When FirstEnergy first proposed its Harrison scheme in WV, they had to deal with a big problem.  Electricity prices on PJM’s wholesale markets are currently very low, and are projected to remain low for at least the next five years.  But FirstEnergy wanted to sell an expensive coal-burner to WV rate payers and that electricity would be much more expensive than PJM’s market prices.

What to do?  They did what all propagandists do.  They created a fake boogie man.  PJM prices are low now, but they will go up eventually.  Oooo, market instability.

Well, we learned yesterday that FirstEnergy has no problem purchasing PJM power for its other utilities in other states.  Keryn has done an analysis of yesterday’s investor call.  Here is one of the many nuggets she found:

4.    Michael Lapides of Goldman Sachs got Donny Schneider off into a discussion of purchased power, where our hero stated, “We’re very comfortable with being able to procure power to serve load. For years, prior to our merger with Allegheny, we served all of the Penelec and Met-Ed [FirstEnergy-owned PA utilities] load, and I think that in total was about 30 terawatt hours a year, and we did almost of all of that with purchased power.”  But now, all of a sudden, FirstEnergy is telling the WV PSC that relying on purchased power to serve Mon Power/Potomac Edison load is too risky and too expensive and that purchasing Harrison is a better idea.  Giggle break!   Was Lapides REALLY asking about “exposure?”

So, 30 terawatt hours of purchased power per year is “very comfortable” in PA, but in WV it’s

VERY SCARY.

FirstEnergy’s first quarter investor call transcript is now on line here.  If you can get through all the “timeframes” and “glide paths” without gagging, take a look for yourself.

The big reveal is that FirstEnergy seems to be implementing Plan B after reading expert testimony in the WV PSC’s Harrison case.

Last quarter, FirstEnergy’s CFO James Pearson put the Harrison plant scheme at the heart of FE’s plan to dig itself out of its debt hole:

Looking now at 2013, our financial plan is structured to improve the balance sheet, enhance liquidity and maintain investment grade credit metrics. The plan initially focuses on reducing debt at our competitive companies, primarily FES and Allegheny Supply by at least $1.5 billion. The proceeds of the Harrison Pleasants transaction at West Virginia combined with asset sales are expected to be sufficient to fund the debt reduction.

Today, Pearson told the investor analysts that FirstEnergy has rejiggered its debt structure, and will be issuing stock to raise needed cash. Interestingly, when an analyst asked Pearson what the ratings agencies think of FirstEnergy’s new plan, he said this:

Well, they came out with a report. I believe it was in the February timeframe where they gave a report on FirstEnergy consolidated. We’ve shared our plan with them. I think they are waiting to see the success of some of the financial initiatives that we’ve laid out as well as the outcome in the Jersey rate proceeding. So, I think they’re waiting to see the end results of all of those, but we’ve fed them all with the information and we’re in an active dialogue with them.

Which, translated from investor call jargon, means “we don’t know.”

Meanwhile, CEO Tony said this about the Harrison scheme:

Our success with the actions we have already taken, particularly the bond deal at FirstEnergy Corp. means the Harrison transaction while still important to both West Virginia and FirstEnergy Solutions is no longer critical to the successful completion of our financial plan.

So, three months ago, the Harrison scheme was “sufficient to fund the debt reduction,” but today it is “no longer critical to the successful completion of our financial plan.”

So what changed?  Here are my thoughts -

• The stock market is again at record highs.  It’s a good time to raise cash by issuing new stock.
• All the parties in the Harrison case filed expert testimony a little over a week ago, and things look pretty grim for FirstEnergy getting what they want from the WV PSC.
• Interest rates remain low, allowing FirstEnergy to restructure a lot of their debt, essentially refinancing at lower interest rates.

The Harrison case looms large in this investor call, despite Tony’s claim that the scheme:

… is far more important to West Virginia and Mon Power in terms of providing them with a stable and long-term resource that they can rely on than it is at this point from a balance sheet standpoint at FES or at FirstEnergy.

Yeah, right, Tony.  It’s not about FirstEnergy’s bottom line, you are a charity that’s just trying to help out WV electric customers.

As anyone with common sense knows, refinancing debt is not paying down debt.  The fact that the credit ratings companies have not yet voiced an opinion about Tony’s Plan B is telling.

No matter what kind of financial games FirstEnergy plays, they are still in the business of selling electricity.  And that isn’t going too well:

We also took a look at the residential sales over the longer period to see if there were any identifiable trends. That analysis revealed that since 2007 our residential customer count and usage has been relatively flat. Commercial and industrial sales are still down versus 2007 at 6% and 8% respectively.

In Ohio’s newly deregulated retail market, FirstEnergy is selling more electricity, but they aren’t making more money:

At FirstEnergy Solutions, we continue to focus on expanding our retail business, strengthening our brand among customers in both new and existing targeted markets, and implementing our multichannel sales strategy. We increased our retail customer base by about 800,000 customers, or 42% since March of 2012. More importantly, while sales margins are compressing somewhat as a result of continued pricing pressure, our strategy of channel shifting, for example, moving kilowatt hours from POLR to higher value retail channels such as mass market and government aggregation continues to help offset the impact of lower market prices.

Yes, “sales margins are compressing somewhat” translates to “our profit from sales sucks.”

