The roots of the looming AEP rate hike can be traced back decades

Update: This piece has been updated to clarify statements from Jon Blackwood related to the enforcement mechanisms in place for distribution projects as compared to supplemental transmission projects.

Energy consumers across 13 states including Ohio will begin paying higher prices for electricity on June 1 – in the case of Columbus, by almost $30 per household each month – while warnings are already being issued about potential summer blackouts stemming from an overtaxed grid. 

The rate increase is one of many over the past few years from AEP Ohio, which proposed an additional hike in January. But the June rate increase is unique. Where past hikes stemmed from transmission upgrades and other surcharges, the looming June increase can be traced to shortcomings inherent in the deregulated energy generation market. Prices in the capacity auction exploded to nine times the cost of the previous auction. The cause has been attributed to a lack of supply and increased demand caused by more data centers and retiring power plants, but critics have called attention to a larger problem: the market system itself.

The Crisis of Deregulation

In a Senate session on June 22, 1999, Ohio Sen. Bruce Johnson, co-chair of the General Assembly’s Joint Committee on Electric Utility Deregulation, advocated for the latest changes to Senate Bill 3 that would open up a deregulated free market for electricity suppliers. He was one of the main advocates in the statehouse pushing for legislation supported by others, including Gov. George Voinovich. The intention was to create a market system of competition between power plants owned by different companies, ideally lowering prices and increasing efficiency. The Public Utilities Commision of Ohio (PUCO) advertised savings of up to 20 percent through the new system, and advocates believed that after the multi-year transition period that consumers would benefit from choosing suppliers. 

“There’s no question that there are going to be people out there suggesting that there are things we ought to do to clean up this legislation,” Johnson said at the conclusion of his speech. “And maybe someday that’ll be necessary. But today, after two and a half years, I stand before you and say we have accomplished the goal of being fair to electric utility companies in the state, creating an atmosphere where people can make a choice in their electric provider without fear [of] the likelihood the competition won’t actually exist.”

The struggle to transform the energy market run by utility monopolies was opposed not only by utilities but also consumer advocate groups and labor unions such as the Utility Workers Union of America. “[Between 1999 and 2004 were] the years when the long-term damage done by the philosophy of deregulation wreaked havoc on California and other states around the US,” former commissioner of the California Public Utilities Commission and UWUA worker Carl Wood said in testimony given years later. 

Industrial ratepayers, however, supported the legislation, believing it created cheaper prices for energy. Deregulated energy markets spread across the country spurred by the political trend at the time, which placed free markets above all else. 

It didn’t take long for ratepayers to see the effects of deregulation. In 2001, California’s rates skyrocketed and the state was plunged into an energy crisis with rolling blackouts across the state. San Diego, the first city in the country to deregulate its energy in 1999, saw electricity prices surge and unprecedented outages. In 2003, a massive blackout sparked in Ohio stretched through Northeast America and parts of Canada, causing regulators and corporations to acknowledge the erosion of reliability. 

Many states, including Ohio, actually prolonged their transitionary price caps to avoid drastic price spikes. Full retail energy choice wasn’t set in motion in Ohio until the passage of SB 221 in 2008. Since then, consumer advocacy groups have been calling for the legislation to be cleaned up and ratepayers have been paying the price. One Ohio State University study found that households in the state have lost at least $1 billion under the current system and another study found that the regional costs have amounted to $5 billion.

Gold Plating

That OSU study emphasized how SB 221 created an industry of middlemen energy companies and avoided the full separation between energy generation and transmission/distribution. This means that a parent company such as AEP could try to recover lost revenue in generation by increasing transmission costs and surcharges. 

”In essence,” the authors of the study wrote, “households in Ohio never saw the benefits of competition, but have instead been forced to subsidize the losses of an aging coal fleet through a system of inflated riders and surcharges on their home electricity bills.”

A majority of AEP Ohio’s rate hikes are not due to power generation but rather to “electric security plan” capital improvements (a price increase that avoids stricter oversight that would come from a “rate case” increase), a dire need for a system that graded a C- in 2021. But it’s also a move that some believe is being taken advantage of by corporations seeking to increase profits – capital improvements are guaranteed a minimum 10 percent profit.

“[A] utility should be able to recover anything it spends prudently on the distribution of electricity,” J.P. Blackwood at the Ohio Consumers’ Counsel said in a recent interview. “But then they should also make a profit on that. … We find it a bone of contention about the level of profit.” 

