FERC Clarifies “Captive Customers” in Rescinding Affiliate PPA Waivers
May 12, 2016
On April 27, 2016, FERC rescinded waivers for two long-term power agreements that FirstEnergy Corp. (“FirstEnergy”) and American Electric Power Co. (“AEP”) had signed with their affiliated coal generation facilities. FERC granted a Complaint filed by competing generators who had argued that the contracts were “anticompetitive” and would unreasonable force captive Ohio ratepayers to keep “uneconomic coal plants” open.
FERC’s regulations, 18 C.F.R. §35.39(b), require that regulated utilities with captive customers demonstrate to FERC that power purchase agreements (“PPA”) between it and any of its affiliated power generation entities essentially are market-based. Utilities, however, can seek prior FERC approval that the requirements in Order No. 697 do not apply to a particular affiliate transaction. On February 5, 2014, FERC granted FirstEnergy and AEP a waiver of the Commission’s affiliate power sales restriction based, in part, upon representations that the utilities did not have captive retail customers.
The Electric Power Supply Association, the Retail Energy Supply Association, and 3 electric generators (“Complainants”) argued in a January 27, 2016 filing that FERC should rescind the subject waivers. They contended that due to fundamental changes in circumstances during the past 2 years, the 2014 waiver was now unjust, unreasonable and unduly discriminatory. According to Complainants, the utilities are not entitled to the waiver, in part, because they have captive customers (i.e., customers that cannot avoid charges). Complainants contended that the affiliate PPAs would saddle Ohio retail consumers with charges of between $1.9 billion and $3.1 billion over an 8-year period . . . even if the retail customers were taking service from a competitive supplier. Complainants requested that FERC instead review the subject PPAs under Section 205 of the Federal Power Act and applicable FERC affiliate precedent.
The affected utilities defended their FERC waivers, in part, by arguing that FERC should defer to the judgment of the Public Utility Commission of Ohio (“PUCO”) regarding the justness of the PPAs. On March 31, 2016, the OPUC had approved a settlement which, in part, had accepted the subject PPAs. Moreover, AEP and FirstEnergy argued that Ohio retail customers were not captive customers of the utilities because there are retail choice programs in Ohio. As a result, they argued that FERC rules should not prohibit the affiliate PPAs because there is no potential for affiliate abuse.
FERC granted the Complaint in Docket No. EL16-33-000 and rescinded the waivers of the affiliate PPAs. FERC ordered that these contracts be reviewed by FERC to evaluate whether there was the potential of affiliate abuse. Until such review is complete, AEP and FirstEnergy would be prohibited from making any sales under the affiliate PPAs.
FERC agreed with Complainants that the non-bypassable charges associated with the affiliate PPAs represented a reportable change in circumstances from the conditions which existed when the waivers were granted in 2014. Although Ohio retail customers have a statutory right under Ohio law to choose their retail electricity supplier, they are nonetheless “captive” because “they have no choice as to payment of the non-bypassable generation-related charges incurred” under the affiliate PPAs. (Order at ¶ 57). FERC rejected the restrictive characterization of Ohio customers as being non-captive simply because they could select an alternate retail supplier, in part, because such an interpretation would be inconsistent with the precedent established in FERC’s Order No. 697 and 697-A. FERC set the refund effective date for the PPAs to January 27, 2016, the date of the complaint.
This order clarifies that “captive customer” does not simply mean a retail customer that is prevented from choosing an alternate retail electricity provider. FERC held that even customers that may choose an alternate supplier may be deemed to be “captive” with regard to an affiliate PPA that is non-bypassable. It is noteworthy that FERC took this action to protect retail customers even though the PUCO had previously accepted the affiliated PPAs as part of a state settlement.
If you have any questions, please contact Charlie Zdebski at (202) 659-6605 – czdebski@eckertseamans.com.
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