Ohio Consumers’ Counsel report finds ‘serious problems’ with Ohio’s electric marketplace

Agency files complaint against AEP for inhibiting development of electric market, urges PUCO to take action to spur competition

COLUMBUS, Ohio, July 10, 2002 — After 18 months of retail electric competition in Ohio, progress toward meaningful electric choice for the state’s residential consumers has begun to stall, a consumer group says.

While about 725,000 residential consumers have switched suppliers since January 1, 2001, active competition among electric suppliers is virtually nonexistent in Ohio recently.

New Power, one of two active residential suppliers in the state, recently declared bankruptcy. As a result, consumers in central and southern Ohio have no alternatives to their local electric utility. The remaining active residential supplier is an affiliate of FirstEnergy that to date has restricted its activity to FirstEnergy’s traditional service territory in northern Ohio.

For much of the state, the only opportunity residential consumers have had to shop for savings on their electric bills has been to participate in an aggregated community buying group.

For a year and a half, the Ohio Consumers’ Counsel (OCC) has repeatedly voiced concerns about the need to address certain fundamental obstacles to effective competition and the long-term success of Ohio’s electric choice program.

To date, OCC has tempered its cautions with an understanding that meaningful competition would not develop overnight and that temporary price caps are protecting consumers from volatile price swings during initial “market development periods.”

Despite these warnings, far too little action has been taken. OCC said it was disappointed at the lack of progress Ohio is making toward healthy competition in the state’s retail electric marketplace.

As a first step toward fixing the situation, OCC and other concerned stakeholders recently filed a complaint at the Public Utilities Commission of Ohio (PUCO) charging one of the state’s electric utilities — American Electric Power (AEP) — with inhibiting the growth of a competitive electric market for Ohio consumers.

Ohio’s electric choice program is halfway through the three-year market development period for residential customers served by Dayton Power and Light (DP&L), who have yet to receive an electric service offer from an alternative electric supplier.

In 18 months, many of the protections established by Ohio’s electric choice legislation will disappear, and DP&L customers will become subject to market rates in what could still be a competition-free environment if certain actions are not taken in the interim.

The consumer group urged Ohio’s policy makers and regulators to adopt a greater sense of urgency about dealing with the state’s still underdeveloped electric marketplace.

“Just as we cannot wait until we have a supply shortage to begin building new power plants — because it takes years to build them — we similarly cannot wait until the market development periods end before taking the necessary actions to spur the development of retail competition and protect residential consumers,” Ohio Consumers Council said in a statement. “The time for ‘hoping and waiting’ is past. What Ohio needs now is serious action.”

Critical concern: delays in settling important regional transmission issues

OCC has long maintained that a single, fully functional Midwest Regional Transmission Organization (RTO) is essential to ensure open, fair and cost- effective access to electricity and the efficient and reliable flow of power across utilities’ service territories.

But after initially negotiating with the Midwest Independent Transmission System Operator (MISO), the state’s major electric utilities elected to go in several different directions, resulting in a fragmented, uncoordinated and consequently ineffective approach to the critical transmission issue:

* American Electric Power (AEP) chose to join Alliance, an RTO that was conditionally approved by the Federal Energy Regulatory Commission (FERC). When FERC finally concluded that the Alliance RTO would not meet all the qualifications to become an approved RTO, AEP had to change its plans. Instead of joining the FERC-approved MISO, however, AEP chose to sign a Memorandum of Understanding (MOU) with Pennsylvania-New Jersey-Maryland (PJM) Interconnection, which is a fully functioning but not FERC-approved RTO. The MOU only commits AEP to continue negotiations with PJM for a set period of time.

* Cinergy was a founding member of FERC-approved MISO and in fact has turned over functional control of its transmission system to MISO. However, MISO is not yet fully functional as some aspects of its operations have yet to be activated.

* Dayton Power and Light (DP&L) joined Alliance but was forced to look elsewhere when FERC withdrew its conditional approval. Like AEP, DP&L subsequently has indicated its intention to join PJM Interconnection.

* FirstEnergy (FE) also elected to join Alliance but has recently signed a binding letter to join Cinergy as part of MISO for an initial two-year period.

The result of these disjointed efforts is that instead of Ohio’s utilities being part of a single regional transmission organization — which OCC believes to be key to minimizing transmission costs and maximizing system reliability — the utilities are split among two separate RTOs.

This split, or “seam,” has the potential to make it more difficult and more expensive to move power into and through Ohio. A variety of operational problems must be overcome as well.

From OCC’s perspective as advocate and watchdog for Ohio’s residential utility customers, the utilities’ efforts to date seemingly have been little more than a drawn out process to maximize revenues rather than promote the development of a regional market. Such efforts fall far short of the goal of having the state’s utilities participating in a single, fully functioning RTO.

