Did you hear about FirstEnergy’s Secret Rate Case (“recover” some of $500 Million)?

20 Nov, 2018

FirstEnergy Corp. (“FE”) recently reached a stipulated agreement with the PUCO (Public Utilities Commission of Ohio) on a significantrate case and I was completely caught off guard with this news.  In fact, this significant rate case news was buried in the second half of annewspaper article, focused on FE’s earnings and growth, I recently read in the local newspaper (“FirstEnergy Predicts Growth, Higher Dividends”; The Plain Dealer, Wednesday November 14, 2018).  Here below isa quote from that article (Quoting Chuck Jones, CEO at FirstEnergy Corp).

“Just recently we reached stipulated settlement in Ohio re-distribution modernization plan, which will support grid modernization efforts in the State consistent with the PUCO’s Power Forward initiative, he told analysts, referring to the PUCO “Roadmap” for the digitized grid of the future. The plan will also include provisions for the company to “recover” some of the $500 million it spends, that is, to seek rate increases by adding a “rider” on the existing delivery rate.  The company has amassed about three dozen such riders in the past decade, so many critics are now calling for a general rate case, which would force the company to show all of its expenses and revenues to justify its total delivery rate.”

Please note that three dozen riders equal 36 riders (yes that is 36 riders) in case your coffee is slow to kick in today.  Mr. Jones goes on to say that the investments FirstEnergy (Ohio)will make in the next 3 years are expected to see their combined rate base grow at 11 percent compounded annual growth rate from 2018 to 2021.  He also stated that the company is increasing its annual dividend from 36 cents to 38 cents per share.  FirstEnergy has also stated that it expects annual dividend growth to its primary goalgoing forward as its revenues increase.Please note it also states FE is looking to recover “some” of the $500 million – how much is “some” as “some” seems purposefully vague from my perspective.  The link to this Plain Dealer article is as follows:  FirstEnergy sees growth, higher dividends with upgrades that will increase customer rates

Some key components of FE’s grid modernization plan outlined in the settlement include (Source: FE News Release):

• Installing 700,000 smart meters throughout the Ohio Edison, Cleveland Electric Illuminating Company and Toledo Edison areas along with the necessary supporting communications infrastructure and data management system.
• Developing time-varying rates that give customers the opportunity to reduce their monthly electric bill by using energy during off-peak periods.
• Installing automated equipment on at least 200 distribution lines that can automatically isolate problems, prevent entire circuit lockouts, and quickly restore electric service to customers. FE will work with the PUCO staff to determine which circuits will be prioritized to maximize customer benefits.
• Installing voltage regulating equipment on at least 202 circuits to provide energy efficiency benefits by reducing excessive voltage levels on the distribution grid.

FE made an announcement about the stipulated settlement on November 9, 2018, which also included a stipulated agreement approved by the PUCO that will return $900 million to customers as a result of the Tax Cut and Jobs Act. The $900 million, while a prudent action by a public utility, appears to be a 25–year savings number as FE states that a typical residential customer using 1,000 kilowatt hours of electricity could expect to see an immediate $3.90 reduction in monthly bills, with the rest of the savings credited to customers over the next 25 years ($36 million per year average).  Even though it was announced on November 9, it was not really publicized until Mr. Jones spoke about this latest rate case at a conference which he spoke at in San Francisco the week of November 12.  Yes, prior to this stipulation agreement settlement being announced, the PUCO was evaluating two prior FE grid modernization proposals.  I was aware of the first two.  However, I had not caught wind of this latest proposal or settlement until I saw this article.  Furthermore, we are talking about a lot of money ($500 million over 3 years or $166 million per year) here and, depending on how much of the $500 million they are actually seeking, customer’s bills will belikely be impacted more by this stipulated agreement (Power Forward), if approved, than they will be by the tax settlement agreement which was conveniently announced on the same day.  By the way, why wont they just tell us how much of the $500 million they are actually seeking – it is not like they don’t know the number or at least the range they are seeking?

