This week Politico reported that Trump administration plans to save aging coal and nuclear plants have stalled in the absence of clearly identified financial backing. Some speculated the cost burden would fall squarely on the shoulders of customers – potentially bearing an annual price tag of $9.7 billion to $17.2 billion.
Energy Secretary Rick Perry argued the price tag is well worth the infrastructure resiliency afforded by coal and nuclear power plants which are capable of storing months of fuel.
All five of the Federal Energy Regulatory Commission (FERC) members countered there is no emergency justification for the bailout and that the unprecedented federal intervention could lead to an unraveling of wholesale power markets.
Sustained by shared opposition from Trump’s advisers on both the National Security Council and the National Economic Council, without significant tolerance for price increases to pay for the plan, it’s possible as the list of coal and nuclear plants under bankruptcy grows, Trump is quietly walking back his support for coal’s Hail Mary – at least for now.
All five members of FERC, the regulatory group responsible for the U.S. power grid, stated there is nothing to suggest an forthcoming emergency in the country’s electricity markets. Their testimony before Tuesday’s Senate hearing could undermine the Trump administration’s efforts to save ailing coal and nuclear plants through subsidies. Many of the plants have closed or signaled closure in the face of plentiful natural gas, growth in wind and solar power, and stagnant power demand.
At this point it is old news, that the largest electric utilities in Ohio have been in discussions regarding “restructuring” competitive markets within the state. Despite their efforts to change the current seven-year construct, Ohio voters may be the biggest political snag in their way.
Based on a poll conducted in January and by Fallon Research and Communications, and first reported by The Cleveland Plain Dealer, Ohio voters are very much in opposition of a return to a regulated market construct that would allow monopoly utilities. The telephone survey was conducted in January polled a panel of 800 Ohio voters about key supporting issues. The results favoring energy choice and objection to monopoly utilities were consistent across party affiliation, gender, age, and location.
Results from Fallon Research’s Poll & The Plain Dealer’s Report:
More than 91 percent would oppose any law change allowing FirstEnergy or Columbus-based AEP to build new power plants and raise monthly rates to pay for them. AEP wants to do exactly that, build wind and solar farms and maybe new gas turbine plants while selling off or closing its old coal units.
Nearly 79 percent would oppose any legislation that did away with a customer’s choice to shop for power suppliers. Dozens of independent suppliers now compete for customers through a state-maintained “Energy Choice” website. A return to old-style regulation could end that kind of competition, say independent power companies, forcing customers to return to their traditional electric utilities for electricity as well as delivery.
Nearly 62 percent said they would oppose paying extra every month to support older power plants that cannot compete well against modern gas turbine plants. FirstEnergy has persuaded state regulators to do just that — though the latest subsidy does not mention its power plants. Federal regulators objected to earlier, more expensive proposals that spelled out exactly how the extra fees — amounting to an extra monthly consumer bill every year — would be spent.
Nearly 60 percent of voters would object to the creation of special subsidies for one fuel source — in this case FirstEnergy’s nuclear power plants, which are expensive to operate and do not always compete well against gas turbine plants. The idea has been adopted in New York and Illinois, but has been challenged as anti-competitive. FirstEnergy is considering asking for such a subsidy but has not made a final decision.
AARP and the Alliance for Energy Choice, a group representing independent power producers funded the statewide poll. The Alliance spokesperson, and former chairman of the PUCO, Todd Snitchler spoke on the results of the poll commenting that, “The results of the poll clearly demonstrate that talk about a need for re-regulation or changes to Ohio’s energy landscape, is pointed in the wrong direction.
Fallon Research and Communications. (2017). Ohio Voters on Energy Choice 2017. The Cleveland Plain Dealer [Distributor]. Retrieved from http://www.cleveland.com/business/index.ssf/2017/02/ohio_voters_want_energy_choice.html.
Over the past couple of years, we have seen electric suppliers’ fixed rate offerings devolve into agreements that are less and less fixed. The Public Utility Commission of Ohio recognized the broken “fixed” rate situation, and this past November mandated guidelines for electric contracts being marketed as fixed.
We initially reported this development in our last newsletter, but what about the underlying issues that led us here, and what should customers expect going forward?
The Roots of Pass-Through Charges in Fixed Rate Contracts
Occurrences over the past few years, such as the 2014 Polar Vortex and the 2015 PJM capacity performance reform, have encouraged suppliers to adopt clauses within their agreements to protect them from the financial risks of events outside of their control. These clauses allowed suppliers to pass-through additional costs to fixed rate customers based on certain events, potentially making the rate not so fixed. Regulatory change clauses have become common among the majority of supplier contracts, as it protects and allows them to pass through cost increases based upon unforeseen governmental or regulation changes.
The devolution from supplier protection to price manipulation
In a free market, businesses must often adapt or die, and this has been true of the deregulated electric market. Suppliers who have become less competitive, have had to make business decisions into finding ways to lower their rates to appear in line with their competitors. Until this past November, there was little regulation to these pass through clauses within fixed price agreements. This created opportunities for noncompetitive suppliers to further broaden language within their fixed price agreements. In doing so, these suppliers were able to move risk to the customer and shave costs off of their quotes, making their rates seem more appealing. Material adverse change clauses allow rates to be adjusted or costs to be passed through based on component costs that are not yet realized, or even ones that are likely to change. Examples of such would be changes in initial contracted amounts of usage and/or capacity obligation (PLC’s).
