A Brief History of FirstEnergy’s Troubles

Electric utilities probably have the best business model in the world. They sell a needed service, have no competitors and earn a government guaranteed profit. And, even those utilities that have expanded into competitive businesses usually make a decent profit as long as they operate efficiently. But, because of bad luck or bad management or both, some utilities just cannot stay out of their own way. They always seem to have troubles.

That brings us to FirstEnergy. On July 23, 2019 Ohio Governor Mike DeWine signed House Bill 6 into law. HB 6 provided a multi-billion dollar ratepayer subsidy that saved FirsEnergy Solutions from bankruptcy. Almost exactly a year later a Federal Grand Jury handed down an indictment accusing an unnamed energy company of providing $60 million that was used as bribes to assure passage of HB 6.

FirstEnergy was later revealed to be the unnamed energy company. FirstEnergy claims that it did not know anything about a bribery scheme. And the Grand Jury did not indict FirstEnergy as a participant in the scheme. However, long time observers of FirstEnergy’s troubles could not have been surprised by this most recent turn of events.

1978 – FirstEnergy’s Troubles Go Back at Least 40 Years 

I first crossed paths with FirstEnergy’s predecessor, Ohio Edison, more than forty years ago. I was a newly minted attorney working for a law firm in Cincinnati, Ohio. One of our clients owned a steel mill that purchased its power from Ohio Edison. In 1978 Ohio Edison filed an application for an electric rate increase with the Public Utilities Commission of Ohio (PUCO). Our client asked us to intervene in the case on its behalf. I participated on the team that represented the client’s interest.

At the time, Ohio Edison was a medium sized utility headquartered in Akron, Ohio. It served a number of small cities and towns in Northeastern Ohio. Ohio Edison’s service territory meandered among and between other utility service territories in the same region. Sometimes the division between service territories ran right down the middle of a street. 

I do not remember much about the outcome of that rate case. But I do remember that Ohio Edison’s customers were outraged that their electric rates were higher than those of their neighbors served by Ohio Power Company. What these customers did not understand was that, by law, utility rates are based upon the costs of utility service. Ohio Edison’s rates were higher than the Ohio Power’s rates because Ohio Edison’s costs were higher than Ohio Power’s. 

But why would Ohio Edison’s costs be higher than Ohio Power’s? There may have been any number of reasons for this disparity. But the most likely reason was that Ohio Edison was just poorly managed and could not control its costs.

1997 – Ohio Edison Enters the Nuclear Power Generation Business 

Ohio Edision Merges with Centerior Energy to Become FirstEnergy

In 1997 Ohio Edison merged with Centerior Energy under the name of FirstEnergy Corp. At the time Centerior Energy owned Cleveland Electric Illuminating Company and Toledo Edison. After the merger FirstEnergy owned four operating electric utilities – Ohio Edison, Cleveland Electric Illuminating, Toledo Edison and Pennsylvania Power.

Along with the Centerior Energy utilities came the three Centerior Energy nuclear power generating plants – Davis Besse, Beaver Valley and Perry. After the 1979 Three Mile Island accident utilities started to consider nuclear generation a very expensive and risky venture. Many utilities cancelled their plans for nuclear plant construction. Centerior had already suffered financial distress because of its investment in nuclear generation. It had written off $1 billion in equity and had slashed its dividend. Could wading into the nuclear generation quagmire lead to more of FirstEnergy’s troubles?

FirstEnergy Incorporates the Centerior Energy Nuclear Plants Into its Generation Portfolio

But there may have been a method to FirstEnergy’s madness. Utility restructuring was on the horizon. Restructuring meant that utilities would be unbundling their generation business from their transmission and distribution business (referred to collectively as their “wires business”). While the earnings of the wires business would remain limited by regulatory restrictions, the earnings of the generation business would be unlimited. Those earnings would be determined solely by the success of the generating company’s participation in the competitive electric markets. 

Most utilities planned to participate in the competitive electric markets. FirstEnergy created FirstEnergy Solutions (Solutions) to serve as its participant in that business. By merging with Centerior, FirstEnergy helped Centerior out of a financially stressful situation, it acquired additional generation for participation in the competitive markets, it raised the potential for higher earnings for FirstEnergy shareholders and it opened the possibility for big bonuses for management. It seemed like a win-win-win situation for all. What could possibly go wrong?

