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Ohio House Bill 6 is a Threat to Ohio’s Economic Development:

The expected cost difference in electricity consumed in Ohio with and

without the bailout is $675 million a year

June 25, 2019

Edward W. [Ned] Hill, Ph.D.

Professor of Economic Development, John Glenn College of Public Affairs & City and

Regional Planning

Faculty member, Ohio Manufacturing Institute

The Ohio State University

The findings, conclusions, and recommendations expressed in this testimony are mine

alone and do not represent the views of The Ohio State University, the John Glenn

College of Public Affairs, or the Ohio Manufacturing Institute

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House Bill 6 is a Threat to Ohio’s Economic Development:

The expected cost difference in electricity consumed in Ohio with and

without the bailout is $675 million a year

Abstract

Amended Substitute House Bill 6 removes the current $4.39 average monthly surcharge

that residential customers currently pay to support energy efficiency (EE) programs. The

claim that residential customers will save money under H.B. 6 is limited to the $3.39 per

month difference between the current $4.39 EE surcharge and the new $1.00 per month

nuclear power plant bail out, termed “Clean Air Credits.” The $40.68 annual “savings”

do not reflect the real cost that power users will see in their electric bills.

The total cost of electricity will increase due to (1) increases in the purchase price of

generated power, (2) expected increases in capacity charges from PJM Interconnection

that will be directly tied to the bailout of FirstEnergy’s two nuclear plants, (3) the Bailout

of AEP’s ownership interest in the Ohio Valley Electric Company (OVEC), and (4)

allowing power from five utility-scale solar power plants and the two nuclear plants to be

purchased by the Investor Owned Utilities (IOU) for their standard service offerings

(SSOs) with 3-year above-market rate Power Purchase Agreements (PPAs). The profit

margins on the PPAs to the utilities that will be based on cost-plus pricing. Competition

for electric power was introduced in Ohio based on the economically sound of consumer

choice; H.B. 6 replaces consumer choice with utility choice.

Electricity bills will increase due to:

1. Bailout payments:

• “Clean Air” credits total $1.1 billion and are subsidies that will flow to nuclear

and utility-scale solar power plants. In most years this rider will cost Ohio’s

electricity users nearly $200 million.

• Allowing AEP to sell power from the OVEC power plants in Ohio and Indiana

in the wholesale generating market and be compensated for any losses from

those sales through a rider paid for by its customers. There is no cost

estimate associated with this part of the bailout. A direct question should be

put to EP before a vote is taken

2. Increased capacity charges: Increased capacity charges: PJM Interconnection will

not allow Ohio's subsidized power from competing for and receiving payments from

the capacity auctions that it runs. This will be done to preserve competition and

investment in the capacity market. RunnerStone, an independent energy consultant,

has estimated this lost revenue at $80 million a year for the nuclear plants alone.

The Ohio Manufacturers Association did a separate calculation and arrived at $82

million a year. This revenue is an important revenue stream for the nuclear plants.

These establishes are close enough to outline the size of the ballpark number for the

lost capacity income.

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If the Clean Air credits are enacted they would more than make up for the lost

payments. However, FirstEnergy testified to Federal Energy Regulatory Commission

(FERC) that it will petition for payments for lost capacity revenue in addition to the

Clean Air Credits. FirrstEnergy informed FERC that it expects the state of Ohio to

provide the compensation. If the capacity revenue is $200 a MWh a day the total

request will be $157 million per year. The state and the PUCO will have to wrestle

with how to spread the capacity charge penalties across utility users. If the increased

capacity charges are assigned to FE’s customers, then businesses in one of the

slowest growing regions of the state will be further disadvantaged by a large

increase in these capacity charges. If they are spread across all electricity users in

the state to lower the impact in FE’s territories those who do not use the power will

be strong-armed into paying for it.

3. Increased electricity generating charges: H.B. 6 defines the nuclear power plants

and five utility-scale solar facilities as “clean air resources.” The bill then mandates

that the IOUs purchase power from these plants with negotiated 3-year power

purchase agreements (PPAs). The cost of the PPAs will passed on to the utility’s

customers with a rate of return that is approved by the PUCO. The combination of

clean air credits and the cost of the non-bypassable PPAs will create higher than

market priced power. We know this will occur because the clean air credits are

designed to keep the most expensive power in the market. If the first layer of

electricity in the power pool is the costliest, then the average price of the entire

bundle will cost more than if the highest priced power is excluded from the power

bundle. The conclusion is straightforward arithmetic.

The second reason why power will become more expensive than it would be in the

absence of this legislation is that it deters entry by producers with potentially lower

production costs.

Third, H.B. 6 prevents the removal of politically-favored high-cost power producers.

An increase in the overall cost of power in Ohio is the intended outcome of House

Bill 6. Keeping the most expensive electricity in the consumption bundle and keeping

cheaper power out of the bundle is not accidental drafting; it is intentional.

4. Cost Shifting Through “Reasonable Arrangements:” Ohio will see an increase in

special-interest petitions by sophisticated and politically connected businesses for

“reasonable arrangements” that are targeted toward trade-impacted industries.

