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PennFuture's E-cubed is a commentary biweekly email publication concerning=
=20 the current themes and trends in the energy market.=20 June 14, 2001 Vol. 3, No. 11 ? A Rock and a Hard Place ? Today, the Pennsylvania Public Utility Commission (PUC) voted 3-0 to appro= ve=20 a settlement=01*proposed by FirstEnergy, GPU, the Office of Consumer Advoc= ate,=20 the Industrial Intervenor groups and PennFuture=01*to resolve the =20 FirstEnergy/GPU merger and provider of last resort rate increase requests.= =20 The PUC was faced with a seemingly intractable choice: grant a rate increa= se=20 that violates the rate cap and risk unraveling every utility rate cap and= =20 stranded cost recovery decision in Pennsylvania, or just saying =01&no=018= and=20 risk=01*according to GPU=01*creating a financially unstable distribution u= tility.=20 In approving the settlement, the PUC resolved the thorny issues raised by= =20 the cases without excusing GPU=01,s failure to adequately plan its provide= r of=20 last resort service. Considering the circumstances, the result is good for= =20 consumers, the companies and the environment.=20 But while Pennsylvania PUC approval was a major hurdle, the New Jersey Boa= rd=20 of Public Utilities must still approve the merger as well, and such approv= al=20 is anything but a sure thing.=20 Now that the PUC has made its decision, let=01,s break through the rhetori= c,=20 assess the real issues in the proceeding and see how the settlement=20 addresses them. The Problem No matter who you are, how you look at it, or who you might blame, the=20 fundamental problem in this case is that GPU divested its generating asset= s=20 in 1998 and failed to protect its shareholders and customers from the=20 possibility of rising wholesale prices. In fact, wholesale prices did rise= ,=20 the retail generation rate caps remained intact, no competitive default=20 service was established, and GPU had insufficient long-term or lower-price= d=20 generation contracts in place. Alone among Pennsylvania=01,s major utiliti= es,=20 GPU was spending much more to buy wholesale generation than it was paid to= =20 sell that generation to its native load customers.=20 The real problem then was that GPU was running out of cash or credit to bu= y=20 wholesale generation to meet its obligations. Although the company as a=20 whole continued to fare well financially, it became clear only towards the= =20 end of the proceedings that the Commission and the public interest require= d=20 a solution which would enable GPU to continue to deliver provider of last= =20 resort generation service, and to do so without breaking the rate caps. If = =20 the Commission didn=01,t find a solution by June 15, GPU could have been fr= ozen=20 out of the capital markets and would have come back to the Commission for= =20 emergency rate relief=01*requiring a whole new set of proceedings concerni= ng=20 the same facts. =20 The Solution=20 The preferred solution was to merge GPU and FirstEnergy and to establish a= n=20 accounting deferral for GPU energy costs. The merger is a good solution in= =20 part because it overcomes the cash flow necessary to buy generation on the= =20 market. Any cash generated by a modest rate increase trickles in over time= =20 and is of secondary importance, so any modest rate increase wasn=01,t goin= g to=20 solve the problem. FirstEnergy, a huge generation owner, can provide some = of=20 the needed generation=01*even at market prices=01*without requiring the GP= U=20 utilities to pay cash on time. With a merged company, there is plenty of= =20 room for internal accounting flexibility. And, as a huge wholesale=20 generation player, FirstEnergy can also better manage wholesale purchasing= . The deferral is a good solution, too, because the rate caps remain 100%=20 intact. Consumers won=01,t pay more for electricity. Finally, GPU will be = able=20 to re-enter the capital markets, and although they are given a lifeline, G= PU=20 shareholders are not taken off the hook for the company=01,s past performa= nce. Thus, on May 24, 2001, the Commission approved the merger itself and allow= ed=20 GPU to establish deferral of generation expenses for accounting purposes.= =20 The issues to be addressed in the settlement, as directed by the Commissio= n=20 in its Order, concerned passing on merger-related benefits to consumers an= d=20 GPU=01,s generation costs. Today=01,s settlement addresses these directive= s by=20 extending the distribution rate cap from 2004 through 2007, rather than=20 violating the generation rate caps; providing a mechanism for GPU to write = =20 off and/or recover its generation expenses from existing revenues over time= ; =20 establishing a demand-side response program to minimize future generation = =20 expenses for the company and all consumers; and committing the company to = =20 contribute $5 million now to the GPU Sustainable Development Funds and=20 invest another $10 million in renewable energy projects.=20 How the Deferral Accounting Works=20 The deferral provisions allow GPU to retain unrecovered generation costs o= n=20 its books until 2010 but doesn=01,t require GPU consumers to pay more as a= =20 result. The rate caps are left 100% intact. Some excess generation costs= =20 will be reduced on the company=01,s books if future energy prices decrease= =20 sufficiently.