FirstEnergy’s Scheme to Stick West Virginia Ratepayers With Speculative Risk Is Working

In its filing last week for a 12.5 percent rate increase in West Virginia, FirstEnergy showed itself for the desperately shrewd customer-gouging company it has become.

“Lower than forecasted energy market prices” is why FirstEnergy says it needs such an increase. On its face, that doesn’t make much sense because lower energy prices should mean lower energy bills for customers, right? That’s what’s happening elsewhere around the mid-Atlantic.

But West Virginia customers are seeing their rates soar. How can this be?

Here’s the explanation: Because of a deal engineered two years ago by FirstEnergy, its West Virginia utilities, Mon Power and Potomac Edison, now own more generating capacity than they need. Excess electricity is typically sold on the PJM wholesale market and the revenues from those sales are credited back to customers. But when wholesale market prices are low—as they are now, primarily driven by low natural gas prices—this credit goes away, and FirstEnergy raises rates.

This customer-nightmare scenario wasn’t always possible. Until 2013, Mon Power and Potomac Edison owned less generating capacity than they needed to serve their customers and they were net purchasers of power from PJM. Had that arrangement been left in place, West Virginia ratepayers today would be benefiting from the low cost of wholesale electricity.

What went wrong, in a nutshell, is that two years ago, FirstEnergy sold its coal-fired Harrison Power Plant, moving ownership from a deregulated FirstEnergy subsidiary to the regulated Mon Power and Potomac Edison (a transaction that was approved 2-1 by the West Virginia Public Service Commission). As a result of the deal, Mon Power and Potomac Edison ended up with more power than either utility will need for at least a decade. The Harrison deal also left Mon Power and Potomac Edison relying on coal for more than 90 of their electricity, which means customers haven’t realized the benefit of low natural gas prices.

When FirstEnergy pitched the Harrison power plant purchase to the public service commission, its executives argued that the transaction would be a boon to West Virginia ratepayers because wholesale electricity prices were sure to rise and ratepayers would reap rewards on the sale of excess electricity at high prices. It was a purely speculative play—and a bet the company was all too willing to make with other peoples’ money.

WE WARNED THE WEST VIRGINIA PUBLIC SERVICE COMMISSION BACK WHEN THE DEAL WAS PROPOSED THAT FIRSTENERGY’S FORECASTS for wholesale energy prices were wildly inflated. We said then—and we say now—that the real purpose of the transaction was to transfer the risk of low wholesale power prices from FirstEnergy shareholders to West Virginia electricity consumers.

When the Harrison plant was owned by the FirstEnergy unregulated subsidiary, the risk of it being unable to compete with less expensive power plants on the wholesale market was borne by FirstEnergy shareholders. Now, because it is owned by the regulated subsidiaries, FirstEnergy can pass Harrison’s costs on to customers regardless of whether the plant is competitive.

We weren’t alone in our skepticism. Ryan Palme, one of the three members of the commission members at the time, dissented strongly, and wisely, from the decision to allow the Harrison power plant sale.

Palmer summed it up as well as anybody:

“This overreliance on one fuel source, and the imposition on ratepayers of a large, long-term fixed cost for twenty-five years regardless of whether the Harrison acquisition proves cost-effective, will expose ratepayers to an unreasonable level of risk.”

Time, unfortunately, has proven Palmer prescient. Through the Harrison transaction, FirstEnergy successfully transferred the risk of low wholesale prices to West Virginia electricity customers, who are now paying a very substantial price.

Cathy Kunkel is an IEEFA fellow.