A look at how affiliate arrangements, subsidies and riders led to higher electric bills in Ohio — even as power prices declined
In a residential neighborhood south of downtown Cleveland, a decorative lamppost provides a stark illustration of what critics say is an abusive system of surcharges that have created billions of dollars in subsidies for the state’s utilities.
The 150-watt light in a tiny residential park is the only thing for which the South Hills Neighborhood Association used electricity in July. Yet the electric bill was nearly $70 — only 38 cents of which was for the actual electricity consumed.
The bill for that single lamppost is now nearly 750% higher than it was just 11 years ago. In July 2008, the charge for the same light totaled $8.28, with $2.69 going toward electricity.
The following summer, the monthly bill had already jumped to $34.85, with the inclusion of a new “Distribution Related Component” charge of $19.69. That charge alone would nearly double to $38.17 by 2019.
“We transformed this neglected traffic island into our little park. Part of this was the lamppost that reflects the architecture of the neighborhood,” said Mary Ann Jannazo, an organizing founder of the association and past president. “It was manageable a decade ago, but now it is the highest cost we have monthly. Annually we are paying over $700 a year for one streetlight.”
Other ratepayers are seeing similar bills. Mike Hulett, the owner of Broadway Cyclery in Bedford, said the delivery charges on his most recent electric bill from FirstEnergy’s Cleveland Electric Illuminating Co. came to $74.33, while the actual price of the electricity was $21.42. Like the neighborhood association, the bike shop is billed by the Illuminating Co. at a small business rate.
How did it get to this point? Like most things involving utilities, it’s complicated.
In 2008, the Ohio Legislature enacted Senate Bill 221, allowing state regulators to develop “electric security plans.” Those plans let utilities to add riders to bills beyond the basic costs of distribution services and investments.
“Customers’ base distribution rates have not changed since 2009 and will continue to be frozen through May 2024,” FirstEnergy spokesperson Mark Durbin said. However, the company’s utilities and others in the state have added a variety of extra charges to their bills.
“The use of riders is common among all Ohio utilities, and has been for years,” Durbin noted. “All riders are subject to PUCO [the Public Utilities Commission of Ohio] review and approval. Many riders are part of utilities’ rate plans, as authorized by Ohio law and approved by the PUCO.”
As a result, thousands of customers’ bills remain high, even as wholesale costs for electricity have fallen.
Timeline: From deregulation to now
A 2018 analysis by 24/7 Wall Street calculated Ohioans’ average monthly bill at $111. Average electricity use was 23rd lowest among the states, yet Ohio ranked two places higher for costs — meaning its people paid disproportionately more for their electricity.
Those higher costs also reflect a disparity between wholesale and retail electricity prices. Ohio is part of the PJM regional grid, a mid-Atlantic regional transmission organization, where wholesale prices have had some significant drops and an overall downward trend since 2008. For the most part, however, the trend in Ohio’s retail electricity prices has been upward, even at times when wholesale electricity prices have fallen.
The average residential customer’s cost per kilowatt-hour delivered was 8.24 cents in 2000, 11.26 cents in 2008, and 12.89 cents in 2018, data from the Energy Information Administration shows. Over that time span, the average wholesale price of power fell from roughly 5.5 cents per kilowatt-hour to 2.5 cents per kilowatt-hour.
“Since deregulation in 1999, Ohioans have been made to pay an astounding $15 billion in subsidies to electric utilities,” energy industry consultant Michael Haugh told lawmakers in June, speaking on behalf of the Office of the Ohio Consumers’ Counsel.
Impacts of subsidies depend on where consumers live. American Electric Power’s residential customers’ rates rose more than 4 cents per kWh since retail restructuring, reported Ohio State University energy analyst Noah Dormady and others in the March 2019 Energy Journal.
Like FirstEnergy, AEP transferred its power plants to an affiliated subsidiary instead of selling them outright. AEP finally sold most of its Ohio coal plants in 2017. The company still has partial ownership interests in two coal-fired power plants at Coschocton and Brilliant. The company also retains a share of the output from two 1950s-era plants, known as the OVEC plants.
In contrast, deregulation saved Duke Energy’s residential customers roughly 3 cents per kWh, Dormady and his colleagues found. Duke sold almost all of its power plants to unaffiliated entities, although it too has a share in the OVEC plants’ output.
Most recently, FirstEnergy and other utilities persuaded lawmakers to require customers to pay yet more subsidies. The companies say FirstEnergy’s affiliated nuclear plants and OVEC’s two aging coal plants are no longer competitive. House Bill 6, passed July 23, creates new charges on customers’ bills to help prop up the plants.
Here’s a look at how Ohio came to the crossroads it faces today.
Before 1999: Full regulation
Before 1999, Ohio utilities owned and ran both power plants and electric distribution systems as regulated monopolies. Customer charges were not well understood by the public. However, the Public Utilities Commission of Ohio provided oversight through comprehensive rate-making cases. Customer charges covered a bundle of services, including costs to make electricity, debt service for costs to build and upgrade power plants, costs for the transmission and distribution of electricity, and various surcharges.
