once and for all. But that's a big lift. In the meantime, it has struck on a novel strategy that, whatever else you might say about it, requires some serious brass ovaries.
FirstEnergy would like to go back to the no-competition please
FirstEnergy is concerned with the fate of two big power plants. The first is the W.H. Sammis Power Plant in Stratton, Ohio, a very large, very old coal-fired plant that has recently undergone expensive renovations to bring it in line with environmental standards. The second is the Davis-Besse power plant on Lake Erie, a very large, very old nuclear plant with a history of safety incidents.
Under the terms of the rate plan FirstEnergy recently submitted to the Public Utilities Commission of Ohio (PUCO), the ratepayers of three of its distribution utilities — Illuminating Co., Ohio Edison, and Toledo Edison — would be forced to buy, through a "power purchase agreement" (PPA), all the power that those two plants produce over the next 15 years, along with the output of two other very old coal plants in which FirstEnergy has a partial stake. Among the costs consumers would cover are a $600 million upgrade to the nuclear plant and an 11 percent return on investment to FirstEnergy shareholders.
It's worth pausing a moment let that sink in. The company can't sell its product on a competitive market, so it's asking the state to force customers to buy it. For 15 years. A Russian oligarch would blush.
The company claims the agreement would mean a modest increase in customer bills in the early years, followed by rebates in the later years, for a total savings over 15 years of $2 billion. This is based on the assumption that natural gas prices will eventually shoot back up (and that renewables will not continue their downward march). The exact details are unclear, since FirstEnergy hasn't shared its modeling, but in effect it is assuming that the current financial difficulties facing large coal and nuclear power plants are a temporary problem. That is ... optimistic.
Meanwhile, the Ohio Consumers Counsel, a state agency assigned to protect the interests of utility ratepayers, contends that the deal will cost ratepayers $3 billion over 15 years. According to RTO Insider, "UBS Securities said the PPA was priced to begin at about $65/MWh — $26 above current market prices — and increase by $2/MWh annually" [my emphasis]. This is what FirstEnergy refers to as "price stability."
Beyond the costs to consumers, large, subsidized baseload plants would suppress the market for new renewable energy and make it difficult for the state to comply with the Clean Power Plan.
FirstEnergy has said that it will be forced to close the plants without this subsidy, but under grilling at the first hearing on the rate case — held Monday and, delightfully, filmed for the second season of Showtime's Years of Living Dangerously — the company's director of rates and regulatory affairs, Eileen M. Mikkelsen, admitted that she couldn't say that for sure.
FirstEnergy's business plan is to keep its baseload plants running
Utilities have known for years that change is coming to the electricity industry, as power plants gets smaller and more nimble and customers, through distributed energy, become producers and demand a more sophisticated grid. Some utilities are working to create new business plans that accommodate these realities.
FirstEnergy has opted instead to double down on its baseload plants, doing everything it can to keep demand high and competitors out.
That's why it joined a coalition that sued FERC to keep "demand response" — programs that would shift or reduce electricity demand at times of congestion — out of PJM wholesale energy markets. Said a spokesman, "We feel that it’s going to lead to even more premature closures of power plants." (Here's a question: if shifts in demand render a power plant unnecessary, in what way is that plant's closure "premature"?)
FirstEnergy's devotion to its baseload plants is also why it led the fight to roll back Ohio's clean energy standard, which forces it to invest in competition to those plants. (It only succeeded in freezing the standard in place, not scrapping it.)
It's also why FirstEnergy is hostile to energy efficiency. Last year, the company cancelled all its residential and industrial efficiency programs. In a 2013 report to PUCO, it calculated that "for every $1 spent on energy efficiency, customers had saved more than $2 in power costs." Nonetheless, the following year, it claimed that canceling efficiency programs would save consumers money. Why? Because consumers would no longer have to pay the extra fees that FirstEnergy charged to make up for the revenue it was losing through efficiency. Orwell would blush.
And finally, devotion to these baseload plants has led CEO Chuck Jones to make the truly bizarre argument that "Ohio is losing its energy independence" because instead of importing coal from outside the state on trains, it is importing electricity from outside the state on power lines. Says Jones, in horror, "these billion-dollar transmission projects are paid for solely by customers." This is the guy, you will recall, trying to stick customers with a 15 year bill for outdated power plants.
Regardless, importing electricity is cheaper than importing coal. And it's not entirely clear what value Ohio would derive from being energy independent of, say, Indiana anyway.
Why all this agita on behalf of a few power plants? "Ohio’s economic security and quality of life is highly dependent on maintaining a diverse mix of baseload coal and nuclear power plants," then-CEO Anthony Alexander said in a 2014 statement. (Savor, for a moment, the phrase "diverse mix of baseload coal and nuclear power plants." Diverse indeed.)
So in FirstEnergy's view, Ohio's economic security and quality of life are not served by renewable energy. They're not served by demand response, or energy efficiency. And apparently they are not served by competitive power markets. No, they can only be vouchsafed through the continued, state-mandated operation of a particular set of extremely old, economically uncompetitive power plants.
That is crazy.
A large majority of the American public, along with virtually every serious climate-change analyst, agrees that America needs to use more renewable electricity and to use electricity as efficiently as possible. Those two goals are essential (if not sufficient) to addressing climate change. As a bonus, they save consumers money.
But both those goals are directly contrary to the financial interests of the company that has been granted a state-sponsored monopoly over electricity provision for 6 million people in Ohio and surrounding states.
It's not a healthy situation. Nor is it coherent public policy.
FirstEnergy's attempt at Soviet-style market planning is likely to fail
PUCO is likely to reject FirstEnergy's rate case. It's not that the company has no pull. Legislators are acutely aware of the jobs and tax contributions provided by large power plants, whereas the benefits of cheaper, cleaner electricity are more diffuse. Utilities and their regulators have a long, cozy relationship that has mostly taken place outside the public gaze, protected by a forcefield of tedium.
But these days, people are watching. Activist groups can't match the money and legal manpower of the big utility holding companies, but they can draw attention to the proceedings, and sometimes that's enough. PUCO rejected a very similar request from utility giant AEP earlier this year after activists mobilized around it. It would be difficult to justify a different decision in this case.
The fact is, if FirstEnergy can exploit its distribution customers to pay off the lemons owned by its generation companies, then it might as well be a vertically integrated utility. It's difficult to imagine anything more contrary to the spirit of deregulation.
The company has been trying to convince Ohioans that competitive markets will bankrupt it and destroy the reliability of the grid. It finally got under the skin of PUCO chair Andre Porter, who said last week:
Stop trying to scare Ohioans. We’re going to continue to have reliable power. We’re going to continue to have cost-effective services. So stop trying to scare Ohioans.
Doesn't sound like a guy positively inclined toward the company.
FirstEnergy has been coasting on its big baseload plants for so long that it hasn't done much to prepare the grid for the electricity system of the future. In fact, a performance audit this year found "management inefficiencies" leading to poor customer service, maintenance backlogs, and insufficient meter reading. It's what happens when you view ratepayers as piggy banks.
Change is coming to the electricity system, whether the company is ready or not. Its current rate case is a crude attempt to use ratepayers as human shields, protecting FirstEnergy shareholders from market risk. There's no reason PUCO should let them get away with it.