FirstEnergy Solutions is preparing to leave most retail sales except to consumers and a few very large industrial customers. It competitors say the company won't be missed and that its strategies warped retail markets.
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View full sizeFirstEnergy Corp.'s unregulated subsidiary, FirstEnergy Solutions, is retreating from retail sales and returning to generating and selling power wholesale into the regional grid. FES won't be missed, say its competitors, who saw its low fixed-price contracts as unsustainable. AKRON, Ohio -- The collapse of FirstEnergy Corp.'s retail marketing company is news -- but not to national retail power suppliers or to local electricity brokers working with them.
For months they saw it coming, a failure signaled in the spring when FirstEnergy Solutions said it would be passing on to its customers the "polar vortex" surcharges that grid manager PJM Interconnection levied against the company.
Then a week ago during a quarterly financial conference Anthony Alexander, FirstEnergy's CEO, confirmed the rumors.
He said the company had decided that FirstEnergy Solutions -- which also owns the corporation's power plants -- would focus on selling its power into wholesale markets and stop pitching retail deals to commercial and most industrial customers, leaving only a few very large industrial customers and its long-term, less risky municipal retail contracts serving residential customers.
"While we have experienced a relatively stable and predictable wholesale market for the past several years, we believe that a fundamental change in markets is under way as available generation is being reduced due to environmental rules and competitive markets rely more heavily on natural gas and other less reliable resources," he said.
He was referring to the power shortages and price spikes that occurred last September during unusually hot weather and during January's "polar vortex" episodes when arctic temperatures invaded the nation, knocking out power plants and pushing demand up.
Less than 24 hours earlier, the company had filed a new rate plan with state regulators that included an instantly controversial provision that ratepayers be forced to subsidize two of the company's aging power plants, suggesting the company is struggling to remain competitive.
About 70 FirstEnergy Solutions sales and sales-support positions will be cut next week, leaving the company's commercial and industrial customers scratching their heads, and competitors scrambling to grab new customers as their contracts with the Akron-based company run out.
Competitors -- about 30 of then in Ohio alone -- are ready for what will be a marketing bonanza. And they are not shedding tears.
"They took a strategic approach to sell their generation at retail prices that were less than the wholesale market (prices) that would support them," said J.D. Burrows, vice president of marketing at Houston-based GDF Suez Energy Resources, North America.
"It is my opinion that FirstEnergy Solutions' behavior was irresponsible. It is almost unbelievable. They bought market share but in the long run, they short-changed their customers," he said in an interview earlier this week.
"And they have ruined the market," he added. "Now, the rest of us have to go back and re-educate the market."
Calling that criticism "unfair and unprofessional," FirstEnergy Solutions spokeswoman Diane Francis on Friday said the company had saved customers a lot of money.
"Through our competitive offers, we have helped our customers, from the individual homeowner to the largest industrial business, save more than half a billion dollars," she said.
And we were making those money-saving offers available when no other suppliers were," she added. "However, because of market conditions that are preventing us from being able to offer low, predictable prices to new residential and certain business customers, we have decided to no longer pursue those retail channels. We will continue to honor all of our customer contracts and maintain our high level of customer service."
GDF Suez Energy Resources, NA, is a division of the French multinational GDF Suez. Globally it serves about 100,000 customers and owns about 600 power plants. The U.S. division tailors its retail contracts to each commercial and industrial customer, Burrows said.
Typically, the rates GDF Suez offers commercial and industrial customers are variable, he said, indexed in this region to daily wholesale prices published by PJM.
Another Houston-based company, Direct Energy, which is a subsidiary of UK-based Centrica plc, and the largest U.S. competitive power retailer, dealt with FirstEnergy's low, fixed price by offering a suite of efficiency and technological upgrades to reduce the amount of electricity their customers used.
That has been effective, particularly with larger companies that regard power prices as a risk, but one that can be managed, said the company
"Customers at this level know where the market is and understand it (a contract) is about more than just a low price," said Teresa Ringenbach, a Columbus-based senior manager of government & regulatory affairs.
Direct Energy also markets to businesses that want fixed-rate contracts but the price will include the risk the power supplier is shouldering, she said, but no fine-print "pass-through" charges such as the "polar vortex" charges. Smaller companies want these kind of contracts.
"They tend to be smaller independently owned companies, and larger franchised companies who want to know what they will be paying next year and don't want to spend days watching power markets," she said.
Baltimore-based Constellation Energy, now part of the Exelon Corp., headquartered in Chicago, is another major national competitive supplier that sees FirstEnergy's problems as an opportunity.
"I will admit they have been very aggressive over the last several years," said Mark Huston, president of Constellation's retail business division.
"We try to price in risk factors because we are in for the long haul. We have seen competitors in the past offering predatory pricing. But we held to our discipline.
"When you don't have periods of [wholesale] market volatility, they become complacent. We have seen competitors not price in their risk. And they make a decision not to be in it for the long haul," he said.
"I won't speak to whether FirstEnergy was doing that. But they are leaving."
It's the same story at the grass-roots level among local brokers who help commercial clients choose contracts offered by the big suppliers, much as an independent insurance company helps consumers choose an affordable insurance policy.
"They have been eating FirstEnergy's lunch for some time," said Mike Brakey, president of Brakey Energy, a Cleveland-based energy broker who shops for electric contracts for his commercial clients with major retail power companies, including Constellation Energy, Direct Energy and GDF Suez, and once, FirstEnergy Solutions.
FirstEnergy's low-priced deals turned out to be not-so-fixed following last January's unusual storms that pushed sub-zero, arctic temperatures deep into much of the nation, increasing power demand and simultaneously knocking out power plants.
"FirstEnergy Solutions went from a don't-lose-any-business-no-matter-what price, in order to retain customers, to raising its prices well above everyone else," Brakey said.
He and other brokers said the decision by FirstEnergy Solution to push "polar vortex" surcharges stemming from the two January storms onto its commercial and industrial customers was a signal of big trouble ahead. (The company has backed down from charging consumers a much smaller surcharge.)
"Everybody is dancing on FirstEnergy Solutions' grave," said Chris Greulich, president of Chagrin Falls-based North Shore Energy Consulting, referring to other big power suppliers who have had to compete against its low prices.
His preliminary analysis of 2013 state records shows that FirstEnergy Solutions accounted for 53 percent of the electricity sold to commercial and industrial customers through retail contracts.
Greulich's analysis puts 22 competitors, including Constellation, Direct Energy and Suez in the single digit percentage of the total amount of power delivered under retail contracts to commercial and industrial customers in the state.
"This is a huge opportunity for us," he said, "because over the years, FES has been both our greatest partner and also our greatest competitor at the same time."