=20 The settlement also increases the shopping credit modestly, while=20 correspondingly reducing the Competitive Transition Charge (CTC), so some = of=20 the possible excess generation costs also may be recovered from existing C= TC=20 revenue, which otherwise would have been applied against company stranded= =20 costs. Doing so does not increase consumer payments, however, because the= =20 1998 GPU Restructuring Settlement allowed CTC collection to continue as lo= ng=20 as 2020, in order to take into account the unknown level of non-utility =20 generation (NUG) costs and divestiture proceeds that were a major portion o= f =20 total GPU stranded costs.=20 The settlement cuts off CTC collection for GPU in 2015, rather than=20 permitting CTC collection from Met Ed customers to continue until as long = as=20 2020. (Best current estimates are that the Met Ed CTC would have continued= =20 to about 2018.) Now, any stranded costs not recovered by 2015 must be =20 written off, reducing consumer payment of stranded costs. This will provide= =20 a modest improvement in the opportunity to shop and for a competitive mark= et=20 to develop. Any remaining excess generation costs must be written off by= =20 2010. =20 The settlement also redefines the way that NUG stranded costs are=20 calculated. Under the 1998 Restructuring Settlement, the amount by which N= UG=20 payments exceed the market value capped rate are stranded costs. As change= d,=20 only the portion of a NUG payment that exceeds the higher of the capped ra= te=20 or the market price is recoverable as stranded costs. This change corrects = =20 what turned out to be an inaccurate assumption that the market price of =20 generation would always be below the capped rate, but it does not affect NU= G =20 contracts in any way. The NUGs still get whatever they are entitled to unde= r =20 their contracts without changes, and even benefit because their payor will = =20 become the financially stronger merged FirstEnergy instead of GPU.=20 The Benefits The primary, and crucial, benefit to the consumer is that provider of last= =20 resort generation service will continue within capped rates. The primary= =20 benefit to the company is that the deferral accounting allows the company= =20 maximum flexibility to recover costs and to write off unrecovered costs. But perhaps the most important aspect of the settlement is that it=20 establishes a firm commitment and mechanism for FirstEnergy to address the= =20 underlying problem by reducing its exposure to high energy costs with a =20 comprehensive demand side response program. While the details of the progra= m =20 remain to be developed, the company commitment includes an effort to=20 =01&maximize the cost-effective reduction of peak load=018 through interva= l and=20 time-of-use metering, appliance control technologies and open architecture= .=20 Its goals are to include participation by all customer classes and=20 competitive suppliers and to be available by next summer. If no program=20 agreement is reached, all parties may address the issues in a future=20 Commission proceeding.=20 The other environmental benefits are real, if not as comprehensive as one= =20 might have preferred. FirstEnergy will give $5 million in company money to= =20 the GPU Sustainable Development Funds within 60 days. This contribution is= =20 in addition to those already made by GPU, but replaces the .01 cents/kwh o= f=20 GPU ratepayer money that might have been provided between 2005 and 2008 IF= =20 the Commission did not change distribution rates by that time. =20 FirstEnergy, in consultation with PennFuture, will also invest an addition= al=20 $10 million in renewable energy. Like all provisions of the settlement, th= e=20 environmental provisions are subject to PUC oversight. =20 What the Settlement Does Not Do First, the settlement does not really resolve what would happen in the eve= nt=20 that the merger falls through=01*if, for example, the New Jersey BPU rejec= ts=20 the merger. All of the agreements would be tossed except the agreement to= =20 deal with the deferral account for generation costs authorized by the=20 Commission on May 24. GPU would write off all generation costs prior to Ju= ne=20 1, 2001, while it would recover the costs incurred after June 1, 2001 in a= =20 manner and at a time to be determined in Commission proceedings. Nothing i= n=20 this provision assumes a rate increase or breaking the rate caps. For=20 example, the costs could be recovered in a manner comparable to the deferr= al=20 accounting in the event that the merger is completed. =20 The settlement also does not allow FirstEnergy to raid any pension funds.= =20 Federal law and union contracts govern pension plan funding and tolerate= =20 some withdrawals with major tax penalties. GPU unions support the =20 settlement.=20 The settlement does not shut down or clean up all of FirstEnergy=01,s foss= il=20 generation plants, or figure out how to safely eliminate FirstEnergy=01,s= =20 nuclear waste.=20 Finally, the settlement does not establish lower competitive wholesale and= =20 retail market prices in the FirstEnergy and GPU territories or jump start= =20 the competitive market.=20 Yeah, that would have been nice, too. =20 E-cubed is available for reprint in newspapers and other publications. =20 Authors are available for print or broadcast.? ? PennFuture (www.pennfuture.org), with offices in Harrisburg, Philadelphia= =20 and Pittsburgh, is a statewide public interest membership organization,=20 which advances policies to protect and improve the state's environment and= =20 economy. PennFuture's activities include litigating cases before regulator= y=20 bodies and in local, state and federal courts, advocating and advancing legislative action on a state and= =20 federal level, public education and assisting citizens in public advocacy. ? To unsubscribe, simply reply to this email with "unsubscribe" in the subje= ct. - vol3no11_61401.doc
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