Electricity rates will decline to some negotiated level for these politically connected

or recruited businesses through an economic development and retention process

run by the PUCO. Negotiated rates are treated confidential business secrets and the

negotiated savings will be passed on as costs for other commercial and residential

customers to pay through non-bypassable riders. The cost savings experienced by

the connected few businesses that receive these arrangements are shifted to

unknowing electricity users. This is picking winners and losers behind closed doors.

5. Discourage investment in disruptive power generation that is not controlled by the

IOUs and regulated by the PUCO. House Bill 6 will discourage investment in efficient

natural gas-fired combined cycle power plants. House Bill 6 helps to ensure that

Ohio’s abundant sources of natural gas will be drilled, put into pipes, shipped out-of-

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state, and the value that could be added in Ohio will take place elsewhere—along

with the associated work. That prospect is an economic development nightmare and

a loss of employment opportunities in Ohio’s shale country.

6. IOU income enhancement through the “decoupling mechanism”: Amended

Substitute House Bill 6 locks-in the income IOUs received in 2018 for providing

energy efficiency programs, while discontinuing the programs. New non-bypassable

riders will replace money that came from the discontinued EE rider (that is the $4.39

average monthly payment that H.B. 6 discontinues). Bizarrely, the IOUs will receive

income from discontinued programs while not incurring the costs associated with

service delivery. Being ordered by the Legislature to not provide services while

receiving the money that was once earned from providing those services from a de

facto tax is a lobbyist’s dream come true. This new rider will last until the IOU has a

new rate case hearing before the PUCO. They will take place years after H.B. 6’s

charges end in 2023. Commercial customers that opted out of the EE programs that

H.B. 6 discontinues will now be forced to make the payments they previously

avoided because of the scope and power of the mandated rider.

PJM’s analysis of the impacts of H.B. 6 indicates that keeping the energy from the two

nuclear plants in the market through subsidy, coupled with half of the expected

power from gas-fired power plants not entering the power pool will cost Ohio’s

consumers $16 million a year in added power generation costs. Add to this number

$198 million a year in subsidy payments and $157 million a year in capacity market

charges that will be added by PJM Interconnection in response to this bailout results

in $1.4 billion in added costs in the four years from 2020 to 2023, or $356 million a

year.

PJM’s modeling indicates that if the nuclear plants close and all of the expected gas-

fired power plants come online Ohio’s consumers will benefit from $1.3 billion in

power generation savings by 2023. The opportunity cost, which is the difference

between these two scenarios, $1.3 billion in savings versus $1.4 billion in added

costs, is $2.7 billion or $675 million a year.

1

House Bill 6 is a Threat to Ohio’s Economic Development:

The expected cost difference in electricity consumed in Ohio with and without the

bailout is $675 million a year

Chairman Wilson, Vice Chair McColley, Ranking Member Williams, and members of the

Senate Energy and Public Utilities Committee, my name is Edward Hill, better known as

Ned Hill, and I am Professor of Economic Development at The Ohio State University's

John Glenn College of Public Affairs and a member of OSU’s Ohio Manufacturing

Institute. Today’s testimony is mine alone and does not represent the views of The Ohio

State University, the John Glenn College of Public Affairs, or the Ohio Manufacturing

Institute. I appreciate the opportunity to submit written opponent testimony on Amended

Substitute House Bill 6 before the Ohio Senate’s Energy and Public Utilities Committee.

I am out of state and cannot testify in person. I am available to meet with the committee,

or its members, upon my return to Columbus in mid-August.

I am an economist and have worked on economic development policies in

general, and on issues that affect Ohio’s manufacturing sector in particular, for nearly

thirty-four years. I am interested in the performance electricity markets in Ohio and have

testified on this industry before the Public Utilities Commission of Ohio (PUCO) and the

Ohio Legislature. I have also participated in research relating to the development of

Ohio's natural gas resources and the operations of the electricity market in Ohio since

2011.

I was neither commissioned nor paid to prepare this testimony, as was the case

of my previous testimony before the Legislature and the Public Utilities Commission of

Ohio on issues related to electricity regulation.

The attempts of Ohio's Investor Owned Utilities (IOUs) over the past five years

to:

• Bailout failing power plants,

• Re-monopolize the electric generation industry through a mix of regulation and

legislation,

• Re-balkanize and degrade an efficient and reliable regional generation market

managed by PJM Interconnection,

• Mandate above market rate payments for electricity through anti-competitive

purchase price agreements (PPAs), and

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• Implement non-bypassable riders that are not connected with the generation,

transmission or distribution of electricity service delivery

are detrimental to the state’s economic development.

The preservation of competitive electricity generation markets is essential for

Ohio’s economic development. Re-monopolizing Ohio’s power generation markets,

propping up a failed investor-owned utilities (IOUs), shielding IOUs from the financial

consequences of not divesting their generating facilities after they were urged by the

Legislature to do so and were paid by their customers to do so and, and attempting to

pre-monopolizing renewable sources of generation will only hurt electricity users and

the state’s economy.

