By Rich Heidorn Jr.
WILLIAMSBURG, Va. — Two former Ohio regulators debated FirstEnergy’s and American Electric Power’s controversial power purchase agreements in the opening session of the Mid-Atlantic Conference of Regulatory Utilities Commissioners Annual Education Conference last week.
Steven Lesser, who served on the Public Utilities Commission of Ohio from 2010 to 2015, defended the commission’s decision to award the eight-year PPAs for the companies’ merchant generation, saying it was consistent with state policy since 1999. “The first thing I want to do is dispel this myth that Ohio has been on this clear trajectory toward deregulation,” he said.
Lesser’s opponent in the debate was former PUCO Chairman Todd Snitchler (2011-2014), who conceded that the state has moved in “fits and starts” toward competition. But he said consumers have indicated their preference for choice, with more than 80% of industrial and commercial customers in most areas of the state choosing alternate suppliers, along with more than 50% of residential customers.
After FERC said April 27 that the PPAs would be subject to its affiliate abuse review, the companies asked to replace the agreements with different proposals crafted to avoid FERC jurisdiction (14-1297-EL-SSO, 14-1693-EL-RDR, 14-1694-EL-AAM). Opponents of the deals have kept up the pressure in filings with FERC. (See FirstEnergy Foes Ask FERC to Step in Again in Ohio Dispute.)
Avoiding Risk
Lesser said PUCO was correct to adopt the PPAs as price hedges given natural gas’ history of price volatility. The commission’s role is to be “risk averse,” he said.
“As regulators … we have to look to the future. Are we one large injection-well earthquake from some moratorium on gas [development]? Has gas ended its long history of being a boom-bust industry?”
He also cited the solar and wind development the utilities promised in return for the PPAs, and PUCO’s conclusion — based on an assumption that gas prices will rise — that the PPAs will produce net benefits of $500 million versus market prices.
Ohio “should not have to choose between being a totally vertically integrated state or a fully deregulated state,” he said. “States should be allowed to choose wherever in that paradigm they want to be.”
Snitchler, now a principal with Vorys Advisors, said state restrictions on utility ownership of generation mean that the promised renewables “may not actually come to fruition.”
“So they sounded terrific, but the deliverables are at some point in the future, to be paid for by a party yet to be determined at a cost that is unknown and unknowable,” he said. He cited testimony that the PPAs could cost customers $3.5 billion to $5.5 billion “for nothing that ratepayers aren’t already receiving.”
Snitchler also acknowledged that gas prices have been volatile in the past. “But no commodity has zero fluctuation,” he said. “And the last time we were concerned about the price of gas, the Marcellus and the Utica [shale plays] were not developed,” he said.
Plant Closures
Lesser said the PPAs allowed regulators to balance the benefits of restructuring with reliability concerns and the state’s “economic development needs,” a reference, in part, to job losses that would result from plant closures.
“Ohio is just looking for some narrow flexibility between the fully deregulated” and fully regulated models, he said. “Regulators have the responsibility to ensure reliability — not hope for it, not wish it, but ensure it. … They need to be very risk-averse. Sometimes that might cost a couple extra dollars. … But being risk-averse is what they have been named to these positions to do.”
Snitchler said the reliability concern is a “red herring,” noting that the “plants in question that were threatened to be closed were committed [as PJM capacity resources] through the end of May 2019.”
“The concerns about jobs are real, because jobs do matter. But all jobs matter,” he continued, citing the construction jobs created by five new natural gas facilities being built in the state.
No Takers
The quick-witted Snitchler has been a crowd favorite at MACRUC gatherings in the past. But it was Lesser who drew the biggest laugh of the session when he responded to former New Jersey regulator Fred Butler, who asked whether politics influenced PUCO’s approval of the PPAs.
“Todd and I both support our families by practicing before the commission,” said Lesser, now senior counsel in the government relations and legislation group at Calfee, Halter & Griswold. “You expect us to answer that question?”