That system also let utilities earn a profit as a return on their investments. This encouraged “gold plating,” a practice where companies often opted for higher-priced options over lower-cost alternatives. That way, the rate base on which companies earned their guaranteed profit was higher. Gold plating made consumers’ electricity rates higher as well. And without competition, companies had little incentive to run their power plants as efficiently as possible.
1999: The move to deregulation
Senate Bill 3 called for Ohio to move to a competitive generation market. The bill also authorizes government aggregation plans, to give consumers bulk purchasing power vis-à-vis generators. In other words, local governments could now negotiate lower power prices for their residents. The provision led to the creation of the Northeast Ohio Public Energy Council, or NOPEC, and similar groups. Delivery prices remained under the control of state regulators.
The law allowed for a transition period from 2001 through 2005, but left most details up to the Public Utilities Commission. Those details included how utilities could recover so-called “stranded costs” for plants they had built and run, but for which they would no longer be able to recover customer charges in a “distribution-only” system. Transition charges under the 1999 law included billions of dollars in costs for FirstEnergy’s Davis-Besse and Perry nuclear plants and for other power plants in Ohio.
By the end of the first five years, a competitive market still had not developed in Ohio. Meanwhile, prices for coal and gas kept rising. In response, the PUCO and utilities developed rate stabilization plans for 2006 through 2008.
2008: “Electric security plans”
By 2008, a competitive generation market for electricity had developed. Nonetheless, Ohio lawmakers authorized “electric security plans,” which were presented as a way to protect consumers from wild fluctuations in electricity prices. The law, Senate Bill 221, also added the state’s first renewable energy and energy efficiency standards. And it added charges for things such as utilities’ “lost profits” due to energy efficiency measures and “reasonable arrangements.” Those arrangements shift some costs from industrial customers to consumers and smaller commercial businesses. Varying rates for different classes of customers also do the same thing, to some extent.
By the time SB 221 took effect the next year, Duke Energy had sold all of its former power plants in Ohio. However, FirstEnergy, American Electric Power and Dayton Power & Light had merely transferred their plants to affiliated subsidiaries. The 2008 law set the stage for those three companies to shift a variety of costs from some customers to others and from their regulated distribution customers to their unregulated generation subsidiaries, said Dormady, the energy industry analyst at Ohio State University. Among other things, the law let utilities add a variety of charges that were not directly tied to distribution costs, and companies could then shift revenue to affiliated generation companies.
2010: Natural gas boom
Fracking — a combination of horizontal drilling and hydraulic fracturing to get oil and gas from shale — took off in earnest in Pennsylvania starting in 2010. That same year, FirstEnergy chose to more than double its investment in coal-fired power plants by announcing a merger with Allegheny Power.
FirstEnergy “doubled down on coal at the same time that natural gas prices were falling,” said Dick Munson, who works to advance clean energy in the Midwest for the Environmental Defense Fund. “Did that mean Ohio ratepayers and taxpayers should bail them out for having made a bad decision?”
By 2011, FirstEnergy acquired Allegheny Power and its coal-fired power plants. Then in 2012, Senate Bill 315 paved the way for fracking expansion in Ohio’s Marcellus and Utica shale.
At the same time, AEP and FirstEnergy competed for customers with each other and with new suppliers that had entered Ohio’s generation market. Monopoly-type profits for their affiliated generation plants were no longer guaranteed. And declining costs for natural gas, and then renewables, made coal and nuclear power less competitive.
Meanwhile, FirstEnergy announced it would close four power plants in Ohio, rather than comply with federal rules to reduce pollution from mercury and other toxic compounds. For the next three years, customers paid higher prices in standby fees and for expanding the distribution system to bring in more electricity from the rest of the PJM grid area.
2014: Bailout cases begin
AEP, Duke and FirstEnergy all filed cases seeking to charge all customers costs for certain noncompetitive coal plants. FirstEnergy’s case also seeks to subsidize the Davis-Besse nuclear plant. In addition, FirstEnergy asked federal regulators to set aside the results of PJM’s annual capacity auction — presumably because some of its plants had trouble competing.
Utilities said the arrangements would save customers money in the long run. Competitors balked and said more efficient resources could be shut out of the market. Consumer and environmental advocates said customers would foot big bills. For example, FirstEnergy’s plan could have cost consumers $3.6 billion to $5.15 billion, according to the Office of the Ohio Consumers’ Counsel.
Also in 2014, Ohio lawmakers weakened the state’s renewable energy and energy efficiency standards, put a two-year “freeze” on those standards, and tripled property line setbacks for commercial wind turbines. The measures slowed the pace of growth in the renewable energy sector, arguably providing some insulation from competition for utility-affiliated power plants. Natural gas development continued, however, increasing competitive pressure on coal and nuclear power.
2016: Ohio regulators rule for bailouts
After initial denials for Duke and AEP in 2015, a March 2016 ruling by the Public Utilities Commission of Ohio allowed FirstEnergy’s plan to guarantee sales of all power from certain noncompetitive plants, plus a similar plan for AEP. Then federal regulators called for strict scrutiny of the deals between utilities and their affiliated generation companies.
