Regulatory News: What’s going on with PJM’s BRA and House Bill 6?

Recently, there have been stories published in the media focusing on two significant regulatory news items: PJM’s Base Residual Auction (BRA) and Ohio’s House Bill (HB) 6.

In this edition of Customer Insights, our regulatory experts dive deep into these issues to bring you the latest developments. Our experts explain how PJM’s BRA postponement and the passage of Ohio’s HB 6 might impact your future electricity prices and energy contracts.

Let’s begin with discussing the BRA.

What’s going on with PJM’s capacity market?
In June 2018, the Federal Energy Regulatory Commission (FERC), the regulatory body charged with oversight of wholesale power markets, determined that PJM’s rules for running capacity markets (and therefore determining capacity rates) were unjust and unreasonable. FERC believes PJM’s capacity rates are unjust and unreasonable because a variety of generation resources within PJM receive out-of market payments, or subsidies, which suppresses capacity market prices, thus resulting in rates that are unjust and unfair, according to FERC. This is presumably, primarily for the generators that are not receiving out-of-market payments and subsidies.

Based on this determination, FERC directed PJM to delay its forthcoming Base Residual Auction (BRA) until FERC was able to determine and rule on a replacement rate mechanism that it could deem just and reasonable. Consequently, the BRA for the 2022/2023 planning year, which was originally to be conducted in May 2019, was postponed to August 2019. This was thought to provide FERC with ample time to provide PJM with new rules under which it could operate its capacity markets.

Did FERC issue new rules in time for the August BRA?
No. FERC unsuccessfully issued replacement rules by a 2-2 vote with one seat remaining vacant. As a result, FERC has directed PJM (in an order dated July 25, 2019) not to conduct the BRA that was deferred to August, since FERC has not yet issued new capacity market rules to replace the rules that were deemed unjust and unreasonable.

So now what?
Market participants, retail energy suppliers and their customers, wait for FERC to issue its new rules, and potentially for challenges and appeals to those new rules to play out. In the meantime, there will be uncertainty for many as to what capacity prices will be for the 2022/2023 planning year.

What’s a customer to do?
The most important thing for a customer to do, if they are looking to fix capacity costs past May 31, 2022, is to understand their options for doing so, and to understand under what conditions “fixed” capacity rates may be adjusted. AEP Energy can procure capacity for periods beyond May 31, 2022 through bi-lateral agreements in the market. The rates fixed by AEP Energy will not be adjusted simply based on BRA prices coming in above our expectations. Customers should ensure this is the case with any capacity rates they are looking to fix. Customers should be aware, though, that to the extent fundamental changes in the market rules render a supplier’s capacity hedges ineffective, then there is a possibility of a “change in law” capacity related rate adjustment.

Our regulatory staff and energy experts will stay tuned to FERC and PJM’s BRA as developments arise. As part of the AEP Energy family, we’re here to keep you informed every step of the way.

Now, let’s turn our attention to Ohio’s House Bill (HB) 6.

What is Ohio’s HB 6?
When initially introduced, the purpose of the legislation was for all Ohio electricity customers to pay to keep open Lake County’s Perry and Ottawa County’s Davis-Besse nuclear plants, owned by FirstEnergy Solutions (FES), a subsidiary of FirstEnergy Corp. However, the goal of the legislation expanded to support additional renewable energy resources while eliminating certain utility energy efficiency activities and renewable portfolio compliance standards. The expansion to HB 6 came with the expectation that distribution charges would be reduced by eliminating the energy efficiency rider charge while promoting clean air resources.

On July 24, 2019, Ohio Governor Mike DeWine signed into law HB 6. This law creates the Nuclear Generation Fund and the Renewable Generation Fund, to be administered by the Ohio Air Quality Development Authority. These funds allow for a “qualifying nuclear resource” or a “qualifying renewable resource” to be eligible for participation in the programs for one or more program years, as determined by the Authority.

