Exelon, FirstEnergy Fleeing “Free Market”

During the HB2201 fight, we have heard a lot of WV legislators and power company lobbyists bloviating about “the free market.” In the electrical industry right now, no power companies support free markets.  They are all pushing as many of their assets into state regulated monopolies as possible to protect their shareholders from new competition from innovation and decentralization.

I have covered Exelon’s attempt to take over Pepco Holdings in an earlier post.  Pepco Holdings owns small utilities in NJ, DE and East VA, but the big fight will be in MD and DC, in the heart of Pepco’s customer base.  MD and DC PSCs are right in the middle of their merger cases.

Last week, the state of MD filed its brief in the MD PSC case.  The brief is a scathing but well argued case for rejection of Exelon’s merger bid.

After twelve (12) days of hearings, the receipt of testimony from dozens of witness, and the development of a record that spans several thousand pages, the answer to this question is clear: Maryland and its ratepayers will not be “better off’ if the merger is completed-unfortunately, the opposite is likely true. The merger enjoys no support from the State or numerous affected stakeholders. This is not surprising-other than a $54 per customer rate credit, there is nothing in this nearly $7 billion transaction that is of tangible benefit to customers or Maryland’s economy. Worse, the transaction poses significant potential harms, and Applicants’ commitments fail to mitigate them. Indeed, implementation of certain of the commitments could make things worse than would otherwise be the case.

Two of the main issues in the case involve Exelon’s lack of commitment to Pepco’s system reliability and to supporting innovation and development of more distributed generation, including small scale solar power.  Here is what MD officials have to say on these subjects:

Reliability. Applicants promise to improve reliability in the Pepco/Delmarva territories, subject to a spending cap-actions which will allegedly provide almost $500 million in economic value in the form of reduced outages. Evidence adduced at trial shows that these claims are false. Contrary to the assumption of its own expert witness, Exelon revealed that it has no “engineering plan” supporting its reliability targets, and will need at least six months in the field to ascertain what reliability improvements can be achieved, by when, and at what cost.

Needed reliability projects may be delayed, and reliability may suffer as Exelon brings itself up to speed.

Worse, unlike pending proposals from Pepco and Delmarva, and contrary to Commission regulations, Exelon’s reliability commitment includes no targets for 2015,2016, or 2017, and no annual targets for 2018, 2019, or 2020. In fact, Exelon’s proposal would not bind it to any reliability target until the end of 2020, roughly five years after consummation of the merger. A Pepco or Delmarva customer experiencing a power outage in the meantime is unlikely to care whether Exelon can meet a “three-year average” atthe end of 2020.

And, if Exelon fails to meet its commitment, then the Company-not the Commission-gets to determine when any penalty is imposed, based on when Exelon files a rate case. Even if this regimen were acceptable, Exelon’s commitment is based on internal annual goals that are in some instances indisputably less stringent than the annual standards already proposed by Pepco and Delmarva, rendering the commitment a harm rather than a benefit. And whatever can be achieved will come with an unknown price tag. Exelon’s budget “commitment” is no more than a promise to seek Commission approval to raise rates even further if Exelon needs more money than it thought-which is likely given that Exelon is yet to perform what it considers to be essential engineering studies. Rather than taking responsibility for these unknown risks, Exelon expects customers, not shareholders, to bear them.

Competition and Innovation. Post-merger, Exelon will control service to 80% of the State’s ratepayers. Internal documents show that Exelon plans to operate its distribution utilities to protect the Company’s massive, multi-billion dollar investment in unregulated generation (including its economically challenged nuclear plants) by seeking to control the pace of distributed energy resource (DER) penetration in retail service territories. The State’s testimony demonstrates that Exelon has both the incentive and, through its utilities, the ability to stifle the implementation of innovative, customer-driven DER, including resources that may improve service reliability. And the contrast could not be more stark: pre-merger, PHI was developing a “Utility 2.0” plan, but that effort is now on hold; Exelon-affiliate Baltimore Gas & Electric (BGE), on the other hand, possesses not a single piece of paper concerning this initiative. The stakes are high: the competitive issues raised by the merger involve the future of Maryland’s electric industry at a time of transformative change. That future is better served by Pepco and Delmarva offering proposals and insights uncompromised by the need to protect Exelon’s merchant generation. As the industry moves toward the distribution “utility of the future,” Maryland’s regulated utilities should be focused on embracing-not undermining pro-consumer reforms. Applicants’ commitments ignore this issue entirely, and there is no meaningful way to mitigate the attendant harms.

