By Ted Caddell

FirstEnergy on Friday posted a $1.1 billion second-quarter loss, much of it related to the pending closure of five coal-fired units, and CEO Chuck Jones said the company will not make any large investments to prop up its merchant generation business credit rating.

“We do not see baseload generation as a good fit for our company,” Jones said during a call with analysts on Friday. The company will not rule out “the possible sale or deactivation” of additional units as wholesale energy prices continue to languish, he said.

The losses make the outcome of the company’s two-year struggle with the Public Utilities Commission of Ohio to garner guaranteed income for its generators that much more critical.

On July 25, it filed testimony with PUCO saying that a staff-recommended plan for a Distribution Modernization Rider of $131 million a year for three years wouldn’t be enough to provide credit support to the company so it can maintain its investment-grade credit rating and begin grid modernization initiatives (14-1297-EL-SSO). (See PUCO Staff Recommends $131M Annual Rider for FirstEnergy.)

It also balked at staff’s recommendation that the company be required to refund the subsidy if it moves from its Akron headquarters.

FirstEnergy has proposed a Retail Rate Stability rider that would provide it $558 million a year for eight years for credit support. Eileen Mikkelsen, vice president of rates and regulatory affairs, said the rider should be increased by an amount reflecting the economic development value of maintaining its headquarters in Akron.

In testimony filed July 22, Sarah Murley, an economic consultant hired by the company, said the headquarters has an annual economic impact of $568 million on Ohio’s economy, based on the 1,360 employees there (an annual payroll of $151.3 million) and its support of an additional 2,047 jobs ($93.3 million in annual payroll) by other businesses throughout Ohio.

Critics said the RRS rider and the economics benefits adder FirstEnergy is seeking could result in more than $8 billion in ratepayer-funded subsidies if they lasted the full eight years.

Shannon Fisk, an attorney with Earthjustice, said the annual price tag could be as high as $1.126 billion, if PUCO grants the $558 million RRS rider and the $568 million the company claims as the economic development value of its operations.

“FirstEnergy is proposing that the DMR would last through May 31, 2024, almost eight years, so the total amount of captive customer money provided under FirstEnergy’s proposal would be somewhere between $4 billion and more than $8 billion,” Fisk said.

Generation Business Driving Losses

FirstEnergy’s $1.1 billion loss represents $2.56/share on revenue of $3.4 billion. That compares with net income of $187 million, or 44 cents/share, during the same period last year.

In a news release, the company attributed the loss primarily to “asset impairment and plant exit costs in the company’s competitive business,” a reference to its recently announced plan to sell or close its Bay Shore plant near Toledo and retire four coal-fired units at its W.H. Sammis plant on the Ohio River. (See FirstEnergy Closing Largest Coal Plant in Ohio; Bay Shore also in Peril.)

It is with its eye on the corporation’s credit rating that Jones said the company will be looking to concentrate on its regulated businesses and begin to look for ways to exit the merchant generation business in the coming years.

“Our long-term goal is to operate as a fully regulated company,” he said. To illustrate its concentration on driving down generation costs, the company announced it was postponing by three years the expensive steam generator and reactor pressure head replacement at its Beaver Valley nuclear station in Pennsylvania, “and we’ve already identified $80 million in fossil fleet savings” annually going forward, he said.

Success Hinges on PUCO

Earlier in its negotiations with PUCO, the company proposed a 15-year period of guaranteed income for its struggling merchant plants. When that was denied, it came back with an eight-year plan, which was approved by PUCO but eventually jettisoned when FERC ruled that it would need to undergo federal review under the Edgar affiliate abuse test.

FirstEnergy withdrew its request and filed a modified request with PUCO that was not tied to any specific generation assets, with the understanding that it would not need FERC review. Critics have charged that it could cost customers between $3.6 billion and $4 billion.

The latest rider request would be an alternative to that plan.

In testimony, the company warned that it could receive a credit downgrade without the increase in revenue. Their latest rider plans, Mikkelsen said, would provide a “more reliable hedge against increasing market prices by using proxy costs and generation capacity and output for diverse generation in the marketplace without reference to any particular generating facilities.”

“By ‘priming the pump,’ the companies will be able to obtain lower financing costs when grid modernization spending begins, resulting in lower rates for customers,” she said.

Although the rider would be, in part, to fund grid modernization projects, she said the company should be able to collect it before that work commences.

Jones said during the analyst call that the company expects a ruling from PUCO by September. He declined to say what they would do if PUCO rules against the company.

“When we know that outcome, we will let you know what the impact is on our credit ratings,” he said. “We have a number of other strategic options we can execute, but it is premature to speculate.

“We are focused on keeping our investment-grade rating of our holding company and the rest of our regulated entities,” he said. He said there would be no large infusions of capital in the merchant business in any attempt to shore up its sagging credit rating.

Another company facing the same economic pressures relating to low wholesale prices, American Electric Power, has said it will devote its energies to “reregulating” the energy market in Ohio. Jones said he is “pulling for” AEP’s efforts, but “at this point in time, we are not actively joining in with them.”

Critics Blast Rider Plans

To FirstEnergy critics, the new testimony is hard to swallow.

“FirstEnergy’s recent testimony asks the PUCO to reject the staff’s criticism of — and embrace — its proposal for a ‘virtual PPA,’ in which the utility’s distribution subsidiary would receive what the Ohio Consumers’ Counsel estimates would be some $4 billion over eight years,” said Dick Munson of the Environmental Defense Fund.

“FirstEnergy’s level of greed is laughable, if it were not so seriously expensive for Ohio consumers … and should be completely rejected,” he said.

“The customers should not be providing credit support, and without serious restrictions, there is nothing to ensure it will not be just the same type of bailout” it already failed to get, Earthjustice’s Fisk said.