One problem that arises is the issue of “gold plating.” If a company is guaranteed a percentage return, they’ll try to spend as much as possible to hike up that return. When this occurs on distribution projects, Blackwood said, it is subject to regulation from PUCO, which can audit the spending by the utility for prudence and necessity. This is not the case with supplemental transmission projects, which involve high-voltage infrastructure that moves electricity long distances. “There’s really nobody regulating that spending,” Blackwood said. “When you have a rate case that kind of takes care of things at a more local level, you have someone reviewing and regulating, but these expenditures are not really being fully regulated by the state, not by the FERC, not by the PUCO. They’re basically unregulated.” 

In September, the Ohio Consumers’ Counsel made a filing against the $332 million phase 3 of the gridSMART project, a joint initiative between PNNL, AEP Ohio, and Battelle Memorial Institute ostensibly aimed at improving efficiency, reducing electric costs to consumers, and improving grid reliability. “Despite the big ask, there is no evidence that AEP Ohio’s past gridSMART investments (Phase 1 and 2) have provided meaningful benefits for consumers,” the counsel wrote. The phase 3 project would install advanced metering systems throughout Ohio, which AEP claims would provide more in-depth data for customers. PUCO approved the project in December.

The Free Market and its Discontents

The June rate hike doesn’t have anything to do with upgrades, however, but instead the shortcomings of Ohio’s deregulated energy market. Every year, auctions are held for power capacity through the Regional Transmission Organization (RTO). Ohio is in the PJM RTO and was caught off guard when prices in the latest capacity auction rose to more than 800 percent higher than the previous year. The RTO and utilities claimed that the increase was due to increased demand from places such as data centers. Critics, however, say this alone doesn’t account for that large of an increase.

In September, a complaint was filed with the Federal Energy Regulatory Commission by the Sierra Club, the Natural Resources Defence Council, Public Citizen, Sustainable FERC Project, and the Union of Concerned Scientists. The filing claimed that the 800 percent spike was largely caused by the non-participation of important energy suppliers in that auction. The reason for this exclusion was due to the fact that PJM makes participation in the auction optional for power plants operating under Reliability Must Run (RMR) arrangements, a system that subsidizes aging power plants in case they’re needed in an emergency, therefore increasing capacity.

“The non-participation of RMR units in PJM’s most recent auction contributed significantly to the dramatic increase in capacity prices,” the complainants wrote, pointing to an independent study published in August by Synapse Energy Economic, Inc. that found four generating units – Brandon Shores units 1 and 2 and Wagner units 3 and 4 – were subject to RMR arrangements, but chose not to participate in the capacity market. 

“Importantly, these RMR units did not participate in the capacity market as supply side resources, dramatically reducing supply in the already-constrained BGE LDA (Baltimore Gas and Electric’s service territory zone),” the filers wrote. This omission from the market artificially decreased the supply and increased the cost. The increased rates born by consumers will be making up for energy that will already be available from those RMR plants. The Synapse study estimates that PJM’s rules amount to $5 billion in costs to consumers. 

In December, Pennsylvania Gov. Josh Shapiro filed a complaint at FERC seeking to lower the auction’s price cap. In April, FERC approved PJM’s proposal for a price cap and floor for its next two capacity auctions. The proposal sets a $325/MW-day price cap and a $175/MW-day floor, reducing the former cap of $500/MW-day. Although consumer advocates are critical of a price floor, the decision is just one sign that the legacy of deregulation continues to be challenged.

The day before I spoke to Blackwood, Ohio Gov. Mike DeWine signed into law House Bill 15, which takes a step backward from the 2008 legislation that opened up the retail electricity market. “It is a big deal,” Blackwood said. “It, in many ways, undoes the 2008 legislation that created security plans in the first place and had other factors that were favorable to utilities.” 

Doing away with electric security plans alone could halt future rate hikes and surcharges and that have plagued customers in recent years. 

Towards a New Electricity

Although America’s electricity system is complicated, the story is nonetheless a familiar one. When markets were opened up to competition in hopes of creating affordability and efficiency, consumers were instead met with monopolies, higher costs, and, as the case of former PUCO chair Sam Randazzo’s bribery case showed, increased political power for those monopolies.

“Nothing in the history of US deregulation suggests probable benefits for domestic customers,” the authors of Democracy and Regulation: How the Public Can Govern Essential Services wrote in 2003, pointing to cable television prices, telecommunications, and even the residential prices of natural gas, all of which drastically rose in price amid 1990s deregulation. The solution proposed then by the authors remains relevant today: Open up the system to prioritize public participation and place public interests over those of private companies.