MD is an “deregulated” state, unlike WV.  Pepco, as it now exists, does not generate any electricity of its own, so the company is free to seek the lowest cost electricity on the market.  Exelon, however, owns big and obsolete generating plants.  A merger would re-integrate Pepco into a company that owned generation and transmission.

This vertically integrated structure is exactly what causes a lot of our problems here in WV.  AEP and FirstEnergy are free to charge all the costs of their high-cost, obsolete coal burners to WV rate payers.  The situation is a little different with Exelon and Pepco, because Exelon owns nominally “independent” merchant generating plants that wouldn’t provide electricity directly to Pepco. However, Exelon would manage Pepco in such a way that Pepco’s policies would not undermine the value of its generating plants through incentives for solar generation or energy efficiency.

Exelon is seeking to capture Pepco, because Pepco is a stable company that is regulated by state PSCs.  Distribution-only companies like Pepco do have their rates and costs regulated, even in “deregulated” states, because these companies sell electricity directly to retail customers.  Exelon is “investing” in Pepco, because it no longer wants to invest in power plants that have to operate in the free market.  Exelon has learned that its generation technologies are obsolete and cannot compete in a fair and open marketplace, so the company is seeking monopoly markets where its profits are protected by government regulators.

If you want to see another power company holding company that can’t hack “the free market,” look no further than Cathy Kunkel’s assessment of FirstEnergy’s situation:

FirstEnergy’s most recent quarterly numbers and its outlook for 2015 are both dismal and in line with a report we published last fall, “FirstEnergy Seeks a Subsidized Turnaround.”

If anything, FirstEnergy’s problems have only gotten worse since we issued our report:

  • FirstEnergy’s net income (revenues less expenses) continues to decline. Here’s the spiral: From $869 million in 2011 to $392 million in 2013 to $299 million in 2014.
  • Its earnings per share fell to its lowest point in a decade. Earnings per share in 2014 were $0.51, down from $0.90 in 2013.
  • Its long-term debt, already among the highest in the utility industry, increased from $15.8 billion in 2013 to $19.2 billion in 2014, and on its fourth-quarter earnings call, the company’s chief financial officer conceded that the parent holding company is carrying more debt than “we are comfortable with.”

FirstEnergy’s weak performance stems from its merchant generation business, which is dominated by obsolete coal-fired generation that is struggling to compete in the wholesale power markets. FirstEnergy’s merchant generation segment posted negative net income in 2014 — even more negative than in 2013.

And how did FirstEnergy respond to its disastrous free market experience?

In the company’s fourth-quarter earnings call, executives emphasized how it is relying on a proposed power-purchase agreement in Ohio to improve its financial performance. Under the proposal, FirstEnergy’s regulated electricity distribution companies would enter into a 15-year agreement to purchase power from several of FirstEnergy’s merchant power plants at a fixed price. In other words, Ohio electricity customers would be required to subsidize these plants—by paying more than the market price for their output—so that FirstEnergy can keep operating them. In its testimony to the Public Utilities Commission of Ohio, FirstEnergy stated very clearly that the reason it is angling so hard for ratepayer subsidies is that “markets have not, and are not, providing sufficient revenues to ensure continued operation of the plants.”

Until recently, FirstEnergy was a vociferous champion of free markets, a stance it began to express when electricity markets were deregulated in Ohio in 2000. FirstEnergy has taken a big step back from that rhetoric now that the free market is not working out for the company. In that fourth-quarter earnings calls, a few words in particular from Chuck Jones, FirstEnergy’s new CEO, spoke volumes: “We trust the regulator to look out for a future Ohio more than we do the markets.”

The company’s bet on ratepayer subsidies might not pan out. The Public Utilities Commission of Ohio (PUCO) last week ruled against a very similar proposal by American Electric Power, noting that the AEP pitch would have raised rates without offering any additional benefits to Ohio electricity consumers.

