FirstEnergy Corp. is concerned about the economic future of two of its large power plants and wants its old, regulated companies to buy all of the power they generate. But that's not re-regulation.
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View full sizeFirstEnergy Corp. briefly mothballed its W.H. Sammis power plant in 2012 because the company could buy gas-fired electricity in wholesale markets for less than it cost Sammis to generate it. The huge, coal-fired power plant on the Ohio River generates twice as much electricity as two nuclear power plants. Now the company wants its regulated companies to buy all of the plant's output. AKRON, Ohio -- FirstEnergy Corp. filed two rate cases late Monday, less than 24 hours before the scheduled release of its second quarter financial report and a teleconference with analysts.
The double filing -- one before the Public Utilities Commission of Ohio, the other before the Pennsylvania Public Utility Commission -- also came just five days after UBS Financial Services downgraded the company's stock.
In a comprehensive analysis issued on July 30, UBS advised its clients to sell, anticipating that that the share price price could tumble from the $32.30 on that day to to as low as $26 in the coming months.
It was the first downgrade since December, 2012, when Deutsche Bank advised its clients not to buy, but continue to hold what FirstEnergy shares they owned. The share price has lost about 25 percent since then.
FirstEnergy's stock price closed down 7 cents Monday at $31.06 per share in higher-than-normal trading on the New York Stock Exchange. The share price has drifted between $30.10 and $39.01 over the last 52 weeks, losing about 4 percent of its value in the last month alone.
Investors who favor utilities look for healthy dividends, but in January, the company reduced its quarterly dividend from 55 cents to 36 cents per share, paying them from the revenues earned by its regulated companies, and according to some analysts, increasing its debt even to pay the reduced dividend.
Rising fuel prices, both of natural gas and coal, and continued slow growth in power sales are the twin albatrosses around the neck of the company's unregulated division, FirstEnergy Solutions, which owns the power plants and which five years ago FirstEnergy's top executives believed would be an engine of growth.
The Pennsylvania rate plans are requests for increases in distribution rates, what consumers pay for improvements in the wires, transformers and other equipment owned by FirstEnergy's regulated Pennsylvania distribution companies. In January, FirstEnergy told analysts it would be spending more money rebuilding its distribution and transmission lines, for which it is guaranteed a rate of return, and focusing less on FirstEnergy Solutions.
The proposed Ohio rate plan would run from June 2016 through May 2016. It would extend many of the provisions of the current rate plan -- and add one new wrinkle -- a provision to use the steady profits from the regulated Ohio companies to subsidize two of the company's unregulated power plants.
The plan, which FirstEnergy has asked the PUCO to approve by April 2015, would commit the Illuminating Co., Ohio Edison and Toledo Edison, to a 15-year contract to buy all of the power -- for whatever it cost to produce -- that the Davis-Besse nuclear power plant in Oak Harbor and the W.H. Sammis power plant in Stratton, Ohio, near Pittsburgh, generate.
The company briefly closed Sammis in 2012, the victim of cheaper power generated by gas-fired plants. And now Sammis faces more pollution control upgrades to meet federal emission standards.
Still, William Ridmann, vice president of rates and regulatory affairs, insisted Monday that the purchase agreements are not about subsidizing the plants but "to provide benefits to our customers."
"As we see it, future prices are increasing, and after the first three years, there is a credit coming to customers to lower their bills in the following 12 years.," he said of how the sees the power purchase agreements working.
The proposed purchase agreements would also commit the three traditional Ohio power companies to buy FirstEnergy's portion of the power generated by two large coal-fired plants owned by the Ohio Valley Electric Corp., a company FirstEnergy founded with the state's other investor-owned utilities but today owns only about 5 percent.
The Illuminating Co, Ohio Edison and Toledo Edison would not use this power they would commit to buy from Davis-Besse, Sammis and OVEC, which would total about 3,200 megawatts, but would instead sell it into the regional wholesale markets.
In other words, they would pay FirstEnergy Solutions what it spent to produce the power, including the cost of fuel and plant upgrades, and then sell the electricity into wholesale markets, where competitive prices have remained low since the start of the Great Recession.
Consumers would pay the difference in the two prices, or reap the benefit, which Ridmann believes would come after the first three years.
The company anticipates that the difference between the cost to produce the power and the wholesale market price would lead initially to consumer price increases -- about $3.50 per month on average.
The working assumption in the case, as Ridmann argues, is that market power prices will inevitably increase over time.
"As power prices increase as projected over time, proceeds from the market sales that exceed costs from the purchased power agreement will be applied as credits on customers' electric bills to mitigate volatility and address rising retail prices.," the company's filings predicted.
And the deal would allow the two power plants to remain operating, preserving jobs and tax revenues to local communities, the company noted.
"The program provides a stability mechanism for customers who are estimated to realize a savings of approximately $2 billion over the 15-year period between June 1, 2016 and May 31, 2031," the company noted Monday in a letter to investors, filed with the U.S. Securities and Exchange Commission.
"The costs, including a return on... the investment in the Sammis and Davis- Besse plants, would be netted against the revenues received from the sale of the associated energy and capacity into the markets, to derive either a credit or charge to be applied to utility customer monthly bills," the company explained.
The new arrangement would not change the current arrangement in which the three Ohio distribution companies buy their power through competitive auctions, Ridmann said.
And customers looking for deals would still be able to buy power from outside competitors. But no customer would be able to escape the extra charges stemming from the power purchase agreements.
FirstEnergy's late-in-the day filing of the proposal limited reaction from opponents, though a spokesman for the Ohio Consumers' Counsel said the agency was concerned, noting that FirstEnergy's Ohio customers had already paid billions of dollars to the company in "transition charges" when it moved the ownership of the plants to FirstEnergy Solutions.
Environmental groups are expected to oppose the plan.
They lost a protracted legislative battle with FirstEnergy over freezing the state's standards for renewable energy and energy efficiency. The loss came just days before the Obama administration announced it would write federal standard on carbon dioxide emissions, which will make coal-fired power plants even more expensive to operate.
The Sierra Club was planning to unleash an advertising campaign Tuesday arguing that FirstEnergy and American Electric Power, which is in the middle of a contentious rate case that includes power purchase agreements, are "asking for a blank check to bail out their dirty, aging coal plants at the expense of customers, the environment and public health."