By Rory D. Sweeney

The CEOs for three of the largest companies that stand to gain from proposed price supports for nuclear and coal generators used their third-quarter earnings calls last week to praise FERC, the Department of Energy, PJM and states for their attention to the issue.

Exelon’s Chris Crane, Public Service Enterprise Group’s Ralph Izzo and Dominion Energy’s Thomas F. Farrell II all made a point to thank the RTO, states or federal agencies who have made — or are considering — changes to funnel additional money to the generators, which the companies argue are critical to the grid but undervalued in markets.

And they had good reason to. Crane said “each dollar [per] megawatt-hour of distortion caused by a flawed market design” costs the company $135 million per year. Izzo said each dollar change in per-megawatt-hour revenue from PJM is worth $55 million pre-tax to his company.

“We commend [Energy Secretary Rick Perry] for focusing attention on the need to reform the energy markets, and ensure that our customers continue to benefit from the resilient system,” Crane said. “Between these efforts and state initiatives, we’re optimistic about the path to preserve nuclear power plants. … We are confident that the FERC actions around resiliency will facilitate needed power price reforms in PJM that will fairly compensate our generating assets.”

The DOE’s Notice of Proposed Rulemaking “is aimed at protecting our customers from outages resulting from manmade and natural interruptions on the gas system by preserving resilient generation sources, including nuclear,” he said.

PSEG is “on track … to reduce the all-in cost per megawatt-hour of its nuclear operations by 10% from the average cost experienced during the prior three years,” Izzo said. “But energy prices influenced by the availability of natural gas have declined by a greater degree during this time frame.

“We believe that the DOE NOPR is necessary. … We recommend that measures adopted in response to the DOE NOPR should be viewed as an interim [solution] until effective mechanisms can be developed that recognize these attributes in the market,” he said. “State action also remains critical to prevent the loss of these units. We believe state action can be done [in a] way that both maintains the integrity of the wholesale market and serves as a bridge until a regional [or] federal solution is in place.”

State ZEC Programs

Farrell didn’t want to speculate on the outcome of the NOPR, but said “Connecticut certainly hasn’t been willing to depend on it.” He said he expects Connecticut lawmakers to follow Illinois and New York in establishing a zero-emission credit program to support nuclear units.

Last week, Gov. Dannel Malloy signed a bill that could allow Dominion’s Millstone nuclear plant in Waterford, Conn., to compete in a state-sponsored solicitation for zero-carbon electricity if officials conclude it is in the best interest of ratepayers. Malloy, however, said he believes the plant is profitable and does not need a subsidy.

“Dominion Energy thanks the general assembly for giving Millstone this opportunity and is grateful to the Malloy administration for his work in negotiating the current form of the legislation,” Farrell said.

“We weren’t surprised” by approval of the legislation, he added. “We’ve been working on it for two years and been deeply involved in it for that period of time.”

Joe Dominguez, Exelon’s vice president of governmental and regulatory affairs and public policy, also praised the Connecticut legislation and said that his lobbying efforts aren’t done.

“We have been [in] very productive discussions both in Pennsylvania and New Jersey. We’ll continue to do that,” he said.

He said that the ZEC programs are designed to decrease if energy-market reforms happen, so “it will not be a double-dip here.”

Izzo said PSEG is lobbying as well.

“Depending on what happens at the federal level, there remains the opportunity for New Jersey to recognize certain attributes that perhaps are not explicitly identified at the federal level,” he said. “We are just in a series of conversations with people right now. We are just making sure they understand what our nuclear plants mean to New Jersey.”

FERC Action

Izzo and Crane agreed FERC should order PJM to revise its price formation methodology, a move Izzo called a “no brainer” and “long overdue.” Crane anticipated changes by as early as mid-2018.

In its comments to FERC on the NOPR, PJM suggested such reforms in arguing that large, inflexible units should be able to set LMPs. (See Critics Slam PJM’s NOPR Alternative as ‘Windfall’.)

Defining “resiliency” has been an ongoing debate, but Dominguez said PJM’s Capacity Performance design makes the discussion quantitative.

“We were able to value the cost of incremental reliability associated with dual fuel, so if the design basis ultimately ends up being we need 90 days of fuel, we have a mathematical way of calculating what’s the market solution to get dual-fuel resources to 90 days of fuel with it,” he said. “That would probably be $8 or $10/MWh in terms of doing that based on the cost we saw in CP.”

A rule from FERC that boosted power prices could also leave smaller retail competitors who have been “aggressive” in their pricing vulnerable to acquisitions by large, integrated energy companies like Exelon, Crane said.

“Any time we’ve seen a volatility event … we’ve had opportunities to acquire companies in that type of environment,” Crane said.

Izzo said he was wary of projections that rules on price formation will increase PJM energy prices by $2 to $4/MWh, saying it ignores other factors that can have an impact.

“What [is the impact] of pipelines that may change the basis differential of gas in Western PJM versus Eastern PJM? What [is the impact of] future carbon constraints that may or may not be part of a subsequent administration in Washington?” he said. “Some people on this call may want to go see their children in their Halloween parades; otherwise I would list a thousand other factors that should go into people’s thought process before making those kind of investment decisions.”

Earnings

Crane said the Illinois Power Authority’s decision last month to delay the finalization of the procurement of the ZEC contracts from December 2017 to January 2018 will shift 9 cents of earnings per share from 2017 to 2018.

Exelon earned $824 million ($0.85/share) in the third quarter, missing expectations by 1 cent but improving on the 53 cents/share earned in the same quarter a year ago. Revenue of $8.77 billion beat expectations by $90 million but was down from $9 billion a year ago. Operating earnings were 85 cents/share, compared to 91 cents/share for the third quarter of 2016.

While Exelon hasn’t escaped the industry’s cyclical nature, “we’ve gained greater flexibility with programs like the ZEC,” Crane said.

Dominion posted operating earnings of $672 million ($1.04/share) for the third quarter of 2017, which beat expectations by 2 cents but was down from $716 million ($1.14/share) for the same period in 2016. Revenue of $3.18 billion missed expectations by $110 million but was up from $3.13 billion in the third quarter of 2016.

PSEG reported third-quarter operating earnings of $417 million ($0.82/share), which missed estimates by 2 cents and was down from $444 million ($0.88/share) a year ago.

Seeking Alpha provided the earnings calls transcripts for this article.