2000 – FirstEnergy Recovers $6.9 Billion in Stranded Costs Under a Cloud

Ohio Senate Bill 3 Implements Utility Restructuring

In 1999 the Ohio General Assembly passed Senate Bill 3 implementing utility restructuring for Ohio. As expected, SB 3 required Ohio electric utilities to “unbundle” their generating business from their wires business. The wires business remained fully regulated by the PUCO. But the generating business operated in a non-regulated, competitive environment. 

FirstEnergy transferred 13,000 MW of generating facilities (including the Centerior nuclear plants) to Solutions. Solutions was, therefore, a fairly good sized generating company when it commenced participation in the competitive power markets. 

Senate Bill 3 Permits FirstEnergy to Recover Stranded Costs

But SB 3 had a wrinkle. It permitted the utilities to charge their ratepayers “transition charges” to recover something called “Stranded Costs”.  The Regulatory Compact, as embedded in Ohio’s public utility law, permits utilities to recover a reasonable return on their investment in facilities dedicated to utility service.

When the FirstEnergy utilities invested in their generating facilities they had a right to expect the PUCO to approve rates that permitted recovery of a reasonable return over the life of those facilities. But when SB 3 required the utilities to operate those facilities in a competitive market, they had not yet recovered their entire permitted return.

The generation facilities were expected to earn something in the competitive market. But there was no longer any assurance that their earnings would amount to the reasonable return guaranteed by the Regulatory Compact. Stranded Costs were equal to the difference between the utilities’ initially expected regulatory return and the return likely to be earned in the competitive market.  And SB 3 permitted the utilities to recover those Stranded Costs from their ratepayers.

SB 3 directed the PUCO to determine each utility’s Stranded Costs and to establish transition charges for their recovery. FirstEnergy claimed that its Stranded Costs equalled $8.8 billion. It filed an application with the PUCO asking for permission to recover those costs from its customers.

FirstEnergy May Have Influenced the Office of Consumers Counsel’s Position on Stranded Costs

When FirstEnergy asked for permission to recover its Stranded Costs, Ohio Consumer’s Counsel (OCC), Robert Tongren, represented customers’ interests in cases before the PUCO. Presumably, he was preparing to oppose FirstEnergy’s calculation of its stranded costs.  OCC retained La Capra Associates to conduct a study to determine FirstEnergy’s actual stranded costs. The La Capra study showed that adoption of FirstEnergy’s proposal would result in a $3.5 billion windfall for FirstEnergy – i.e. the Stranded Costs were no more than $5.3 billion.  

But OCC did not willingly disclose the results of the Capra study. OCC never presented the results of the study in the PUCO case dealing with FirstEnergy’s Stranded Costs. And, in response to a request for a copy of the study, OCC said that it was protected from production during the litigation. Then, upon being asked for the study after completion of the case, OCC said that the study had been destroyed.

OCC ended up settling the PUCO case with FirstEnergy agreeing that it could recover $6.9 billion of its requested $8.8 billion in Stranded Costs. Ratepayers paid that $6.9 billion through transition charges that were in effect from 2000 through 2005.

When the specifics of the La Capra study were finally made public FirstEnergy’s lobbying activities with Mr. Tongren were called into question. FirstEnergy never faced any repercussions from its possible influence of Mr. Tongren. However, because of the suspicions surrounding this issue Mr. Tongren resigned his position as OCC.

There is one more item of note here. SB 3 said that, once ratepayers paid the approved transition charges, FirstEnergy would be fully at risk for its participation in the competitive markets. In other words, no matter how well, or how poorly, FirstEnergy did in the competitive markets, after collection of the Stranded Costs, it could not expect any more relief from its customers related to its generating facilities.

2002  – FirstEnergy Dodges a Disaster at the Davis-Bess Nuclear Plant

The NRC Requires Special Inspections of Pressurized Water Reactors

Once FirstEnergy owned the Centerior nuclear plants it assumed responsibility for their safe operation. Not every utility would have taken on such risk. But FirstEnergy did. And it lead to more of FirstEnergy’s troubles.

