Ohio Regulators Deliver “Undoubtedly Unconventional” Decision In FirstEnergy Bailout Case

on October 18, 2016 at 10:00 AM

American Electric Power's (AEP) Mountain

In a long-awaited decision, the Public Utilities Commission of Ohio (PUCO) yesterday approved a $600-million electricity rate plan for FirstEnergy.

One read of the decision is, regulators killed the Ohio-based utility giant’s massive bailout and ordered the utility to modernize its grid. If accurate, this would be an incredible victory: Dirty power plants would not be subsidized, FirstEnergy would not be rewarded for its poor business decisions, and the company would invest in measures that increase efficiency and welcome clean-energy resources.

Ah, if the PUCO order were only so clear. On the one hand, it does seem the regulators are giving FirstEnergy $600 million upfront and requiring it to spend those funds on grid-modernization programs the PUCO will approve in the future. Yet, the more realistic read is, Ohio regulators are simply handing FirstEnergy $600 million in hopes the subsidy will allow the utility to improve its balance sheet. Then, FirstEnergy will (hopefully) propose grid-modernization efforts that the PUCO will consider and fund down the line. In other words, the PUCO is providing FirstEnergy a no-strings-attached subsidy.

The decision is unusual and a bit difficult to interpret – even the PUCO chairman admits the approach is “undoubtedly unconventional.” The only certainty is that this issue will not die. Environmental Defense Fund and its allies will continue to press the PUCO and the Ohio Supreme Court to ensure the $600 million goes toward building a cleaner, more modern electric grid.

FirstEnergy’s bailout background

A little history here is helpful. About two years ago, FirstEnergy requested a $4-billion bailout to keep operating its old, uneconomic, and dirty power plants. The PUCO agreed, but the Federal Energy Regulatory Commission (FERC) objected, saying the $4 billion was an illegal subsidy that would distort competitive electricity markets. In order to avoid FERC jurisdiction, FirstEnergy then revised its $4-billion-bailout request to remove the part related to the continued operation of any power plants. It also asked for another $4 billion to reduce its debt – caused by its own bad business decisions – as well as yet another $4 billion to justify keeping its corporate headquarters in Ohio.

A few months ago, the PUCO staff recommended the utility receive only $600 million – just 5 percent of the utility’s $12-billion request – in order to reduce its debt. That proposal was premised on the belief such funds would improve FirstEnergy’s credit rating, allowing the utility to obtain capital and invest in grid modernization. However, the PUCO staff’s recommendation didn’t require any of the $600 million to be spent on grid modernization – it was more along the lines of wishful thinking.

An ambiguous order

Yesterday, the PUCO commissioners essentially accepted the staff’s recommendation. Yet some portions of itsorder suggest the $600 million must be spent to improve the utility’s distribution system.

The order declares that the approved funds “should be conditioned upon the implementation of all grid modernization programs approved by the Commission.” It even states that the PUCO will annually review FirstEnergy’s grid-modernization progress and adjust its receipts, “including any over- or under-recoveries.” So, if FirstEnergy ends up spending less on grid modernization than it earned in new revenues, it would have to make up the difference through credits to customers, for example.

Yet, hidden in the 192-page document are other lines saying the regulators “will not place restrictions on the use” of the funds and that FirstEnergy may use the resources “to indirectly support grid modernization investments.” The operative word, of course, is “indirectly,” and the regulators suggest such “investments” could “include outstanding pension obligations, reducing debt, or taking other steps to reduce the long-term costs of accessing capital.” In other words, FirstEnergy could use the money solely to reduce its debt, without the need to show any connection to grid-modernization efforts.

The PUCO also ruled that the $600 million in revenue would not be subject to an earnings test, which would require FirstEnergy to refund any revenues collected from customers that significantly exceed the utility’s cost of providing service. By excluding these revenues from an earnings test, the PUCO made it more likely that the money will not be used for grid modernization.

The PUCO decision is an important step in the FirstEnergy saga, but it is far from the end.

What happens next?

The PUCO decision is an important step in the FirstEnergy saga, but it is far from the end. Parties, including EDF, will ask the Ohio Supreme Court to consider whether the PUCO’s “undoubtedly unconventional” approach is legal. The PUCO itself will need to clarify what grid-modernization initiatives it supports. Most likely, FirstEnergy – which received a measly 5 percent of its plea – will appeal to Ohio legislators for a larger bailout as well as protection from competition.

How the FirstEnergy situation shakes out has national significance. As one former FERC commissioner noted, subsidizing uneconomic power plants or poorly-managed utilities is the major challenge facing the electricity industry at this critical juncture in its evolution. These “out-of-market constructs” being debated in Ohio would distort price signals in the electricity market and lead to “a really, really unsustainable future.” The outcome will signal whether electricity markets rely on competition or monopolies, on markets or subsidies.

The PUCO is so close to a great decision. Rejecting the bailout and ordering grid modernization would be a victory for markets, investment in Ohio, efficiency, customers, and the environment. Here’s hoping the PUCO itself or the Ohio Supreme Court provides such clarity and progress.

By Dick Munson

Originally Published on October 13, 2016

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