Electricity: How Ohio Shut Down a Manufacturer and Allows Its Citizens to Pay Too Much

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TransmissionLines1by Tim Danahey

It is always interesting to speculate on the relationships between government officials and business. The relationships often results in rules and regulations that provide substantial benefits to businesses and leave citizens paying the benefits government bestows. It can also lead to the loss of jobs for workers who do not have the same relationship with government officials. This story talks about relationships and who pays for them.

Ormet Corporation is an Ohio-based company that smelted aluminum in southeast Ohio for fifty-seven years. It was always open as it endured recessions and prospered with American manufacturing. It stayed open to varying degrees during fluctuations in aluminum prices. However, it filed for bankruptcy in February, 2013 and today a skeleton crew of security guards and maintenance personnel ends its operations.

It once thrived and recently employed over 1,000 members of the United Steelworkers in well-paying jobs with benefits. It’s operations were critical to the economy of the depressed southeast Ohio region. Much of its productive capacity has gone overseas.

The easy way to explain its fate would be to blame overpaid union workers and, no doubt, many people will incorrectly do so. We can shrug and accept the outsourcing of well-paying American jobs as inevitable – a natural result of U.S. Trade policies..

That would be easy but that would also be incomplete. There are questions about the rates charged by American Electric and Power’s (AEP) and sanctioned by the Public Utility Commission of Ohio (PUCO) (). The questions reach back to the rates charged to all electric consumers in Ohio and if the state’s government is actively condoning massive overcharges through current legislation.

In fact, the questions have national implications.

The cost of smelting aluminum requires massive amounts of electricity. It represents 40% of the total costs of aluminum production at Ormet. It is a large factor but it may have been surmountable. The United Steelworkers offered major concessions as their share to keep the facilities open. A Minnesota-based private equity firm was willing to invest $221 million to buy Ormet. Prices of aluminum were returning to relatively normal levels.

One thing was absent: the ability to negotiate bulk rates for electricity with AEP through the PUCO.

Since Ormet was a massive consumer of electricity, it negotiated its bulk rates with AEP and the PUCO. It’s rates were discounted to reflect its consumption. Volume buying, if you will. In July, 2009, Ormet requested rate relief that PUCO states it was, “…a unique rate arrangement for electricity that totaled $308 million of which all is to be subsidized by American Electric Power-OHIO (AEP-Ohio) ratepayers”. Governor Strickland intervened and a deal was struck to implement negotiated rates from 2009 to 2018.

The agreement was in place until June, 2013 when Ormet filed an application to amend the agreement. Ormet needed emergency relief to “emerge from a recent bankruptcy sale and to continue its operations in Ohio.”

The PUCO refused to renegotiate and Governor Kasich refused to instruct the PUCO to negotiate even though all but one of the Commissioners were his appointees.

Donnie Blatt, the District 1 representative from the United Steelworkers, provides a different perspective on the rate structures. He says the Ormet facility was paying $38 per megawatt (Mgw) hour and AEP suddenly wanted to raise it to $62 per Mgw/hour. According to Blatt, Ormet could have made the plant viable with a raise to $46 per Mgw/hour but AEP and the PUCO would not even negotiate. He voices his frustration because bulk energy rates down river in Kentucky were $39 per Mgw/hour. He states the national average for bulk electricity purchases was $30 per Mgw/hour.

According to government statistics, the average non-discounted regional electricity prices for all industrial users in Ohio’s region was $64 per Mgw/hour. In the region that includes Kentucky, the average rate was $57 per Mgw/hour. Bear in mind, these are the average rates for all industrial customers. The volume buying by major consumers of electricity qualify for sharply reduced rates. What is clear: AEP and PUCO were not offering any advantaged rate to reflect Ormet’s bulk consumption. Ormet was offered what approximates the average industrial rate.

Here is where terminology becomes important. Blatt states that, whenever AEP/PUCO “jacked up the rates” (they did it three times since 1994), they regarded the difference between the standard rate and the final negotiated bulk rate as a subsidy. The PUCO did not believe the other ratepayers in Ohio should have to subsidize Ormet any longer so Ormet ceased operations. No negotiations ensued despite pleas to Governor Kasich. Over 1,000 jobs were lost.

Even the National Association of State Utility Consumer Advocates (NASUCA) which advocates for residential energy consumers find discounted industrial bulk rates to be acceptable as a needed function of economic development. As long as the rates charged are more than the cost of producing electricity, it helps residential consumers by lowering AEP’s overhead residential consumers would otherwise have to pay.

