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Ohio Power Companies, Consumers Spar Over Who Pays for Spare Electricity

11/16/2015 | 02:28pm US/Eastern
By Cassandra Sweet 

What should electric companies do with money-losing power plants when there is more than enough electricity available to satisfy day-to-day demand?

The answer isn't to close the unprofitable plants, say two of the nation's biggest electricity producers, but rather to shift the financial burden to consumers.

American Electric Power Co. and FirstEnergy Corp. say they don't make enough money selling the power from seven old, coal-fired generating stations and one nuclear plant in their home state of Ohio. They have set off a firestorm of criticism by proposing that consumers and businesses in the state should cover the cost of operating the plants.

The power companies argue they need to keep the surplus production capacity to make sure there is enough electricity when consumption spikes--such as during heat waves and blasts of Arctic cold.

But consumer advocates, environmental groups, industry rivals and some of Ohio's big electricity users, including Wal-Mart Stores Inc., don't buy it, and the staff of the state's Public Utilities Commission has recommended rejecting the companies' request. Critics say the proposal could add as much as $600 million a year to customers' utility bills over 15 years and give AEP and FirstEnergy an unfair competitive advantage.

Ohio regulators are expected to make a decision by March.

The Ohio battle is the latest chapter in a nationwide debate over who should foot the bill for power plants that could provide an extra margin of security during periods of extreme weather. It also shows how newer plants that burn cheap natural gas are reshaping the economics of producing electricity in many markets, putting a squeeze on aging coal and nuclear plants.

That is particularly true in Ohio and roughly a dozen other states where power plants compete against one another to offer the lowest-price electricity to the grid and utilities aren't locked into buying power from a particular producer. In many other states, power markets are regulated, with producers selling electricity to their customers at prices monitored by regulators.

Columbus-based AEP has shut down two Ohio coal plants and plans to switch to natural gas to generate power. But the company's older coal units will be necessary for several years to prevent power outages, said Nick Akins, the company's chief executive.

"You're looking for state backup to support these units running for a period of time until you can make the transition" he said.

The company, which delivers electricity to households and businesses in the state though its Ohio Power utility unit, wants those customers to pay its share of the costs of operating and upgrading six coal plants it co-owns.

In return, the utility would get AEP's share of the power from the plants, which it would sell in the wholesale market. That would be a money-losing proposition under current conditions, but AEP says wholesale power prices are bound to rise in the future, and utility customers would recoup the costs.

AEP's plan would cost its customers $3 billion to $4 billion over the first decade, according to the Sierra Club, which opposes the plan because of concerns about pollution from the coal plants.

If regulators don't go along, AEP says it might sell its shares in the plant. The company, which owns utilities in 11 states, reported a 5.2% increase in third-quarter profit to $519 million, but its revenue from selling power on the open market fell 7% from a year earlier.

Akron-based FirstEnergy says it would probably have to shut down a large coal plant south of Youngstown and a nuclear plant near Toledo if it can't get the financial help it is seeking from utility customers.

"We wouldn't have proposed something like this if they weren't at some degree of risk," said Bill Ridmann, a vice president at FirstEnergy.

FirstEnergy's plan would cost its customers $3 billion over 15 years, according to Bruce Weston, the state Consumers' Counsel, who represents residential utility customers in regulatory and court proceedings.

Last month, FirstEnergy reported third-quarter profit of $395 million, up 19% from a year earlier, but revenue at its unregulated power-plant business fell 6% to $1.3 billion.

The Ohio Energy Group, which includes large industrial energy users such as Ford Motor Co., support FirstEnergy's plan, saying customers will benefit in the long term. The group's lawyer, Michael Kurtz, said it doesn't support AEP's proposal because the plan would allow AEP to earn a profit of as much as 16% on investments in the plants, even if they lose money.

Ohio residents currently pay about 12.6 cents a kilowatt-hour for electricity, up 3% from a year ago, but slightly below the national average, according to federal data.

Meanwhile, the amount of power generated has slipped 8% this year through August, compared with a year earlier, according to data from the Department of Energy.

Wholesale power prices in Ohio have averaged $46.44 a megawatt-hour this year, down 27% from 2014. But AEP and FirstEnergy predict that prices will jump as early as 2019, allowing their utilities to make money from power sales, profits which they can pass on to customers.

AEP estimates higher prices in the future will bring its Ohio utility about $675 million over the first nine years, plus additional profit through 2050, while FirstEnergy estimates its utility customers will gain $2 billion over 15 years.

Write to Cassandra Sweet at cassandra.sweet@wsj.com

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