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The Ohio House of Representatives
Public Utilities Committee

Testimony on House Bill 178

Presented by Jeff Jacobson
Strategic Insight Group, Ltd.

On Behalf of
Office of the Ohio Consumers’ Counsel
Northeast Ohio Public Energy Council

May 9, 2017

Hello Chair Seitz, Vice Chair Carfagna, Ranking Minority Member Ashford, and members of the Committee.

My name is Jeff Jacobson. I am here representing the Office of the Ohio Consumers’ Counsel, the state’s representative of four million residential utility consumers. I am also representing the Northeast Ohio Public Energy Council (NOPEC), the largest retail governmental aggregator of electric customers in Ohio and nationally, with about 500,000 electric customers in the FirstEnergy service area.

I am testifying in opposition to H.B. 178 to protect nearly two million residential consumers from each paying up to approximately $1,000 on average in subsidies to FirstEnergy over 16 years (approximately $5.00 per month) and to protect the competitive market for power plants that provides benefits of competition to Ohioans.

First, just a bit about my background: I am a former member of the Ohio House and Senate. In 1999, I voted for electric deregulation, Senate Bill 3, like most all my colleagues—though I will admit to not understanding it well at the time. I had more to do with getting Senate Bill 221 enacted in 2008, and deserve part of the blame for the slowness of Ohio’s transition to full power plant competition by the decisions we made in that bill.

Today, of the 50 states and the District of Columbia, Ohio has the 18th highest average residential rate for electricity—meaning 33 states have lower residential rates. (See Attachment 1) Of the restructured states—those who have moved towards the free market—Ohio has the second highest residential price increases from 2008 to 2016. (See Attachment 2)

Ohio has these higher electricity costs for consumers despite being awash in shale oil and natural gas that have given us historically low gas prices, that the U.S. Energy Information Administration has projected to be relatively stable for a couple decades or more. Not surprisingly, Ohio has a growing number of new gas-fired power plants under construction. (See Attachment 3)

Competition is working in the electric generation market. A recent study1 by The Ohio State University and Cleveland State University researchers found about $12 billion in consumer savings from the utilities’ competitively bid standard service offers during 2011 to 2015. And the researchers project another $12 billion to be saved in the next five years because of having the market-based standard service offer. Moreover, having the ability for consumers to band together by community for government aggregation has been one of the key successes of the 1999 law for benefiting consumers, with total shopping savings of more than $3 billion in the same time period. We thank the Ohio General Assembly for giving consumers those benefits of the competitive electric generation market.

But there is a problem that is preventing Ohio families and businesses from realizing the full benefits of lower prices in the market. That problem is the continuing requests by Ohio electric utilities—now years after the 1999 deregulation law’s transition period ended—for consumers to pay subsidies above the market price of electricity. Attached to this testimony is a “subsidy scorecard” from the Consumers’ Counsel. That shows the subsidies that Ohioans have paid and are currently paying to their electric utilities—totaling nearly $15 billion overall from 2000 to the present. (See Attachment 4)

The bulk of these subsidies were paid as transition charges during the first ten years after deregulation was adopted. But in the past several years there have been instances of utilities asking for and being granted new subsidies.

And now these utility efforts to increase the cost of electricity for Ohioans have come to the General Assembly. FirstEnergy is asking for passage of a bill that would make about two million residential FirstEnergy consumers pay up to $300 million per year, for up to 16 years (or up to about $1,000 per customer). This rate increase proposal is said to be for nuclear power plants owned by FirstEnergy.

Three years ago, FirstEnergy asked for approval of a plan allegedly to stabilize rates, that the Consumers’ Counsel and NOPEC calculated would cost consumers $3.5 billion or more over eight years, or upwards of about $1,000 per each of two million consumers. And Ohio regulators approved the essence of the plan, known as a power purchase agreement. But then, stakeholders including OCC asked the Federal Energy Regulatory Commission to protect customers from the plan’s anti-competitive effects. The Federal Commission stepped in to prevent the subsidy, requiring FirstEnergy to prove that its plan did not negatively impact the electric markets or consumers. That ended FirstEnergy's power purchase subsidy plan.

But FirstEnergy persisted. FirstEnergy presented more proposals to state government until Ohio regulators awarded it $204 million per year for at least three years (and maybe more). FirstEnergy was allowed to charge consumers for a so-called “distribution modernization rider” that doesn’t require consumers’ money to be spent on modernizing the distribution grid. Since January 1, 2017, FirstEnergy's customers have been paying for that charge. And now, not satisfied with the new $204 million annual subsidy for at least three years, and after receiving $9.8 billion in subsidies for its transition to competition from 2001 to 2010 FirstEnergy is back. This time the ask is for up to nearly $5 billion more for Ohioans to subsidize. Respectfully, you should stop this cycle of subsidies and give consumers more of the benefit of competition intended under the 1999 law.