In the 1990s the Nuclear Regulatory Commission (NRC) determined that cracks were developing in the pressurized water reactors of nuclear plants similar to Davis-Besse. In 2001 the NRC directed operators to shut down their plants to perform special inspections by December 31, 2001. The NRC, however, said that it would approve extensions of the inspection deadline for operators who submitted satisfactory justification.

FirstEnergy sought such an extension. In support of its request, it told the NRC that its past inspections were adequate to determine if there was any cracking. It said that, in light of those inspections, it could safely postpone the special inspection until early 2002. Based upon FirstEnergy’s submission, the NRC granted it permission to postpone the special inspection until February 15, 2002. 

FirstEnergy Finds a Hole in its Reactor

When FirstEnergy finally conducted the special inspection it found a “pineapple-sized cavity” in the head of its pressurized water reactor. FirstEnergy had to shut down the plant for two years while it spent over $600 million to repair the damaged head.

The NRC found that FirstEnergy had provided false information in support of its request to postpone the special inspection. It assessed FirstEnergy a $5.45 million fine – the largest fine in NRC history. And the Federal Justice Department opened a criminal investigation into FirstEnergy’s submission of false information. FirstEnergy ended up paying $28 million to settle that investigation.

2003 – FirstEnergy Causes a Wide-Scale Outage that Leaves 50 million People in the Dark

After the 1965 Northeast Blackout the Utility Industry Promised to Prevent any Future Large Scale Blackout

After a wide-scale power blackout of the Northeastern United States in 1965 the electric utility industry promised that it would never happen again. The industry organized into nine regional transmission planning organizations. And it created the National Electric Reliability Council (NERC) whose role was to develop reliability standards and practices.  The utilities promised their regulators that they would adhere to the NERC standards.  

Fast forward 38 years and it turned out that not all of the utilities shared the same commitment to the reliability of the transmission grid. Instead, some of the utilities were distracted by their efforts to maximize profits in a rapidly deregulating electric industry. 

FirstEnergy Fails to Follow Industry Standards

In 2003 there was another wide-scale outage that dwarfed the scale of the first outage. This time 50 million electric users in the Northeastern United States were without power for two days. Investigations led to directly to FirstEnergy. While FirstEnergy was focusing on the integration of Centerior Energy and the problems at the Davis-Besse Nuclear Plant, it grew lax in its compliance with the NERC reliability standards. 

The 2003 Blackout started when a FirstEnergy-owned high voltage line went out of service when coming into contact with a tree. Had FirstEnergy complied with the NERC standards it would have trimmed the tree in question so the contact would never have occurred. 

However, FirstEnergy’s failure to trim the tree was not the only issue. A computer system required by the reliability standards should have notified FirstEnergy operators when the line went out of service so that they could take action to prevent the spread of the outage. But at the time of the outage the computer system was out of service. And even if the system had been in service there have been suggestions that the FirstEnergy operators were not adequately trained to know how to react upon receipt of the computer signal.  

Because utilities were not required by law to comply with the NERC standards, no regulatory agency fined FirstEnergy for its role in the outage. However, as a result of FirstEnergy’s failure to comply with voluntary standards, Congress passed new legislation, and the Federal Energy Regulatory Commission (FERC) adopted new regulations, that made compliance in the future mandatory.

2016 – FirstEnergy Gives Up on the Competitive Power Market

FirstEnergy Solutions Participated in a Regional Power Market Managed by PJM Interconnection

Beginning in 2000 FirstEnergy Solutions operated in a competitive power market operated by PJM Interconnection, LLC (PJM). Coincidentally, about the same time that Solutions commenced its operation in that market, I moved to the East Coast and started working for another participant in the same market. 

PJM is a regional transmission organization (RTO) that coordinates the movement of wholesale electricity in all or parts of twelve states and the District of Columbia. PJM’s competitive power market rules are developed by committees of its stakeholders and approved by the FERC. 

Those rules are designed to make reliable and low cost electricity available to ratepayers located in the area that PJM manages. All generating plant owners in the PJM area participate in a series of PJM managed auctions. The plant owners submit prices in those auctions at which they offer to sell their power. Naturally, the bid prices generally reflect the generators’ cost to operate. PJM dispatches the generators in the order of their bids – from lowest price to highest price.

