It's time to retire, not bail out, OVEC's ageing and expensive coal plants

The Indiana legislature recently passed HB 1414, which will require Indiana electricity ratepayers to continue to pay for power produced by two coal-fired power plants in southeast Ohio and Indiana. The two plants, Kyger Creek and Clifty Creek, are owned by the Ohio Valley Electric Corporation (OVEC). They were originally built sixty-five years ago to provide power to the now-closed Portsmouth Uranium Enrichment Facility. Both plants are uneconomic, with total costs far exceeding the current and expected future costs of obtaining power through the PJM and MISO markets.

HB 1414 was introduced in the Indiana General Assembly on January 15, 2020 with the avowed purpose of preserving the status quo for a year pending the findings and recommendations of the recently-created 21st Century Energy Policy Task Force for consideration by the legislature and the governor in 2021.

However, the bill quickly came under fire as a thinly disguised effort to bail out the Indiana coal industry and slow to a crawl the transition away from coal-fired generation by the state's electric utility sector. In particular, the bill was criticized for imposing regulatory roadblocks on the retirement of coal-fired power plants and for requiring utilities to follow power-plant planning and operating practices that would increase and extend the use of coal and thereby increase significantly both utility costs and customer rates.

After sometimes stormy and acrimonious debate, HB 1414 narrowly passed the Indiana House on February 3, 2020 by a vote of 52 to 41 substantially unchanged from the form in which it was originally introduced.

However, in the Indiana Senate, HB 1414 was amended to water down the regulatory roadblocks to coal plant retirements as well as eliminate a controversial provision that would have required regulators to allow utilities to maintain coal inventories at power plants at up to twice their normal levels. During this debate, the Senate sponsor of HB 1414, Senator Mark Messmer (R-Jasper), publicly proclaimed that, as amended, "There is nothing in this bill that has the potential to raise rates."

During conference committee to reconcile the differences between House and Senate versions of the bill, HB 1414 was further amended to rebuild roadblocks to retiring coal plants but not to authorize higher coal inventories at operating plants. After contentious debate in both chambers, the conference committee report version of HB 1414 passed the House on March 10, 2020 by a vote of 56 to 37 and the Senate by a vote of 28 to 21. The bill became law with Governor Holcomb’s signature on March 21, 2020.

One of the more contentious provisions of HB 1414 relates to OVEC’s two large, coal-fired plants built in the mid-1950s that are defined in the bill as "legacy generation resources." OVEC is a non-regulated affiliate of fifteen regulated electric utilities operating in four states (Indiana, Kentucky, Ohio and West Virginia) that are known as "Sponsoring Companies." These "Sponsoring Companies" are required by contract to purchase allocated shares of the generation from the two plants, the Kyger Creek plant located near Portsmouth, OH and the Clifty Creek plant located near Madison, IN. Two "Sponsoring Companies" operate in Indiana—Indiana Michigan Power Company (“I&M”) and Southern Indiana Gas & Electric Company dba Vectren Energy Delivery (“Vectren”), which are allocated, respectively, 7.85% and 1.5% of the OVEC plants' coal-fired generation.

The provision of HB 1414 relating to these two "legacy generation resources" reads as follows:

• A public utility may not terminate a power agreement with a legacy generation resource in which the public utility has an ownership interest unless the public utility provides the commission with at least three (3) years advance notice of the termination. The commission shall determine the reasonable costs incurred by the public utility under the power agreement and allow the public utility to recover those costs in a fuel adjustment charge [italics added] proceeding under IC 8-1-2-42. For purposes of this subsection, a public utility's reasonable costs related to a legacy generation resource means those costs, including deferred costs, allocated under a power agreement approved by the Federal Energy Regulatory Commission and relating to a legacy generation resource.

This provision of the bill has been criticized primarily for two reasons:

1. The Clifty Creek and Kyger Creek plants are old and uneconomic coal-fired power plants that should be retired as soon as possible and not afforded special treatment in order to extend their lives; and
2. Contrary to the public claim of HB 1414’s Senate sponsor Sen. Messmer central to the bill's approval, the cost recovery language relating to these two legacy generation resources definitely has "the potential to raise rates" for the retail customers of I&M and Vectren.

The Institute for Energy Economics and Financial Analysis (IEEFA) has looked at the financial impact of the OVEC bailout legislation (HB 1414), and has found:

• Indiana customers of I&M and Vectren could pay at least $128 million above the cost of market power to keep the two plants in service between 2020 and 2026. A longer bailout would be even more expensive.
• OVEC’s cost of power increased by nearly 60 percent from 2007 to 2018, in large part due to declining generation and ill-advised capital expenditures for pollution control equipment made after the markets were rendering the plants uncompetitive.
• Market conditions, including low natural gas prices and increasing competition from declining cost renewable resources, will continue to undermine the viability of the plants for years to come, potentially increasing the costs of the bailouts.
• The plants are not needed for grid reliability.
• A more prudent financial use of state resources would be to retire the two plants, to encourage development of renewable resources and end-use efficiency, and to provide fiscal support to the local governments during a multi-year transition period, as well as supporting workers who would be laid off.