Ohio Industrials Seek Price Cap in AEP Ohio Default Service Auctions

The Ohio Energy Group has requested that the Public Utilities Commission of Ohio impose a maximum starting price in the default service auctions for a portion of AEP Ohio Standard Service Offer (SSO) energy for the period prior to January 1, 2015, with such starting price acting as a price cap in the descending clock auctions.

As previously reported, under the AEP Ohio electric security plan, a limited amount of auction-based supply will be blended with tariffed generation rates for the period prior to the use of auctions for 100% of SSO supplies starting January 1, 2015. AEP Ohio anticipates an auction being used for 10% of SSO energy for the period starting July 1, 2013, with the auction-based portion of SSO supplies increasing to 60% for the period June 1, 2014 through December 31, 2014.

Supply not sourced from the auction will be served by AEP Ohio (or successor affiliate) at frozen, tariff-based generation rates, plus several bypassable adders, including the Fuel Adjustment Clause (FAC).

The Ohio Energy Group said that, "the Commission should establish one important auction protocol: the starting price for the descending clock energy-only auctions for each AEP Ohio rate zone should be the forecasted FAC rate that customers would otherwise pay."

While varying by class and rate zone, the AEP Ohio FAC rate ranges from $32/MWh to $40/MWh.

At the recent FirstEnergy Ohio SSO auction, the auction starting price was in the range of $80/MWh-$105/MWh, with an SSO auction clearing price of over $60/MWh (admittedly, the FirstEnergy SSO auction included capacity in the auction product and is a more congested area, while the AEP Ohio auctions will be energy-only during the blending period. Still, backing out an estimated capacity rate from the FirstEnergy SSO auction leaves a non-capacity clearing price of about $46/MWh, or above the current AEP Ohio FAC rates)

"Establishing the forecasted FAC rate for the Ohio Power ('OP') and Columbus Southern ('CSP') rate zones as the 'price to beat' will guard against a self-imposed and unnecessary rate increase on SSO customers. In addition, because AEP Ohio is allowed to participate in its own auctions, setting the forecasted FACs as the auction starting prices will prevent a situation where the same utility provides the same energy to the same customers, but at a higher price," OEG said.

OEG said that the FAC-based price cap is needed because the energy-only auctions will be based upon marginal prices (market pricing) plus a risk premium and profit margin, but that under the hybrid blending adopted at AEP Ohio, customers will still also pay average embedded costs for capacity through the legacy cost-based rate structure.

"The result of the energy-only auction could be that SSO customers will pay the utility's average embedded cost for capacity and marginal or market rates for 10%-60% of their energy ... The worst case scenario for SSO customers would be if they are required to pay high average embedded capacity costs based upon base load coal generation and high marginal cost (market) energy rates, plus a risk premium and supplier profit margin. By properly setting the starting auction price at the projected FACs of OP and CSP (which AEP Ohio can provide through its normal budgeting process), the Commission can avoid this scenario," OEG said.

"There may be some concern that setting the descending clock auction starting price at the forecasted FAC rates will somehow chill the market or deter bidding. If bidding is deterred, then it simply means that competitors cannot beat the energy rate to which consumers are entitled by virtue of paying a cost-based rate for capacity. From a consumer and economic development point of view, there is certainly nothing wrong with maintaining low prices. Any concern about a long-term chilling of the market for auction bids is overstated," OEG said.

Furthermore, OEG said that because the Commission decided to maintain separate FAC rates for the OP and CSP rate zones during the term of the electric security plan (ESP), the energy-only SSO auctions approved by the Commission should likewise be held separately for each rate zone. "This is because the 'price to beat' differs significantly for each rate zone," OEG said, noting that for high voltage customers, the FAC rate for the OP rate zone is $32.41/MWh, while the corresponding FAC rate for the CSP rate zone is $38.38/MWh

OEG made note of the existing 12% rate increase limitation currently included in the ESP, but said that this protection does not obviate the need for its desired FAC starting price in the SSO auctions.

"It is possible that individual customers may be protected from undue rate increases stemming from the energy-only auctions by the 12% customer rate impact cap established in the ESP. The 12% customer rate impact cap applies to 'items approved within this modified ESP.' To the extent that the energy-only auctions are covered, then individual customers would be protected. But that would simply mean deferrals would be created which could raise rates on all consumers. The problem would not go away. The better solution is to stop the damage in the first place by setting the auction starting price at the FAC rates customers would have otherwise paid," OEG said.