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What Happens When Deregulated Utilities Own Generation?

May 20, 2015 By Josh Kessler

One of the foundational principles of deregulation is that power generation companies must compete with one another to ensure that their prices are in line with market prices. If they cannot profit by doing so, they must choose to either operate at a loss or opt not to operate for a period of time. To ensure that power companies “play fair,” deregulated states required utilities to divest their generation assets. However, large generators can avoid this requirement by creating separate subsidiaries for their competitive power generation and regulated power generation businesses and promising that the divisions will run independently and not collaborate with each other.

The Environmental Defense Fund (EDF)’s blog explained how FirstEnergy, which owns 10 regulated utilities and numerous power generation assets in the Midwest and Mid-Atlantic, removed some of its coal-based assets from a recent energy auction that determined the price of wholesale power in the region. EDF suggests that the company did so intentionally, reducing the power generation supplies bid into the auction in order to increase prices for its other generation assets that did participate in the auction. At the same time, the company neglected to bid energy efficiency into the auction, which would have served to decrease the overall demand for power and therefore suppress prices for all assets participating in the auction. The Public Utility Commission of Ohio (PUCO) ordered First Energy to include these assets in the auction, and the company responded with a campaign to “freeze and gut the state-mandated energy efficiency programs,” writes EDF.

Meanwhile, since 2012, the company has been receiving $300 million per month to operate these plants with the assumption that the plants would operate continuously – but they have not been doing so. The company also requested a bailout for its plants in the form of an above-market-price power purchase agreement. This would have left customers on the hook for the company’s decision not to upgrade or close the plants and could have affected prices across the entire PJM Interconnection region. The PUCO has since rejected the proposal, and it is investigating the company for not properly separating its regulated and deregulated businesses. The company was also investigated for market manipulation in 2012, according to a post on StopPathWV.

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