The Debate Continues
PUCO Chairman Asim Haque and Commissioner Thomas Johnson, who voted to approve the PPAs, had to leave the conference room for the debate because of ex parte concerns. “We’re going to get a couple’s massage,” Haque joked.
But Haque was present for a later session at which PJM CEO Andy Ott, Maryland Public Service Commission Chairman Kevin Hughes, former U.S. Energy Secretary Spencer Abraham and former Pennsylvania regulator Glen Thomas discussed the benefits and limits of restructuring and PJM’s capacity market.
Haque asked Thomas, now head of the PJM Power Providers Group (P3), whether the markets “got lucky” because of the cheap gas brought by the shale revolution. “Markets could be working but prices could be high,” Haque said.
“Maybe,” Thomas conceded. “But the bigger point is, because the markets were in place, consumers were able to benefit more than they would have otherwise.
“If you look at last 20 years of electric prices in PJM, there have been some [price] upticks. The polar vortex happened two years ago. There was Hurricane Katrina in [2005]. But if you look at the … overall trend over the long term, whenever there are [price] increases, the market responds, supply comes on and prices go down. … The market always responds to whatever is thrown at it.”
In 2015, he noted, wholesale energy prices were about the same as they were in 1999.
Thomas said when Pennsylvania approved restructuring two decades ago, “the single biggest concern … was ‘Could a competitive market build new resources?’ Twenty years later … the answer is a resounding ‘yes.’ We’re going into this summer with a 28% reserve margin.”
At the same time, he said, NOX, SOx and CO2 emissions are “all dramatically down.”
Support from Maryland
Hughes said PJM’s capacity market has recently resulted in new gas-fired generation in Maryland.
That was not the case in 2012, when the PSC ordered the state’s utilities to enter into contracts-for-differences with Competitive Power Ventures to build a gas-fired plant in the state.
At the time, Hughes recalled, policymakers believed the state was overly dependent on imported power. No new baseload generation had been built in the state since the mid-1990s. As coal plants began to retire, the commission feared the lack of in-state replacement capacity could cause reliability problems, Hughes said.
The contract was voided in April by the U.S. Supreme Court. (See Supreme Court Rejects MD Subsidy for CPV Plant.)
But CPV found financing to build the plant anyway and now it is one of three gas-fired plants under construction in the state; the PSC recently granted a certificate of public convenience and necessity for a fourth. “So I do think … we are seeing some signs now that capacity markets are working and are incentivizing some new generation,” Hughes said.
He said the state will seek additional in-state generation to comply with its Greenhouse Gas Reduction Act, enacted in April, which mandates a 40% reduction in emissions from 2006 levels by 2030.
But he added, “I do not think we are going to need to look at incentivizing new baseload generation. I think we have some good news there.”
Ott acknowledged that the majority of new capacity in the RTO has been gas-fired, which he said raised the question, “How much gas is too much?”
But that, he said, is a long-term concern. For now, he noted, PJM’s capacity is growing more diverse. Gas was the real-time marginal fuel in 35% of hours in 2015, up from 26% in 2011, while coal has dropped to 52% in 2015 from 69% in 2011, according to the Independent Market Monitor. Meanwhile, demand response clearing the capacity market has increased from less than 2,000 MW for delivery year 2011/12 to more than 10,000 MW for 2019/20.
“The good news is some of these gas units coming on … sit right on wellheads. … Some have dual-fuel capabilities. So the point is they are not all created equal from an operational perspective,” Ott said.
“What are the operational implications of being 70% gas?” he continued. “Certainly there are areas of the country that are at that level today so it’s not unprecedented.”
Ott also addressed Exelon’s threat to retire its Clinton and Quad Cities nuclear plants in Illinois, saying he hoped an “in-market solution” would be reached. The goal, he said, should not be to save every nuclear unit. (See Exelon to Close Quad Cities, Clinton Nuclear Plants.)
“Not every nuclear plant is created equal,” he said, noting the higher operating costs faced by small, single-unit plants. “Not everyone is run the best. So there is some benefit to having a market-based solution.”
