Claim: Subsidized Ohio Generation Will Artificially Reduce Price To Compare, Force Retail Suppliers To Leave Market

Claim: Electric Competition Has Saved Ohio Customers Nearly $9 Billion From 2016-18 (Uses Muni Aggregation Rates As Proxy For All Mass Market Migrated Customers)

August 9, 2019

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Reporting by Paul Ring • ring@energychoicematters.com

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An updated study from researchers at The Ohio State University and Cleveland State University says that the deregulation of retail electricity markets has delivered $8.7 billion in savings to Ohio customers from 2016-2018.

Combined with the impact reported in an earlier study by the research team, researchers said that, since 2011, Ohio’s consumers have saved $23.9 billion as a result of electricity deregulation

The study was commissioned by the NOPEC (Northeast Ohio Public Energy Council)

The totals reflect savings for customers on default service, as well as those on competitive retail supply

Notably, for customers on competitive retail supply, researchers used NOPEC pricing as a proxy for the price paid by all competitive retail supply mass market customers. Aggregated retail contract data obtained from brokers was used to calculate prices for mercantile customers on competitive retail supply. Data were gathered from over 1,000 accounts for mercantile customers

Specifically, the effects of deregulation on smaller, non-mercantile consumers (residential and some commercial users) in Ohio were estimated by applying the discount rates negotiated by the Northeast Ohio Public Energy Council (NOPEC) through 2017. These rates were assumed to be representative of savings offered to non-mercantile electricity shoppers across the state.

The study notes, in terms of using this same proxy aggregation rate approach for 2018, that, "By 2018, however, the PTC [price to compare] was such that CRES [retail] providers were no longer offering rates tied to the PTC [as a % discount]," and instead, specific rates were negotiated in the aggregation contracts. As a result, the study team was unable to obtain a data-base for 2018 non-mercantile contracts in time for the study. Accordingly, for purposes of the study, the study team assumed the savings from mass market shopping to be zero for 2018.

Using this data, the study found that savings from electric shopping alone were $1.3 billion over the period 2016 through 2018.

The study also estimated the savings to customers served on default service, using a calculation based on EIA data for nearby vertically integrated regulated states and the change in such monopoly rates versus Ohio. The study said that savings to customers on default service was $7.6 billion for the period 2016 through 2018.

The study claims that Ohio generation receiving subsidies that bids into the Standard Service Offer auctions will depress the Price to Compare and drive retail competitors out of the market

"[S]ubsidized generation bid into the utility Standard Service Offer (SSO) auctions depress Ohio’s 'Price to Compare (PTC),' the rate which competitive retailers must beat to sell electricity," the report claims

However, the report does not explain why this behavior would occur.

Putting aside other negative impacts from any subsidies (such as displacing other competing wholesale suppliers), any generator receiving subsidies that elects to participate in the SSO auctions would want to maximize their revenue under the auctions

As such, a subsidized resource would bid in at the highest price at which it would clear the SSO auction. In other words, it would want to maximize its bid price to the level that it just marginally undercuts other bidders (say by $0.01/MWh or whatever incremental is in the auction).

Given the price discovery provided by Ohio's descending clock SSO auctions, any subsidized resource can easily price its offering to be at or one increment under its competitors, making any impact on the Price to Compare de minimis if the subsidized resource is seeking to maximize its profit (which it would rationally do). Notably, the FirstEnergy Ohio EDCs' SSO auctions do not even proceed to a sealed bid round when over-subscribed where price discovery would be harder, (using random assignment instead).

We stress that our observations here are based on current subsidies in the Ohio market -- namely, the nuclear/clean air subsidies (whose output isn't required to be dedicated to the SSO at cost and thus the resources would bid to maximize profit), and the OVEC subsidies, with the OVEC output specifically barred from being used for SSO. To the extent subsidized resources were required to be bid into the SSO auctions at marginal cost or otherwise dedicated to SSO at a price not reflecting their total cost due to the subsidies, we'd agree that the PTC would be artificially depressed.

We also note subsidized resources may give competitive advantages to resources receiving such subsidies when competing to serve individual retail customers, but that is a separate issue

In any case, the researchers state, "An artificially suppressed PTC reduces the available 'headroom' for CRES providers to show value to customers while delivering acceptable margins. This may in turn cause aggregators, brokers and commercial retail electric service (CRES) providers to leave Ohio’s market, easing competitive pressure on the IOUs"

The researchers state, "the headroom between the PTC and contract prices must remain high enough to encourage aggregators, brokers, and CRES providers to compete and survive in the market. It is for this reason that subsidies for generation, especially that generation bid into the SSO auctions, pose a considerable threat to the electricity markets in Ohio. If the CRES providers, aggregators, and brokers leave the market, then competitive pressure will ease and prices will rise once again."

The researchers state that, "Ohio’s regulatory structure can be improved by reducing utility incentives to seek cross-subsidization for their deregulated legacy generation businesses. The best way to accomplish this would be to require that utilities fully divest their generation assets, as Duke has done, and that the ratemaking process include more rigorous oversight over non-bypassable charges to ensure that generation costs or forgone profits do not leak into the regulated side of the business."

The 2019 updated study and other materials can be found here (link)

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