And if you think power companies’ anti-free market actions are something new, take a look at what I wrote in 2009.  The fact is that free market rhetoric has been a smokescreen for monopoly strategies from the beginning of the US shareholder-owned electric power industry.

Karl Cates – The Other War: Underreported but Not Insignificant

Karl Cates has an excellent piece over at the IEEFA blog that will give you a good look at how decentralized solar power is under attack by the electrical industry around the US.  Cates also describes how this story is being suppressed in the US media.

Here’s what Mr. Cates has to say:

But there is a war on solar. It’s happening nationally in congressional reluctance to extend tax credits that encourage solar-energy development. It is being waged locally and effectively in states that most recently include Hawaii, Indiana and Washington, where utility and mining interests have had lawmakers draft legislation to put restrictions on solar development.

Organizations pressing the war on solar are numerous and well funded. They include the American Legislative Exchange Council, or ALEC, a regressive organization that brings big companies and lawmakers together to write or rewrite state laws. (ALEC has crossed the line in so many ways on so many issues that some high-profile corporate members have left out of sheer embarrassment, including most recently Northrop Grumman and—before them—Blue Cross/Blue Shield, Coca-Cola, PepsiCo, and Kraft.)

Other soldiers in the war on solar include the Edison Electric Institute, a Washington-based utility-company association that lobbies Congress; Americans for Tax Reform, the Grover Norquist group that focuses maniacally on undermining the financial stability of the U.S. government; and Americans for Prosperity, the shadowy and notoriously well-financed organization that works at the behest of the industrialist Koch Brothers.

The goal of the war on solar, of course, is to kill a budding industry before it can get its legs. Much of its strategy is in a state-by-state campaign the employs two tactics: reducing state-government commitments to the percentage of energy acquired from renewables and repealing “net-metering” laws that fairly compensate homeowners and businesses for the solar energy they produce.

The stakes in the war on solar are not insignificant. The Solar Energy Industries Association, which has been around since 1973, reports it its latest numbers that 36 percent of all new electricity-generation capacity in the U.S. in the first three quarters of 2014 came from solar. It puts the total number of solar-industry jobs in the U.S. at 174,000, almost twice the number of coal-mining jobs nationally.

Yet the war on solar remains starkly underreported, and vastly deserving of much more and better coverage than it’s gotten so far.

Regular readers of The Power Line are familiar with my posts on efforts in other states to suppress decentralized power, stretching back to my post on EEI’s strategic report on the industry’s plan to, as Mr. Cates puts it, “kill a budding industry before it can get its legs.”

While the Republican leadership in the WV Legislature has preserved net metering in its recent repeal of WV’s ARPS law, lobbyists from the two Ohio-based holding companies that control WV’s electrical system have managed to get amendments to the new net metering bills that open the door for future mischief for ALEC and its minions.  Citizens have let our legislators know that we are watching them closely.

Duke Energy Holding Company Using Bogus Arguments to Attack Net Metering in Indiana

The desperate multi-state holding company Duke Energy is attacking net metering in Indiana.  RTO Insider has a good summary of the situation.

Duke trotted out the tired old propaganda that adding extra charges to solar power producers “balances the interests of customers who have their own generation and those who don’t.”

RTO Insider reporter Chris O’Malley points to:

…a study conducted for the Public Service Commission of Mississippi found “very little substantiated evidence that there are significant costs incurred by grid operators or distribution companies as a result of low levels of solar distribution resources.”

The study, by Synapse Energy Economics, concluded that solar net metering would have estimated benefits of $170/MWh and estimated costs of $143/MWh, resulting in $27/MWh of net benefits to Mississippi.

So the Mississippi study indicates that all rate payers should actually be paying solar producers for the benefits they are receiving from net metering.

The fundamentals of net metering are really based on the science of electricity, not power companies’ needs to recover past bad investments from rate payers.

Uninformed descriptions often claim that solar power producers “feed their electricity back into the grid.” This is wrong.

Current flows along the path of least resistance to the nearest loads.  When my solar panels produce more electricity than I can use, those electrons don’t go “to the grid,” they go to my nearest neighbors’ houses.

