Akron-based FirstEnergy Corp. revealed on Friday an accelerated effort to separate its profitable utility businesses from its troubled competitive generation side, promising to be a fully regulated company within 18 months.
That means that its six Pennsylvania power plants, which employ more than 1,000 people, are either headed for a sale, closure or bankruptcy.
“It’s not a business we want to be in,” said FirstEnergy’s CEO Chuck Jones.
FirstEnergy already is talking to potential buyers to sell several natural gas power plants in Appalachia, including a large facility in Springdale and smaller units in Chambersburg, Hunlock, and Gans, Pa.
“Those are the most attractive plants to a new buyer,” said Mr. Jones, given the low price and plentiful supply of natural gas. “Whether there’s an active market for the remaining units, we’ll know very soon.”
The remaining units include the Bruce Mansfield coal-fired power station with 296 employees and the Beaver Valley nuclear plant with 744 employees, both in Beaver County.
Where possible, FirstEnergy has tried to simulate a regulated model, in which utilities own both the power plants and the power lines that deliver energy to consumers. Regulated utilities get to recover the cost of their operations plus a regulator-approved rate of return, while competitive generators are ruled by the market.
And in recent years, the market hasn’t been kind to them.
After more than a year of waiting for Ohio regulators to rule on a proposal meant to prop up two money-losing plants in the state through an income guarantee, FirstEnergy finally got its answer last month -— $204 million per year deal for three years to be recovered from its utility customers. The company called the result “disappointing.”
But in Pennsylvania, the whole idea would likely be a non-starter, Mr. Jones said.
Pennsylvania’s Public Utility Commission disapproved of FirstEnergy’s effort in Ohio, going so far as to file a statement before Ohio regulators that said an income guarantee as proposed would interfere with fair competition in an electric market that spans 13 states, including Pennsylvania.
So FirstEnergy plans to pursue a different way to save its Beaver Valley plant from early retirement — through something akin to the zero emission credits recently created by New York State to give subsidies to nuclear plants to prevent their early retirements.
“There’s a disconnect in policy going on in our country right now,” Mr. Jones said. “We want a lower carbon future,” but the competitive electricity market is driving nuclear plants out as competition from cheap natural gas makes renders them uneconomic.
“I think what New York did was to create a bridge,” he said. “We are going be looking to ask the state of Ohio, the state of Pennsylvania — does this make sense for your state?”
FirstEnergy Solutions has two nuclear plants in Ohio with more than 1,500 employees. The future of those is also in question.
Some Pennsylvania Public Utility Commissioners have emphasized their support for nuclear power and lamented that it’s not getting its due in terms of environmental and reliability benefits.
But, Mr. Jones noted, “They are also very outspoken about competitive markets.”
“I think they are going be torn and what we need to do is we need to get them focused on the longer term implications of what's going on,” he said. Retiring a nuclear plant — “These are forever decisions.”
Mr. Jones said whatever policy decisions will be made to help FirstEnergy’s generation plants will need to be obvious in the first half of next year in order to fall into the company’s time frame for dealing with its competitive energy segment.
But analysts at Moody’s Investors Service said that was unrealistic and downgraded FirstEnergy Solutions, a subsidiary that manages the company’s coal-fired plants, to two notches above default on Friday.
“We view regulatory or political intervention within the 18-month time frame as unlikely, making a restructuring or bankruptcy filing a more likely outcome,” Swami Venkataraman, a senior vice president at Moody’s wrote.
FirstEnergy’s schedule is driven in large part by two factors: the need to get buyers for its revenue bonds in 2018 and a potentially large penalty that FirstEnergy would have to pay if it loses a case brought by several railroads.
The dispute, which is in arbitration, stems from FirstEnergy’s claim that environmental regulations enacted to reduce mercury pollution from power plants created a constraint on its business that was out of its control, giving the company a way to cut short certain coal shipping contracts.
The railroads could receive up to $770 million in penalties by mid-2017 if they succeed in proving otherwise.
As Moody’s notes, even if the award is a fraction of the maximum penalty, at $100 million it could trigger a default under the company’s borrowing arrangement with banks.
“A very negative” decision in the railroad case could speed up the 12- to 18-month time frame, Mr. Jones acknowledged on Friday.
FirstEnergy’s problems aren’t unique in the utility space. In a parallel move Friday, Moody’s gave all unregulated utilities a negative outlook, writing that “most coal plants and small nuclear plants can no longer compete with modern gas plants ... which will likely mean more early retirements.” That refers to power plants being shut down before they reach the end of their useful lives.
FirstEnergy also reported earnings on Friday, recording a profit of $380 million, or 89 cents per share, for the past quarter, down slightly from $393 million, or 93 cents per share, during the same three months last year.
A hot summer boosted revenue at FirstEnergy’s distribution companies, which include West Penn Power.
During the past quarter, the company reached settlements for rate increases at its Pennsylvania utilities which will bump up bills for the average West Penn customer by $8.09 a month, or 7.2 percent.
The settlement, which must be approved by the Public Utility Commission, stipulates that FirstEnergy won’t seek another rate increase until at least January 2019.
Anya Litvak: email@example.com or 412-263-1455.
First Published November 4, 2016 8:16 AM