I have to admit when I read this article on Wednesday November 14, I was shocked as I had not read anything published by the PUCO or in the media that suggested a stipulated settlement on the Power Forward initiative was close to being reached.  Where has all the media attention been on this topic and why did I have to read about the stipulated settlement in an article which was focused on discussing FEdividends?   While I am “happy” their earnings continue to grow, the real news to me, an energy professional,in this November 14 Plain Dealer article was the stipulated settlement agreement being reached six days earlier.  You get the feeling that both the PUCO and FE are trying to hide this upcoming “rate case” as long as possible so the public is less informed once the official review process begins.  I read a lot of energy related articles and news feeds and I knew FE was going to be required to modernize their transmission and distribution systems in the coming years but I never read anything about the stipulated settlement for FE’s Power Forward initiative beingso close to being finalized.  Granted, the PUCO has not ordered a single hearing or asked opponents, of which there will be many, to file their objections but FE wants the PUCO’s approval by the end of the year 2018.  Are you kidding me?

After reflecting on this Plain Dealer article over the last few days, I am now calling this initiative the “Secret FE Rate Case”.  This whole case sure feels that way to me in two ways – both in how it is being secretly publicized and in how much money they are actually or secretly seeking.  Yes, this case is part of the PUCO’s Power Forward initiative (https://www.puco.ohio.gov/industry-information/industry-topics/powerforward/), but this is a lot of money we are talking about and we don’t know how much they are actually seeking.  Since it is part of the PUCO’s Power Forward initiative, I get the feeling the PUCO (Note: PUCO isalso responsible for approving the request, after hearings of course), is as anxious as FEto see it approved.Don’t you feel this is a little bit of a conflict of interest for the PUCO to be both the proponent of the Power Forward initiative andthey also are the party ultimately responsible for approving the utility rate case for funding this Power Forward initiative?  I guess we will have to wait and see how the hearing process on this goes, as groups such as Ohio Citizens Action (http://ohiocitizen.org) and the industrial users group (http://www.ieu-ohio.org/), an association of large industrial and commercial energy users, will have much to say about this Power Forward stipulated agreement as well.

In an effort to bail out FirstEnergy Solutions, do you recall all of the recent attempts in the last few years by FE to get additional money approved by both the PUCO and/or the Ohio Legislature? These prior PUCO rate cases and Ohio legislative actions would have created additional revenue streams for their uncompetitive nuclear and coal fired generation facilities.FES argued that these baseload facilities were required to provide voltage regulation for the greater FE transmission system, but PJM, the quasi-governmental entity responsible for managing the transmission grid for the States which FE operates in, stated the following on October 4, 2018: “Retiring 4,000 megawatts of coal-fired electric production in Ohio and Pennsylvania by Ohio-based FirstEnergy Solutions will not impact electricity reliability”.While FE’s argument is certainly logical, the entity responsible for managing their transmission lines (and other utility’s lines in Ohio a few other States) has a different perspective (http://governorswindenergycoalition.org/pjm-firstenergy-plant-closures-wont-hurt-reliability).  PJM has less at risk here in this debate so I am inclined to lean towards their recommendations.  Anyway, these rate cases and legislative actions were all very well publicized in the media and the following listhighlightsa few of the important events surrounding these FES’ bail out attempts:

Power Purchase Agreements:  In April of 2016, The Federal Energy Regulatory Commission (FERC) blocked Power Purchase Agreements (PPA’s) approved by Ohio regulators (PUCO approvedPPA’s in March of 2018)to support aging coal and nuclear plants owned by FE and AEP Ohio.  It is interesting that FERC, and not the PUCO, is the government entity which blocked this FE rate request previously approved by the PUCO.  The PPA’s were probably the most publicized of the attempts by FEto bail out the FES coal and nuclear assets.  In May of 2016, FE went to the PUCO and told the “The Commission” toabandon the PPA proposal; However, FE said they wanted to still keep the revenue approved by the PUCO in March of 2016 as part of the PPA rate case.  It gets complicated as it has to do with how the money travels between unregulated and regulated assets but essentially this modified request was for FE to keep the money for the plants but ignore the PPA strategy.  This May 2016 modified request was ultimately denied or ignored by the PUCO.

Zero Emission Credits (“ZEC’s”):In June of 2017, a proposed bailout ($300 million in FES subsidies) for Ohio’s two nuclear power plants that would lead to rate increases for FE customers,stalls in the Ohio Legislature.FirstEnergy Solutions unsuccessfully argued that, unlike coal or gas facilities, nuclear facilities do not have emissions so they should be given credits, in the form of a subsidy, for these zero emission nuclear power plants.  After having their last ruling overturned by FERC, I do not believe The PUCO was ever going to get behind FES’ request for ZEC’s.

