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AEP Ohio Cites Polar Vortex, Volatility In Seeking More Nonbypassable PPAs With Affiliated Generation

October 6, 2014

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Copyright 2010-14 EnergyChoiceMatters.com
Reporting by Karen Abbott • kabbott@energychoicematters.com

AEP Ohio has petitioned the Public Utilities Commission of Ohio to expand a previously proposed nonbypassable surcharge to support entitlements AEP Ohio would retain in the Ohio Valley Electric Corporation (OVEC) to now include PPAs with several additional competitive AEP generating resources totaling 2,700 MW.

The originally proposed PPA rider was to be nonbypassable, with OVEC energy and capacity disposed of in the PJM markets, with costs/benefits flowed through to all customers. No output would be used to supply AEP Ohio SSO customers.

AEP Ohio has now proposed to expand this PPA rider to include 2,700 MW of affiliated generation owned by AEP Generation Resources, Inc.

Energy and capacity from the new plants covered by the PPA rider would be disposed of in the same manner as the OVEC entitlements, with no output dedicated to SSO load, and all customers sharing in costs or benefits regardless of shopping status.

"The weather events experienced this past Winter – during the Polar Vortex events in the First Quarter of 2014 – have provided an early warning about serious issues with electric supply, especially as it relates to generation resources in Ohio as compared to electric load in Ohio," AEP Ohio said.

"For example, during the Polar Vortex events in the First Quarter of 2014, more than two-thirds of the generation resources that AEPGR will be retiring in 2015 were called upon to meet electricity demand in January," AEP Ohio said.

However, the expanded PPA Rider, "will not avoid closure of units already planned for retirement in 2015," but AEP Ohio said that, "it would incorporate a long-term solution for other Ohio coal plants that are on the economic bubble going forward."

"As a related matter, the proposed PPA would help begin to address the current prospects faced by Ohio of being a perpetual importer of power and a taker of volatile market prices in the future," AEP Ohio said.

"Including the AEPGR PPA in the PPA Rider will also promote Ohio competitive markets and keeps AEP Ohio on the path to a fully auction-based standard service offer (SSO)," AEP Ohio said.

"First, by providing a 'safety net' against more volatile market prices, the PPA Rider helps encourage customers to shop by reducing the volatility pricing disincentive and providing a financial stability benefit. Second, the SSO supply will continue being supplied through the competitive bidding process and the capacity, energy and ancillary services associated with the PPA units will be liquidated in the PJM market. Thus, the PPA Rider promotes Ohio’s energy policy by fostering competitive markets for both shopping and SSO customers," AEP Ohio said.

AEP Ohio said that customers cannot depend on the competitive retail market to avoid rate volatility.

"While it is theoretically possible that a competitive supplier could offer long-term stable offers, the fact is that they do not currently do so. In my ESP III rebuttal testimony, I used June 2013 and June 2014 data from the Commission’s Apples-to-Apples web page to review the current CRES offerings to residential customers across all six Ohio Electric Distribution Utilities (EDUs). This data demonstrated that CRES providers are not offering long term stable offers. The short-term nature of these contracts results in customers needing to sign new contracts on a regular basis which creates volatility for customers as they transition from one contract to another. My review of CRES offerings of comparable terms confirmed that significant volatility in the form of generation rate changes over periods as short as 12-months exists," a witness for AEP Ohio said.

"The risk of shopping customers seeing significant price volatility is exacerbated by the fact that many CRES contracts for residential customers include a rollover provision that automatically enrolls the customer in a new market-based variable rate plan or a fixed rate plan absent action by the customer. Unless the customer takes proactive action, a new and potentially higher rate unilaterally charged by the CRES provider will automatically apply," AEP Ohio said.

Notable is that while AEP Ohio proposes that all energy from the expanded PPAs be liquidated into the PJM market, "the Company could use the costs from this PPA as a basis to price contracts with specific economic development customers that could benefit from a more stable price."

"The customer would still be served by the SSO auction but the discount from the tariff rate that they receive could be based upon the costs of the PPA. Any revenues received from these economic development customers could be used as an offset to the cost of the PPA in the same manner that market revenues are used to offset the cost of the PPA. I have been advised by Counsel that this type of structure could be used under the Special Arrangement provision of section R.C. 4905.31 of the Ohio Code," a witness for AEP Ohio said.

It was unclear what impact this would have on the shopping decision for customers eligible for such discounts.

"[I]including the AEPGR PPA as part of the PPA Rider will protect Ohio’s economy and reduce the likelihood of premature retirements of the relevant AEPGR generating plants due to short-term economic signals. Large base load generating plants are vital to Ohio’s economy, as they employ hundreds of Ohioans and produce millions of dollars of annual economic benefit to the state and local economies; conversely, premature closure of the generating plants would be devastating to the local economies in which they currently operate," AEP Ohio said, in comments that remind us of the pitch Exelon is making in Illinois for ratepayers support for its nuclear plants.

Of note, AEP Ohio said that, "The wholesale rates paid to AEPGR under the proposed PPA are jurisdictional to the Federal Energy Regulatory Commission (FERC) and could only be challenged through proceedings before the FERC."

AEP Ohio nevertheless claimed that, "the [Ohio] Commission will have reasonable and adequate regulatory jurisdiction over several aspects of AEP Ohio’s recovery of the proposed PPA costs through retail rates."

The specific generating plants proposed to be covered by the expanded PPAs are:

Cardinal Plant Unit 1
Conesville Plant Units 4, 5, and 6
Stuart Plant Units 1 through 4
Zimmer Plant Unit 1.

"These generating units, Cardinal 1, Conesville 4, 5, and 6, Stuart 1, 2, 3, and 4, and Zimmer 1, are all generating units that I would describe as marginal units with respect to their economic viability while operating in a deregulated market. Although these units are not currently planned to be retired in the next few years for economic or environmental reasons, as further explained below the future market-based revenue uncertainty and fixed cost structure make them vulnerable to early retirement," AEP Ohio said.

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