The ‘90s are calling…


…and a utility’s calling back

A 1990s policy debate whose echoes persist involved the idea of discarding the regulated electric utility and breaking up its components (“functional segmentation” in the wonk-speak of the time), expecting the resulting new companies to burst out of their stodgy business model and engage in deregulated, “swashbuckling competition,” to use another phrase often invoked in those days, however implausibly.

It’s debatable how much “deregulation” occurred, since it was enacted by officials with career interests in making every consumer feel like a winner and unembarrassed to pursue that end through more regulation. Nearly half the states took the plunge into retail electric competition. Wisconsin was more than halfway to joining them when other experiments imploding—think California’s skyrocketing electricity prices and rolling blackouts—convinced this state’s legislative and regulatory officials to step back from the cliff.

While 23 states adopted deregulation, there’s still no state that doesn’t regulate utilities. The relevant question today isn’t what path a state will take but what path a utility prefers. One early deregulation enthusiast is trying hard to go back where it came from.

Reversing Course

Among the largest U.S. utilities, Akron, Ohio-based FirstEnergy owns 10 regulated electric distribution companies serving approximately 6 million customers in Ohio, Pennsylvania, New Jersey, Maryland, Virginia, and West Virginia.

FirstEnergy also owns FirstEnergy Solutions (FES), which in turn owns a fleet of power plants with more than 13,000 megawatts of generating capacity. Oddly, this presents a major problem for FirstEnergy.

The FES fleet is made up of what the industry calls merchant plants, outside the structure of the regulated utility and selling power into regional wholesale markets. The early days of electric deregulation put merchant plants at the cutting edge of a reinvented industry. Big companies bought up generating facilities to sell their output at whatever price the traffic would bear. The problem for today’s merchant-plant owners is that the traffic no longer bears a price that allows many of their plants to be profitable.

The dynamics are not unprecedented. Similar forces have disrupted the deregulated electricity business at least once before, though not always affecting power plant owners: The first major disruption affected businesses that owned no generation at all. The common factor is natural gas.

Hat? Check. Cattle? No.

Electric deregulation spawned the appearance of energy marketers, companies that theoretically could consist of little more than an individual with a telephone and credit card. The idea was to have no generating capacity but to buy wholesale power from someone who did, and sell it to retail customers at a price lower than the incumbent utility’s.

Around the turn of the century, natural gas prices climbed high enough that a lot of marketers couldn’t afford the power to serve customers they’d signed up. Many quit the business, dropping customers back on the doorstep of the utility they’d left.

Merchant plant owners don’t have the problem of being unable to obtain power supplies, but they’re caught in a squeeze when, like FES, their fleet is mainly coal and nuclear plants and natural gas prices turn the opposite way from the move that scuttled marketers.

As gas prices plummeted in recent years, wholesale power bids that would make money for coal and nuclear generation grew increasingly resistible. Today, it’s not marketers but merchants exiting the business or seeking market rule changes to stay afloat.

Full Circle

Though an early and major merchant plant sector participant, by the fall of 2016 FirstEnergy was planning to offload as many as 13 power plants. In November of that year, Columbus Business First quoted FirstEnergy CEO Chuck Jones saying, “competitive generation is weighing down the rest of the company.”
And in one of those echoes of the 1990s policy debate, late in January FirstEnergy happily announced a $2.5 billion cash infusion from a group of investors to support its return to the status of a “fully regulated utility company.”

Moody’s Investor’s Service called the move “a step in the right direction.”—Dave Hoopman