FirstEnergy's electric security plan
Role of the Commission
In formulating its decision in a case, the Commission must balance the interests of many parties and stakeholders while adhering to its mission, “to assure all residential and business consumers access to adequate, safe and reliable utility services at fair prices, while facilitating an environment that provides competitive choices.”
The Commission must balance this responsibility with an obligation to ensure Ohio’s regulated utilities the ability to continue to provide adequate, safe and cost-effective services to Ohio’s consumers and continue to invest in infrastructure improvements and innovative technologies.
In every case that comes before the Commission, a formal record is created. The case record includes written testimony, public testimony and cross-examination of expert witnesses. The Commission cannot make arbitrary decisions; information that is not in the formal record cannot be considered by the Commission in formulating its decision in a case.
Working as the neutral arbiter, it is the Commission’s goal to put Ohio in a position as a leader in developing regulatory certainty, rate stability and modernized grid technologies.
State law requires electric distribution utilities to provide their customers a default generation service. This is called a standard service offer, or SSO. An SSO may be in the form of either an electric security plan (ESP) or market rate offer (MRO). Electric distribution utilities are required to file applications with the PUCO to establish either an ESP or MRO.
ESPs establish the pricing and supply of generation service, and may include distribution system investments, grid modernization, economic development and job retention initiatives, and energy efficiency measures. The PUCO is tasked with determining whether an ESP, including its pricing and all other terms and conditions, is more favorable in the aggregate as compared to the expected results that would otherwise apply under a MRO.
The PUCO has historically adopted three-year ESPs for Ohio’s regulated electric utilities.
What did FirstEnergy request in its ESP application?
On Aug. 4, 2014, FirstEnergy filed an application to establish its fourth ESP, for the period of June 1, 2016 through May 31, 2019. The application also proposed to freeze base distribution rates through the end of the requested ESP period.
In this application, FirstEnergy proposed to secure all supply needed for its standard service offer (SSO) for Ohio Edison, Toledo Edison and The Cleveland Electric Illuminating companies through a competitive bidding process. FirstEnergy requested approval of a Retail Rate Stability (RRS) rider to act as a retail rate stability mechanism through a 15-year power purchase agreement. In the application, the companies sought to acquire generation from their share of Ohio Valley Electric Corporation and generation from the Davis-Besse and W.H. Sammis plants and then sell that capacity, energy and ancillary services back to the PJM wholesale market. The proposed rider would include the net costs associated with legacy contracts, capital investments and credit to customers the revenue from selling the capacity, energy and ancillary services from the associated plants into the PJM markets.
What agreement did FirstEnergy, PUCO staff and other parties reach?
FirstEnergy, PUCO staff and 16 other parties reached multiple agreements in the electric security plan case. The agreements, referred to as stipulations, serve as recommendations to the five-member Commission, which has the ultimate decision making authority. Commissioners take settlement agreements into consideration, along with all evidence supported in the case record when forming their opinions. The Commission may accept, reject or modify a stipulation.
The stipulations were signed by The Cleveland Electric Illuminating Company, The Toledo Edison Company, Ohio Edison Company, PUCO staff, Consumer Protection Association, Cleveland Housing Network, Council for Economic Opportunities in Greater Cleveland, Citizens Coalition, Ohio Power Company, Nucor Steel Marion, Inc., Ohio Energy Group, Material Sciences Corporation, city of Akron, Association of Independent Colleges and Universities of Ohio, Council of Smaller Enterprises, International Brotherhood of Electrical Workers Local 245, The Kroger Company, EnerNOC, Inc., Ohio Partners for Affordable Energy, and Interstate Gas Supply, Inc.
What decision did the PUCO reach?
On March 31, 2016, the Commission issued its opinion and order modifying and adopting the stipulations. The opinion and order established an electric security plan for the term June 1, 2016 through May 21, 2024, promoted rate stability, retail competition and laid the foundation for the development of Ohio’s modern grid infrastructure. Base distribution rates will be frozen during the term of the ESP.
FirstEnergy’s standard service offer will continue to be established through a series of competitively bid auctions.
The Commission approved the adoption of rider RRS. FirstEnergy’s electric distribution utilities will establish the rate stabilization mechanism during the term of the ESP. Rider RRS will act to reduce customer exposure to market volatility. The Commission found that the record of evidence demonstrates a projected net credit to customers of $256 million during the eight year term of the ESP.
FirstEnergy will file with the PUCO to reactivate its energy efficiency and peak demand reduction portfolio plans to empower its customers with tools to control their energy usage.
The Commission directed FirstEnergy to file a grid modernization plan with the PUCO to enhance customer engagement, the competitive marketplace, distributed generation opportunities, and support the deployment of advanced technologies.
FirstEnergy will also file a plan with the PUCO to transition its distribution rates to incorporate a straight fixed variable rate design.