It is inescapable to conclude that Ohio House Bill 6 in both its original and

amended forms is an attempt to raise electricity rates in the state of Ohio. And, as we

wrestle over potential rate increases, our competitors in the 7-state region served by the

Tennessee Valley Authority to our south is taking action to lower their electricity rates.1

The accompanying map is of TVA’s 7-state service region. TVA serves southern

Kentucky and a

connecting piece of

southwestern Virginia;

most of Tennessee, as

well as those living in

adjoining western North

Carolina; sophisticated

manufacturing employers

in northern Mississippi

benefit from TVA's rates,

as do those in northern

Alabama's Muscle Shoals

and Huntsville regions. Chattanooga and Atlanta’s northern suburbs are also customers

1 Gardner, Timothy, “U.S.-owned utility to close two coal plants, in blow to Trump,”

Reuters, February 14, 2019, and James Brugger, “TVA Votes to Close 2 Coal Plants, Despite Political

Pressure from Trump and Kentucky GOP,” Inside Climate News, February 14, 2019.

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of TVA. In other words, a good portion of Ohio’s day-to-day economic competition

purchases power from TVA.

Comparing Ohio’s economic development activity to TVA’s in the southeast

underlines what is at risk in H.B.6’s embrace of crony capitalism and higher electricity

bills.2 TVA’s targeted industries (listed in italics) include:

• Aerospace and Defense (JobsOhio targets Aerospace and Aviation and the

Dayton region leads on defense): More than 2,400 aerospace and defense firms

are located in the TVA region. These include system integrators who are

customers of Ohio-based businesses: Boeing, Airbus, Raytheon, Lockheed

Martin, BAE Systems, Embraer, and Bell Helicopter.

• Automotive (another JobsOhio target): TVA asserts that its service area is the

second-largest automobile manufacturing region in the country trailing Michigan

with approximately 90,000 automotive industry jobs. The TVA service area is the

location of GM, Nissan, Toyota, and Volkswagen assembly plants; while BMW

(South Carolina), Honda (Alabama), Hino (West Virginia), Hyundai (Alabama),

Kia (Georgia), and Mercedes (Alabama) are in bordering locations that share a

well-developed just-in-time supply chain. TVA also states that motor vehicle parts

suppliers are an important target of its attraction activities. Ohio auto parts and

assembly plants fight factories in the southeast every day for work that is

allocated based on financial spreadsheets dominated by production cost

consideration. Some of these plants are part of the same company as the Ohio

facility, others are owned by competitor companies.

• Advanced Manufacturing and Industrial Products (JobsOhio targets the

advanced manufacturing and chemicals industries). Advanced manufacturing is a

sector that is especially sensitive to the cost of electricity and of natural gas. TVA

notes facilities owned by Siemens, Lifetime, Alcoa, 3M, GKN, Electrolux, BASF,

Wacker, Carpenter Technologies and LG Appliances. The TVA region competes

with Ohio for investments and operations in composites, chemicals, electronics,

plastics, additives, and metals manufacturing and processing. H.B. 6 only makes

the competition harder and erodes the advantages given to the state from our

deposits of wet-gas, which is the building block material for composites and

plastics. H.B. 6 disadvantages Appalachian Ohio and provides advantage to

Appalachian TVA.

• Data Centers: While JobsOhio does not list data centers as a specific target it,

and Central Ohio, have been very active in recruiting them. Northeast Ohio is

showing enthusiasm about blockchain programming and code generation. Both

activities are intensive users of electricity. I suspect that part of every one of

Ohio’s data center projects has a PUCO-approved “reasonable arrangement”

that caps their electricity costs. I know that several have included exemptions

from riders that other businesses pay. These regulatory approved avoided costs

2 https://www.tva.gov/Economic-Development/Attract

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are then shifted onto the rest of the rate base (a term to describe what is known

in other industries as customers). Contrast this with TVA, which encourages data

centers to “take maximum advantage of the area’s major strengths: competitive

electric power rates, excellent reliability and capacity, dual-feed capability and

business-friendly climate.” Ohio sells the ability to cap electric rates and pass the

avoid costs on to others.

Ohio is heading in the wrong direction by allowing in-state corporate redistributive

politics increase electricity rates and pick winners and losers while a major competitor

region is busy cutting electricity and not subsidizing legacy generating capacity.

The six-years of attempted bailouts, PPAs, and riders all came after transition, or

stranded asset, payments were made to the state’s IOUs over the past decade and a

half. The stranded assets payments were intended to be used by the IOUs to mark

down stranded assets, sperate their generating subsidiaries from their overall

transmission and distribution businesses and adjust to competition in the electricity

market. With the exception of Duke Energy meaningful separation did not occur.

Ohio's Consumer Counsel estimates that Ohio's IOUs have collected more than

$14 billion in stranded asset payments and non-bypassable riders since 2000.

Amended Substitute House Bill 6 will add another $1 billion in mandatory charges from

2020 through 2026, most going to the owners of FE’s two nuclear power plants. H.B. 6

also continues an existing subsidy that offsets AEP’s losses from its failed investment in

the Ohio Valley Electric Company (OVEC) that was due to expire in 2022. The bill

allows the subsidy to continue through 2030 and sets the stage for subsidies beyond

that date.

H.B. 6 triggers other sources of higher electricity costs for Ohio’s consumers by:

(1) preserving utility earnings from energy efficiency programs that will be phased out,

(2) increasing capacity charges from PJM Interconnection that Ohioans will have to pay,

(3) forcing the most expensive sources of Ohio-generated power into the pool of

electricity—rationing out lower cost sources of electricity, and (4) triggering cost-shifting

from politically connected and sophisticated businesses that can seek “reasonably

arrangements” to lower their power bills and shift them off to non-connected power

customers.

