By Rich Heidorn Jr.

Dynegy, NRG Energy and other independent power producers asked FERC Wednesday to void the power purchase agreements FirstEnergy and American Electric Power have proposed to Ohio regulators, saying the deals fail the commission’s Edgar/Allegheny test regarding affiliate transactions.

PJM, meanwhile, filed an amicus brief with regulators Monday, calling AEP’s assertions that reliability would be threatened if its units retired “a red herring.”

The IPPs and the Electric Power Supply Association jointly filed complaints against the AEP (EL16-33) and FirstEnergy (EL16-34) proposals, saying they were seeking to ensure that “abusive” affiliate power sales contracts do “not evade [FERC] review.”

The Ohio-based companies have proposed PPAs to the Public Utilities Commission of Ohio that would provide a guaranteed return for their embattled generating stations for eight years. PUCO staff has signed on to both proposals.

The complainants said FERC should revoke the waivers it granted AEP and FirstEnergy regarding affiliate power sales to ensure a Section 205 review of the PPAs under the standards the commission set out in its 1991 Edgar Electric Energy Co. (55 FERC ¶61,382) and 2004 Allegheny Energy Supply Co. rulings (108 FERC¶61,082).

The Edgar ruling required demonstration that long-term PPAs utilities sign with their marketing affiliates are reasonably priced compared to alternatives. The commission said such a demonstration could include evidence of competition between affiliated and unaffiliated suppliers or a showing of prices paid by non-affiliated buyers. FERC refined its guidance in Allegheny.

“The fact that AEP has devised, and that the PUCO may approve, a clever scheme to shift costs of this abusive affiliate contract onto consumers does not alter the commission’s statutory duty to protect consumers from the effects of unjust and unreasonable wholesale rates or in any way make it less critical to ensure the integrity of the PJM markets,” the plaintiffs wrote, using nearly identical language in their FirstEnergy complaint.

The complainants cited “fundamental changes in circumstances since the commission granted the waiver that make it unjust, unreasonable and unduly discriminatory to allow AEP Generation Resources to enter into the affiliate PPA pursuant to its blanket market-based rate authorization.”

Quick Action Sought

They asked the commission to act quickly, noting that PUCO may rule on the PPAs as soon as next month and contending the agreements could have a major impact on PJM’s 2019/20 Base Residual Auction in May.

Joining EPSA, Dynegy and NRG in the complaint were the Retail Energy Supply Association and Eastern Generation, a subsidiary of a private equity fund managed by ArcLight Capital Partners, whose generation holdings include an 825-MW natural gas-fired generation facility in Vinton County, Ohio.

The Ohio Consumers’ Counsel filed comments supporting the call for FERC review.

“We expected allegations similar to those made in the complaint that was filed at FERC, and we are confident that the PPA will pass the test,” said FirstEnergy spokesman Doug Colafella.

“FirstEnergy’s Ohio Utilities were granted authority to conduct transactions with our unregulated affiliates after Ohio restructured its electric markets to allow shopping with energy suppliers.  This arrangement extends to our proposed purchased power agreement, so absent further FERC orders, separate FERC approval of the PPA is not necessary,” he added. “We carefully evaluated this issue when preparing our filing with the Public Utilities Commission of Ohio — the regulatory agency that is solely authorized to approve the proposed retail stability rider on customer bills associated with the PPA.”

AEP spokeswoman Melissa McHenry said PUCO “is fully able to protect retail customers. So, any allegations that AEP Ohio customers need to be protected from excessive charges are simply untrue.

“The core question for FERC is whether there is retail competition under Ohio law. FERC has determined in other cases that there is competition in Ohio and has agreed that the PUCO is better equipped to make that determination. The AEP Ohio PPA will provide rate stability for all AEP Ohio customers, and they can still choose any supplier for their electricity needs.

“The PUCO has conducted an extensive review process over the last two years to ensure that AEP Ohio customers are treated fairly and benefit from the PPA. The parties filing at FERC should participate in that process instead of appealing to a federal agency for relief at the last stage of the process,” she said.

The plaintiffs said the affiliate PPAs threaten “exactly the harm to both captive consumers and markets that prompted the adoption of [FERC’s] restrictions in the first place,” saying it would “saddle captive Ohio consumers with hundreds of millions or even billions of dollars in above-market costs” and distort prices in the PJM markets by subsidizing the continued operation of more than 6 GW of generation that AEP and FirstEnergy say would otherwise retire.