The unresolved transmission grid issue has contributed to relatively higher wholesale electricity prices, which together with a comparatively low “price to compare,” have served to inhibit competition in Ohio. This is due in part to the overall level of transmission rates that results from the accumulation of charges from every utility whose transmission lines are used to transport electricity across regions.

With a single RTO, these charges would be reduced over time, which could help lower total wholesale electric prices and give suppliers more room to beat the default prices being charged by local electric utilities.

Given the current status of RTO negotiations, it could be six months or more before the critical question of RTO selection in the Midwest is resolved. As we marked the midpoint of the market development period for DP&L last week (with the midpoint for Ohio’s other electric utilities being July 1, 2003), it is time to conduct a careful and formal review of the status of electric choice in Ohio.

To underscore the urgency of the situation, OCC recently sent a letter to PUCO Chairman Alan Schriber strongly urging the Commission to give serious consideration to initiating one or more of the following actions until the state’s investor-owned electric utilities formally join a regional transmission organization:

* Suspending payment of the utilities’ transition costs;
* Exploring all options for adjusting the utilities’ “price to compare” to increase the margin for competitive offers from alternative suppliers; and
* Extending the capped price for the generation portion of consumers’ electric bills beyond the initial market development periods.

Other federal and state actions may impact the future of electric choice in Ohio

OCC continues to monitor two additional external factors — one at the state level, and one at the federal level – that could impact the vitality of Ohio’s retail electric marketplace:

* At the state level, a special joint legislative committee in the Ohio House of Representatives has held several hearings in the last three months as it begins the important work of developing recommendations for a statewide energy policy. While the true measure of the committee’s work will be determined by the legislative recommendations it puts forth, OCC commends House Speaker Larry Householder for the leadership he has shown in convening this committee. We will continue to monitor the committee’s work and pledge our full commitment to work with Speaker Householder, committee co-chairs Nancy Hollister and Lynn Olman and their colleagues in the Ohio House on this important project.

* At the federal level, OCC continues to oppose legislation that would repeal important consumer protection standards contained in the Public Utility Holding Company Act without enhancing the authority of the Federal Energy Regulatory Commission (FERC) to oversee the development of a competitive wholesale electric market. By undermining competition at the wholesale level, the proposed federal legislation could further stall the progress of a competitive retail electric marketplace in Ohio and delay many of the potential benefits of electric choice for years.

OCC strongly believes that FERC needs additional authority to govern market-based rates in wholesale electricity markets — especially in light of recent revelations about Enron’s market manipulations in wholesale markets serving California. A recent report issued by the U.S. General Accounting Office (GAO) concurs in this recommendation, finding that “FERC has not yet adequately revised its regulatory and oversight approach to respond to the transition to competitive energy markets.”

The report suggested that the U.S. Congress may want to review and revise FERC’s legislative authority so the agency has more credibility and clout in fighting anticompetitive behavior or violations of market rules by market participants — a recommendation that OCC heartily endorses.

Summer electric supply forecast

On a more immediate front, Ohio should have an adequate supply of power to meet the summer season’s peak demand for electricity. The Generation Resources Panel of the East Central Area Reliability (ECAR) Council projects that barring anything unexpected, the region comprising Ohio, Indiana, Kentucky, Michigan, West Virginia and parts of other neighboring states will have about 6,950 megawatts of new generating capacity this summer — a 6.8 percent increase over the available supplies from last summer.

While it is true that FirstEnergy’s Davis-Bessie nuclear power plant is expected to remain off-line for repairs throughout the peak summer season, OCC has been assured that FirstEnergy has arranged firm contracts for adequate replacement power — so the situation at Davis-Bessie should not impact Ohio’s summer power supply.

Other factors that bode well for Ohio’s summer energy forecast include demand projections that are well off the average demand growth of the last 10 years — due in large part to the slow economy — as well as relatively mild weather patterns and continuing conservation efforts. OCC will monitor Ohio’s electric market closely throughout the summer for any signs of potential supply problems.

However, OCC underscored its assertion that Ohio is making unsatisfactory progress toward developing a healthy, competitive retail electric marketplace. Without a developed competitive market, the price consumers pay for electricity is likely to increase when the utilities’ market development periods end, the OCC said.

Ohio’s residential electric consumers are similarly at risk from pending federal legislation that would repeal important consumer protection standards without enhanced federal authority to provide much needed oversight of the nation’s wholesale electric markets. OCC urges state and federal officials to take appropriate action now to ensure that residential consumers receive the full anticipated benefits of “electric choice.”

SOURCE: Ohio Consumers’ Counsel

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