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Amended Substitute House Bill 6 is a Corporate Bailout

The bulk of House Bill 6 constitutes the third attempt by FirstEnergy (FE) to bail out its

uncompetitive nuclear power plants, with similar levels of non-bypassable charges

demanded in each effort. In my assessment, these non-bypassable charges are de

facto taxes because the power of the state is used to extract payments from electricity

users. Additionally, AEP is seeking its piece of corporate welfare to continue the bailout

of its failed ownership of the Ohio Valley Electric Corporation (OVEC). The Legislature

is being asked to tax electricity users to compensate FE and AEP for bad business

decisions and inappropriate uses of stranded asset payments.

It is essential to keep in mind the core public policy goals of competitive

wholesale energy markets. They are to provide reliable power at the lowest cost to

consumers. As former Federal Energy Regulatory Commissioner Tony Clark wrote in a

July 2017 white paper: “For many, a ‘freer market’ was never the end goal. The market

was a tool. Affordable power was the goal .... but many state public policy makers no

longer see that as the only goal ... (Electricity generating markets) were never designed

for job creation, tax preservation, politically popular generation, or anything other than

reliable, affordable electricity.”3 Former PUCO Chair, and current Executive Director for

Strategic Policy and External Affairs for PJM Interconnection, Asim Z. Haque, in

testimony before this committee defined PJM’s mission as: “keep[ing] the lights on at

lowest reasonable cost to the consumer.”4

H.B. 6 supports inefficient power producers who will drive up the cost of

electricity consumption in Ohio. This prediction is undeniable because it is the purpose

of H.B. 6.

3 Clark, Tony. Regulation and Markets: Ideas for Solving the Identity Crisis. Wilkinson, Baker, Knauer.

July 2017. https://www.wbklaw.com

4 Haque, Asim Z. Statement of Asim Z. Haque, on Behalf of PJM Interconnection before the Ohio

Senate’s Energy and Public Utilities Committee.” June 5, 2019. https://www.pjm.com/-

/media/library/reports-notices/special-reports/2019/20190605-statement-of-asim-z-haque-to-the-ohio-

senate-energy-and-public-utilities-committee

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Competitive Power Generation Markets are Working for Ohioans

The electricity generation and capacity markets are working in Ohio and benefit

consumers and employers. There is no economic rationale for introducing subsidies into

the electricity generating markets; they amount to nothing more than corporate welfare.

There is a straight forward four-part test that determines if the electricity markets

are working for consumers and industry:

First: Are electricity generating prices lower than they would have been without

competitive electricity markets? In 2016 a research team that I was a part of estimated

that nearly $3 billion a year in savings resulted from the entrance of new competitors.5

PJM Interconnection’s Asim Haque testified that “Ohioans, over the past five years,

have seen more than $2 billion dollars in savings through our [PJM’s] core functions.6

Second: Is investment in new generating capacity taking place in PJM

Interconnection’s region and is investment taking place in Ohio? The answer to this

question is also, yes. Approximately $11 billion in new power plant investments in Ohio

are operating, approved for operation, or in the approval process. The combined

generating capacity is 11.1 MW.7 Testimony given in the House hearing indicates that

the ground is beginning to shift. Some investors in approved projects that have not yet

broken ground are heading for the sidelines.8 Additionally, when Duke Energy sold off

its generating fleet Vistra Energy invested in them and is now a major power generator

5 Thomas, Andrew, et al. Electricity Customer Choice in Ohio: How competition has outperformed

traditional monopoly regulation. Northeast Ohio Public Energy Council, November 2016.

6 Haque, op. cit., p. 1.

7 Ohio Independent Power Producers, Testimony before the Ohio House Energy and Natural Resource

Committee, Subcommittee on Energy Generation, March 19, 2018. Haque, op. cit. pages 2 and 11.

Asim Haque, Attachment to Testimony of Asim Z. Haque: Ohio Senate Energy and Public Utilities

Committee, June 5, 2019, page 12. www.ohiosenate.gov/committees/energy-and-public

utilities/document-archive. PJM Interconnection Response to the Pennsylvania Public Utility

Commission & Ohio Consumers’ Counsel Requests to Analyze Certain Impacts of Nuclear Power Plant

Retirement, June 5, 2019. https://www.pjm.com/-/media/library/reports-notices/special-

reports/20190605-pjm-response-to-ppuc-ohio-consumers-requests-to-analyze-certain-impacts-of-

nuclear-power-plant-retirements.

8 See the testimony of Mayor Arno Hill of Lordstown Ohio at https://ohiochannel.org/video/ohio-house-

energy-and-natural-resources-subcommittee-on-energy-generation-4-24-2019-part-2 and Oregon

Ohio’s City Manager Michael J. Beasley at https://ohiochannel.org/video/ohio-house-energy-and-

natural-resources-subcommittee-on-energy-generation-4-24-2019-part-3. Also see PJM Interconnection

Response ibid.

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in Ohio.9 Lighthouse Generation invested $21.7 billion to acquire three power plants in

Ohio (Gavin coal-fired power station and two natural gas-fired plants) and one in

Indiana that were owned by AEP. And NRG purchased and then invested in turning

around generating operations purchased from FirstEnergy.

