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Senate Energy and Public Utilities Committee Interim Report June 21, 2005 Table of Contents Introduction......................................................................................................................... 2 Government Oversight.........................................................................................................4 Utility Providers.................................................................................................................. 5 Marketers ............................................................................................................................ 6 Oil and Gas ......................................................................................................................... 8 Energy Cooperatives and Users.........................................................................................10T Regional Transmission Organizations...............................................................................11 Energy Reliability ............................................................................................................. 13 Energy Efficiency ............................................................................................................. 14 Alternative Energy Sources and Environmental Issues.................................................... 15 Ohio Coal.......................................................................................................................... 16 Conclusion ........................................................................................................................ 18 Appendices.........................................................................................................................21 1 Introduction In March of 2005, President George W. Bush visited Ohio to discuss the need for a national energy policy. During this visit, President Bush talked about promoting conservation and efficient new technologies, increasing and diversifying the domestic production of energy, and creating a more reliable infrastructure for the delivery of energy. The president also toured the Battelle Corporation headquarters in Columbus to see recent advances in energy-conserving products. Addressing domestic energy production, President Bush touched on the issue of coal production, stressing that Ohio would be at the forefront of the national debate for the continued development of new emission technology. The goal, he shared, is to use this valuable natural resource to its full potential―approximately another 250 years. Just a few months prior to the president’s visit to Ohio, Senate President Bill Harris (R- Ashland) illustrated the need for a statewide energy policy in his opening comments to the new General Assembly. He said, “I submit to you that a balanced budget, an improved economy, tax reform, Medicaid reform, school funding and a state energy policy are all within our reach…” Using Senator Harris’ direction, Senator Robert Schuler (R-Sycamore Township), chairman of the Senate Energy and Public Utilities Committee, is leading an inquiry to determine what, if any, recommendations are needed to establish a statewide energy policy for Ohio. Along with the other members of the committee, Senator Schuler began hearing testimony and learning from presentations by interested parties in February 2005. While these presentations focused on a variety of issues related to an energy policy, including natural gas, petroleum and conservation, one area of interest has become a reoccurring theme throughout the committee hearings—the deregulation of the electric industry. Deregulation was established through Senate Bill 3, sponsored by Senator Bruce Johnson. This legislation, enacted in July of 1999, changed the landscape of the electric 2 industry for generators, transmitters, distributors, commercial and residential users, and many others. Prior to SB 3, all prices for electric service were determined through government regulation of the industry. However, the 123rd General Assembly decided to take part in a growing national trend and move away from this regulated approach to let the open market determine the cost of electric service. SB 3 opened the market to competition during January of 2001 in a number of ways. For generation, it directed that the certified territories controlled by Ohio’s incumbent for- profit electric companies were abolished and that any electric suppliers could compete for the previously off-limit customers. Territories that covered an estimated 91 percent of all electricity users were opened to the market. Deregulation also unbundled the vertical services provided by the electric companies for generation, transmission and distribution. After the passage of SB 3, transmission services had to be moved to a federally-approved transmission system, two of which currently operate in Ohio: the Midwest Independent Transmission System Operator, Inc. (MISO) and the Pennsylvania, New Jersey and Maryland (PJM) Interconnection. With the demand for electricity in the current high-paced world, the General Assembly wanted to keep electric service both reliable and affordable when competitive service was initiated. To ensure that the there was no flash cut in prices with the start of deregulation, SB 3 put in place a market development period (MDP) of five years to permit new markets to develop. During this time, residential users would experience a 5 percent reduction in generation cost, while incumbent utilities were permitted to collect transition costs from both utilities customers and former customers who had switched generators. As the close of the MDP approaches on December 31, 2005, approximately 22 percent of Ohio’s residential users have changed generation services. Most of the switching occurred in Northern Ohio. The Public Utilities Commission of Ohio (PUCO) has continued to work with utility companies to bring the reliable service sought under deregulation through its approval of Rate Stabilization Plans (RSPs). The PUCO hopes 3 RSPs will provide continued stability after the end of MDP, allowing competitive markets to continue to develop in Ohio. Government Oversight Throughout the committee meetings, members have heard from government officials regarding the level of oversight needed for deregulation. Testifying before the committee, Chairman Alan Schriber said the PUCO is committed to keeping Ohioans connected to safe, efficient and reliable public utilities services. Since the PUCO regulates a wide variety of public utilities, the services it provides affect every household and business in Ohio. Chairman Schriber testified that over the past four years, the PUCO has monitored the development of a competitive electric market and worked to ensure that Ohio’s electric customers do not face “sticker shock” from rates when the MDP ends in December of 2005. Four major electricity providers in Ohio have filed RSPs for the next three years. Chairman Schriber said RSPs provide rate stability for customers, financial stability for electric utilities to ensure reliable service for customers, and promote further development of competitive markets. He added that the establishment of these plans was supported by the General Assembly in an October 2003 report, which encouraged the PUCO to “continue to take the necessary steps, whether by rule or a request for legislation, to ensure that a healthy competitive market is in place before full electric competition begins.” Ohio Consumers’ Counsel (OCC) Janine L. Migden-Ostrander also said much of her work in recent months has been focused on electric restructuring and the end of the MDP. “While the OCC acknowledges that the competitive market has been slow to develop, we believe barriers still exist,” Counsel Migden-Ostrander said. She added that the RSPs proposed by the major electric companies are not the answer and that she believes they harm residential consumers and violate Ohio’s electric choice law. 4 In regard to natural gas, Counsel Migden-Ostrander said Ohio’s gas program is one of the best in the nation. Currently, she said, 50 percent of customers of large utilities have switched to alternative suppliers. The OCC also supports the continued development of natural gas choice programs, while working to identify and secure improvements to existing choice programs to increase customer participation and savings. Utility Providers Although electric utility providers did not directly offer their opinions on deregulation and regulation, one clear theme did emerge from their testimonies. Each witness pointed to the uncertainty that utilities face now that Ohio is revisiting its energy policy. This uncertainty, witnesses said, is keeping them from investing more in Ohio. Kevin Walker, president and chief operating officer of American Electric Power (AEP) Ohio, said AEP announced plans to add baseload generation by 2010. The baseload generation AEP proposes to build will take the form of an Integrated Gasification Combined Cycle (IGCC) clean-coal plant. More than 1,200 acres in Meigs County, owned by Columbus Southern Power, have been identified as a potential site for this construction. However, AEP would like to have the assurance of cost recovery before making a large investment in Ohio. “It is in the best interest of Ohioans that a process be developed to facilitate and answer questions well before the end of the rate stabilization plans,” Mr. Walker added. Another witness said investors need more certainty because generating plants