Author :
Paul Arbaje
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Ohio Ratepayers Shouldn’t Have to Pay for Money-Losing Coal Plants

   

 The Equation Read More 

Large numbers of coal plants in the United States have been closing for quite some time now due to the declining economics of coal-fired power. It doesn’t make financial sense for many coal plants stay open due to competition from more affordable clean resources—such as wind and solar—as well as from other fossil fuel power plants, such as those fired by methane gas.

But what if I told you that some coal plants are able to continue operating—and continue polluting—with little to no regard for how much money they’re losing? And further, what if I told you that these coal plants have been operating since the 1950s, and their ability to stay open is being aided by hundreds of millions of dollars in ratepayer-funded subsidies? That would be outrageous, wouldn’t it?

But that’s exactly what’s happening right now. The Ohio Valley Electric Corporation (OVEC) owns and operates two such coal plants, and Ohio ratepayers are set to continue subsidizing these uneconomic plants absent any intervention from state policymakers.

But the Public Utilities Commission of Ohio (PUCO) will soon have the chance to save ratepayers large sums of money—in excess of $100 million for a single year—and hold OVEC and its shareholders accountable for their profligate practices.

The Citizens Utility Board of Ohio (CUB) and the Union of Concerned Scientists (UCS), alongside other intervenors in an ongoing PUCO regulatory proceeding, are working to ensure ratepayers aren’t left to foot the bill for the massive financial losses incurred by OVEC.

March 5 will be the last day parties—that is, groups or organizations registered with the PUCO—can argue their positions in the proceeding. Then the PUCO commissioners will decide which costs of operating these two coal plants should be passed to Ohio ratepayers.

In this blog post I’ll walk through how we got here and why it’s so important that the PUCO doesn’t give OVEC free rein to operate these money-losing plants without any regard for Ohioans’ energy burdens.

To set the scene, OVEC operates the 1,085-megawatt (MW) Kyger Creek plant in Cheshire, Ohio, as well as the 1,302-MW Clifty Creek plant in Madison, Indiana. This ongoing PUCO proceeding is specific to the costs of operating the two coal plants in 2020.

Somewhat confusingly, OVEC itself is not actually a party in the proceeding. Instead, this proceeding aims to scrutinize the costs of operating the two plants that were incurred by the Ohio Power Company (also known as AEP Ohio), Duke Energy Ohio, and the Dayton Power & Light Company (also known as AES Ohio).

These three utilities and their parent companies are some of OVEC’s largest shareholders, collectively owning more than half of the company. The OVEC plants sell electricity into the regional wholesale market operated by PJM Interconnection, and the utilities receive the amount of resulting revenue in proportion to their OVEC ownership stake. Similarly, the utilities also get billed proportionally by OVEC for the costs of operating the coal plants.

PJM market rules are designed with the aim of minimizing costs for consumers, generally prioritizing lower-cost electricity resources over higher-cost resources. This includes the cost of actually delivering electricity to the grid (often referred to as simply “energy” in the wholesale market context), but also the cost of paying power plants to be available in the future when the grid needs them. This latter service of being on standby to generate when called upon by a grid operator, such as PJM, is called “capacity.”

However, OVEC has not been operating its coal plants in a manner that minimizes costs for consumers. In fact, its coal plants have been losing money for years. The plants’ operating costs have been consistently higher than the average PJM market price of energy and capacity, and this difference accumulated to a loss of more than $900 million between 2015-2019 (see Table 4 here). Ohioans were forced to subsidize some of these costs through various surcharges on their utility bills.

These pre-2020 subsidies were approved by the PUCO as hedges, so that customers would get a credit when market electricity prices exceeded OVEC’s costs. But that has rarely happened, and customers have instead gotten hit with charges over and over again, since market prices have been mostly much lower than OVEC’s costs. The post-2020 subsidies tell a very similar story.

Ohio House Bill 6 (HB6), signed into law in 2019, established a new and expanded subsidy for the OVEC coal plants in place of the existing subsidies the PUCO had approved for AEP Ohio, Duke Energy Ohio, and AES Ohio—I’ll refer to these utilities from now on as simply “AEP, Duke and AES.” These three utilities are beneficiaries of the new subsidy, which has been collected monthly from ratepayers statewide starting on January 1, 2020.

In this very first proceeding on the HB6 subsidy for the OVEC coal plants, the PUCO will decide if the 2020 costs incurred by the three utilities to fund the plants’ operations were “prudent.” If any costs are found to be “imprudently incurred,” then ratepayers will see corresponding relief on their utility bills.