Third: Have uncompetitive generating plants closed? Yes. Between 2010 and

2022, 48 coal-fired power boilers located at 16 separate power stations are, or will be,

retired. These plants have the ability to generate 14MW of electricity.10 If H.B. 6 is

passed some plants slated for closure may stay open and OVEC will have a long -

subsidy-supported life—at least until 2030 and most likely until 2040.

Fourth: Has the reliability of the electric grid improved with the onset of

competition? The answer to this question is also positive. The power reserve standard

for summertime peak usage under the state-regulated regime was between 12 to 16

percent. From 2008 to 2010, before competition in purchasing electricity was fully

effective in Ohio, the reserve margin for PJM Interconnection was between 16.6 percent

and 18.0 percent. PJM’s reserve margin for 2019 is 27.5 percent, and they estimate that

reserves will peak in 2021 at 28 percent. The reserves will decline a bit, yet still stay ten

percentage points above the old regulatory rule-of-thumb, a still-robust 26 percent in

2023.11

Reliability has increased with the invention of regional transmission networks and

competitive capacity markets that combine power generation capacity over a 13-state

region. When weather events shift power demand, or outages dislocate power supplies,

reserve power is dispatch throughout PJM Interconnection’s grid. Reliability is now more

robust than when electricity generation capacity was balkanized under state-regulation

9 Vistra Energy, Written Testimony before the Senate Energy and Public Utilities Committee, June 18,

2019.

10 I collected the data from: Impact of Coal Plant Retirements on the U.S. Power Markets: PJM

Interconnect Case Study, Appendix A, Energy Ventures Analysis, July 2018; Seth Feaster, Record

Drop in U.S. Coal-Fired Capacity Likely in 2018. IEEFA October 2018. http://ieefa.org/wp-

content/uploads/2018/10/Record-Drop-in-U.S.-Coal-Fired-Capacity-in-2018_October2018.pdf; List of

Power Stations in Ohio, Wikipedia; Individual pages maintained by Sourcewatch, example:

https://www.sourcewatch.org/index.php/Eastlake_Power_Plant

11 PJM Interconnect, Reserve Margin Graph, 2019. https://www.pjm.com/~/media/planning/res-

adeq/20190409-forecasted-reserve-margin-graph.ashx Also see, Haque, Addendum to Testimony, op.

cit., page 7: the “committed reserve margin” for PJM Interconnection was 22.4% in 2019-2020, and in

2021-2022 it will be 21.5%.

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of the market for electricity. A large regionally interconnected transmission grid is

electricity’s version of the Law of Large Numbers in statistics.

Some in the legislature listen to lobbyists for the IOUs who claim that energy

insecurity is increasing in the state because of the number of shuttered coal-fired power

plants and the prospect of the two northern Ohio nuclear generating plants closing. The

talking points of industry lobbyists do not include openings of natural-gas plants, which

are not owned by their employers and clients, and they do not talk about the

improvements in efficiency that have taken place in power stations that the IOU’s have

sold. Statements circulate that Ohioans are at the mercy of an uncaring and

incompetent PJM Interconnection. All of this is self-serving foolishness.

Ohio’s is both a major producer and consumer of electricity. Our state is a

significant location of both power plant openings and closings that come with shifts in

the relative price of fuel, changes in power-producing technologies, and as business

management decisions affect the credit ratings and balance sheets of the owners of

those facilities. The amount of electricity imported into Ohio is a direct function of the

cost of electricity that is generated in-state compared to the cost of “imported” power

and the investment climate for new generating capacity in Ohio compared to other

states. As former PUCO Chair Asim Haque testified: “importing power is not due to

Ohio’s inability to meet demand from its locally owned generating units; instead, it

means that lower cost generation from outside Ohio was able to serve Ohio’s

customers.”12 Ohio should dominate the market for new electricity generating capacity

thanks to the dry gas reserves in our eastern counties. H.B. 6 will turn advantage into

disadvantage.

Data from the Energy Information Agency show that from 1986 through 2017

Ohio has been a net importer of electric power in every year but 2006. PJM

Interconnection has data on 2018 showing that Ohio imported 23.8% of its power in that

year. Power imports increased in volume beginning in 2009 when Ohio’s power markets

embarked on competition, with the flow increasing in 2015 as competition finally

included the entire state. These two jumps in imports demonstrate that competitive

12 Haque, op. cit., page 8.

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power markets were working; and they were followed by investments in new generating

capacity—another sign of markets working properly. Since 2015 imports have been

between 27,000 and 32,000 Megawatt hours.

Imports of electricity can decrease in the future if the state remains a desirable

location for natural gas power plants. The test of successful generating markets is

reflected in two portions of the four-part test discussed earlier—lower prices coupled

with increased reliability. The competitive position of the state as a place to make power

generating investments is documented by the third part of that same test—investment in

new power plants. The competitiveness of existing plants is documented with the fourth

part of the test, the closure of uncompetitive plants.

Electrons do not come in state colors, and the location of a power plant on one

side of the Ohio River or the other makes no difference to the grid and to customers.

Electrons generated in Ohio, Pennsylvania, West Virginia, Kentucky, or Indiana all work

the same way. Apparently to Ohio’s IOUs unsubsidized “foreign” electrons are harmful

to Ohio while bailed out “foreign” electrons are beneficial. Such is the logic used when

balance sheets are negatively impacted.

