The Public Utilities Commission of Ohio (PUCO) is set to determine whether FirstEnergy Corp. exceeded the three percent “cost cap” contained in Ohio’s renewable energy portfolio standard. Pursuant to Ohio law, electric distribution utilities (EDUs) making sales to Ohio retail customers must ultimately achieve 12.5 percent of sales from renewable energy resources by 2025; however, EDUs are excused from the requirement if the reasonably expected cost of compliance exceeds the reasonably expected cost of otherwise producing or acquiring the requisite electricity by three percent or more.

A third party had claimed that FirstEnergy exceeded the cost cap mandate relating to RECs it purchased between late 2009 and the end of 2011. In response, the PUCO selected two independent auditors to conduct a financial audit and a management/performance audit of FirstEnergy’s renewable energy spending. The PUCO released the reports on August 15, 2012.

The financial audit report provides different methodologies that the PUCO might consider adopting in calculating the cost cap. The management report found that while FirstEnergy may not have violated the letter of the law, the company paid “unreasonably high prices” for RECs that it purchased from FirstEnergy Solutions, its unregulated affiliate, in comparison to prices paid by other EDUs all over in the country. Below is a brief summary of each auditor’s report.

Goldenberg Report – Financial Audit

  • Audit objective and scope:
    • The objective of the audit was to verify the mathematical accuracy, to review FirstEnergy’s Renewable Portfolio Standard (RPS) compliance and status relative to the cost cap, and to develop a “range of alternative methodologies” to calculate the cost cap.
  • Findings and conclusions:
    • FirstEnergy “consistently has a significantly higher” Rider AER than other Ohio EDUs.
    • FirstEnergy allocates charges by customer class using each class’ “loss factor” to the detriment of smaller customers.
    • FirstEnergy “decided rider should cover costs over a period longer than a quarter” despite the PUCO order providing for quarterly recovery.
    • FirstEnergy has not shown that it attempted to reconcile the rider for any period to date.
    • FirstEnergy “attempted to recover estimated annual compliance obligation” as opposed to estimated costs of RECs plus administrative costs and carrying costs.
    • It appears one method FirstEnergy employed to estimate compliance costs was to simply estimate compliance to be the maximum allowable cost.
  • Status relative to the three percent provision:
    • The auditor offers alternatives “not required by current law.”
      • There is no specific guidance in Ohio law regarding the timeframe for calculation or the definitions of reasonably expected cost of compliance and reasonably expected cost of otherwise producing or acquiring the requisite electricity.
      • Calculation of reasonably expected cost of compliance is based on “expected costs;” therefore, the auditor believes this is forward-looking.
    • Forecasting compliance costs is challenging because it requires load forecast and REC price forecasting.
    • Alternative methodologies:
      • Determine the reasonably expected cost of compliance with RPS and divide it by the reasonably expected cost of generation to the customer. There are three components: timeframe, compliance costs and generation costs.
      • Various timeframe options suggested by auditor.
      • Reasonably expected cost of compliance forecasted:
        • Ohio law implies that the reasonably expected cost of compliance must be forecasted.
          • Could move compliance costs to year intended without force majeure.
      • Cost of generation forecasted with regard to the reasonably expected cost of otherwise producing or acquiring the requisite electricity:
        • SSO generation prices.
        • PUCO could adjust for “benefits of renewable generation from downward pressure on PJM wholesale prices.” The auditor believes these savings could be estimated.
  • Three percent provision calculation:
    • The auditor recommends that each company develop a calculation for 2013 of the balance of the SSO period.

Exeter Report – Management/Performance Audit

  • Solicitation results and procurement decisions:
    • FirstEnergy paid reasonable prices for All-States All Renewables RECs, which were consistent with other regional REC prices.
    • While lower prices would have been available had fewer RECs been purchased under RFP 1 and more purchased under RFP 3, FirstEnergy’s decision to purchase the bulk of the 2009, 2010 and 2011 requirements under RFP 1 was not unreasonable.
    • FirstEnergy paid prices for All-States SRECs that are consistent with regional pricing.
    • FirstEnergy did not establish a maximum price that it was willing to pay for In-State All Renewables RECs prior to issuing RFPs.
    • FirstEnergy paid unreasonably high prices for In-State All Renewables RECs.
    • Prices for In-State All Renewables RECs exceeded the reported prices paid for non-solar compliance RECs everywhere else in the country between July 2008 and December 2011.
    • FirstEnergy had several alternatives available to the purchase of high-priced In-State All Renewables RECs, but none were considered or acted upon.
    • FirstEnergy should have been aware that the prices bid by FirstEnergy Solutions reflected significant economic rents and were excessive by any reasonable measure.
  • Recommendations:
    • The auditor recommends that the PUCO examine the disallowance of excessive costs associated with purchasing RECs to meet the FirstEnergy’s In-State All Renewables obligations.
  • Recovery of ACP charges:
    • The purpose of the ACP is to set a limit on the exposure of retail customers to the costs of AEP’s compliance. Not allowing recovery of the ACP creates a significant deterrent to regulated utilities from employing the ACP rather than procuring RECs, even at prices in excess of the ACP.
  • PUCO could consider approving the purchase of RECs for the retail suppliers of SSO before the RECs contracts are signed. This would eliminate some issues in the context of the management/performance audit.

The above are limited summaries of the audit reports; however, both audits are available online in their entirety. As to the case status, parties may intervene and file testimony in the case by November 13, 2012, followed by a prehearing conference scheduled for Tuesday, November 20, 2012. Finally, the formal hearing will commence on Tuesday, November 27, 2012, at the PUCO.