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Competitive Stakeholders Say Market Rate Offer Would Lower AEP Ohio Rates

July 26, 2011
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The Public Utilities Commission of Ohio, "should not confuse AEP Ohio's application for 'free money' from all the customers within its service territories with a need for new, in-state generation," the Retail Energy Supply Association said in testimony regarding AEP Ohio's proposed electric security plan (ESP).

As first reported by Matters, the ESP contains a number of nonbypassable riders and subsidized generation rates designed to eliminate retail competition at Ohio Power (and Columbus Southern Power, which would be merged into Ohio Power under the application).

1/31: Morris: Proposed Ohio ESP Designed to Combat Migration

1/31: Half a Dozen New Nonbypassable Charges Highlight AEP Ohio Electric Security Plan

Testimony from retail suppliers, competitive generators, and large customers focused on several arguments including: (1) AEP Ohio does not require new generation, (2) market pricing would be more favorable to customers than the proposed ESP rates; and (3) there is no cost justification for the proposed POLR charges. Competitive stakeholders also sought elimination of a host of other nonbypassable charges; elimination of proposed subsidized energy rates for certain classes (specifically, those currently most prone to shop); and removal of other current barriers to choice at AEP Ohio.

Although designed to eliminate competitive supply, AEP Ohio justified the proposals as providing required cost recovery to support new generation which is purportedly needed.

However RESA noted, as Matters did in our original Jan. 31 story, that AEP Ohio's own testimony concedes that under the merger of Columbus Southern Power and Ohio Power, the merged company will be long on capacity.

AEP Ohio's testimony even indicates that, given this long position, the utilities might even consider selling generation plants, RESA noted.

"So one must ask oneself, 'Which is it? Is the merged company long generation or is there a desperate need for more?'" RESA said.

Additionally, Constellation Energy also cited AEP Ohio's two most recent Long-Term Forecast Report filings as acknowledging that AEP Ohio has an oversupply of generation.

"With the ESP in place and CRES [competitive] providers gone from the market, the risks of AEP Ohio's multi-billion dollar generation-related business decisions will be borne by Ohio customers (and employers) instead of by AEP Ohio shareholders. As a result, AEP Ohio will have even less incentive to lower costs and provide innovative services. With guaranteed cost recovery through the non-bypassable riders, AEP Ohio will be incented to build new facilities whether or not they are needed and with minimal accountability for cost controls. With no assurance that investments and other procurement and operational decisions are the most economic, Ohio customers could potentially subsidize above-market solutions that do not meet Ohio's energy needs," Steve Elsea, Director of Energy Services, Leggett & Platt, Inc., said in testimony on behalf of the Compete Coalition.

Prices Under ESP Versus MRO
Competitive stakeholders attacked AEP Ohio's analysis that prices under the ESP would be more favorable than those under a Market Rate Offer (MRO), on a variety of fronts.

FirstEnergy Solutions, as well as other intervenors, noted that the forecast MRO prices used by AEP Ohio are overstated due to the use of outdated energy market prices, and the inclusion of higher (embedded cost) capacity costs sought by AEP Ohio, but which have been rejected by both FERC and PUCO in favor of RPM-based capacity prices.

Industrial Energy Uses-Ohio faulted AEP Ohio's use of an administratively determined market price estimate, rather than relying on the actual results from recent auctions in Ohio to establish SSO generation prices for other utilities. FirstEnergy Solutions also noted that the actual clearing prices that the FirstEnergy Ohio Utilities obtained in their competitive solicitations are $23 to $27 per MWh lower than AEP Ohio's estimate of the price that AEP Ohio would obtain in a competitive solicitation.

Additionally, IEU-Ohio noted that AEP's competitive retail arm, AEP Retail Energy, is currently making competitive generation offers at Ohio Power and Columbus Southern Power well below the benchmark market prices used in AEP Ohio's MRO analysis.

Furthermore, IEU noted that several riders allowed under single-issue ratemaking (gridSMART and the Enhanced Service Reliability Rider) would not be permitted under an MRO, and thus would reduce total retail rates under the MRO versus the ESP.

IEU-Ohio presented an analysis that Ohio Power's proposed ESP is less favorable than an MRO by $3.01 per MWh or $188 million over the 29-month term of the proposed ESP, and that Columbus Southern Power's proposed ESP is less favorable than an MRO option by $5.69 per MWh or $238 million over the term of the proposed ESP.

FirstEnergy Solutions noted that the proposed ESP can be expected to result in an average total rate increase of 18% to 23% relative to current rates (or 23-27% if currently disputed POLR and environmental charges are removed from current rates).

In contrast, after correcting various flaws in AEP Ohio's competitive benchmark price, FirstEnergy Solutions determined that the competitive benchmark price (without any blending with the 2011 Total Generation Service Price) is actually $16 to $19 per MWh lower than AEP Ohio's proposed ESP price.

"This suggests that a modified ESP that relies fully on competitive solicitations for SSO supply could save SSO customers about $1.6 to $2.0 billion over the proposed 29-month ESP period, as compared to the Company's proposal," FirstEnergy Solutions said.

RESA summarized that, "AEP Ohio is only throwing in the MRO acronym as a threat to get what it wants relying on the Commission's preference for an ESP over MRO."

Ohio Energy Group Capacity Proposal
While opposing the nonbypassable environmental investment cost recovery rider proposed by AEP Ohio, the Ohio Energy Group alternatively suggested that should such a nonbypassable rider be approved, shopping customers should receive energy and capacity benefits associated with any nonbypassable charges for specific plants paid for under the rider.

OEG said that there are a number of approaches that could be used to provide shopping customers with their respective "shares" of the capacity and energy associated with the "rededicated generating units" subject to the nonbypassable environmental investment cost recovery rider. "For example, it might be feasible to directly allocate a pro-rata share of the physical mWs of capacity and mWh of energy associated with each rededicated EICCR generating unit to the CRES provider of each shopping customer through a 'first-through-the-meter' plan, OEG said.

Retail Market Enhancements
RESA, Constellation, and FirstEnergy Solutions all sought various modifications to current barriers to retail choice at AEP Ohio. Recommendations included elimination of a 90-day Notice Requirement for switches; elimination of a 12-month minimum stay for large customers and the date-based minimum stay for small customers (e.g. must stay with utility through April 15 of next year if returning during the summer); elimination of the $10 switching fee; and greater and improved access to customer information.

RESA also suggested a formal, tariffed POR program, as opposed to the negotiated program currently in place. RESA also said that AEP Ohio's GridSmart program should allow customers to receive supply from competitive suppliers while participating in the program.

Final Words
As stated in intervenor testimony:

"If the Commission approves the ESP in the form proposed by AEP Ohio, it will effectively eliminate retail competition, violate Ohio's policy to encourage diversity of electric supplies and suppliers, harm consumers, and damage the Ohio economy" -- FirstEnergy Solutions

"AEP Ohio's proposed ESP would effectively end retail competition in the AEP Ohio zone by providing AEP Ohio massive, above-market subsidies unavailable to any other supplier and by embedding those subsidies in generation-related non-bypassable surcharges to shopping customers" -- Exelon Generation

"AEP Ohio's proposed ESP is bad for consumers as it will eliminate competition and customer choice" -- Constellation Energy

"The AEP Ohio ESP II application runs afoul of the General Assembly's expressed goal of permitting customers to shop and for there to be supply options and suppliers available. The application is anticompetitive and anti-consumer" -- RESA

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