Shale industry closing the door on energy re-regulation in Ohio

Senate Bill 3 of Ohio’s 123rd General Assembly, which took effect on Jan. 1, 2001, during the tenure of Gov. Bob Taft, gave Ohioans a choice in their electricity provider and created competition between Ohio’s public utilities providers. The bill provided for a five-year transition period through Dec. 31, 2005, during which time customers and providers could adapt and take advantage of a competitive retail market in the electric service industry. At the time, Ohio’s largest four investor-owned utilities (IOUs) – AEP Ohio, Dayton Power & Light Company, Duke Energy, and FirstEnergy – powered over 90 percent of the state.

With the passage of SB 3, Ohio’s energy market was broken up into three components – generation, transmission, and distribution. Lawmakers believed that consumer choice and competitive markets for generation, not transmission or distribution, would drive innovation and efficiency in Ohio’s energy market. Thus, generation was put on a path towards deregulation and a quasi-competitive market was formed. SB 3 required the continued regulation of both electric transmission services, under the Federal Energy Regulatory Commission (FERC), and distribution services, under the Public Utilities Commission (PUCO).

The next phase of deregulation  

SB 3 did not meet PUCO’s expectations during the transition period. The competitive market was slow to develop and there was wide concern that fully competitive markets would result in significant price hikes. Consequently, the commission introduced the concept of rate stabilization plans (RSP). The RSP provided for regulated retail rates for three years, 2006-2008, while the competitive markets further developed.  Following the introduction of the RSP concept and the election of Gov. Ted Strickland in 2006, discussions began about the next phase of deregulation as well as an effort to devote resources to energy conservation. Ohio business was clamoring for more electric choice and the IOU’s wanted further deregulation to take advantage of higher wholesale electric prices. 

These discussions culminated in the passage of Senate Bill 221 of Ohio’s 127th General Assembly that took effect on July 31, 2008. SB 221 developed two hybrid rate plans:

• Electric security plan (ESP) - a rate plan based on the cost of service provided 
• Market rate offer (MRO) - a market based pricing plan that sets retail prices through a competitive bidding process from wholesale suppliers of power.

The IOUs were required to begin with an ESP until the competitive rates of the MRO were favorable to those of the ESP. 

According to former chairman of the PUCO, Alan Schriber, this process first took place for FirstEnergy and its rates were established via auction within its ESP. However, other provisions of SB 221 have since been ignored as the regulatory committee has strayed away from the use of the MRO. SB 221 furthered the deregulation process by requiring corporate separation of non-competitive and competitive electric service.

Shale enters the energy market

By 2010, shale began to make a major impact on the U.S. energy markets. In a few short years, the U.S. went from an importer of oil and natural gas to an exporter, and the electric markets turned upside down. The premise of SB 221 (rising electric rates) was removed.  From 2010 to 2014 the price of natural gas decreased from over $8/Mcf to under $4/Mcf. These low natural gas prices resulted in almost a dozen new natural gas fired plants either built or contemplated in Ohio.  These new plants could generate power at lower prices than the existing coal and nuclear plants. The IOU’s share of the Ohio generation market quickly decreased to 85 percent in 2013, and has continued to fall with the further development of natural gas from shale.

FirstEnergy in the crosshairs

FirstEnergy has been caught in the crosshairs of the state’s move towards deregulation while wholesale electric prices have plummeted. Currently, Senate Bill 128 and House Bill 178 in Ohio’s 132nd General Assembly (the “ZEN bills”), are an attempt to put the deregulation “genie” temporarily back in the bottle. These bills would allow for the sale of zero-emission nuclear energy credits. In order to fund the zero-emission nuclear energy credits program, a non-bypassable rider charge would be added on to consumers’ energy bill each month. The yearly rate would be no higher than 5 percent more than that of June 2015. Increases for residential customers are estimated to be $5/month or $60/year.  FirstEnergy would likely see a guaranteed new revenue stream of $330 million/year over sixteen years.

Recently, former Senator Jacobson testified on pending Senate Bill 128. In his testimony, he emphasized Ohio’s high electricity costs despite the abundance of shale oil and natural gas. He also noted on this historic process:

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. The subsidies that two million Ohio consumers have paid to FirstEnergy, since, 2000, are measured in the billions of dollars.

FirstEnergy has stated that this new revenue could help the company avoid a bankruptcy of the FirstEnergy affiliate holding the generation assets. It further argues that nuclear energy promotes a strong local economy, a clean environment, and a more secure energy future for Ohio. FirstEnergy’s two Ohio nuclear plants generate more than 2,200 megawatts of electricity – enough to power more than 2.8 million homes, around the clock, every day of the year, and produce approximately 90 percent of our state’s carbon-free electricity.

The future of electricity in Ohio

According to a Public Utilities Commission report, Ohio’s electricity demand is expected to be stable through 2033. At the same time, Ohio is producing record amounts of natural gas because of the Utica Shale. This new production is driving down prices and jump starting the construction of gas fired generation. Eight new natural gas power plants are in different stages of planning and construction in Ohio. These plants could conceivably cover the energy production of the nuclear power plants if the plants were to shut down.

As electricity prices continue to rise, the question posed to Ohio legislators is whether the best future energy path in Ohio is a further investment in nuclear energy or should there be an intensified focus on the utilization of shale and gas fired generation.  

A special thank you to former Gov. Bob Taft as well as Mr. Alan Schriber, former Chairman of the PUCO, for their insight on this issue.

Justin Abbarno, a legal intern at McDonald Hopkins, assisted with the research and writing of this blog post.