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FirstEnergy Fails the Test On Utility Competition With Its Bailout Bid

Executives at Akron, Ohio-based FirstEnergy Corp. have perfected the art of talking out of both sides of their mouths: Just look at their approach to competition, which they whole-heartedly support—except when they don’t.

In Maryland, where Republican Gov. Larry Hogan recently vetoed a bill overwhelmingly approved by the state legislature that would have increased the state’s renewable portfolio standard (RPS) from 20 percent in 2022 to 25 percent by 2020, FirstEnergy is all for competition and letting the free market decide. “Competitive markets, not regulatory mandates, provide the most economical solution for renewable generation supply needs in Maryland,’’ the company wrote in March urging state legislators to oppose the new higher standards. Those tighter standards, the company warned, “would result in significant increases in the cost of generation in Maryland.”

And when there was a move back in 2007 to re-regulate the electric market in Ohio, the company argued forcefully in favor of competition. Tony Alexander, FirstEnergy’s chairman and CEO at the time, repeatedly criticized moves to re-regulate the state’s utilities, testifying in October, 2007 before the Ohio Senate that:

  • “…competitive markets for electricity—like any other market—drive innovation, efficiency and investment and, over time, produce the lowest prices.”
  • “…we’re now faced with legislation that would turn back the clock on competition and return Ohio to the failed policies of regulated generation rates.”
  • “…it’s clear that competitive markets, over time, will produce the lowest prices for customers. This basic economic theory applies to all markets, it applies to electricity.”
  • “Re-regulation may sound like a good idea,…. But if re-regulation becomes a reality in Ohio, we should expect significant increases in regulated rates….”
  • “Re-regulation and government mandates, controls and preferences are not the answer to Ohio’s energy future. They failed in the past, and have been challenged in virtually every aspect since the 1970s.”
  • “Rather than relying on regulation and government mandates to meet our state’s energy objectives, FirstEnergy believes that the competitive marketplace will deliver better products and prices and drive innovation and efficiency improvements.”

Got to hand it to FirstEnergy, they are all in for competitive markets, and have been remarkably consistent for the past 10 years—except when they aren’t.

The problem here is that FirstEnergy really only wants competition when it suits them, not as a general principle, as is evident in their years-long effort to get the Public Utilities Commission of Ohio to approve patently uncompetitive support for two of its Ohio generating facilities, the 900 megawatt Davis-Besse nuclear plant and the 2,200 MW W.H. Sammis coal-fired facility.

These two aging facilities—the Sammis plant’s newest unit is 45 years old while the oldest is 57; the Davis-Besse facility is 39 years old but it has a history of serious maintenance problems—have been battered by the drop in natural gas prices, the influx of new wind and solar generation, and the continued stagnation in overall electricity demand. The battering has been so bad that they essentially can’t compete in the current market, and FirstEnergy is asking state regulators to bail them out while hitting customers with new monthly charges that could run into the billions of dollars over the coming eight years.

IEEFA-FirstEnergy-cost-2-6-2016-360x216-v1

The graphic is from the Institute for Energy Economics and Financial Analysis’ February, 2016 report on FirstEnergy’s bailout proposal; the full report can be found here.

In its pleadings with the Ohio PUC, FirstEnergy has said the bailout is essential to keep the plants operating, and that the plants, in turn, are needed to maintain reliable, affordable electric supplies in the state—in other words, could I get a little re-regulation here, please.

In defending the company’s proposal, Doug Colafella, a FirstEnergy spokesman, told the Toledo Blade: “We like to think of it as an insurance policy against volatility and the future uncertainty of the marketplace. It’s a concept we think will benefit customers because it considers the long-term volatility of the marketplace.”

That doesn’t sound at all like the pro-competition track laid down by former CEO Alexander (Remember, “competitive markets, over time, will produce the lowest prices for customers.”) or the pro-competition testimony offered just months ago in Maryland regarding renewables (Remember, “competitive markets, not regulatory mandates, provide the most economical solution….”).

Well, the competitive markets have spoken in Ohio (and the broader PJM territory in which FirstEnergy’s generating units operate), and Sammis and Davis-Besse simply can’t compete. This point was driven home by PJM itself in a recent report: “The simple fact that a generating facility cannot earn sufficient market revenue to cover its going-forward costs does not reasonably lead to the conclusion that wholesale markets are flawed,” PJM wrote. “More likely, it demonstrates that the generating facility is uneconomic.”

It’s time for FirstEnergy to stand by its competitive mantra and close those two plants, not seek to soak its customers for billions for plants that are no longer economic.

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Grace Adams's picture
Grace Adams on Jun 8, 2016

It does sound like what they really want is income and don’t care too much whether they get to earn it doing something useful at a competitive price or get much of their income from government subsidies.
Admittedly they are an electric utility–thus heavily regulated by state government. On the other hand they are still burning coal, which is nasty dirty energy with lots of emissions, mostly greenhouse gas emissions these days, now that coal industry has been forced to remove mercury and other toxic heavy metals before coal is burned.
I suspect Ohio’s best bet might be to BUY the firm’s obsolete generating equipment. I believe Ohio has at least some geothermal energy resources (hot rocks that can be reached by drilling geothermal wells). Maybe Ohio can bail them out by arranging a deal for them to enter a joint venture with one of our ten too big to fail oil/gas firms to capture CO2 from ambient air, compress it and use it as fracking/hydraulic/heat-transfer fluid in geothermal wells, with the utility owning, maintaining, operating the generator and the geothermal well replacing the coal-furnace that is on its last legs anyhow.

Bob Meinetz's picture
Bob Meinetz on Jun 8, 2016

Grace, the idea electric utilities are “heavily regulated by state government” is a myth. That was the pretense under which George W. Bush deregulated them in 2005, only encouraging national energy powerhouses (First Energy, Entergy, Dominion) to buy up local utilities, then use $billions in influence to herald the Gilded Age of Gas.

Dennis’s mistake is harboring the notion utilities have any real competition for providing electricity. In most cases they own the wires – the keys to the car. Like most good corporations and all bad ones, they will pursue any means to profit which doesn’t put their CEOs in Ken Lay’s predicament.

And their natural monopolies make turning a profit easy: just keep raising prices. What are ratepayers going to do to charge their iPhones – pedal a bike or something?

Dennis Wamsted's picture

Thank Dennis for the Post!

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