Non-bypassable Riders Reduces Consumer Benefits

Savings from competitive generation markets have been clawed back to major extent

through the expansion of non-bypassable riders by the PUCO. The most troublesome

are the riders that are associated with charges for above-market energy generation,

compensation for bad business decisions and losses, or designed to enhance the credit

standing of an IOU. An example is the Distribution Modernization Rider (DMR) that

allowed FE to collect $168 million a year from 2017 to 2019. The legislature allowed the

company to petition the PUCO to renew the DMR for another two years. These funds

were fungible; they did not have to be spent on their named use. The corporation

appeared to be able to use the funds as it wishes—including making good on losses

from generating subsidiaries.13 The Ohio Supreme Court struck down this rider in a slip

13 Kowalski, Kathiann M. FirstEnergy won’t say what it’s done with Ohio grid modernization money.

Midwest Energy News. https://energynews.us/2018/07/30/midwest/firstenergy-wont-say-what-its-done-

with-ohio-grid-modernization-money/

10

opinion released June 19, 2019.14 Unfortunately, FirstEnergy gets to keep the ill-gotten

gains from the DMR that it collected thanks to previous Ohio Supreme Court decisions.

The ruling may affect a PUCO-approved “credit enhancement” rider for Dayton Power &

Light.

Competitive electric generation markets were in effect in most of Ohio in 2016. At

that time non-bypassable riders constituted 14 percent of total electricity spending;

electricity generation costs were 48 percent of the aggregate bill. In 2018 generation

costs are 41 percent of aggregate payments, and non-bypassable riders were 21

percent. There was a 7 percent swap between the two cost categories. The growth in

non-bypassable riders is now both an economic development and a regulatory problem.

Regulatory Capture Has Taken Place

Has regulatory capture occurred over the past five years? It has. Non-bypassable costs

in the transmission and distribution portions of the business have grown faster among

the IOUs that own generating capacity than for the single utility that does not. We all

can observe the results of a natural experiment that occurred when Duke Energy shed

its electricity generation capacity while AEP and FirstEnergy did not. We found out how

IOUs with a fleet of generating plants behaves in the PUCO and Legislature compared

to one that sold off its generating fleet.15 The one without generating capacity has fewer

and less costly non-bypassable riders in its ESP.

Despite the assertions of paid media that the version of House Bill 6 you are

considering will save power users money, the bill will drive the total cost of electricity

higher. The most convincing piece of evidence is the amount of money spent, or

invested, on the bill in terms of lobbying and campaign expenses. No company invests

in paid media and political contributions looking for a decrease in revenues. FirstEnergy,

its leadership, and the hedge funds that invested $2.5 billion in FirstEnergy (Elliott

14 Trevas, Dan. “First Energy Electric Grid Modernization Charge Improperly Imposed,” Court News Ohio,

June 19, 2019. The slip opinion is: In re Application of Ohio Edison Co., Slip Opinion No. 2019-Ohio-

2401.

15 Thomas, et al., op. cit.

11

Management, Bluescape, Singapore sovereign fund, and Zimmer Partners) have

engaged in aggressive political marketing on House Bill 6 and expect a positive return

on their political investments. Dayton Daily News reporter Laura Bischoff documents

$2.4 million in advertising paid for by the dark money lobbying group Generation Now in

story published on May 17—before the heavy advertising blitz began.16 Additional

money poured into the campaign fund of the current House Speaker and the bankruptcy

filings of FirstEnergy Solutions document an extensive and expensive lobbying

operation17

In the next section I walk through the ways the H.B. 6 bailout will increase the bill

that Ohioans and their employers will have to pay.

H.B. 6 and the False Claims of Savings

H.B. 6 creates the Ohio Clean Air Program, which is not about clean air, it is a

bailout of FE’s loss-making nuclear facilities, and it extends of a bailout of AEP’s

investment in two coal-fired power plants owned by the Ohio Valley Electric Company.

A non-bypassable rider, or mandatory assessment on each electricity account in the

state of Ohio, funds the program. While H.B. 6 and its supportive advertising mentions

customers, the bill refers to accounts. And each account is associated with an electric

meter. Companies can have multiple meters in one facility and separate meters in each

of their facilities. Additionally, the bill does not mention how very large users with master

meters will be billed to support the Clean Air Program.

The rider affects the bills generated by every account or electric meter in the

state:

• Residential accounts or electric meters will be billed $6 a year in 2020 and $12 a

year from 2021 through 2026;

16 Bischoff, Laura A. “Battle over energy bill includes $2.4M in ads to sway public,” Dayton Daily News,

May 17, 2019.

17 Tobias, Andrew J. “FirstEnergy and its allies, seeking nuclear plant bailout, have spent millions on

influence campaign,” Cleveland Plain Dealer, April 17, 2019.

https://www.cleveland.com/open/2019/04/firstenergy-and-its-allies-seeking-nuclear-plant-bailout-have-

spent-millions-on-influence-campaign.html

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• Commercial accounts that use less than 45,000 megawatt hours (MWh) of

electricity will pay $10 per meter per month in 2020 and $15 per meter per month

($180 per year) from 2021 to 2026;

• Industrial accounts (meters) that use less than 45,000 MWh will be charged $250

monthly or $3,000 per year from 2020 to 2026; and

• Large commercial or industrial accounts (meters) that register more than 45,000

MWh can expect an assessment of $2,500 per month or $30,000 per year.

