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FERC Blocks Ohio Income Guarantee For Uncompetitive Coal, Nuclear Plants

FERC has stepped in to block a pair of controversial Ohio power purchase agreements (PPA) designed to keep currently uneconomic coal and nuclear generating units owned by FirstEnergy Corp. and American Electric Power Co. (AEP) in operation.

The PPAs, approved last month by the Public Utilities Commission of Ohio (PUCO) (see Daily GPI, March 31),would have guaranteed cost recovery for AEP and FirstEnergy to purchase power from affiliated coal and nuclear wholesale generating units that had been struggling to compete in a market where low-cost natural gas has driven down prices (see Daily GPI, Jan. 11).  

In a pair of orders released Wednesday, the Federal Energy Regulatory Commission blocked the PPAs by rescinding waivers of affiliate power sales restrictions previously granted to FirstEnergy and AEP in Ohio. Under the Federal Power Act (FPA), wholesale electricity sales cannot be made “between a franchised public utility with captive customers and a market-regulated power sales affiliate without” Commission approval.

FirstEnergy and AEP had received waivers for the affiliate restriction under the FPA on the basis that Ohio’s retail choice program prevents ratepayers from being captive to a particular electric supplier. With AEP and FirstEnergy ratepayers now required to subsidize the PPAs through a rider on their bills, the four sitting FERC commissioners unanimously concluded that circumstances have changed.

The multi-year PPAs, which would have also required AEP and FirstEnergy to invest in new renewable capacity and convert some existing plants to burn natural gas, had drawn heavy criticism from consumer advocates, environmental groups and competing wholesale electric generators who claimed the income guarantees were anti-competitive. Houston, TX-based Dynegy Inc., which operates a number of generating units in Ohio, said in January that it could save ratepayers billions of dollars compared to the PPAs by building more natural gas-fired plants (see Daily GPI, Jan. 14).

“Complainants argue that retail choice is effectively absent as it concerns the Affiliate PPA because the PPA Rider would compel all customers, even those that opt to take service from a competitive retail supplier, to pay for the costs associated with the affiliate PPA,” FERC wrote. “Therefore, complainants argue that retail customers...are in fact captive and that this case involves [an] extreme example of affiliate abuse.”

FirstEnergy and AEP had maintained that the Ohio ratepayers would not be captive under the PPAs since they would still be able to choose a different retail supplier, according to FERC’s summary of the arguments in the case. The utilities had also argued that the PPAs would protect ratepayers against future energy price spikes.

Competing generators expressed concern that the AEP and FirstEnergy income guarantees would impose potentially billions of dollars in above-market costs for Ohio ratepayers, which they argued “would artificially distort prices” in the regional wholesale electric market “by subsidizing the continued operation of generation that would otherwise retire.”

In order for FirstEnergy and AEP to enact the PPAs approved by PUCO, they will now have to submit them for review by FERC.

In a note examining FERC’s actions Wednesday, ClearView Energy Partners LLC wrote: “Assuming that AEP and [FirstEnergy] file the PPAs, new proceedings would be initiated and a comment period would follow. If the Commission finds it has sufficient information to render a decision at that point, it could do so on the basis of the comments filed (and a round of answers). What is probably more likely in such a technical matter is that the Commission would identify material issues of fact and set the matter for hearing before an Administrative Law Judge. Several commenters in both cases contend that the PPAs will likely fail” established regulatory standards for affiliate transactions. “Our review of the comments suggests this may prove to be the case.”

Dynegy CEO Robert Flexon said FERC’s actions will “protect consumers and the wholesale markets from abuse...FERC agreed that customers are indeed captive to the out-of-market and exorbitantly priced PPA proposals” approved by PUCO “and has now ensured a transparent and thorough review for the benefit of Ohio residents and businesses.”

Meanwhile, FirstEnergy spokesman Doug Colafella told NGI via email that the utility is “disappointed with FERC’s decision...the PPA will benefit our customers by protecting them against rising retail prices and volatility in future years. The arrangement also will help avoid up to $4.1 billion in additional charges to Ohio customers for new transmission projects.

“We also believe that the PPA complies with existing FERC rules that promote retail shopping, and our Ohio customers will continue to have the ability to choose a competitive supplier.     

“FirstEnergy is evaluating its options, which include seeking rehearing of FERC's order, as well as filing the PPA for FERC's review. It's always been our position that the PPA will satisfy the FERC's criteria for an affiliate contract.”

AEP spokeswoman Terri Flora called FERC’s order “a disappointing and unfortunate intrusion by FERC into Ohio’s ability to define its own long-term electricity supply and protect customers and the state economy from electricity price spikes and market volatility.

“Although we believe the AEP Ohio power purchase agreement is the best long-term approach for our Ohio customers and the state and that it would survive FERC review, AEP is not interested in participating in a drawn-out FERC review process. We are focused on being a regulated utility company, so we will initiate a strategic review of the generation assets in the power purchase agreement, similar to the review already in place for our other competitive generation assets.”

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