FirstEnergy Corp.'s decision to close its small Ohio coal power plants could lead to soaring power prices
Published: Thursday, February 16, 2012, 7:00 AM Updated: Thursday, February 16, 2012, 10:43 AM
View full sizeThe stacks from the FirstEnergy Corp. coal-fired power plant are seen rising above a row of homes in Eastlake. FirstEnergy Corp. says it will shut down six older, coal-fired power plants in Ohio, Pennsylvania and Maryland, affecting about 530 employees on Sept. 1. The Akron, Ohio-based utility said Thursday that the move is related to new environmental rules.
CLEVELAND, Ohio -- FirstEnergy Corp.'srecent decision to shut down four smaller, coal-burning power plants has sparked a storm of speculation that electric rates here could soar within three years.
The company has dismissed the conjecture as Wall Street chatter by analysts hoping the company's stock prices will move up along with the price of power.
FirstEnergy's power plants have not run regularly for some time and generate only a small percentage of FirstEnergy's total output, so the talk of price spikes has seemed improbable and premature.
Also, FirstEnergy now owns additional power plants in Pennsylvania that it plans to modify to generate additional power - electricity that in theory could flow west into Ohio.
The common sense analysis would conclude that the loss of the small power plants would have little effect.
But the in the arcane world of deregulation, Internet-based auctions determine power prices, and they don't necessarily make common sense.
Conducted under federally authorized rules, the auctions not only determine power prices but also the cost of building additional power plants, if needed. By federal rules, the industry must maintain a reserve capacity to generate a level of extra power that is 15 percent above the demand during peak use days, such as a hot day in August.
The issue is whether FirstEnergy's decision to close rather than upgrade its old plants to meet new Environmental Protection Agency rules might tip the balance between demand and supply.
The Public Utilities Commission of Ohio is concerned enough to have intervened in a case well under way before the Federal Energy Regulatory Commission that could have a huge bearing on what Ohio consumers will pay because of a supply shortage.
The case was filed last year by PJM Interconnection, the private company that controls power flows over much of the East Coast and now Ohio as well.
PJM has asked the FERC for authority to change the rules about how it determines whether a region has enough power plants and how money should be raised to build new power plants.
The outcome of the case could affect a special PJM auction set for May - and end up costing Ohio rate payers hundreds of millions of dollars in new charges. The auction is not directly about power prices.
Its purpose is to determine how much electricity will be needed three years in the future, June 1, 2015, and then determine through bidding how much it would cost to build additional power plants or additional transmission lines to import power into Ohio, if it is needed.
Some analysts have called the auction "contrived," and its has forced New Jersey into a federal court battle with PJM over the process.
Every power supplier, whether it is a utility or just a middle man that buys power wholesale and sells it to customers, has to pay a share of that cost to build additional plants, based on how much power it sells.
PJM collects those fees and distributes them back to power plant owners.
The extra costs would show up in the bids at the next auction for power itself, experts say, and then in customer bills.
FirstEnergy spokesmen maintain that predicting what power prices will be a couple of years in the future is just too speculative.
"It's simply not possible to predict an auction price, whether for a car, an antique or electricalgeneration," said spokesman Todd Schneider.
Predicting the outcome of May's capacity auction is just as difficult, analysts say.
But because existing transmission lines in and out of Ohio are already pretty busy and because other Ohio utilities are joining PJM, it is pretty clear to some analysts that prices in the May capacity auction probably will be higher than today.
"I do believe prices are likely to rise from last year's level in PJM West (western Pennsylvania and Ohio), because American Electric Power and Duke Power of Ohio are joining PJM," said Hugh Wynne, senior analyst with Bernstein Research in New York.
Wynne said AEP will be 2,000 megawatts short of power. He said Duke is also closing a large power plant.
The PUCO fears that the result could be that PJM will treat FirstEnergy's Ohio territory as an island as far as reserve generation capacity - ultimately making power much more expensive here.
"The planned retirement of about 2,200 megawatts of generation in the FirstEnergy zone and the formation of a separate pricing zone could have a dramatic effect on electric prices for Ohio consumers in FirstEnergy's region," PUCO's lawyers wrote in their petition to the FERC
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