Mon Power collects the retail price of that electricity from my neighbors.  I already pay $5 per month to Mon Power for my connection to their system.  My electricity only uses an infinitesimal amount of Mon Power’s entire generation, transmission and distribution system, the couple of hundred yards to my neighbors’ houses.

Mon Power charges my neighbors retail prices for the electricity I supply.  If Mon Power added extra fees or reduced the price of the electricity I sell them, they would be getting a windfall profit that they didn’t earn.  This is a windfall from my generation equipment that I asked no other rate payers to pay for.

Science is on the side of net metering, and more and more independent studies, like the one by the Mississippi PSC, are demonstrating that it’s the power companies, not the solar power producers who are pushing “unfairness.”

Dangerous Holding Companies Rebuilding Empires at the Expense of the Rest of Us

Back in the 1910s and 1920s, Samuel Insull, president of Commonwealth Edison in Chicago, and banker J.P. Morgan put together a network of privately owned holding companies that controlled must of the major electric utilities in the US.  In the late 1920s and early 1930s, this dangerous pyramid of companies collapsed, threatening the stability of electrical service across the country.

In 1935, the US Congress passed the Public Utility Holding Company Act which limited the size and activities of utilities to prevent the collapse of dangerous financial structures that threatened the US electrical and natural gas infrastructure.

This federal law remained in place until the Cheney Administration and the Republican-controlled Congress repealed it as part of the 2005 Energy Policy Act.  The 2005 Energy Policy Act was the same law that granted massive rate payer subsidies to power companies for building new high voltage transmission lines.  Readers of The Power Line are very familiar with the disastrous impacts of this transmission subsidy scheme.

So erstwhile “free market” Republicans passed the 2005 Energy Policy Act to encourage the growth of new, unstable monopoly holding companies in the electricity markets and huge subsidy schemes for those same holding companies to build obsolete and unneeded high voltage transmission, all at the expense of electric retail customers.

We are witnessing the results of the repeal of the 1935 Utility Holding Company Act in real time.  Holding companies AEP and FirstEnergy have dumped obsolete coal-fired power plants onto the captive electric bills of West Virginians.  New post-2005 repeal holding companies are merging into ever fewer monopolies that operate in multiple business lines and exert increasing power in regional transmission organization cartels across the US.  The attempt by Chicago-based Exelon to swallow regional distribution company PEPCo Holdings on the East Coast is just the latest in the holding company monopoly game, and this one even includes Atlantic City.

I have posted a number of times, here, here, here and here, about the Exelon merger, because the forces at play in this case offer real insight into the train wreck that is West Virginia’s electrical system.  In the last few years, the WV PSC and the two Ohio-based holding companies that control WV’s electric utilities have played West Virginians for chumps.  AEP’s and FirstEnergy’s coal-fired power plants can no longer compete in wholesale electricity markets, so friendly regulators have forced their WV customers to pay for much more power plant capacity then customers will need for the next thirty years.

Exelon is moving to create that same situation for the customers of PEPCo’s companies.  Exelon’s shaky holding company structure is almost entirely dependent on expensive and obsolete nuclear power plants.  Like coal-fired power plants, nukes are struggling to compete in the free market.  Exelon is paying billions of dollars above PEPCo’s stock value because it wants access to PEPCo’s captive rate payers in stable regulated retail markets.

Wall Street bankers have seen the dangers facing unstable electric holding companies and their obsolete generating plants.  Starting last May with Barclays Bank, major investment banks have been downgrading the bonds of the entire electrical generation sector because they can no longer compete with natural gas plants, investment in energy efficiency and renewable power.

Last week, the Institute for Energy Economics and Financial Analysis published an in depth report by WV’s own Cathy Kunkel describing exactly how and why Exelon wants to control a captive PEPCo Holdings for its own profit.

Also last week, the always entertaining and informative David Roberts provided an overview of the Exelon/PEPCo merger, plus some important history and context.

If you are interested in real electricity innovation in the US, you need to understand the massive forces that are arrayed against us.  Understanding the newly hatched monopoly holding companies that control electricity in our country is essential for identifying who is resisting change and why they are doing it.