Amended Substitute House Bill 6 removes the current $4.39 average monthly

surcharge that residential customers currently pay to support energy efficiency (EE)

programs. The claim that residential customers will save money under H.B. 6 is limited

to the $3.39 per month difference between the current $4.39 EE surcharge and the new

$1.00 per month nuclear power plant bail out, termed “Clean Air Credits.” The $40.68

annual “savings” do not reflect the real cost increases that power users will see in their

electric bills.

The total cost of electricity will increase due to (1) increases in the purchase price

of generated power, (2) expected increases in capacity charges from PJM

Interconnection that will be directly tied to the bailout of FirstEnergy’s two nuclear

plants, (3) the Bailout of AEP’s ownership interest in the Ohio Valley Electric Company

(OVEC), and (4) allowing power from five utility-scale solar power plants and the two

nuclear plants to be purchased by the Investor Owned Utilities (IOU) for their standard

service offerings (SSOs) with 3-year above-market rate Power Purchase Agreements

(PPAs). The profit margins on the PPAs to the utilities that will be based on cost-plus

pricing. Competition for electric power was introduced in Ohio based on the

economically sound of consumer choice. H.B. 6 replaces consumer choice with utility

choice.

Electricity bills will increase due to:

1. Bailout payments:

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• “Clean Air” credits total $1.1 billion. The payments will flow to nuclear and

utility-scale solar power plants. In most years this rider will cost Ohio’s

electricity users nearly $200 million.

• Allowing AEP to sell power from the OVEC power plants in Ohio and

Indiana in the wholesale generating market and be compensated for any

losses from those sales through a rider paid for by its customers. There is

no cost estimate associated with this part of the bailout. A direct question

should be put to EP before a vote is taken

2. Increased capacity charges: PJM Interconnection will not allow Ohio’s

subsidized power from competing for and receiving payments from the capacity

auctions that it runs. This will be done to preserve competition and investment

in the capacity market. RunnerStone, an independent energy consultant, has

estimated this lost revenue at $80 million a year for the nuclear plants alone.18

The Ohio Manufacturers Association did a separate calculation and arrived at

$82 million a year. This revenue is an important revenue stream for the nuclear

plants. These establishes are close enough to outline the size of the ballpark

number for the lost capacity income.

If the Clean Air credits are enacted they would more than make up for the lost

payments. However, FirstEnergy testified to Federal Energy Regulatory

Commission (FERC) that it will petition for payments for lost capacity revenue

in addition to the Clean Air Credits.19 FirrstEnergy informed FERC that it

expects the state of Ohio to provide the compensation. If the capacity revenue

is $200 a MWh a day the total request will be $157 million per year.

3. PJM Interconnection will assess a penalty on the subsidized power, called a

capacity charge, generated by the nuclear plants and utility-scale solar facilities

18 Nader, Jordan and John Seryak, FirstEnergy Solutions Corp. Recommended Changes to Wholesale

Electricity Markets to Address Power Plant Subsidies, Ohio Manufacturers Association, May 16, 2019

and Ohio Manufacturers Association, An Analysis of Ohio Nuclear Plant Profitability Under House Bill 6,

June 2019. https://ohiomfg.informz.net/ohiomfg/data/images/MEMO%20-%20HB%206%20-

%20Nuclear%20Plants%20Excess%20Revenue%20-%206.18.19.pd

19 Ohio Manufacturers Association, An Analysis of Ohio Nuclear Plant Profitability Under House Bill 6,

ibid, p. 5.

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in Ohio to preserve competition and investment in its capacity market.

RunnerStone, an independent energy consultant, has estimated this cost at

$80 million a year for the nuclear plants alone.20

The state and the PUCO will have to wrestle with how to spread the capacity

charge penalties across utility users. If the increased capacity charges are

assigned to FE’s customers, then businesses in one of the slowest growing

regions of the state will be further disadvantaged by a large increase in these

capacity charges. If they are spread across all electricity users in the state to

lower the impact in FE’s territories those who do not use the power will be

strong-armed into paying for it.

3. Increased electricity generating charges: H.B. 6 defines the nuclear power

plants and five utility-scale solar facilities as “clean air resources.” The bill then

allows that the IOUs purchase power from these plants with negotiated 3-year

power purchase agreements (PPAs).21 The cost of the PPAs will passed on to

the utility’s customers with a rate of return that is approved by the PUCO. The

combination of clean air credits and the cost of the non-bypassable PPAs will

create higher than market priced power. We know this will occur because the

clean air credits are designed to keep the most expensive power in the market.

If the first layer of electricity in the power pool is the costliest, then the average

price of the entire bundle will cost more than if the highest priced power is

excluded from the power bundle. The conclusion is straightforward arithmetic.

The second reason why power will become more expensive than it would be in

the absence of this legislation is that it deters entry by producers with

potentially lower production costs.