So Tony and his NEOs are on to Plan B.  Plan B provides some good old CEO cover-your-butt spin.  If the Harrison scheme goes down in flames at the WV PSC, Tony hasn’t bet the farm on the deal.  The bump in the stock market gave him just the out he was looking for – sell some more stock to raise the cash, even if his real business continues to stagnate.

And we still don’t know what the ratings agencies think of Plan B.  But it lets Tony tapdance his way through another investor call.

Keryn listened to FirstEnergy CEO Tony Alexander tapdance today on the company’s first quarter investor call.  Tony seems to be sending signals that FirstEnergy may be going wobbly on their Harrison power plant transfer to Mon Power.  He said that “Harrison is no longer critical” to FirstEnergy’s business strategy.  Here is a link to Keryn’s post.

Keryn has told me that investment analyst covered Alexander with lots of questions about the Harrison scheme.  We will see if Tony was admitting defeat and plans to withdraw FirstEnergy’s application for the transfer from the WV PSC, or if he was just admitting defeat and plans to face humiliation when the PSC rejects the scheme.

FirstEnergy, and Allegheny Energy before them, has a long history of pursuing regulatory processes long after they are defeated, wasting everyone’s money and time in the process.

When a transcript of the call is posted, I’ll be sure to post a link.

Here is the Web cast of the conference call.  So you can here the spinning yourself.

This is my final post about expert testimony filed in the WV PSC’s Harrison power plant case.  This post is about simple common sense.

It makes sense that before you look around to buy anything, you first make an assessment of what you need.  If you can reduce what you need to buy, you will spend less.  Common sense.

Go back and look at any of the expert testimony in the Harrison power plant case, particularly testimony by Cathy Kunkel and Jeffrey Loiter.  You will see extensive discussion, along with examples from all over the US, about how investing in the reduction of electricity use before building or buying new electric power plants is a less expensive and more reliable way of keeping electric rates low.

Here in WV, the cost of coal-fired electricity from FirstEnergy and AEP, has risen steadily for the last ten years, along with WV electric rates.  Because coal-fired electricity was relatively cheap 20 or 30 years ago, WV political leaders and regulators have reflexively supported our Ohio-based power companies’ claims that building or buying more power plants was the best way to meet new electricity needs.

As a result, few people in WV government know anything about the rapid strides the rest of the US has been making in using investment in energy efficiency and demand management to reduce electricity demand and the need for more power plants.

Many states, as Ms. Kunkel and Mr. Loiter both point out, have a hierarchy of electricity solutions that requires demand management come first, before regulators can consider building new power plants.  And guess what?  It works.

Don’t believe these experts?

Look at the most recent WV Energy Plan, issued by the WV Division of Energy just this year.

A primary benefit of EE for utilities and ratepayers is the avoidance of capacity-related costs. A long-term, sustained reduction in aggregate system capacity requirements is achieved when efficiency gains are made. Increases in power rates from utilities are often attributed to large investments in capital expenditures which are made to keep pace with the increasing levels of energy demand. If an increase in the demand for energy is decelerated through EE initiatives, utilities will purchase and build less power generating infrastructure. The reduction in capacity investment translates from lower fixed costs for utilities to fewer price increases for consumers over the long-run.

Effective EE programs can also contribute to a deceleration in peak demand as well due to the decrease in overall demand. As less energy is consumed overall, utilities no longer need to utilize their least cost-effective sources of power generation such as older plants which are primarily employed to account for periods of peak load. The increased reliance on newer, more efficient facilities leads to lower marginal costs of production for utilities over the short-run. This factor along with smaller consumption levels inherent with energy efficient technologies and practices can lead to a decrease in utility customers’ bills over the short-term as well.

Read Ms. Kunkel’s and Mr. Loiter’s testimony, and you will learn how states across the US are using demand management investments to avoid exactly the power plant cost trap that FirstEnergy has set for WV with the Harrison power plant transfer.

For years, WV’s Ohio-based power companies have been claiming that WV rate payers won’t take advantage of energy efficiency investments because WV electric rates are so low.  Late last week, FirstEnergy lawyer Chris Callas filed discovery questions on Ms. Kunkel asking why she had used the effectiveness of energy efficiency programs in the Pacific Northwest in a case about WV.  Really? Are FirstEnergy’s lawyers that clueless?

Washington state has lower electric rates than WV, largely because of the availability of hydroelectric power there.  Yet, as Ms. Kunkel points out:

In the Pacific Northwest, where electric rates are among the lowest in the country, energy efficiency has met approximately half of load growth since 1980 and can cost-effectively meet 85% of expected electricity demand growth over the next 20 years. Efficiency gains are expected to come from the residential sector (primarily lighting, appliances, water heating, and consumer electronics), commercial sector (primarily lighting and HVAC), and industrial sector (primarily efficient pumps, fans, compressed air, lighting, and material handling systems, as well as industry-specific process improvements).

So, Mr. Callas, I wonder why Ms. Kunkel would compare the Pacific Northwest, an area with even lower electric rates than WV.  Could it be that she was trying to make the point that states with very low electric rates have made great strides in reducing demand before they look around for new power plants, despite WV power company claims that this is impossible?

Could it be that investing in energy efficiency before buying expensive power plants is just common sense?