PUCO’s FirstEnergy Bailout: What Does it Mean?

Ohio utility regulators this week (Oct. 12, 2016) adopted a plan to rescue Akron-based FirstEnergy from its inability to compete in wholesale generation markets. The utility has threatened to close the generating company’s 2,210-MW Sammis coal-fired plant and the 908-MW Davis-Besse nuclear unit. The rather opaque order by the Public Utility Commission of Ohio, gives FirstEnergy a $200 million/year surcharge to its rates over three years.

The order is a response to an earlier, failed attempt to bail out the generators. It left parties on both sides of the dispute scratching their heads.

A PUCO order in April gave investor-owned utilities FirstEnergy and AEP the ability to charge premium price subsidies from consumers when the companies are unable to compete in competitive wholesale markets, particularly in the PJM Interconnection. The Federal Energy Regulatory Commission, asserting its authority over wholesale transactions, quickly nixed that approach, as well it should.

That April order, orchestrated by then-PUCO chairman Andre Porter, led to a further reshuffling of the PUCO, which has seen much turmoil and turnover during the administration of Republican Gov. John Kasich. Porter resigned and Kasich replaced him with Asim Z. Haque, whom Kasich first named to the commission in 2013 and reappointed in 2016. Haque is generally viewed as a conciliator and compromiser.

Following the FERC order, FirstEnergy came up with a substitute plan for “Retail Rate Stability” rider on consumer rates (that means a charge not related to use of electricity), which would have cost consumers some $4 billion, or $558 million yearly for eight years, about the same as FirstEnergy would have received under the plan the FERC rejected.

Last week, the commission approved a modified plan, including an annual rate increase of $132.5 million plus a “gross-up” to make the company whole for new federal taxes, a deal that results in an annual rate increase of about $200 million a year over three years, or $600 million, plus a possible two-year extension, bringing to potential total rate hike to about $1 billion. The PUCO disingenuously called this a “distribution modernization rider.” Haque said that the rate rider, or add-on, “is to ensure that FirstEnergy retains a certain level of financial health and creditworthiness so that it can invest in future distribution modernization efforts.”

In other words, the PUCO said the investor-owned utility is too important to fail. Would that the regulators had been that upfront in their finding. That would have given clarity to the argument. But, as politicians, they fudged the order in order to avoid controversy. They failed.

FirstEnergy CEO Charles Lane said the PUCO decision “is disappointing for our customers. While we clearly demonstrated to the PUCO what is essential to ensure reliability for customers in the future, the amount granted is insufficient to cover the necessary and costly investments.” The company said it is considering “next steps,” whatever they may be.

Ohio Consumers’ Council, the official state utility watchdog, told Cleveland.com (the Plain Dealer newspaper’s online news service), that it objects to the deal. OCC’s Bruce Weston said, “Ohioans should have lower electricity bills reflecting lower prices in the energy markets. Unfortunately, consumers will pay higher electric bills to subsidize their utility.”

Dick Munson, the veteran Midwestern utility observer for the Environmental Defense Fund, commented, “One read of the decision is, regulators killed the Ohio-based utility giant’s massive bailout and ordered the utility to modernize its grid. If accurate, this would be an incredible victory: Dirty power plants would not be subsidized, FirstEnergy would not be rewarded for its poor business decisions, and the company would invest in measures that increase efficiency and welcome clean-energy resources.

“Ah, if the PUCO order were only so clear. On the one hand, it does seem the regulators are giving FirstEnergy $600 million upfront and requiring it to spend those funds on grid-modernization programs the PUCO will approve in the future. Yet, the more realistic read is, Ohio regulators are simply handing FirstEnergy $600 million in hopes the subsidy will allow the utility to improve its balance sheet. Then, FirstEnergy will (hopefully) propose grid-modernization efforts that the PUCO will consider and fund down the line. In other words, the PUCO is providing FirstEnergy a no-strings-attached subsidy.”

But the order is not clear, notes Munson, calling it “unusual and bit difficult to interpret – even the PUCO chairman admits the approach is ‘undoubtedly unconventional.’” Munson told me in an email, “My guess is AEP (and [Dayton Power & Light]) soon will be asking for something similar.”