20 Nader, Jordan and John Seryak, FirstEnergy Solutions Corp. Recommended Changes to Wholesale

Electricity Markets to Address Power Plant Subsidies, Ohio Manufacturers Association, May 16, 2019

and Ohio Manufacturers Association, An Analysis of Ohio Nuclear Plant Profitability Under House Bill 6,

June 2019. https://ohiomfg.informz.net/ohiomfg/data/images/MEMO%20-%20HB%206%20-

%20Nuclear%20Plants%20Excess%20Revenue%20-%206.18.19.pd

21 Ohio Manufacturers Association, An Analysis of Ohio Nuclear Plant Profitability Under House Bill 6,

June 2019.

15

Third, H.B. 6 prevents the removal of politically-favored high-cost power

producers. An increase in the overall cost of power in Ohio is the intended

outcome of House Bill 6. Keeping the most expensive electricity in the

consumption bundle and keeping cheaper power out of the bundle is not

accidental drafting; it is intentional.

4. Cost Shifting Through “Reasonable Arrangements:” Ohio will see an increase

in special-interest petitions by sophisticated and politically connected

businesses for “reasonable arrangements” that are targeted toward trade-

impacted industries. Electricity rates will decline to some negotiated level for

these politically connected or recruited businesses through an economic

development and retention process run by the PUCO. Negotiated rates are

treated confidential business secrets and the negotiated savings will be passed

on as costs for other commercial and residential customers to pay through non-

bypassable riders. The cost savings experienced by the connected few

businesses that receive these arrangements are shifted to unknowing electricity

users. This is picking winners and losers behind closed doors.

5. Discourage investment in disruptive power generation that is not controlled by

the IOUs and regulated by the PUCO. House Bill 6 will discourage investment

in efficient natural gas-fired combined cycle power plants. House Bill 6 helps to

ensure that Ohio’s abundant sources of natural gas will be drilled, put into

pipes, shipped out-of-state, and the value that could be added in Ohio will take

place elsewhere—along with the associated work. That prospect is an

economic development nightmare and a loss of employment opportunities in

Ohio’s shale country.

6. IOU income enhancement through the “decoupling mechanism:” Amended

Substitute House Bill 6 locks-in the income IOUs received in 2018 for providing

energy efficiency programs, while discontinuing the programs. New non-

bypassable riders will replace money that came from the discontinued EE rider

(that is the $4.39 average monthly payment that H.B. 6 discontinues). Bizarrely,

the IOUs will receive income from discontinued programs while not incurring

the costs associated with service delivery. Being ordered by the Legislature to

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not provide services while receiving the money that was once earned from

providing those services from a de facto tax is a lobbyist’s dream come true.

This new rider will last until the IOU has a new rate case hearing before the

PUCO. They will take place years after H.B. 6’s charges end in 2023.

Commercial customers that opted out of the EE programs that H.B. 6

discontinues will now be forced to make the payments they previously avoided

because of the scope and power of the mandated rider.

PJM’s analysis of the impacts of H.B. 6 indicates that keeping the energy from the

two nuclear plants in the market through subsidy, coupled with half of the expected

power from gas-fired power plants not entering the power pool will cost Ohio’s

consumers $16 million a year in added power generation costs. Add to this number

$198 million a year in subsidy payments and $157 million a year in capacity market

charges that will be added by PJM Interconnection in response to this bailout results in

$1.4 billion in added costs in the four years from 2020 to 2023, or $356 million a year.

PJM’s modeling indicates that if the nuclear plants close and all of the expected

gas-fired power plants come online Ohio’s consumers will benefit from $1.3 billion in

power generation savings by 2023. The opportunity cost, which is the difference

between these two scenarios, $1.3 billion in savings versus $1.4 billion in added costs,

is $2.7 billion or $675 million a year.

Core Problems with Amended Substitute House Bill 6

The problems in House Bill 6 are so fundamental and numerous that I do not see how

the bill can be fixed or how an altered bill can be useful economic development policy.

The reason is that the assumptions made in this bill about how markets work are

nonsense.

House Bill 6 is reacting to the competitive failure of nuclear power as a near term

political issue. And, if the problem were merely political, a deal could be cut.

Unfortunately, the challenge presented by the two upside-down nuclear power plants in

Ohio is fundamentally an economic problem.

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There is a solution to the competitive problems of FE’s two nuclear plants and

that is to allow the bankruptcy process to work and ensure that whatever entity that

purchases the plants out of bankruptcy has no connection to FE. In other words, do

what FE did not do when Ohio embarked on establishing competitive electricity

generating markets. PJM Interconnection’s Independent Monitor stated that the plants

are losing $98 million a year. The modeling commission by Paul M. Sotkiewicz by the

American Petroleum Institute indicates that much of the drag on the financial

performance of nuclear plants is debt.22 If the debt load was either eliminated or greatly

reduced through the bankruptcy process the plants could be profitable. Bankruptcy

provides the only chance to establish the real market value of the plants.

The members of the legislature should understand that markets will beat politics

over time because investment moves to avoid higher prices and seek higher returns.

And what the drafters of House Bill 6 get wrong is their understanding of how

competitive markets work. Investment in new sources of power generation by private

sources of capital will not take place when the state government denies investors

opportunities to compete against existing firms. House Bill 6 is lemon socialism and

crony capitalism.

Ohio House Bill 6 is truly bad legislation and a very expensive bailout.

22 Sotkiewicz, Paul M. The Market and Financial Position of Nuclear Resources in Ohio. E-cubed Policy

Associates, May 28, 2019 for the API (American Petroleum Institute) Ohio.