In December, EPCO took a stand against the power purchase agreements that FirstEnergy and AEP presented before the Public Utilities Commission of Ohio (PUCO). Over the last several months additional hearings were held, and experts testified for each side, regarding the viability and potential consumer costs of the proposals. On March 31, the PUCO issued their ruling in favor of the power purchase agreements for both FirstEnergy and AEP. The complete order with opinions from the PUCO can be read here.
The PUCO has given FirstEnergy and AEP approval for an eight year rate plan. This plan will go into effect over the summer, following a set of auctions on pricing later this spring. Simply put, the customers in these territories will be subsidizing FirstEnergy and AEP to ensure they turn a profit through 2024. FirstEnergy has argued that over the eight year term, the rates consumers pay will be lower in aggregate (projected at $256 million), following an initial increase in the first couple years.
However, many in opposition including the Ohio Consumers Council believe this deal will cost consumers at least $3 billion over the eight year term. Some estimates have even put the cost to consumers at nearly $6 billion. There is clearly a stark contrast regarding the potential cost to consumers. This divide is due in large part to differing assumptions regarding where the natural gas market, and state of renewable energy, will be in the future.
To understand this argument better, let’s take a brief step back to evaluate how we got here. Historically, most electricity in Ohio has been produced from coal fired plants. But over the past five years, half the large coal fired plants in the state have been retired. During that time, generation from coal dropped from 82 percent throughout Ohio to 59 percent.
There are two significant reasons why this shift has occurred. First, the influx of natural gas in the market has provided a less expensive and cleaner alternative to coal fired generation. In just the past couple of years, the price for natural gas is down roughly 60 percent and trading below $2 on the stock exchange. The second issue is the increased cost of compliance due to additional federal and state regulations levied on coal and nuclear plants.
The utilities were able to successfully argue to the PUCO that their coal fired and nuclear plants are unable to compete in this changing market. As more natural gas fired plants come online, and additional regulations are issued, it has become exceedingly difficult for FirstEnergy and AEP to compete. In order to ensure that their plants stay active and produce the necessary power for the regional grid, they required a subsidy from the consumer in the form of an income guarantee.
The utilities have argued that natural gas pricing is going to dramatically increase to bolster their claims that rates will precipitously rise in the future. According to their logic, once rates increase their plants become more competitive. The utilities added that the need for the income guarantee is short term until the market turns in their favor.
The only problem with this argument is there is nothing to support the utilities claims. To the contrary, a great deal of research, data, and market analysis has shown the opposite trends have, and will continue, to occur. The current freeze on the Ohio renewable energy portfolio is likely to expire by the end of the year. Even Governor Kasich has come out strongly opposed to any continued freeze. Once this current legislation expires, private investment in renewable energy will continue at an increasing pace. Furthermore, many of the projections that FirstEnergy has cited have already been proven wildly incorrect. Natural gas prices continue to plummet to historic lows and show absolutely no signs of significant increase over time.
Groups such as the Ohio Consumers Council have vowed to challenge these rulings at the state level, while others seek appeals through the Federal Energy Regulatory Commission (FERC). Despite claims to the contrary, it is unlikely to change the outcome of the PUCO ruling. At this time, EPCO is warning clients that rates will be increasing in the near future. The PUCO ruling will result an increased cost of doing business that ultimately will adversely affect business growth and development in Ohio. As such, the best course of action to take is reducing the amount of electric consumption at your facility through a comprehensive set of energy efficiency measures. Be sure to consult your energy advisor on what your next steps should be.