Ohio Adopts ‘No-Fault Capitalism’ for AEP, First Energy

Years ago, a friend said he viewed electric utilities as an example of “no-fault capitalism,” because state regulators always bail the companies out when they make bad business decisions. That was before the mid-1990s restructuring that brought competition to many markets that were previously monopolies. Among them was Ohio’s utility system, an entrenched monopoly environment that only reluctantly got dragged into the world of real capitalism.

Now, the Buckeye State’s two dominant utilities – AEP and First Energy – have persuaded the local regulator, the Public Utilities Commission of Ohio, to embrace no-fault capitalism. Another tag might be “back-door socialism.” At the end of March, the PUCO approved a plan to guarantee Columbus-based AEP and Akron’s First Energy profits from stumbling coal and nuclear plants for the next eight years.

The PUCO-approved deal will hit customers with the difference between what prices the companies are able to win in competitive auctions at the PJM Interconnection and what they say it costs them to generate power, running from this June to May 2024.

Opponents of the utility bail-out – which protects the utilities from the results of competitive power markets – say the PUCO plan amounts to a “handout” of $1.9 billion to AEP’s Ohio operations and $4 billion for FirstEnergy. The utilities argue, unpersuasively to me, that the guarantees will prevent larger rate increases in the future, based on the dubious assumption that wholesale power prices will rise significantly in the next eight years.

In its March 31 order, the PUCO said it was acting to promote “a modernized grid and continued customer shopping for electricity.” That’s more than disingenuous. The PUCO acted to shield AEP and FirstEnergy from the functioning of competitive wholesale markets – PJM in particular – where the utilities’ plants, including seven elderly coal-fired units and the long-troubled and high-cost Davis Bess nuke, were losing money in wholesale bidding contests to new gas-fired generation.

The Columbus Dispatch reported that PUCO chairman Andre Porter said, “These orders today are as much about the future modernized grid as they are about the challenges today.” The newspaper noted, “Following the vote, he declined to take questions from reporters and made a quick exit.” Porter, a lawyer, is a 2015 appointee of Ohio’s Republican governor, John Kasich. He was a PUCO commissioner from 2011-2013.

The PUCO order guarantees a 10.38% return on equity through 2024 for capacity and energy from six AEP coal-fired stations, a major FirstEnergy coal plant (the 2,210-MW W.H. Sammis plant) and FirstEnergy’s 908-MW Davis-Besse nuclear unit. In the FirstEnergy case, the PUCO said its profit guarantee will yield $256 million in net revenue over the eight years of the deal, probably a low-ball guess.

Lynn Slaby, a PUCO commissioner, said that he believes that “free open markets competition is not compromised with this order.” He did not specify his belief in the Easter Bunny or Santa Claus.

Dick Munson of the Environmental Defense Fund, an expert in Midwest energy and environmental issues, said opponents of the deal, including EDF, could be headed to state court and to the Federal Energy Regulatory Commission for a challenge of the PUCO order. He noted that state subsidies designed to overcome market forces in federally-established wholesale markets raise the hackles of the federal regulators. His judgment is that the PUCO order will “get overturned pretty quickly,”

Competitive power producers – including independent generators such as Dynegy and conventional utility competitors such as Exelon — have said they will sue and have already filed complaints at FERC. Bob Flexon, Dynegy CEO, said, “This is a clear example of state intervention that hurts competition, hurts prices and hurts citizens.” PJM has also joined the opposition to the PUCO order, on the grounds that it conflicts with federally-mandated competitive wholesale markets.