Office of the Ohio Consumers' Counsel

Executive Summary

Ohio has faced exceptional challenges in implementing a competitive electricity market since the 2005 end of the statutory Market Development Period. The Public Utilities Commission of Ohio (PUCO), realizing that very little residential choice activity had occurred, implemented such interim measures as utility-designed rate stabilization plans. Some of those plans have been found unlawful by the Ohio Supreme Court, which remanded them to the PUCO for further consideration.

In this restructured power market, Ohio faces the task of minimizing costs and risks for ratepayers while creating a reasonable degree of certainty as to short- and long-term power prices and an opportunity for a competitive market to develop after the expiration of the interim rate stabilization plans (mostly after 2008). Achieving those objectives will require the following steps:

• Fixing the wholesale procurement process, so that customers who continue to receive power supply through the utility as the Standard Service Offer (SSO) pay prices that reflect prudent acquisitions from the competitive market.
• Ensuring that supply costs are fully recovered through the SSO and that the SSO charges are fully bypassable by customers who switch to alternative retail suppliers.
• Diversifying the SSO supply, to minimize short- and long-term costs and risks for SSO customers.
• Planning, to ensure adequate, low-cost, reliable and stable regional power supply and the availability of those supplies for Ohio consumers.

The proposed tools for regulators to meet this goal include the following:

• A series of competitive generation procurements of SSO power supplies, for varying purchase dates, contract lengths (from less than a year to more than a decade), and pricing terms, including fixed prices and potentially formulae tied to market fuel prices or other indices.
• Acquisitions of specific types of resources—new coal capacity, renewables, and energy efficiency—to supplement the generic full-requirements supplies in the SSO.
• Portfolio standards to ensure that all power suppliers are contributing to the development of clean and efficient resources that will provide environmental benefits, reliability, price stability and lower bills to all customers.
• A statewide planning process to determine needs for capacity and energy supply statewide and regionally, and establish priorities for SSO acquisitions.

The diversified mix of supplies for SSO, like a diversified investment portfolio, will protect customers from excessive swings in future market prices, as well as providing opportunities for the least-cost development of resources needed for reliability, price stability, and/or bill reduction.

The SSO portfolio should be divided between long-term supply contracts of five to twenty years and short-term contracts of up to three years. As discussed in Chapter I, a mix of 60% of energy supply from long-term contracts and 40% of energy (plus a majority of capacity and ancillary services) may be a reasonable mix of resources.

The long-term supply contracts would comprise the following:

• existing supplies for fixed blocks of power,
• new clean baseload supply (such as integrated gasification combined-cycle),
• renewables,
• energy efficiency, and
• existing supplies for fixed percentages of the remaining SSO load.

The short-term contracts would cover fixed percentages of the SSO load not served by long-term supplies.

The long-term supply contracts would both stabilize prices and allow developers to build new capital-intensive resources, preferably in Ohio, which are difficult to finance based only on projected revenues from short-term markets.

Figure 1 illustrates the assembly of SSO contracts over time.¹ The top section represents a series of short-term full-requirements contracts, starting with a one-year contract serving 2009, a two-year contract for 2009–2010, and a three-year contract for 2009–2011. As each of these contracts expires, it is replaced by a new three-year contract. After 2011, each year is served by three short-term contracts, procured one, two and three years earlier.² Below the short-term contracts is a block of contracts for new renewable or other preferred new resources, which are acquired over time, and a variety of short-term contracts to fill in the supply requirements until the later renewable contracts enter service. Below the renewables is a group of baseload contracts, starting with short-term contracts for baseload power from existing plants or firm system supply, followed by contracts with new plants to ensure development of adequate capacity. The bottom block represents one or more long-term contracts for intermediate supply, similar to the baseload contracts.

Both the SSO portfolio and competitive suppliers should be required to supply a portion of their loads from renewables and energy efficiency. These portfolio standards would grow over time. For illustrative purposes, as described in Chapters V and VI of this report, the standard might be set at the following percentages of energy delivered:

The Renewable Portfolio Standard (RPS) for the SSO could be satisfied by some combination of the renewable portions of the long-term SSO portfolio and requiring the suppliers of short-term full-requirements SSO to include renewable energy (or equivalent credits) in their supply. Competitive retailers would probably meet their RPS obligation via market purchases of renewables (or credits). The Energy Efficiency Portfolio Standard, for both SSO and competitive retail suppliers, would be satisfied by purchase of energy efficiency credits from a program administrator, such as the Ohio Office of Energy Efficiency.

¹ The specific values and timing of the resources in the integrated portfolio would be developed over time, reflecting market conditions and regulatory decisions regarding risk and other objectives. The values in Figure 1 are simply illustrative.

² Each of the contract blocks shown could be divided into several smaller slices, to allow for multiple providers and multiple procurement dates. Each slice, regardless of megawatt size, would be for three years.