What’s included in HB 6?
HB 6 essentially contains five main provisions.
1. Establishes a Clean Air Fund to subsidize two nuclear power plants.
2. Renewable Funding Opportunity, which supports pre-qualified solar projects certificated before June 2019.
3. Ohio Valley Electric Corporation (OVEC) Statewide Recovery Charge, subsidizing two coal-fired power plants.
4. Reduced Renewable Portfolio Standards (RPS) required by electricity suppliers.
5. Energy efficiency programs offered by utilities end December 2020.

What are the details of each provision in HB 6?
Clean Air Fund
Proponents of the Clean Air Fund believe nuclear generation is a benefit to a diverse generation portfolio, promotes a clean air generating resource, and is imperative to provide financial aid for economic vitality to the State of Ohio.

The Clean Air Fund will subsidize two nuclear plants owned and operated by FES. These plants are Davis-Besse (908MW) in Oak Harbor and Perry (1,268MW) in Lake County. The Clean Air Fund is expected to generate $170 million and of that, FES will receive $150 million for nuclear subsidies to support Davis-Besse and Perry Lake County plants. Both nuclear power plants face closure in the near term without assistance through the Clean Air Fund.

The financial aid paid to FES will be accrued through monthly riders imposed on Ohio utility ratepayers. Each residential customer will pay $0.85 per month, whereas industrial customers large enough to self-assess will be charged up to $2,400 per month. The exact statewide monthly charge to be collected by each utility for commercial customers will be determined by the Public Utilities Commission of Ohio (PUCO) based on the number of customers, the number of kilowatt-hours served by each utility, or a combination of the two. This rider will begin January 1, 2021 and end December 31, 2027.

The remaining $20 million will support renewable funding opportunities, directed by the Ohio Air Quality Development Authority.

Renewable Funding Opportunity
HB 6 supports eligible solar facilities over 50MW that already have siting certification as of June 2019. AEP Ohio has two eligible solar renewable facilities located in Highland County. These are the Willowbrook project (100MW) and the Hecate project (300MW).

Through the renewable funding opportunity, a $9 per MWh credit is paid to project owners of eligible solar facilities for a total of $20 million annually, which covers about 1,000MW of solar. This credit is assessed from the $20 million renewable portion of the Clean Air Fund as described above.

OVEC Statewide Recovery
The Ohio Valley Electric Corporation (OVEC) and the Indiana-Kentucky Electric Corporation (IKEC) are generating stations originally built in the 1950s and provided electric power for the U.S. Department of Energy’s uranium enrichment facilities then near Portsmouth, Ohio. Today, OVEC and IKEC own two coal power plants; Kyger Creek Generating Station (1.1GW) in Cheshire, Ohio and Clifty Creek Generating Station (1.3GW) in Madison, Indiana. Under HB 6, OVEC and IKEC will receive subsidies to support their coal-fired power plants.

Effective January 1, 2020, distribution customers throughout Ohio will incur a non-bypassable charge, called the Purchased Power Agreement (PPA) Rider. The rider for residential customers is $1.50 per month. Commercial and industrial customers’ monthly charge is $1,500 for this rider. The PPA Rider will begin in 2021 and will be reviewed by the Commission every three years to determine continuation of the rider, which is to end December 31, 2030.

Reduced Renewable Portfolio Standards
In 2008, the State of Ohio established their Renewable Portfolio Standards (RPS) policy. This policy required providers selling electricity to consumers to provide a specific percentage of that supply from renewable sources. Currently, the RPS policy states 12.5% of your electricity must come from renewable energy sources by 2027, with 0.5% required to be solar.

HB 6 reduces the RPS target for utilities and competitive retail energy suppliers to 8.5%, and the solar portion is eliminated by December 31, 2026. This means that most Ohio customers will see a price reduction by the elimination of RPS requirements effective January 1, 2027. However, an AEP Ohio customer should read the section below on the AEP Ohio bypassable renewable legacy charge, as you will continue to receive this charge through 2032.

Termination of Energy Efficiency Programs
In 2009, electric distribution utilities (EDU) implemented energy efficiency programs which include peak demand reduction, demand response and installation of energy efficient appliances for your home. By taking part in some of these programs, you receive incentives through rebates. Commercial and industrial customers receive credits towards energy costs when participating in energy load management programs.

