Will Ohio Choose Re-regulation Over Competition?

There’s a word that best describes what’s going on with Ohio investor-owned utilities these days: “re-regulation.” The Buckeye State’s two largest IOUs, having lived in competitive power markets for some 20 years, have decided they prefer the good old days of guaranteed markets and regulated returns.

FirstEnergy, based in Akron, and American Electric Power, headquartered in Columbus, since 2014 have been pushing the state regulators to bail them out of competitive markets where their biggest assets – mostly nuclear for First Energy and large coal-fired generation for AEP – can’t compete against low-cost gas generation.

The two utilities want the PUCO to give them eight years of guaranteed prices. Their assumption is that at the end of that period, natural gas prices will have risen back to the point where their currently-unprofitably plants can compete. That’s probably wrong but also irrelevant.

Ohio’s regulators should not let FirstEnergy and AEP evade market forces and put the burden of their inability to compete on captive customers. A friend of mine in the environmental community once described conventional electric utility regulation – before the advent of competitive markets in the 1990s – as “no-fault capitalism.” He had it right. Real markets imply that there will be winners and losers and no guarantees of profit.

Neither FirstEnergy nor AEP were willing participants in the market’s deregulation revolution that demonstrated that generating electricity is not, as had long been presumed, a “natural monopoly.” But they were unable to persuade regulators and legislators that new, competitive power markets would not work. So they entered into wholesale competitive bidding.

They profited from competition. For years, they were successful in competitive auction markets, based on their fully-amortized, low-cost coal and nuclear generation. Perhaps they could have done better for their shareholders with the old paradigm of cost-based rates and regulated returns, but it would have been at the expense of their customers.

The wholesale markets stopped working for them within the past several years because of the rise of plentiful, cheap natural gas (much of it developed in Ohio in the Marcellus and Utica shale plays). In FirstEnergy’s case, an expensive nuclear unit, Davis-Besse, legendary for poor performance, along with the elderly and inefficient W.H. Sammis coal-fired plant, hurt the company’s ability to compete. AEP also found itself burdened with old, high-cost coal-fired generation that couldn’t compete against new natural gas.

So the two utilities went to the Ohio regulators and said, “Help protect us against our competitors.” They proposed plans that would hit electric customers with the costs of guaranteeing a market for the uncompetitive plants and protect the company’s income and profits. It all looked like it just might pass muster at the Public Utilities Commission of Ohio.

But then the competitors weighed in. They may have turned the tide on re-regulation in Ohio. The PJM Interconnection, where AEP and FirstEnergy bid power into the wholesale market, giant Chicago-based investor-owned utility Exelon Corp., and Dynegy, a non-utility generator, all told the Ohio commission that the two utilities’ proposals were bad economic policy. Exelon and Dynegy both offered to beat the deal AEP and FirstEnergy were offering Ohio customers, which would raise average customer bills by about $130 a year.

Dynegy told the commission that it could cut the costs of the AEP and FirstEnergy proposals by $2.5 billion, saving customers money. Heavily-nuclear Exelon said it could undercut the deals by $2 billion and provide 100% carbon-free power. PJM’s market monitor, Joseph Bowring, hammered the FirstEnergy proposal. It would, he said, “constitute a subsidy which provides incentives for noncompetitive offers and is inconsistent with competition in the PJM wholesale power markets.”

FirstEnergy argued that its plan would bolster reliability in the region. PJM ignored that bogus claim. PJM has seen no capacity concerns in recent auctions. Dick Munson of the Environmental Defense Fund, which opposes the re-regulation, said, “The business case against the bailout has become particularly stronger” following the interventions of PJM, Dynegy and Exelon. He argued that “what FirstEnergy is proposing will stifle investments in the electric sector and itself lead to a reduction in reliability.”

Faced with this blowback, the PUCO backed off and scheduled new hearings on the FirstEnergy and AEP plans for later this month. What will come from that proceeding? It’s difficult to predict how state regulators will react. EDF’s Munson said, “I would think it’s very hard for Ohio regulators to want to waste $2 billion and to turn their backs on markets and competition.”