By Suzanne Herel

Power purchase agreements proposed by American Electric Power and FirstEnergy need changes to preserve competition and Ohio’s ability to attract merchant generation, PJM said this week.

The RTO made the recommendations in testimony to the Public Utilities Commission of Ohio (14-1693-EL-RDR, 14-1694-EL-AAM, 14-1297-EL-SSO).

The filings were virtually identical and offered two amendments to the eight-year agreements. The first would define a “reasonable bidding practice” as offering the output of units covered by the deals into PJM’s markets at no lower than their actual cost, with no consideration of offsetting revenue being provided by Ohio retail customers.

“Bidding at actual cost, consistent with the definition of acceptable costs included in the PJM Tariff and manuals, ensures that the PPA does not have the effect of artificially suppressing prices in any of PJM’s markets,” Stu Bresler, senior vice president of markets, said in the AEP case. The phrasing for the FirstEnergy case was changed only to reflect the term that company is using for its request, a retail rate stability rider (RRS).

Bresler also recommended that if the commission accepts the agreements, it should make clear in its order whether generation owners or their customers would bear the risk of non-performance under the new Capacity Performance model, which aims to ensure reliability by rewarding over-performing units and penalizing under-performing generators.

Bresler said PJM takes no position on the proposed stipulations but felt it necessary to weigh in on aspects that could affect its wholesale markets.

The consequences of “unreasonable” actions when selling AEP’s and FirstEnergy’s output would be “severe,” yet the agreements do not clarify “reasonable” or “unreasonable” actions, Bresler said.

“This provision, more than any other in the stipulation, has the potential to impact the PJM marketplace as a whole and the marketplace in Ohio for new investment, depending on how the provision is implemented,” he said.

PJM’s recommendations are in Ohio’s interest because the output of units covered by the agreements falls substantially short of the companies’ peak loads — 10,500 MW in AEP Ohio’s case and 11,900 MW for FirstEnergy, Bresler said. New generation resources are critical to Ohio’s future, he said, but they would be discouraged from investing in the state if others were allowed to bid below their costs.

Bowring: PPAs Inconsistent with Competition

PJM Market Monitor Joe Bowring also filed testimony, saying that the retail rate stability rider requested by FirstEnergy and AEP’s proposed power purchase agreement both “constitute a subsidy which is inconsistent with competition in the PJM wholesale power market.” He urged the commission to reject them.

The purpose of the AEP agreement, he said, “is to shift costs and risks from shareholders to customers, to remove the incentives to make competitive offers in the PJM capacity market and to provide incentives to make offers below the competitive level in the PJM capacity market.”

The agreement also does not explicitly address how AEP plans to operate within PJM’s new capacity market design.

However, Bowring said, “I would expect that the proposed PPA rider would require ratepayers to pay any performance penalties associated with the assets included in the PPA rider. I would also expect that AEP would retain any performance payments at other AEP units not included in the PPA rider, even if paid for in part by these ratepayer penalties.”

That removes the risk from shareholders, along with the incentive to manage the performance of the units, he said.

Like Bresler, Bowring expressed concern about the agreements enabling the companies to offer output into the market at artificially low prices, edging out competition.

AEP’s request, he said, indicates that PJM should expand its minimum offer price rule to include any new units with subsidies, requiring them to bid into the market at a level no lower than the cost of new entry.

Bowring also testified that the rider requested by FirstEnergy would transfer all “historic and future costs” for certain plants to ratepayers and set up the same paradigm involving its participation in PJM’s capacity market.

Together, the agreements essentially would re-regulate about 6,300 MW of generation. AEP announced its PPA on Dec. 14. FirstEnergy released its proposal Dec. 1. PUCO is expected to rule on the cases in early 2016.

In addition to its testimony, PJM plans to issue a market analysis of both deals this spring. (See PJM Looking at AEP, FirstEnergy PPAs; Critics Join Forces.)