House Bill 381: -After a previous attempt stalled in the Ohio legislature, a new ZEC bill ($180 million in FES subsidies) to help subsidize the State’s two nuclear power plants was introduced in the Ohio State House.  More specifically, in October of 2017, FE’s legislative supporters introduced a new bill in the Ohio House that would create special customer charges to subsidize the company’s nuclear power plants because they cannot compete with new ultra-efficient gas turbine power plants.  This initiative, which asked for significantly less money that the earlier ZEC legislation, ultimately failed.  FES eventually filed for bankruptcy protection at the end of March 2018.

The main point here is these rate cases were all highly publicized and debated in the State of Ohio and all of these cases ultimately failed after various stakeholders got involved and encouraged the government to vote against these bailout dollars.In the preceding cases, there was also ample time for the Ohio public to weigh in and comment on these cases.  The holiday season is going to be starting this week (Thursday November 22, 2018 is Thanksgiving), meaning many businesses and consumers will be very distracted by all that comes with the holidayseason.  With this in mind,I hope the PUCO makes the prudent decision and delays ruling on this important case until 2019 as allFE ratepayers will be significantly impacted.  Since the Power Forward initiative is sponsored by the PUCO, it is unlikely this stipulated agreement will reach the same dead-end street that the FES bail-out requests did but it is only fair for the PUCO to give the Ohio public adequate time to review and comment appropriately.  Furthermore, I hope the media starts providing this “secret” rate case improvedand more comprehensive coverage than they have so far as the Ohio public needs to better understand the financial implications of this monumental “Power Forward” initiative.  In my humble opinion, announcing a stipulated agreement on November 8, 2018 and then expecting that it is ruled on by the end of the year 2018 during the busy holiday season is not enough time for the various stakeholders to respond, especially for a rate case which was not widely publicized.  Please feel free to reach out to the PUCO should you want to comment on this important case.  The PUCO can be reached in the ways specified in the following web-link:  https://www.puco.ohio.gov/contact-us/.  If you are like me and feel the PUCO should require FE to file a more formal rate case, forcing them to show all revenue and expenses and having themjustify their final delivery rates, then please be vocal and as such with the PUCO.If not, we will likely be getting close to 40 riders which is way too many in my humble opinion.  The Power Forward concept has been approved by the PUCO, but the dollars associated with it have not.  Furthermore, providing all stakeholders less than two months to properly evaluate the financial impact on FE ratepayers is not enough time.

As mentioned previously in this blog post, FEOhio currently has approximately three dozen riders which might impact your electrical costs.Wow!  First of all and just to be clear, a “rider” typically means you pay more for your electricity that you would absent the rider being in place.  Ohio Public Utilities (electric and gas utilities) are paid by rates published in tariffs, which are approved by the PUCO, and riders are typically rates in addition to those rates published in tariff.  Secondly, not all the riders apply to all businesses – it depends on your situation.  Thirdly, did you see in the November 14 article that all of these riders have been approved in the last decade?  The Rider team in the FE Rates Department has sure been busy the last ten years.

What does this discussion about 36 tariff riders really mean and what about more riders being added potentially if FE Power Forward rate case is approved as defined in the just announced stipulated agreement settlement between FE and the PUCO?  Well, if you haven’t had someone with utility rate experience look at your regulated FE rates in the last 5 years then it is probably prudent for you to do so now.  Utilities do make mistakes and you could be paying more money than you should be if the riders are not being applied correctly to your specific situation.  Furthermore, your business and associated operations have likely changed over the years so you might not be on the correct utility rate any more.

If you have not looked at the “other side” of your utility bill in a while, this is where our team of professionals can help as we have experience helping business save significant dollars by doing regulated reviews of their utility rates and helping them consider their regulated options.If you are not working with anenergy broker or consultant who is helping you review the regulated side of your utility invoices, please feel free to give us a call at Statistical Energy LLC by calling 614-505-4007 or email us at info@statisticalenergy.com.  We would be happy to learn more about your situation, assist you in reviewing your regulated options and help your business develop a plan for making your energy procurement process as efficient as possible.

Jim Risk, CFO/Partner at Statistical Energy LLC, began his energy and utility career in 1997 at Ohio Edison.  He was the first sales employee ever employed at FirstEnergy Solutions and was the founding business development executive at The E Group, the energy consulting group owned by FirstEnergy Solutions.  Statistical Energy LLC (www.statisticalenergy.com), currently provides gas and electric brokerage services to clients in 15 State and 2 Canadian provinces.  Jim can be reached at jim.risk@statisticalenergy.com