Is the fixed price issue fixed?
The PUC’s new “fixed means fixed” guidelines are now active as of January 1st, 2016. While the commission attempted to make buying electricity less cryptic and deceptive for customers, the only real change we expect to see is the title of supplier offerings, formally known as “fixed”. For the most part these programs are suppliers’ standard offers, and whether they are now named Fixed Introductory, All Inclusive, Fully Bundled, Full Requirements, what have you, nothing has really changed, and the nature of power buying will still be as confusing for customers as before.
What’s important to take away from all of this is the same issues of evaluating; what’s included in a supplier’s rate, what’s missing, what could be passed through, all are expected to continue. A trained monkey can give you a piece of paper and point you to the lowest rate, but now more than ever it’s imperative for customers to understand the lowest rate may not be the lowest cost option.
In March 2014, the Public Utility Commission of Ohio (PUCO) became aware that electric suppliers have been including pass-through clauses in their supply agreements. Such clauses allow the supplier to pass through to the customer cost changes for certain events. A prime example was FirstEnergy’s RTO charges that were passed-through, even on fixed price contracts.
As a result, there were concerns that permitting pass-through clauses in a fixed rate contract confuses customers. This contract language made it difficult for consumers to compare other fixed rate offers that didn’t contain such clauses.
As we have advised customers forever, lowest price should not be your sole deciding factor. One needs to know what the contract language is telling you.
Remember the BIG print giveth and the SMALL print taketh.
After hearing all the supporting arguments to include or exclude pass-through language, the PUCO has come to the conclusion that all electric supplier contracts, whether residential, commercial or industrial, “fixed” should mean “fixed”. As such, supplier contracts going forward, may not include a pass-through clause in a contract labeled as “FIXED RATE”.
This does not eliminate suppliers from continuing to offer products that contain pass-through provisions, it just means they must alter the contract label to “variable or introductory rates”
The PUCO recognizes that regulatory out clauses are included in supplier contracts as a means to pass-through charges that they have no control over. The PUCO believes these clauses should be available in very limited circumstances and clearly spelled out in plain language.
Moving forward under the new fixed means fixed guidelines, if the supplier wants to revise its pricing, they must inform the customer by proposing a new contract price. If the customer agrees to the revised pricing, the contract remains in place under the current contracted terms.
However, if the customer would “reject” the revised agreement, the customer would be permitted to pursue default service or other supply offerings without being subject to penalties.
These changes are intended for any new contracts and the PUCO noted that this order makes no ruling with respect to existing contracts.
The implementation for the PUCO finding, suppliers shall have until January 1, 2016 to bring all contracts into compliance with the “fixed means fixed” guidelines.
If you have missed all the happenings going on at the PUCO over the last few months, FirstEnergy’s PPA (Power Purchase Agreement) has been negotiated with and approved by the PUCO staff. As of this writing, the agreement is expected to be signed by the commissioners early in 2016 (and take effect starting June 1, 2016). The AEP filing approval is not far behind.
The FirstEnergy PPA was originally proposed as a 15-year arrangement as a means to keep viable some of the legacy generation assets (coal and nuclear) with a guaranteed rate of return. The Retail Rate Stability Rider (RRS) of the PPA returns First Energy Solutions generation facilities (Davis Besse, Sammis and their share of OVEC) to a “cost plus” regulation where they are guaranteed to cover the costs with a “reasonable” rate of return.
These plants are not able to compete with low cost natural gas produced electricity in the market. The PUCO accepted a negotiated plan of 8 years to begin in June 2016 and expire in May 2024. As the wholesale market has changed, the utility system(s) had to come up with “innovative” ways to keep operating their facilities and it looks like everyone in the FirstEnergy (and AEP) footprint will see increased distribution costs passed along to them. This ruling, if approved, will have no effect on your ability to participate or secure your power on the open market.
When all the dust settles and no matter the “spin”, this is a shift from de-regulation to, at least for now, partial re-regulation. According to FirstEnergy’s analysis, this program will “save” consumers $590 Million – the Ohio Consumers Council independent study asserts it will cost us $3.9 Billion, this is quite a spread. Now more than ever, we as consumers in Ohio need to make our collective voices heard.
Write/Call/Email – Since the first word of the acronym for the PUCO is Public, as ratepayers within the great state of Ohio, if we collectively express our displeasure with the pending approval of the PPA, maybe we will be heard. Not all that long ago, in the AEP market after a rate plan went into effect, there was a public outcry. The PUCO reversed their decision and had AEP return to their prior rate structure until a new and more “reasonable” plan was adopted. Can history repeat itself?
Update: New hearings have been set by an administrative judge at the PUCO regarding FirstEnergy’s PPA to begin on January 14th with no timeline announced for conclusion. The AEP PPA was approved by staff at the PUCO on 12/14/2015 but still has to be signed off by the commissioners.