It Ain’t Over ’til It’s Over: Ohio Bailout Battle Marches On

In extremely disappointing news, the Public Utilities Commission of Ohio (PUCO) recently approved the AEP and FirstEnergy bailout cases. By keeping old, uneconomic coal and nuclear plants running for the next eight years, the bailouts are bad for customers, bad for the environment, and bad for the competitive electric market. Even worse, customers are forced to subsidize these plants, even if they buy their power from a different supplier.

A broad coalition of consumer, industrial, commercial, and environmental advocates opposed the bailouts, but the PUCO disregarded this strong public opposition. However, the battle over the bailouts is far from over. 

Approaching the battle from multiple angles

First, Environmental Defense Fund (EDF) and the other parties fighting the bailouts will ask the PUCO for a rehearing. The PUCO rarely reverses itself when it rehears a case, but this is a required step in the appeal process. After the regulators issues their rehearing decision, if it is not in our favor, EDF will appeal to the Supreme Court of Ohio. This is a time-consuming process that may take up to two years.

Second, merchant generators likely will file lawsuits alleging the PUCO acted illegally by approving the bailouts. Ohio is part of a competitive wholesale energy market in which electricity is sold across several states, and so is subject to federal law. Because the deals are wholesale power contracts within the exclusive jurisdiction of the Federal Energy Regulatory Commission (FERC), Ohio does not have the authority to authorize these backroom bailout deals. EDF is preparing to join this litigation.

Third, and most immediately, the action and spotlight will shift to FERC, where EDF has filed comments in three new cases related to the bailouts.

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Sweetheart deals are unfair to customers

The first two cases involve waivers that FERC previously granted to AEP and FirstEnergy, allowing their affiliated power companies to sell electricity to the utilities. In other words, one company produces the power and another (the utility) buys and distributes it, but they are all part of the same, larger enterprise. Normally, FERC requires companies to obtain prior approval for these contracts, and the companies would be required to show that the agreements were the result of a competitive bidding process or informal negotiation that involved other companies not affiliated with the utilities. These steps aim to protect customers from corporate nepotism and paying above-market prices through sweetheart, no-bid contracts.

FERC granted waivers to AEP and FirstEnergy several years ago because Ohio is a retail choice state. This means customers can choose to buy power from competitive retail suppliers, if they do not want to pay the rates charged by AEP and FirstEnergy. This situation does not apply, however, for the bailout cases. Utilities still have a monopoly on service territories, so FirstEnergy and AEP will deliver your electricity if you live in their territory – even if you buy your electricity from another provider. And the costs for the bailout are “non-bypassable,” meaning all customers must pay for the bailouts, regardless of whether they buy their power from the utilities or from other suppliers.

So, the federal waivers should not apply for the bailout contracts, and FERC should reject the bailouts. AEP and FirstEnergy entered into these sweetheart affiliate deals with no negotiation on price, no competitive bidding, and no protections for consumers. Only AEP’s and FirstEnergy’s shareholders will benefit from these bailouts, at the customers’ expense.

The bailouts will distort competitive electricity markets

The third FERC case involves federal rules for bidding power plants into the competitive wholesale electricity auctions. In the auctions, power generators offer to sell a certain amount of electricity at a certain price, without knowing what others are offering. The grid operator ranks these bids in terms of price, and then determines how much electricity the region needs for the time period covered by the auction. Starting with the lowest bids, the bids are collected to reach the amount of electricity the region needs, and the price for the last bid needed is the “auction clearing price.” All of the generators that make the cut – or have offered electricity at or below that price – will be paid the clearing price, regardless of whether they bid at a lower price. Therefore there is an incentive for generators to bid low, because they will be more likely to clear the auction and will still be paid the higher amount.

FERC’s rules prevent owners of new power plants from bidding into the auctions at prices below the plants’ cost. EDF is asking FERC to extend this rule to cover the bailout plants, even though they are not new. AEP’s and FirstEnergy’s customers are paying 100 percent of the plants’ costs, so the companies will be motivated to bid these plants into the auctions at zero price. Put another way, the utilities know their costs are covered, so they can offer electricity into the auction at the price of zero, ensuring their power will be purchased at the auction clearing price. This would distort wholesale market prices and dissuade other companies from building new generation in this region. But if there were no bailouts, AEP and FirstEnergy would have to decide whether the projected bid revenues would cover the plants’ operating costs and, if not, they would conclude it doesn’t make sense economically to keep the plants open.

“It ain’t over ’til it’s over,” as the late, great Yogi Berra once said. The battle over the backroom bailouts has a long way to go. On multiple fronts, EDF will continue to vigorously oppose these awful bailout deals.