The Commission also adopted the utility’s commitment to reduce CO2 emissions by at least 90 percent below 2005 levels by 2045, and file regular status reports to the PUCO on its progress.
FirstEnergy will commit to procure at least 100 MW of new Ohio renewable resources, in the event that the market fails to adequately spur development of new renewable energy generation resources. The Commission specifically encourages solar development.
FirstEnergy will continue to make capital improvements throughout its distribution systems during the term of the ESP. Revenues will continue to be collected through FirstEnergy’s Delivery Capital Recovery Rider, subject to annual revenue caps and audits.
FirstEnergy will implement a number of rate design changes in order to allow large energy users the ability to better manage their energy use and costs, including an extension of interruptible credit provisions and restructuring of various transmission tariffs.
FirstEnergy will contribute $51 million of shareholder funds during the term of the ESP to various low-income, conservation and economic development programs throughout its service territories.
What initiatives did the Commission order to advance efforts to modernize the electric grid?
Through the Commission opinion and order FirstEnergy agreed to file an application outlining a plan to fully modernize its portion of the grid utilizing Volt/VAR technology, distribution automation and automated metering infrastructure. In addition, the application submitted by FirstEnergy is to explore deploying battery technology, encouraging distributed generation, new renewable commitments, and advanced metering technologies with data transfer capabilities. Competitive suppliers with access to data can help to engage consumers regarding their individual electric usage.
What did the Commission decide on rehearing?
On Oct. 12, 2016, the Commission issued a fifth entry on rehearing to reject FirstEnergy’s modified Retail Rate Stability (RRS) rider or “virtual PPA” proposal. The Commission ordered FirstEnergy’s Ohio utilities to establish PUCO staff’s recommended Distribution Modernization Rider (DMR) instead, and to eliminate the existing RRS rider.
In its application for rehearing, FirstEnergy proposed to modify rider RRS such that it would continue as a financial hedge, but would not be tied to the physical operation of generation in the state. The Commission rejected FirstEnergy’s proposal because it lacked important benefits related to reliability, resource diversity and economic development.
Rider DMR will provide FirstEnergy with an infusion of capital so that it will be financially healthy enough to make future investments in grid modernization. Rider DMR is set at $132.5 million per year, to be grossed up for taxes (approximately $204 million per year). The Commission limited Rider DMR to three years, with the possibility of a two-year extension, subject to Commission approval. FirstEnergy requested that Rider DMR be set at $558 million annually over the course of eight years.
An average residential customer using 750 kWh per month can expect to see bills increase by no more than an estimated $3 per month due to rider DMR.
During the term of rider DMR, FirstEnergy will maintain its headquarters in Akron, Ohio, and make sufficient progress in grid modernization initiatives ordered by the Commission.
Rider DMR supersedes the 50 basis point adder to the return on equity for investments made for grid modernization. The Commission found that the adder is no longer necessary or appropriate and will be removed from the original stipulation.
In addition to rider DMR replacing rider RRS, the Commission granted rehearing to modify ESP IV to eliminate the placeholder for the Retail Competition Enhancement rider.
The Commission clarified that in regard to the Non-Market-Based Services (NMB) rider pilot program, additional customers who may benefit from participation should work with PUCO staff and FirstEnergy to determine if participation is appropriate and then the customer may file an application with the Commission for permission to participate. The Commission directs FirstEnergy and PUCO staff to continuously review the results of the NMB pilot program.
Lastly, the Commission placed a stay on the effective date of the increase in the shared savings cap that the companies may earn on energy savings from their efficiency programs until such time as they are no longer receiving revenue under rider DMR.
Did the PUCO consider public opinion before reaching its decision?
Yes. The PUCO held three local public hearings throughout FirstEnergy’s service territory, and received thousands of contacts from Ohioans expressing their views on the utility’s application. Hearing transcripts and other communications are available in the case docket.
History of deregulation
A law enacted in 1999 restructured Ohio’s electric industry by changing the way customers shop for electricity. The law, which took effect January 2001, provided for a five-year market development period. During this time, the utilities’ rates were frozen to allow a competitive retail market to develop.
As the end of the market development period neared, there was a growing concern that an immediate shift to market-based rates in 2006 would not be in the best interest of customers. To minimize the effects of rate “sticker shock” and transition customers to market-based rates, the PUCO worked with Ohio’s electric utilities to develop rate stabilization plans.
The rate stabilization plans, along with other changes, eliminated market uncertainty and provided customers with stable rates. Most of these plans expired at the end of 2008. In 2008, the Ohio General Assembly passed Senate Bill 221 to keep electric rates stable going forward, create jobs, implement energy efficiency and expand Ohio’s renewable and advanced energy industry. The law incorporates a system under which rates would be approved by the PUCO beginning in 2009.
Senate Bill 221 outlined two paths for electric utilities to implement different forms of market-based pricing, either through a hybrid of regulation and market pricing, known as an electric security plan, or through a market rate option.
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