AEP has said that PUCO must approve or reject the PPA as is, saying it “lacks jurisdiction over the rates and terms” of the agreement. At the same time, the company says it does not intend to submit the agreement for FERC review.

“Failure to review the affiliate PPA would recreate precisely the sort of regulatory gap that the [Federal Power Act] was enacted to fill” in 1935, the plaintiffs said.

‘Greedy Tiger’

To conduct a review of the AEP proposal, the plaintiffs said the commission should first revoke the waiver it granted in 2014 regarding AEP Ohio, a franchised public utility, and its market-based affiliate AEP Generation (ER14-593). Because of Ohio’s retail choice, the AEP companies said in their petition for a waiver, AEP Ohio would not have captive retail customers.

The plaintiffs said that is not true regarding the proposed PPAs because they would be funded by surcharges on all customers within AEP and FirstEnergy’s service territories, regardless of whether they take provider of last resort service from the utilities or purchase from a competitive retail supplier.

“These retail customers could not be more captive with respect to costs of the affiliate PPA[s] if they were locked in a cage with a greedy tiger,” they said.

As evidence that the PPAs would impose above-market costs, they cited the counteroffer Dynegy made to PUCO earlier this month, which the company said would save consumers $5 billion. Exelon also has made a counteroffer it says would be cheaper. (See Next up in Ohio PPA Battle: Dynegy Weighs in.)

The plaintiffs also cited the “enormous” impact the PPAs would have on the PJM markets.

“This case involves the same issue of ‘uneconomic non-exit’ — i.e., subsidized retention of resources that would otherwise have left the market — with which the commission has been confronted in other proceedings. Because capacity markets are designed to convey the price signals needed both to encourage entry of economic new resources and to discourage the premature exit of economic existing resources, it follows naturally that uneconomic non-exit will present the same threat to such markets as uneconomic entry.”

$8 Billion in Excess Costs

The Ohio Consumers’ Counsel (OCC) said it was up to FERC to protect the state’s consumers from excess costs that could top $8 billion.

The counsel cited testimony by its consultant James Wilson, who projected that FirstEnergy’s 1.9 million consumers could each pay about $800 ($3.6 billion total) and AEP’s 1.3 million consumers could each pay about $700 ($1.9 billion) over the eight years of the PPAs.

Dan Doron, spokesman for the OCC, said the costs could be much higher if the power plants fail to clear in PJM’s energy and capacity markets.

PJM Market Monitor Joe Bowring has said the generators should not be allowed to participate using subsidized prices. In testimony to PUCO, Bowring said that the generators would “be returned to the cost of service regulation regime that predated the introduction of competitive wholesale power markets.”

Doron said that if the plants cannot participate in the PJM wholesale markets, “the estimated subsidies could increase to over $1,100, on average per customer, for FirstEnergy consumers ($5.15 billion) and over $1,000, on average per customer, for AEP Ohio consumers ($3.1 billion).”

PJM: Reliability Arguments a ‘Red Herring’

On Monday, PJM filed a 12-page amicus brief with PUCO, criticizing AEP’s assertions that reliability would be threatened if its units retired.

The RTO said new generation has replaced plants that retired in the past, ensuring Ohio continues to meet resource adequacy targets.

“Arguments that approval of the stipulation is needed to ensure reliability in Ohio are wide of the mark and represent a proverbial ‘red herring’ that should not distract from consideration of the issues presented in the record as to the merits of the proposed stipulation itself,” PJM said.

PJM also urged the commission, if it approves the proposal, to clarify that offers from the units must be no lower than their actual cost, without consideration of revenue under the deal.

The RTO also said that the generators’ owners — not ratepayers — should bear any nonperformance penalties under its Capacity Performance construct.

CEO Andy Ott echoed the RTO’s position in a response to several of those who have written letters to PJM’s Board of Managers seeking its intervention against the PPAs.

Timothy R. Eves, vice president of NTE Energy, which is building a 475-MW natural gas generator in Butler County, Ohio, said in a Jan. 27 letter to the board that the PPAs would “undermine confidence in the PJM markets and can lead to a chilling effect on future power plant development.”

He asked PJM “to swiftly take necessary actions at the state-level, RTO-level and at FERC to mitigate this looming harm.”

Oregon Clean Energy, an 860-MW gas-fired generator under construction in Lucas County, Ohio, made a similar appeal in a letter Jan. 22.

Suzanne Herel contributed to this article.