The Gift of Cost Recovery

More and more headlines are going to be reading that Ohio is re-regulating generation, and in a sense they may be right. AEP Ohio, Duke Energy and FirstEnergy Corp. all have rate cases pending at the Public Utility Commission that includes a Power Purchase Agreement (PPA) Rider. This rider would guarantee the regulated utilities a fixed rate for certain deregulated generation assets via the ratepayers. This would impact customer bills whether they are shopping for generation service or not. Since electric generation in Ohio is unregulated, this is causing a weird conflict that not only tests economics but also regulatory jurisdictions.

The players in this game are the utility (i.e., AEP Ohio), the utility’s deregulated affiliate (i.e., AEP Energy) and the ratepayers (us).  The affiliate owns the power plants and would sell the output from older power plants to the utility at some fixed rate.  The utility would turn around and sell that same power into the wholesale electricity market. If the utility makes money on the sale then the ratepayers get a credit. If they lose money on the sale then they would add a charge to your bill. Essentially, consumers would be taking on market risk for this power.

A number of issues crop up from this structure: 1) how is the fixed price determined; 2) what regulated body validates this price is fair; and 3) how does the utility get a guaranteed rate on generation they do not own.

Utilities see this construct as a way to keep older plants running as they are now underwater. Since the market is now low, the expectation is this rider will result in charges to ratepayers in the near term. The PUCO staff has been in opposition of this rider, and many consumer groups are calling it a coal plant subsidy.

All eyes will be on the outcome of the AEP rate case as they are the first utility to ask for this PPA rider. If the PUCO approves it, then precedence has been set for the balance of the investor owned utilities to receive their own PPA rider. It is unlikely any decision by the PUCO will be made until after the elections are over in November, so we should know the outcome just in time for holiday season. The question is will the utilities receive this gift of guaranteed cost recovery.