Creative Utility Accounting: Estimating the True Cost of a Subsidy

rp_coal-88064_640-300x199.jpg$5 billion is a lot of money, yet that’s the difference in cost estimates between an Ohio-based, consumer advocacy group and FirstEnergy for the utility’s proposed bailout plan.

FirstEnergy, the giant Akron-based company that owns power plants and transmission lines in several midwestern and northeastern states, calculates its proposed plan to raise electricity rates will eventually save Ohio customers $2 billion. The Ohio Consumers’ Counsel, in contrast, estimates the subsidies will cost Ohioans $3 billion.

To appreciate the differences, consider a little history.

Several years ago, FirstEnergy thought it could profit in emerging regional electricity markets, so it convinced regulators to allow it to set up a separate subsidiary that would generate and sell electricity. That unit was to be independent from another subsidiary company, which managed the power wires and delivered power to customers. This partial step toward free markets, however, didn’t work out too well for FirstEnergy. Now, it’s asking regulators to abandon competition.

In an effort to shift risk from its shareholders to its customers, FirstEnergy wants regulators to approve a non-competitive purchase agreement whereby its sister company will buy the output of another subsidiary’s three, old coal-fired power plants and a nuclear reactor that are not able to compete in regional power markets.

The Ohio Consumers’ Counsel thinks the arguments for such a deal are “unpersuasive, highly speculative, [and] … onerous.”

Even FirstEnergy admits its proposal will cost customers a lot of money – a bit more than $400 million – during the three-year period of the proposed rate increase. Yet the utility decided to base its proposal on a 15-year period. Over the same period, OCC found FirstEnergy’s proposal would cost about $3 billion instead of the utility’s calculation of a $2.021-billion benefit.

The FirstEnergy bailout also raises fundamental questions about the future of the power industry. Because the utility is proposing a return to the days when its distribution or “wires” subsidiary (which is a regulated monopoly with virtually guaranteed profits) could give preferential treatment to its power-generation subsidiary (which is supposed to compete with other power plants), the plan would be a blow to corporate separation, competition, and innovation.

The Public Utility Commission of Ohio (PUCO), the state agency that regulates Ohio’s power grid, is charged with reviewing the cost-estimate differences and deciding on FirstEnergy’s request. PUCO’s hearings are scheduled to begin on June 15, 2015. In the past few months, the Commission has decided against similar proposals by AEP and Duke, but the FirstEnergy case involves more money.

This is one in a series of posts that examine FirstEnergy’s proposed bailout for its aging coal fleet and other market manipulations. Stay up to date on FirstEnergy by visiting EDF’s website, where we’ve published helpful resources and will host a series of newsletters. If you would like to receive our FirstEnergy newsletter directly, please click here.

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  1. Ski Milburn
    Posted May 8, 2015 at 2:58 pm | Permalink

    This article is just the tip of the iceberg. We’re going to be seeing more stories like this in the years to come as old school generation assets come under increasing competition from gas turbines, renewables, fuel cells, batteries and all sorts of new things both centralized and distributed, utility and customer-owned.

    This isn’t going to be your grandmothers annuity anymore. Traditional utilities with their Soviet-style command and control organizations and guaranteed returns are going to find the competitive landscape tough to navigate.

    Reminds me of a finding by the Colorado Governor’s Energy Office a few years ago, greatly simplified, but directionally accurate.

    If we adopt renewable energy for the majority of our new generation capacity, the cost of electricity will double. If we don’t, it will triple.

    • Dick Munson
      Posted May 13, 2015 at 8:51 am | Permalink

      Ski Milburn:

      Many thanks for your good comment. No doubt competition from entrepreneurs frightens old school generators. Fortunately, innovation and markets usually win. We just need to make sure policy gives them a chance.

      Dick Munson

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