As DTE EnergyCo. unveiled its latest plans to tap into the booming gasmarket, FirstEnergy Corp.'stop executive said the shale revolution has provided more obstacles thanopportunities for the company's competitive generation business.

"We live in a very geographically challengedarea," FirstEnergy President and CEO Charles Jones Jr. said Sept. 27 at theWolfe Research Power and Gas Leaders Conference in New York.

"Clearly, our competitive business is in a difficultlocation. We sit right on top of the Utica and Marcellus shale," Jonessaid. "Gas prices in our region are at very low prices [and] have loweredthe overall electric price significantly. Good for customers, in the shortterm, but obviously a strain on this business."

Jones, appearing on a panel with Chairman and CEO LeoDenault, explained how the power business has changed since 2008, when hesupervised FirstEnergy's commodities operations.

The CEO noted that the combined fleets of FirstEnergy andAllegheny Energy Inc.— which FirstEnergy later acquired — could generate 110 million MWh of electricityand power prices were $65/MWh or higher "around the clock … pretty muchthat entire year." In addition, gas prices ranged from $9.50/Mcf to$14.50/Mcf that year, he said.

"Two things happened. We had a recession that affectedthe economy particularly hard in the region that we serve and there was atechnological breakthrough with shale, and we happen to sit right on top ofit," Jones said. "Today, with the fleet that we have left, we canmake about 80 million MWh [of electricity] and the price is generally below$30. It's not hard math to figure out what that did to the competitivebusiness."

FirstEnergy currently operates more than 9,400 MW of coalgeneration primarily in Ohio, Pennsylvania and West Virginia, which sit atopthe Marcellus and Utica shale in the Appalachian Basin. The company, however,only operates slightly more than 1,400 MW of gas-fired generation in Ohio andPennsylvania, according to SNL Energy data.

DTE Energy, meanwhile, on Sept. 26 announced it plans tobuy multiplemidstream gas assets in the Appalachian Basin from and forapproximately $1.3 billion, further diversifying a business that includesmidstream assets and the utilities DTE Gas Co. and DTEElectric Co.

"These transactions will significantly increase ourmidstream presence in the Appalachian basin," DTE Energy Chairman and CEOGerard Anderson said in a news release announcing the deal. "The acquiredassets are in a productive area of the Southwest Marcellus/Utica region andhave expansion potential."

The systems move natural gas from the Marcellus and Uticashale regions to multiple markets.

DTE followed the midstream acquisition deal with a Sept. 29announcement that it plans to build 1,000 MW of natural gas capacity inMichigan to replace planned coal plant retirements through 2023.

Regulatory help

FirstEnergy, which has not invested as heavily in gasgeneration, is seeking regulatory help for baseload coal and nuclear generationin Ohio.

The company has modified its electric security plan and generationrider, approved bythe Public Utilities Commission of Ohio in March, following to intervene.

Jones said the "very complicated case," initiallyfiled in August 2014, has been through three different PUCO chairmen, but heexpects a final decision in the next four to six weeks.

The CEO said after the case is resolved, FirstEnergy plansto have discussions with policymakers, both regulators and legislators, in allthe states it operates in to find out what their long-term vision is forgeneration.

"I think the data clearly shows that deregulatedstates' customers are paying more today and have paid more consistently sincethey deregulated than regulated state customers pay. The data also shows thatderegulated states, for the most part, have become more and more net importersof generation than what they were when they deregulated," Jones said."I think the data, particularly in some of the states that we serve — Ohioand Pennsylvania, in particular — shows that it's had a negative impact on theindustrial economy of those states."

Jones said the integrated model is not the right way to dobusiness for FirstEnergy's customers, so if regulators continue to stick withthis plan "then our strategy is going to be to find a way to get out ofcompetitive generation."

"How do you do that? Some of that is you're just goingto close units that don't make economic sense. You're probably going to sellsome units that have value and then ultimately we'll see where that takesus," he said.

Jones, however, reiterated that discussions withpolicymakers around some sort of nuclear subsidy plan, reregulation or assettransfers must take precedence over any decision with FirstEnergy's competitivebusiness.

"There's a lot of discussion that needs to happenbefore I see us just jettisoning that part of the company. I don't think that'sthe right thing to do for customers either," he said.

Separation plan

Both Jones and Denault discussed the challenges associatedwith their respective merchant businesses.

Jones said in July that the company will look at"allalternatives" for its competitive business, including the saleor deactivation of units, in response to challenging conditions in the market.

"We own a competitive generation fleet that I think,long-term, doesn't fit in the mix of the type of company that we want tobe," Jones said at the Wolfe Research conference. "We are movingtowards being more of a regulated company."

More than 80% of the company's annual earnings comes fromits regulated businesses "and we're positioning each of those to grow aswe move into the future," he added.

UBS Securities LLC contendsFirstEnergy "will need to consider spinning off, shutting or selling[FirstEnergy SolutionsCorp.] assets to improve credit metrics."

"We're improving. We clearly have some issues with ourbalance sheet that we're continuing to work on," Jones said. "Therate cases in Pennsylvania and Ohio, we hope, will position us [so] that we canbe talking about … more of the types of investments we're going to be makingand where we're going to make them."

Denault noted that Entergy's focus of separating itsregulated and merchant businesses is "one that we've had for quite sometime."

"The volatility associated with the merchant businessand the vagaries of the market there are so much different than what we see aswe look at what's going on in the regulated utility business that we've neverreally viewed those as businesses that should be together," Denault said."That's why we tried to spin them, sell them and that sort of thing.

"Our objective there is exactly the same. What we'vehad to do is adapt to the marketplace."