While the new holding companies still control most of the US electrical grid, they are becoming increasingly desperate as their market base erodes and their financiers get weak in the knees.  These companies have become the enemies of the free market in electricity.  Their only hope is to manipulate the political and regulatory process to maintain their slipping grip on power, as their industry association recommended back in 2013.

Look closely at the links in this post, and you will be able to see beyond the misleading information that pops up in the media (most of it from power company press releases) to see what is really at stake.  As I have always said here on The Power Line, knowledge is power.

FirstEnergy Dumps Failed CEO

If you live in WV and pay your electric bills to either Mon Power or Potomac Edison, you need to pay attention to what is happening with FirstEnergy the Akron, OH-based holding company that owns these WV utilities.

Cathy Kunkel, whose work has appeared here on The Power Line, is a fellow at the Institute for Energy Economics and Financial Analysis.  She just posted an piece at the IEEFA Web site about the “early retirement” of former FirstEnergy CEO Tony Alexander, two years before his current contract ended.  The decision was sudden and there were no previous indications that Alexander was considering retirement.

Here is Cathy’s account of Alexander’s failed tenure as FirstEnergy CEO

Under Alexander’s reign, FirstEnergy doubled down on coal-fire power generation at exactly the wrong time. That happened in 2010 when FirstEnergy merged with Allegheny Energy, a company that was 78 percent dependent on coal. The deal increased FirstEnergy’s asset value by more than 30 percent but also put FirstEnergy at tremendous risk for being so coal dependent. Those risks materialized almost immediately—low natural gas prices and greater market penetration of renewable energy and energy-efficiency programs drove wholesale electricity prices to record lows, dealing FirstEnergy’s coal-fired power plant earnings a deep blow.  As a result, FirstEnergy’s financial performance lagged far behind its peers, even as Alexander made the Forbes 500 list of best-paid CEOs with a compensation package estimated in 2012 at $43 million over five years.

It’s not overstating it to say Alexander’s missteps were epic. First came the failure to diversify away from coal. Then came a cynical strategy by which the company aimed to get taxpayers and customers to bail the company out. These efforts, detailed in our October 2014 report on FirstEnergy, included organized political opposition to the development of renewables and overt campaigning against popular energy-efficiency programs. That FirstEnergy bailout scheme under Alexander ultimately sought to put ratepayers on the hook for FirstEnergy’s money-losing power plants.  It is a scheme that unfortunately is alive and well: today, for example, FirstEnergy customers are awaiting a ruling from the Public Utilities Commission of Ohio on whether the company will be allowed to set up a long-term contract through which customers will pay above-market prices for electricity from FirstEnergy’s Sammis coal plant and Davis-Besse nuclear plant.

FirstEnergy’s backward-looking, coal-focused strategy hasn’t worked for shareholders either.  The company cut its dividend in 2014, its stock price is down by more than half since 2008 and is roughly where it was when Alexander took over 10 years (while the S&P 500 Index, by comparison, had more than doubled), and the company is saddled with huge debt.

Large utility holding companies such as FirstEnergy have learned that they can’t compete in even the heavily rigged energy markets created by the wave of deregulation under Clinton and Cheney.  FirstEnergy has rushed to dump its uncompetitive coal-fired plants on customers in regulated markets, where rate payers are forced to pay the plants’ costs and profits.  FirstEnergy is even trying to get the PUC in supposedly deregulated OH to allow long term power contracts that would bailout FE’s failing nuclear and coal plants there.

So it is not surprising that FE’s board has hired Charles Jones, FE’s former director of regulated utilities, to replace Alexander.  The board has also decided that Alexander’s bad advice and poor judgment is still needed, because they kept him on the holding company’s board of directors.

The Jones appointment is a clear signal that FE is going to continue the political strong-arming and manipulation of regulated markets that began in the past couple of years, as FE tried to dig its way out of the hole Alexander dug for the company.

German Power Giant E.on Shedding Coal Burners

Here’s the story from Reuters.

Germany’s top utility E.ON (EONGn.DE) said it would split in two, spinning off power plants to focus on renewable energy and power grids, in a dramatic response to industry changes that could trigger similar moves at European peers.

Europe’s power sector has been hit by weak energy demand in a sluggish economy, low wholesale power prices and a surge in demand for cleaner renewable energy which is replacing gas and coal-fired power plants.