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AEP Ohio and First Energy Seek PUCO Approval on Revised Power Purchase Agreements

May 13, 2016

On April 27th, after Federal Energy Regulatory Commission (FERC) unanimously rejected Public Utility Commission Ohio’s (PUCO’s) March 31, 2016 approvals of AEP and First Energy’s Power Purchase Agreements (PPAs) both utilities filed modified proposals. FERC rejected the PPAs on anti-competitive affiliate contracting waiver grounds under the Edgar/Allegheny standards.  The PPA contracts would have allowed the unregulated subsidiaries of both utilities to sidestep the competition involved in selling the electricity they generate into regional wholesale power markets. Instead, they would have sold the power — at whatever it cost to generate — to their local distribution companies, which in turn would immediately bid it into the wholesale auctions. If the local distribution companies lost money selling the power into interstate markets, all customers would make up the difference with higher delivery charges including customers who had contracted to buy power from competitive retail suppliers.

Rather than fighting FERC's affiliate waiver rejection, AEP Ohio and First Energy have each decided to take separate  paths in hopes of skirting FERC review the next time around.

AEP Ohio’s revised proposal took a slimmed down approach by seeking PUCO approval of only 440 MW shares of the Ohio Valley Electric Corporation, rather than all of its 3,100 MW Ohio merchant generation fleet included in its original PPA.  In addition, AEP Ohio stated it will honor its previous commitment to develop at least 900 MW of wind and solar energy projects in Ohio over the next five years; continue its strong support of energy efficiency programs; move forward with grid modernization efforts, including the installation of smart meters, distribution automation and Volt-VAR optimization; and provide up to $100 million in customer credits during the term of the agreement.

First Energy’s filing, on the other hand, requested to basically withdraw its original PPA and replace the agreement with a modified plan. Revenues under the modified plan would accrue to the regulated utilities rather than the non-recourse First Energy Solutions (FES) subsidiary.  The Company contends the new filing was designed to create a mechanism solely within PUCO’s jurisdiction by removing the contractual tie to FES but still offering a hedge to ratepayers. Basically, First Energy is proposing to use projections of the cost and revenues rather than actual costs and revenues associated with the plants. Under this new plan customer bills would not be impacted by future actual economics of the plants; instead the Energy Service Provider (ESP) would simulate the effect of a rider (i.e. financial hedge) rather than establishing one.  In so doing, the utility argues that FERC’s concern about non-competitive bilateral affiliate transactions will be preempted and therefore the new plan would only be subject to PUCO review.

The deadline for parties to respond to revised proposals submitted by AEP Ohio and First Energy is May 12, 2016. It is possible that the Commission will rule on the merits of the applications before June 1, but the Commission does not have a specific deadline in this case.  On May 11, the Commission added the First Energy case to its agenda and signed an entry granting all 12 pending applications for rehearing for further consideration.  Also, the Commission stated that the parties can begin discovery “in anticipation of potential further hearings.”  FirstEnergy will be filing its proposed tariffs by May 13, 2016.  Unlike the AEP PPA case, it is looking like this case will be continuing before the Commission for some time to come.

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