HB 6 reduces the current energy efficiency benchmark EDUs must meet between 2012 through 2027 from 22.2% to 17.5%. If the PUCO determines the cumulative energy savings among all Ohio utilities of 17.5% is achieved, then energy efficiency compliance is deemed achieved and therefore energy efficiency programs through EDUs will end as of December 31, 2020.

Effective January 1, 2021, you will no longer incur the Open Access Distribution (OAD) Energy Efficiency and Peak Demand Reduction Cost Recovery Rider charge by your utility as a result of the elimination of energy efficiency programs through EDUs.

If you elect to purchase your energy supply through a competitive retail electric service (CRES) provider, you may continue to participate in energy efficiency programs. HB 6 does not affect programs, such as demand management, offered by a CRES provider like AEP Energy.

So, how can you protect your business?
Now that we’ve described the provisions of HB 6, let’s discuss what actions you can take to protect your business. As a result of HB 6, there are three areas to be aware of to help protect your business. These are AEP Ohio’s by-passable Recovery Rider (REC), self-assessing mercantile purchasers and a proposed referendum to HB 6. Let’s review what these mean to you.

AEP Ohio bypassable legacy renewable charge
If the utility has entered into purchase agreements with renewable energy resources before April 1, 2014 and the utility has ongoing costs associated with those agreements, customers receiving electric supply from that utility will incur a bypassable distribution charge through December 31, 2032. A bypassable charge means a customer can avoid the charge by taking electric supply from a CRES provider. It is our understanding that AEP Ohio qualifies to assess such a charge but has not yet advanced any specific proposal in this regard. The price impact of avoiding a bypassable charge should be considered when comparing supply offers from a CRES provider, such as AEP Energy, with default service supply from a utility.

Self-assessing mercantile purchasers
On May 1, 2001, the Ohio General Assembly passed the kilowatt-hour tax, replacing the public utility excise tax as a broader legislative deregulation effort. As part of the kilowatt-hour tax a large commercial or industrial customer, referred to as a “mercantile purchaser”, consuming 750,000 kWh annually or part of a national account is eligible to become a “self-assessor” that pays this monthly tax based on annual consumption.

By becoming a self-assessing mercantile purchaser, you can opt-out of utility energy efficiency and peak reduction programs which continue until December 31, 2020. By choosing to opt-out you will not incur the utility’s cost recovery charges, but you aren’t permitted to participate in these programs offered by the utility. Your energy load as a self-assessing mercantile purchaser is not included in a utility or CRES’ RPS. Therefore, you aren’t subjected to any bypassable RPS charge imposed by the utility.

To qualify for self-assessing, you must either be a mercantile customer or receive primary voltage level distribution service with annual usage of 45 million kWh at a single location during the preceding year. Lastly, you must submit a written request to your utility to become a self-assessing mercantile purchaser. Registration year begins May 1 and ends April 30 of the following year.

Potential Referendum on Ohio HB 6
Groups are forming a campaign to add a referendum on the November 2020 ballot to repeal HB 6. Opponents include environmental groups opposed to the elimination of energy efficiency programs and developers of natural gas-fired power plants opposed to the subsidy for nuclear generation. These groups are circulating a petition, seeking 1,000 signatures from registered Ohio voters in hopes of adding a referendum to the 2020 election.

The petition was approved by the Ohio Attorney General David Yost on August 29, 2019. The next step opponents will take is to obtain approximately 266,000 additional signatures to place the petition on the November 2020 ballot for a vote. Finally, a majority vote is needed to approve the petition for the repeal of HB 6.

Meanwhile FES filed a challenge to the petition with the Supreme Court of Ohio on September 4, stating HB 6 is a tax and tax laws are exempt from referendums.

This petition process will take a long time before being resolved and may create market uncertainty for everyone at each step of the process. This uncertainty may impact energy supply plans and strategies for all involved.

Stay in touch
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