AEP called for a return to regulation of generation with guaranteed profits where it could own power plants. The company dropped affiliated plants from its plan but still sought subsidies for the two 1950s-era coal plants from its initial 2014 plan. Those plants are owned by OVEC, the Ohio Valley Electric Corporation, and Ohio utilities had previously committed to buy power from them. The PUCO eventually allowed those subsidies for AEP, Duke and Dayton Power & Light, with costs being passed on to all customers, regardless of who they chose as their electricity supplier.
Meanwhile, FirstEnergy shifted to a “virtual” power purchase plan, where it would just get the money for the noncompetitive plants, with no formal contract to buy electricity. By July 2016, estimated costs for FirstEnergy’s requests ballooned to more than $8.5 billion. In October 2016, the PUCO instead let FirstEnergy charge customers a credit support rider of about $200 million per year for three years. The PUCO called the charge a “distribution modernization rider,” but nothing required FirstEnergy to use the money for that purpose.
2017: Renewed legislative efforts
The Ohio Consumers’ Counsel said riders under electric security plans and other subsidies since 1999 totalled more than $14 billion as 2017 started. Yet pro-utility bills in the 2017-18 session would have cemented subsidies for the old OVEC coal plants, subsidized FirstEnergy’s Davis-Besse and Perry power plants, further weakened the energy efficiency standard, and made the renewable energy standards voluntary. Ultimately, they did not pass.
Industry competitors and consumer advocates called for fuller competition, noting that deregulation of generation has saved consumers roughly $3 billion per year. However, a bill to get rid of electric security plans with their riders, prohibit utility ownership or affiliation with generation plants, and allow customer refunds of unlawful utility charges didn’t move out of committee, despite support from conservative, environmental and consumer groups. Neither did bills to relax the tripled wind turbine setbacks from 2014.
2018: Bankruptcy and more
FirstEnergy filed for bankruptcy for its generation subsidiary, FirstEnergy Solutions, and announced that the Davis-Besse and Perry power plants would close if the company didn’t get subsidies. FirstEnergy Solutions filed notice to planned closures with the Nuclear Regulatory Commission. An April 2019 ruling later held that FirstEnergy could not use the bankruptcy case to fully insulate itself from the closure costs associated with its former plants.
In late 2018, the Ohio Supreme Court affirmed the PUCO’s order calling for AEP ratepayers to subsidize the OVEC plants, affirming the regulators’ choice to insulate old coal plants from competition.
2019: Subsidy charges back on the table
In July 2019, Ohio lawmakers gave in to pressure from FirstEnergy and other utilities. House Bill 6 will make all Ohio customers subsidize the Davis-Besse and Perry nuclear plants, plus the two 1950s-era coal plants. The law also guts large parts of the state’s clean energy standards.
In June 2019, the Ohio Supreme Court finally ruled that FirstEnergy’s 2016 credit support rider was unlawful. By then, ratepayers had already shelled out roughly $440 million in extra charges. However, the court would not let consumers recover the money for charges before its decision.
“A frustration for consumers is that Ohio government, including the PUCO, seems determined to find ways to make Ohioans subsidize or bail out FirstEnergy companies when they want money that they can’t make in the competitive market,” said J.P. Blackwood, spokesperson for Ohio Consumers’ Counsel Bruce Weston, when the court’s June 2019 decision came out.
“FirstEnergy provides electric distribution and transmission service to more than 2 million Ohioans through our three regulated utilities companies in the state,” said Durbin, the FirstEnergy spokesperson. “We are committed to providing those customers with safe, reliable, clean and affordable energy.”
Nonetheless, continuation of riders, subsidies and other policies has shifted away from the state’s original 1999 goal of deregulating the state’s retail electricity markets. Most consumers’ total electric bills have risen, even as wholesale prices for electricity have fallen over the last decade.
Yet competition in electric markets has kept bills from climbing even higher, according to researchers at Ohio State University and Cleveland State University. Competitive generation markets have saved Ohioans $23.9 billion since 2011, the researchers report in an August 2019 analysis prepared for NOPEC, the Northeast Ohio Public Energy Council.
“Ohioans would have seen even greater savings had state regulators been more frugal in their approval of these non-bypassable charges [added to the delivery side of the bill]” said Chuck Keiper, executive director of NOPEC.
“AEP Ohio is focused on delivering electricity to our customers and making improvements that make our distribution system smarter, more reliable and more resilient,” AEP spokesperson Scott Blake said. “Many of the charges referred to in the report are directly related to these improvements and are regulated by the PUCO as well as other government agencies.”
Meanwhile, the energy market continues to evolve.
“The falling price of natural gas, as well as to a lesser extent the falling price of wind and solar, have caused old technologies — things from the 1950s — to no longer be able to participate in the market,” said Munson at the Environmental Defense Fund. “The owners of those plants would like them to be able to. And if they can’t do it through the traditional free enterprise system, they’ll look for subsidies.”
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