Whether or not the rates needed by Ormet to operate constituted a “subsidy” are open to interpretation. It is also open to interpretation as to whether the ratepayers of Ohio under the direction of the PUCO have been subsidizing AEP for years. The electric ratepayers of Ohio may be paying $200 to $300 million per year too much for their electricity because of a simple law in the books that could easily be changed.

According to Jason Gilham, the Deputy Director of the Office of Public Affairs at PUCO, the rates determined by PUCO are based upon “stand alone” criteria. That means considerations outside of Ohio are not part of the rate calculation. He says, “There would be no legal basis for the Commission (PUCO) to take losses from unregulated or non-jurisdictional portions of its (AEP’s) business and apply them to an Ohio-regulated….entity”. He cites Rule 4909.15 (B) as justification and says the rule has been around since 1953 and renewed a number of times up to 1999.

What this means is: Federal income tax rates are outside Ohio’s jurisdiction. Therefore, when considering a rate application, PUCO allows the Federal income tax statutory rate of 35% to be used.

The problem is: According to a Citizens for Tax Justice publication dated April 9, 2012, AEP did not pay any taxes from 2008 to 2011. In fact, AEP’s overall corporate effective tax rate – the rate they actually paid – was actually negative. It was -6.4%. Taxpayers paid AEP.

The issue becomes: Why are the rate payers of Ohio paying the difference between 35% in the approved rate applications and the real rate of -6.4%? Based upon AEP’s 10-K report filed with the U.S. Securities and Exchange Commission, their net income before income taxes were:

Net Income Before Income Tax Expense:
2010 – $843 mill
2011 – $679 mill
2012 -$488 mill

If the tax rates were 35%, then AEP would put a total of $703 million into their rate applications as income tax expense. However, their real income tax expense was a credit of $128 million. That’s a difference of $831 million paid by electric utility customers in Ohio under the regulation of PUCO over a three-year period.

Tax rates vary and lines of business are a factor. Some aspects are regulated differently. There are legal tax gimmicks that allow corporations to delay taxes indefinitely. These are all factors. If the calculations presented are only 10% accurate, that’s still $83 million ratepayers in Ohio paid for taxes AEP did not pay over three years. PUCO approved this arrangement.

The NASUCA states, “The problem is that ratepayers never really see the benefit in later years because utilities continually invest in utility plant and current tax expense is always larger than taxes paid”.

This concept is not new. David Cay Johnston, the Pulitzer Prize-winning investigative reporter and author of “The Fine Print”, examined PacifiCorp’s electric utility in Oregon a few years ago. His research emboldened Oregon’s legislature to pass a law “requiring that electricity and natural-gas utility taxes must be paid over to government or given back to customers” according to Johnston. The law was repealed under heavy industry lobbying in 2011.

So, who is subsidizing whom? Was AEP and PUCO subsidizing Ormet by offering bulk rates below average industrial rates? More important: Are the ratepayers of Ohio subsidizing AEP for taxes they do not pay?

The jobs at Ormet may have been needlessly lost. The tragedy was Ormet was in the process of tapping natural gas on its own land and building facilities to generate its own electricity. Conceivably, they could have used excess capacity during slow times to produce power for other electric consumers. It was scheduled to be on-line in 2015 but it fell behind schedule. We’ll never know because AEP, PUCO, and inaction by Governor Kasich pulled the plug on Ormet and 1,000 well-paying United Steelworkers jobs before it could be implemented.

For the record and the irony, AEP provided the initial $1 million seed money for Governor Kasich’s “JobsOhio” project. AEP was also Kasich’s 6th largest campaign contributor according to FollowtheMoney.org. In fact, utility generating companies in Ohio and elsewhere constituted four of the top twenty campaign contributors to Kasich. The United Steelworkers have never contributed to Kasich’s campaigns.

Under the “JobsOhio” plan, Kasich abolished the state’s Department of Development and replaced it with a privatized, corporate board he appoints and chairs.

Ohio ranks 26th of 45 states listed for rate of job growth.

Tim Danahey broadcasts the “Tim Danahey Show” at www.Danahey.com

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The Tim Danahey Show started in July, 2010 at internet station Castle Rock Radio. It started as a one-day-per week endeavor and quickly grew to five days per week. The show discusses economics, government, social issues, history, and non-fiction books in a magazine format featuring in-depth conversations with guests. Politics and inflammatory conversations are discouraged as they are divisive and counter-productive. Instead, the show seeks under-reported topics and delves into facts, different perspectives, and ramifications of each perspective.