Generators with low operating costs, typically gas-fired and renewable generation, usually clear the PJM auctions and run on a regular basis. Generators with high operating costs, typically coal-fired and nuclear, do not usually clear the auctions and often stand idle.

All participants understand the risks and rewards of the competitive market. Shareholders of companies that sell adequate quantities of power at prices above costs reap rewards. Shareholders of companies that are not often dispatched might lose some or all of their investment. And, unfortunately, the employees of companies that cannot compete sometimes lose their jobs.

FirstEnergy Solutions’ Nuclear and Coal Fired Generation Could Not Compete with Gas Fired Generation and Renewables

It would have been hard to criticize FirstEnergy for its decision to big bet on coal-fired and nuclear generation. After all, coal-fired and nuclear generation were quite profitable during the early days of the competitive markets. At that time few could have foreseen how natural gas fired generation was going to upend the power markets.

However, by 2016, the decision to bet on coal-fired and nuclear generation had led to more of FirstEnergy’s troubles. Solutions was facing the same challenges as other owners of nuclear and coal-fired generation. The costs of operating such generation simply could not compete with natural gas and renewables. Because it could not compete, Solutions announced that it would be exiting the generation business. As a first step in this process Solutions sold 1,572 MW of its generation to LS Power. At the same time, Solutions  announced that it might sell or retire some or all the rest of its plants in the next few years.

But, before completing its exit from the competitive generation business, Solutions thought that it might be special, that it might have a way to by-pass the risks inherent in the PJM market. Solutions asked the FERC to force PJM to change its market rules so that its uneconomic plants would qualify for operation. But the FERC was committed to competitive markets where low cost, efficient generation was encouraged and high cost, inefficient generation was discouraged. The FERC denied Solution’s request for relief.

After being rejected by the FERC Solutions was running out of options. In March, 2018, Solutions filed for Chapter 11 bankruptcy protection. At the same time it announced plans to deactivate its nuclear plants within the next three years. Then, later in 2018, FirstEnergy announced the retirement of 4000 MW of fossil-fueled capacity at Bruce Mansfield, W.H. Sammis and Eastlake.  Solutions, thus, appeared to be moving forward with its plan to exit the competitive power business.

2019 – Ohio Legislation Provides Ratepayer Subsidies for FirstEnergy Solutions

FirstEnergy Solutions Seeks Relief From the Ohio General Assembly

But Solutions did not give up on the idea that it might be able to by-pass the risks of the PJM market. It asked the Ohio General Assembly for help in the form of a ratepayer subsidy. The proposed legislation enabled Solutions to bid its generation into the PJM auctions at prices low enough to qualify for operation. But such a low price would have to be below Solutions’ operating costs. In order to facilitate this uneconomic bidding, the proposed legislation required Ohio ratepayers to provide an additional source of funds for Solutions to cover its costs.

When those of us in the competitive power industry heard about this proposed legislation we were appalled. If the legislation passed, every time that the Solutions’ generation cleared the auction, and was directed to operate, another member of competitive generation industry – one whose generation was less costly and more efficient than FirstEnergy’s – would be bumped offline. The proposed legislation undermined the competitive markets, threatened the investments of all other market participants and risked the jobs of other market participants’ employees. 

The General Assembly Saves FirstEnergy Solutions by Passing House Bill 6

The members of the competitive power industry joined others in opposing Ohio’s proposed legislation. But it was all to no avail. In July, 2019, the legislation was passed as House Bill 6 and signed into law by Governor Mike DeWine.

House Bill 6 accomplished the following:

  • It created a Nuclear Generation Fund into which all Ohio electric ratepayers will pay surcharges totaling $150 million per year for 8 years. Payments will be made out of the Nuclear Generation Fund to Solutions (now named Energy Harbor Generation) for all generation produced by the nuclear plants. This is the subsidy that facilitates Energy Harbor’s bidding of the nuclear energy into the PJM market at below cost. 
  • It reduced the utilities’ Renewable Portfolio Standards requirements from 12.5% of total generation by 2026 to 8.5% in 2026 and eliminated the Renewable Portfolio Standard after 2026 in its entirety.
  • It eliminated Ohio’s energy resource standard (which required improvements in customer efficiency) and eliminated funds for the efficiency programs.

