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Consumer advocates say a proposed deal involving FirstEnergy’s earnings in Ohio ignores the interests of most ratepayers.

The Office of the Ohio Consumers’ Counsel says regulators should have included revenue from a credit support rider when calculating Ohio Edison’s allowable earnings last year. A deal struck between its parent company, FirstEnergy, along with state regulatory staff and a group of energy-intensive industrial companies could let the company keep $42 million in “significantly excessive earnings” from last year, according to the state’s consumer advocate.

The Public Utilities Commission of Ohio held a hearing on the proposed “settlement” on Nov. 29. The Office of the Ohio Consumers’ Counsel presented evidence and arguments against the plan.

“The PUCO’s settlement process is contributing to the electric utilities’ subsidy culture to the detriment of the consumers who pay for it,” said spokesperson J.P. Blackwood at the Office of the Ohio Consumers’ Counsel.

The case reflects a deeper problem with the way the PUCO rules on “settlements” agreed to by only a limited number of intervenors, said Rep. Mark Romanchuk, R-Ontario. “I don’t think that’s the way we should be making policy in the state,” he said.

Making a deal?

As a general rule, the PUCO is supposed to determine whether rates for regulated utility services are just and reasonable. Current Ohio law says utilities are not supposed to retain earnings that are significantly excessive.  

The settlement in FirstEnergy’s excessive earnings case is a stipulation agreed to by FirstEnergy’s Ohio utilities, the staff of the PUCO, and the Ohio Energy Group, which describes itself as a group of 27 large companies in energy-intensive industries. Approval by the commission would basically let FirstEnergy’s Ohio utilities keep all their earnings for 2017, without having to adjust future bills for refunds or credits.

According to the stipulation, FirstEnergy’s Cleveland Electric Illuminating Company earned a 4 percent return on equity in 2017, its Toledo Edison utility earned 6.4 percent, and Ohio Edison had an 11.8 percent return on equity. The stipulating parties then agree that none of the three utilities had “significantly excessive earnings” that year.  

However, the calculations don’t account for a challenged credit support rider collected by the utility in 2017, and that money should have been included in the calculations, said regulatory economist Daniel Duann of the Office of the Ohio Consumers’ Counsel, in testimony filed with the regulators before last week’s hearing. By his calculations, including those earnings would push Ohio Edison’s rate of return up to 17.39 percent, with $42 million constituting “significantly excessive earnings.”

The credit support rider is being challenged before the Ohio Supreme Court. Oral argument in the case won’t take place until Jan. 9.

The proposed stipulation would be “detrimental to the welfare of many Ohioans and the Ohio economy,” Duann said. In his view, it would go against state policies for non-discriminatory and reasonably priced retail electric service and for the protection of at-risk populations.

It’s unclear how much arms-length dealing, if any, went into the stipulation. The Office of the Ohio Consumers’ Counsel is urging the PUCO to reject the agreement. Romanchuk is also unhappy with that case and other PUCO settlements.

“I’m just not happy with the way settlements are decided at the commission,” Romanchuk said. Currently, most settlements filed with the PUCO involve a limited number of intervenors signing onto a settlement, he noted. But usually when that happens, there’s money or some other financial benefit exchanged, such as preferential rates, he added.

In Romanchuk’s view, the PUCO should review cases and utility charges independently with the public interest in mind, as opposed to the narrower interests of utilities and certain intervenors who might get financial benefits if they go along with a utility’s plan.

Representatives of FirstEnergy did not respond to repeated requests for comment on the case, nor did they respond to a question about how the company actually used the money it collected for the credit support rider in 2017.

Justice delayed?

The regulatory file for the case allowing the challenged credit support rider actually dates back to 2014.

FirstEnergy initially wanted regulators to approve a deal that would have required its Ohio utility customers to guarantee the sale of all electricity produced by certain coal and nuclear plants. When federal authorities indicated the deal would get close scrutiny, that proposal morphed into a “virtual” power purchase agreement.

After critics challenged that idea as a $4 billion “bailout,” the PUCO staff proposed a “distribution modernization rider” in 2016. Despite the name, the utilities were not required to use any of the funds collected under Rider DMR for actual grid modernization projects. Nor did the money even have to be used by the utilities, rather than their corporate parent or affiliates. Rather, the PUCO commissioners said, the charge would improve FirstEnergy’s credit position, arguably making it easier to get credit for grid projects as and when those were approved.

Critics have said that FirstEnergy’s former credit problems were largely due to its generation subsidiaries, which filed for bankruptcy in late March. And challengers have asked the Ohio Supreme Court to rule that the charges were unlawful.

Nonetheless, FirstEnergy started collecting the money in January 2017, following an October 2016 ruling by the PUCO. But challengers could not start the court review process until that ruling became “final” a year later.

Now with oral argument slated for January 2019, a ruling in the court case won’t come until more than two years after FirstEnergy started collecting the charge. And even if the Ohio Supreme Court holds that the charges were unlawful, FirstEnergy may be able to avoid giving back any of the money, based on the court’s rulings in other cases.

A legislative fix?

Romanchuk tried to cure that problem by introducing House Bill 247 in 2017. The Office of the Ohio Consumers’ Counsel supports that bill.

Although the bill has had multiple committee hearings in the Ohio House, it still has not been reported out for a vote. Passage during this legislative term looks less and less likely, Romanchuk said.

Now he’s looking ahead to crafting a new bill to introduce in 2019. Besides fixing the refund problem, Romanchuk would like to see Ohio utilities get away from their heavy reliance on bill riders and back to more traditional rulemaking, where there would be a fuller review of utilities’ books and revenue requirements.

The current system of “single-issue ratemaking” can wind up giving utilities revenue for things that don’t lead to customer benefits, Romanchuk said. “You’re not getting something for your money.”

In his view, the credit support rider that was charged to FirstEnergy’s utility customers is “probably one of the most egregious” of those cases.

Kathiann M. Kowalski

Kathi is the author of 25 books and more than 600 articles, and writes often on science and policy issues. In addition to her journalism career, Kathi is an alumna of Harvard Law School and has spent 15 years practicing law. She is a member of the Society of Environmental Journalists and the National Association of Science Writers. Kathi covers the state of Ohio.