The subsidies OVEC’s money-losing coal plants’ have received are even more troubling when you consider how HB6 came to be in the first place.

This law was at the center of likely the largest corruption and bribery scandal in Ohio’s history. A separate utility giant in the state, FirstEnergy, was found by federal prosecutors to have funneled more than $60 million in dark money bribes to the Ohio House Speaker at the time, Larry Householder, and several associates. In exchange, Householder arranged for the passage of HB6, which included a $1.3 billion bailout of two bankrupt nuclear plants owned by a unit of FirstEnergy.

Householder was ultimately sentenced to 20 years in prison, and FirstEnergy had to pay $230 million in a deferred prosecution agreement. The former PUCO chair was also criminally charged, and just this week, former FirstEnergy executives were indicted for the first time. The nuclear bailout for FirstEnergy was also repealed in the aftermath of the scandal, but the coal bailout for OVEC was not repealed and persists.

Absent any action from Ohio lawmakers or the PUCO, OVEC will continue incurring massive financial losses from operating its aging coal plants and recouping those losses from ratepayers until at least 2030. The total HB6 subsidy for the coal plants could grow nearly seven times larger by then, reaching $700 million or possibly more.

Now is the time for PUCO to protect ratepayers and stop this from happening, starting with this first post-HB6 regulatory proceeding focused on 2020 costs.

In October and November of last year, the PUCO held an evidentiary hearing on OVEC’s 2020 costs that were billed to AEP, Duke, and AES. For our hearing testimony, CUB and UCS worked with Synapse Energy Economics to calculate OVEC’s “above-market” costs—that is, the difference in cost of the energy and capacity from the OVEC coal plants versus the relatively lower cost of energy and capacity from the PJM regional wholesale electricity market.

We stated in our testimony that OVEC’s 2020 revenues from the PJM market were about $29 per megawatt-hour (MWh) of electricity, but its costs were more than double that, at about $67 per MWh. This huge difference totaled a $117.9 million loss in a single year when scaled to the ownership stakes of AEP, Duke, and AES.

OVEC’s 2020 costs billed to AEP, Duke, and AES substantially exceeded its revenues from the PJM market, accumulating to a $117.9 million loss. Source: Synapse Energy Economics testimony on behalf of CUB and UCS.

These above-market costs do not pass the prudency test; Ohio ratepayers could have gotten a much better deal for electricity from other resources in the PJM market. Yet these three utility companies in this current proceeding are seeking to pass the $117.9 million onto ratepayers across the state. The PUCO must not let them do so.

When selling electricity day-to-day in PJM’s energy market (separate from its capacity market), OVEC designates both of its coal plants as “must-run,” which means it sells electricity into the market regardless of whether the going price, which is constantly fluctuating, is high enough to cover its marginal costs. A must-run status for a power plant is in contrast with an “economic” status, which is what most generating resources use. Economic status allows market operators such as PJM to use low-cost resources on the grid before needing to resort to higher-cost resources to meet electric demand, thereby reducing overall system costs.

OVEC and its shareholders cite operational inflexibility as one of the main reasons for the coal plants’ must-run statuses. But in reality, they’re electing to use the must-run status because they believe state regulators like the PUCO will allow them to recover the resulting losses from ratepayers. However, not all states are buying this proposition.

Last year, the Michigan Public Service Commission ruled that Indiana Michigan Power (I&M)–an AEP affiliate and another OVEC shareholder–imprudently incurred about $1.3 million in 2020 costs to purchase power from the OVEC plants, when there were more affordable sources available. Therefore, the shareholders of I&M’s parent company, not Michigan ratepayers, had to pay for those costs. The ruling was recently upheld by a Michigan appellate court.

While $1.3 million may not sound like a lot given the massive dollar amounts that OVEC has incurred, it’s important to note that I&M owns only 7.85% of OVEC, and the Michigan-specific share of that ownership stake is only 13.9%. If other state regulators follow suit and the $1.3 million “disallowance” were scaled up to 100% of OVEC, the ratepayer relief would be significant, likely forcing meaningful change and discouraging such anti-consumer behavior.

It’s time for the PUCO to follow suit and prohibit AEP, Duke, and AES from recovering above-market OVEC costs, among other unnecessary costs laid out in our testimony and recent post-hearing brief. The PUCO is obligated to protect ratepayers by holding utilities accountable for the business decisions they make. Foundational to this accountability is making sure utilities aren’t authorized to make ratepayers foot the bill for imprudently incurred costs—like burning coal just for the sake of burning coal, without providing any consumer value.

 

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