In an article dated, July 27, 2019, Vox called House Bill 6 the “worst energy bill of the 21st century.” But House Bill 6 was the law in Ohio. And it seemed that there was no turning back.

2020 – A Federal Grand Jury Sends Down an Indictment Related to HB 6

The HB 6 Subsidies Enable Solutions to Emerge From Bankruptcy

Prior to passage of HB 6 Solutions had filed for Chapter 11 bankruptcy protection because it was unable to make payments on its existing debt. A debtor can emerge from Chapter 11 if its creditors agree to restructure the debt so that it can make its payments. 

Creditors typically agree to restructure the debt only if the debtor pays some type of partial payment or provides acceptable assurance that it will be able to pay the restructured debt. But Solutions’ only assets – the generating plants – were not selling power into the competitive markets. They were, therefore, pretty much worthless. Solutions could not use its worthless assets to satisfy its creditors.  

That is until the Ohio General Assembly passed HB 6. The ratepayer subsidies in HB 6 transformed the Solutions generating facilities into valuable assets that Solutions could use to resolve its bankruptcy. Solutions’ creditors accepted ownership of Solutions as, at least, partial settlement of their claims. And, in February, 2020, Solutions – then owned by the creditors and renamed Energy Harbor Generation – emerged from Chapter 11 to continue its participation in the competitive power market. 

In mid-July 2020, after the dust had settled, FirstEnergy no longer owned Solutions or any of its generating plants. The former Solutions’ creditors owned Solutions. The new owners had changed Solutions’ name to Energy Harbor Generation. Ohio ratepayers were scheduled to pay into a fund that would be used to subsidize operations of the Energy Harbor Generation plants. The energy efficiency laws applicable to Ohio utilities had been gutted. And competitors in the regional competitive power market were competing with ratepayer subsidized costly and inefficient Energy Harbor Generation plants.

A Federal Grand Jury Brings a Bribery Indictment

Then, on July 20, 2020, a Federal Grand Jury indicted Ohio House Speaker, Larry Householder, four other individuals, and an entity named Generation Now in a racketeering conspiracy. That conspiracy involved $60 million in illegal payments from an unnamed energy company that was used to obtain passage of HB 6.

According to the indictment, a large portion of the $60 million went to support the election of 21 state candidates who, when elected, supported Householder’s election as Speaker of the House and then supported passage of HB 6. Another large portion of the funds went to oppose a ballot initiative aimed at overturning HB 6.

The unnamed energy company referenced in the indictment turned out to be FirstEnergy. FirstEnergy has not been indicted. And there is no suggestion here that the bribery scheme was a FirstEnergy managed strategy. Since being identified as the unnamed energy company, FirstEnergy has claimed to have provided only a quarter of the $60 million. And it has further claimed that, as far as it knew, its payments were for legitimate lobbying services.

All of those who were indicted, are, of course, innocent until proven guilty. And their fates will eventually be decided by the courts. But the fate of HB 6 is now before he Ohio General Assembly.

The Future of HB 6

There is already strong sentiment in Columbus, including Governor DeWine, that HB 6 is tainted and should be repealed. Any such repeal would probably be fairly straightforward. The General Assembly can reinstate the energy efficiency rules that were terminated. And they can terminate the ratepayer charges that were going to be used to subsidize the Energy Harbor plants.

But there is one part of the toothpaste that may not be easy to return to the tube. Solutions’ creditors agreed to take ownership of Solutions as settlement of the Solutions’ debt based on the assumption that the ratepayer subsidies were going to make the plants profitable. Without those subsidies the plants are no longer profitable. They will not have the value assumed by the creditors. Repeal of HB 6 could, therefore, scramble the settlement reached by Solutions and its creditors in bankruptcy court. Expect everyone to now lawyer up. It should be interesting to follow.

 Author

I. David Rosenstein worked as a consulting engineer and attorney in the electric industry for 40 years. At various times during his career he worked for utility customers, Rural Electric Cooperatives, traditional investor owned regulated utilities and deregulated power generation companies. Each of his posts in this blog describes a different aspect of the past, present or future of the electric industry. 

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