On April 25, 2017, FirstEnergy testified that the government should make two million Ohioans pay up to about $1,000 each, on average, for the nuclear plants to protect what FirstEnergy asserts to be Ohio’s energy security and diversity. But just six years ago FirstEnergy testified to the opposite point before this Committee: that Ohio’s energy security was not about diversifying types of electric generation. (See Attachment 5: Testimony of Leila Vespoli, “Competitive Markets Work,” October 11, 2011). In that testimony, FirstEnergy spoke of “ensur[ing] adequate and affordable supplies of generation for Ohio’s future”—which it described as “the only meaningful definition of Ohio’s energy security.” (FirstEnergy Testimony, Attachment 5 at p. 2) FirstEnergy said that “the real problem with subsidized generation is that regulators would be picking the ‘winners’ and ‘losers’ in the energy market. We’ve been down that road before, and the results weren’t pretty.” (FirstEnergy Testimony, Attachment 5 at p. 5) FirstEnergy’s 2011 testimony statements were true then and just as true now, even though FirstEnergy’s position has now changed.

There are other problems as well. H.B. 178’s requirements that the plant owner maintain its corporate headquarters in Ohio if it has one here and maintain a certain employment level sounds good but accomplishes little. Corporate headquarters is undefined, but even should FirstEnergy’s generation affiliate be acquired by another company or otherwise move its headquarters out of state, the bill doesn’t allow or require the PUCO to withhold credits or do anything. And since FirstEnergy has made clear its intention to sell these plants, it is telling that the legislation does not say that an out-of-state purchaser has to move any jobs here or maintain any sort of Ohio presence. Interestingly, the provision could be said to discourage an Ohio corporation from buying the nuclear plants as it arguably requires more from them than it does from non-Ohio purchasers.

Also, the bill’s requirement that the owner maintain a similar level of employment as other similarly situated plants has no enforcement mechanism, says nothing about what those employees are paid or what jobs they are doing. It just talks about “employment levels.” FirstEnergy also talks about the jobs that would be lost if these plants would close. I certainly do not discount the hardship faced by individuals who lose their jobs. But it is worth noting that Ohio Revised Code Section 4928.31(A)(4) required electric utilities in their transition plans (when FirstEnergy got $9.8 billion of consumer’s money for transition) to help their employees with their transition.2

Even if these plants were to close, Ohio has about eight new power plants that are in different stages of planning and construction. Those plants will have to be run economically and will have no ability to obtain a similar subsidy from Ohioans. They will employ Ohioans, pay Ohio local taxes, and if they clear the regional market, will cost Ohioans less than the two nuclear plants, if those two plants cannot be run economically.

So what then might this consumer bailout of FirstEnergy and its investors be about? FirstEnergy’s financial challenges for its generation affiliate increased with its $4.7 billion acquisition of Allegheny Energy in Pennsylvania about 5 years ago. It is our understanding that FirstEnergy agreed to absorb $3.8 billion of Allegheny’s debt and to pay a stock premium of approximately between 22 and 36 percent. Allegheny’s generating fleet was almost all coal-fired, and FirstEnergy closed down a number of generating units after it made this unfortunate acquisition.

If FirstEnergy’s generation affiliate declares bankruptcy, another company could buy and operate these two plants and keep the vast bulk of the jobs intact. Even were H.B. 178 to pass, FirstEnergy’s generation affiliate might still declare bankruptcy, as FirstEnergy’s CEO has indicated in several investor calls in the past months. In that event, the $300 million annual subsidy for 16 years will go to the buyer of the plants and whatever extra that purchaser pays for the plants will just end up helping the lenders, bondholders, and shareholders make more money than they would otherwise make..

By transferring business risk, the effect of this bill is to convert customers into investors. But customers should not have to bear the risks of FirstEnergy investors. In a capitalist society like the United States, investors, bondholders, and lenders voluntarily take risks for the potential rewards. Customers already paid $9.8 billion to FirstEnergy in the early years after deregulation for the transition from regulated generation to unregulated generation. That was an extraordinary, but temporary measure to help the utility and its investors pare their risk, that should not be repeated now to the detriment of two million Ohio families and businesses.

Please listen again to the words of FirstEnergy from six years ago:

At FirstEnergy, we made every effort to meet the letter and spirit of the new law – devoting significant resources to prepare our company, employees and customers for competitive markets.

But more important, all of our generation-related investments – including the risks that accompany them – are now borne by our shareholders, not by customers. ... This change has made us better – leaner, more efficient, and more customer-focused.

Since 1999, our competitive subsidiary FirstEnergy Solutions, has invested nearly $6.4 billion in its generating fleet while adding more than 900 megawatts of power. That’s the equivalent of a large, baseload power plant – and, once again, we’ve brought that additional capacity online at no risk to consumers. (FE testimony, 3-4)

FirstEnergy understood and touted to this committee that under the new law its shareholders, not its customers, bear the risk for its business decisions.

That is no less right today than it was six years ago. The risk for FirstEnergy’s business decisions belongs with people who invested or lent money to FE. That risk should not be transferred involuntarily to the two million Ohioans who live in FirstEnergy’s territory. Enough is enough.

Chairman Seitz and members of the Public Utilities Committee, I urge you to protect two million Ohioans, businesses and families, in FirstEnergy territory by rejecting House Bill 178. Thank you.

1 Thomas et al., Electricity Customer Choice in Ohio: How Competition Has Outperformed Traditional Monopoly Regulation (2016), page 3.

2 Division (A)(4) provides that a transition plan shall include: “An employee assistance plan for providing severance, retraining, early retirement, retention, outplacement, and other assistance for the utility's employees whose employment is affected by electric industry restructuring under this chapter.”