Ohio regulators recently provided $600 million to FirstEnergy, the states largest utility. Although the decision was labeled as a distribution modernization rider, the money seemingly came with no strings attached, meaning the utility giant need not do anything to update or improve its system of wires and transformers.
Even the chairman of the Public Utilities Commission of Ohio, Asim Haque, described the decision as undoubtedly unconventional. His rationale for the subsidy was that FirstEnergy could not modernize its grid until it reduced its debt, which would allow it to obtain a better credit rating, which, in turn, would lead to lower financing costs for future grid investments if they occur.
That line of thinking led to the $600 million decision, raising six questions.
First, rather than advance grid modernization in the state, has the decision actually set it back? FirstEnergy will not spend any of the money on near-term upgrades. Plus, other electricity companies will avoid investing in Ohio, as regulators are showing a preference for the incumbent utility monopolies. Innovative entrepreneurs will not risk their capital when regulators have stacked the market against them.
Second, should we reward a utilitys poor management? FirstEnergy needed to reduce its debt because its executives made bad business decisions, particularly buying up old coal-fired power plants at the very time the price of natural gas was falling, making those plants uneconomic. Rather than reduce executive bonuses or trim generous dividends to shareholders, regulators sent the tab to customers, every one of whom must pay $36 more per year to cover FirstEnergys mistakes. Regulators are signaling more interest in a utilitys pleas than its performance.
Third, how much will Ohioans really have to pay? Since every other utility in the state is now lining up to get the same deal regulators gave to FirstEnergy, the cost will certainly be much more than $600 million.
Fourth, doesnt the subsidy distort regional power markets? FirstEnergy originally asked for money to cover power purchase agreements that would support the continued operation of its uneconomic (and dirty) power plants. Federal regulators objected, saying such a subsidy would distort competitive markets. To skirt those objections, the utility then asked for the subsidy to go to a different subsidiary instead. The effect, however, is the same state regulators have provided a competitive advantage to FirstEnergys generators. As a result, FERC will need to decide if such a virtual PPA also illegally disrupts regional markets.
Fifth, is there true corporate separation between FirstEnergys generation and distribution subsidiaries, as required by Ohios deregulation law? As mentioned, FirstEnergy diverted the subsidy, directing the money away from its generation units to its distribution companies. Those subsidiaries, ironically, are doing very well financially, largely because they are monopolies that enjoy guaranteed profits. Although state law requires arms-length dealings among the utilitys subsidiaries, the subsidy came in through a different door but ended up in the same house. In effect, it is still propping up FirstEnergys economically challenged generation units that are not able to compete in regional power markets.
Sixth, should utilities get something for nothing? Ohio regulators did not place restrictions on the use of the subsidy and said FirstEnergy could use the funds to cover outstanding pension obligations, reducing debt or taking other steps to reduce the long-term costs of accessing capital. Almost as an afterthought, PUCO also said FirstEnergy could use the subsidy to indirectly support grid modernization investments. The operative word, of course, is indirectly, noting the utility need not show any connection to grid modernization efforts. Put another way, Ohioans are paying millions of dollars for something they have no guarantee of receiving.
Such questions suggest a simple subsidy prompts ripple effects that set back grid upgrades, hurt customers and distort competitive markets. The PUCO chairman has said he wants to move beyond the subsidy debate so regulators can focus on modernizing the grid. Perhaps the question he should be considering is, what are the investments and innovation needed to build a cleaner, more affordable energy system?
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