FirstEnergy hopes to spend $15 billion to upgrade its high-voltage transmission lines and millions more on upgrades to local power lines as a strategy to make future profits predictable while the company backs away from competitive power sales that it once saw as its future.
FirstEnergy is rebuilding its system of high-voltage transmission lines and could spend up to $15 billion on upgrades in the next few years. The company owns 24,000 miles of high-voltage power lines. AKRON, Ohio -- FirstEnergy believes rebuilding its high-voltage transmission system is the best strategy for growth and future profits.
The company is currently in the third year of a $4.2 billion renovation of portions of the grid in Ohio and Pennsylvania and expects to complete the upgrades by next year, James Pearson, chief financial officer, told analysts Monday after markets closed at a J.P. Morgan conference.
Pearson said the company had identified an additional $15 billion in upgrades it can begin making in 2018.
This means that customers may see delivery charges continue to increase, as they have in recent years.
The interstate high-voltage system is regulated by the Federal Energy Regulatory Commission, which customarily does not hold public hearings on renovation projects or upgrades of existing lines. Instead, it uses a formula to determine the rate of return -- about 10 percent. These are profits the company can then collect from customers.
Starting last year, FirstEnergy adopted formula-based rate structure "which allows for faster conversion of capital spent to earnings in cash," Pearson said.
"Overall we have identified more than $15 billion of incremental future opportunities related to reliability enhancements, which serve as a significant source of significant growth in 2018 and beyond," he explained.
Former FirstEnergy CEO Anthony Alexander announced this emphasis of power line rebuilding in the fall of 2013, on the same day the company reported lackluster third quarter earnings results.
The strategy was to "re-position" the company's business by relying less on its unregulated, competitive sales divisions at FirstEnergy Solutions. FES by that time was not doing as well as well as once expected.
The idea was to emphasize rebuilding of local and regional power lines owned by the old-fashioned regulated subsidiaries in order to pump up revenues and profits.
The new strategy put emphasis on projects in local FirstEnergy companies such as the Illuminating Co. and Ohio Edison, and in long-distance power-line companies such as FirstEnergy's American Transmission Systems, Inc.
The reasoning was simple: Growth at regulated companies can be planned and revenue increases are guaranteed, once approved by regulators.
The move was a turnaround from the company's strategy back in 2008 when it fiercely fought for -- and won -- the right to keep its power plants deregulated and free from state rate-making. The plan then was that the unregulated FirstEnergy Solutions would drive growth and profits.
That was turned on its head by the new strategy.
"The majority of our growth in the next several years will come from investments in transmission," Alexander told analysts during that 2013 earnings conference, signalling a radical change back to the past.
Pearson on Monday told analysts that FirstEnergy's two transmission line companies and 10 regulated local distribution companies "provide financial stability and contribute about 80 percent of our overall earnings."
Without naming FirstEnergy Solutions, Pearson told the analysts, "Turning to our competitive energy services segment, we continue to operate with a conservative hedging strategy and reduced risk.
"We recognize that reducing risk also means we are likely giving up some earnings potential, but we are willing to make that trade-off in return for more earnings stability...," he said.
But even this strategy will not guarantee FES's future profitability. FES owns the company's power plants. They must compete for customers in complex regional auctions to sell their electricity.
FES did not do as well as it had hoped in PJM's May auctions designed to determine the least-cost power plants, which PJM grid managers will turn to three years from today. PJM subsidizes those power plants.
Pearson said a portion of the anticipated output of the company's power plants did not "clear" the auction.
"A portion of every one of our generating units did not clear, about 15 percent," he said. "So, a slice of our system cleared."
His answer implied that the company bid the output of all of its power plants into the auction, including the Davis-Besse nuclear plant and the W.H Sammis coal-fired power plant on the Ohio River.
FirstEnergy has been trying for nearly two years to win approval from the Public Utilities Commission of Ohio for a plan to charge customers extra monthly fees in order to subsidize those two power plants. The company has said the two cannot always compete on price with new gas-fired plants.
Pearson did not elaborate on which power plants bid prices that were too high to clear the auction. But he did say that the company expects more gas-fired power plants in next year's PJM auction.
A FirstEnergy spokesman later explained that the company offered portions of the future output of its power plants at different pricing levels.