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FirstEnergy proposes rate mechanism alternative to PUCO-approved PPA plan

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FirstEnergy proposes rate mechanism alternative to PUCO-approved PPA plan

's Ohioutilities have asked state regulators to approve modifications to theirgeneration rider while eliminating a power purchase agreement with

Thenew plan is designed to act as a hedge on 3,200 MW of previously rate-basedgeneration, but would not be based on actual plant costs and the utilities willnot sell the output into the PJMInterconnection LLC market.

ThePublic Utilities Commission of Ohio voted unanimously March 31 to modified eight-yearpower purchaseagreements for nearly 6,000 MW of primarily coal-fired generationowned by competitive subsidiaries of American Electric Power Co. Inc. and FirstEnergy.Customers will receive rate credits or charges to offset the costs for AEPsubsidiary Ohio PowerCo. and FirstEnergy's Ohio utilities to purchase the power and bidit into PJM capacity markets.

ThesePPAs, however, are now subject toFERC approval and could be rejected.

AsFirstEnergy weighs whether or not it wants FERC to review its PUCO-approvedPPA, the company's utilities filed an application for rehearing May 2 with Ohioregulators that seeks to modify the structure of its non-bypassable retail ratestability rider, or Rider RRS.

"[T]hecompanies have modified how Rider RRS charges and credits will be calculated sothat Rider RRS will continue to provide all the rate stabilization benefitsrecognized in the order, but without reliance on or existence of a PPA or anyother contractual arrangement or other involvement with FES," theapplication states.

Themain argument before FERC is that the PPA sales agreements will force captivecustomers "to fund abailout" of AEP and FirstEnergy's competitive subsidiaries.Therefore, FirstEnergy has proposed that its plan is no longer specificallytied to the performance of the 2,210-MW W.H. Sammis coal plant, 908-MW nuclear plant or itsinterests in Ohio Valley ElectricCorp.'s KygerCreek and CliftyCreek coal plants.

TheFirstEnergy utilities argue that the benefits provided by the tied totheir electric security plan and rider "are too important to the future ofOhio to be delayed" and are seeking PUCO approval by May 25, so the ridercan still go into effect June 1.

FirstEnergymaintains that customers will receive $561 million in total credits over theeight-year term of the ESP, under which distribution rates will remain frozen.The company also will keep in place the risk sharing mechanism, gridmodernization plan, CO2 reduction goal and energy efficiency commitmentsapproved in the original proposal.

"Essentially,this plan would preserve the hedge that we had conceptualized for our customersto protect against rising prices in the long term," FirstEnergy spokesmanDoug Colafella said May 3. "What this modified request would do is … itwould continue to preserve this concept of a rate stability provision on our bill.

"Westill want to pursue that approach, but we're now not going to be basing it ona purchase power agreement between our utilities and our unregulated affiliate.That rate stability provision will now simply be based on all the same plantcosts, calculations and market data that was in our approved plan [but not theplants themselves]. That would be the basis for us calculating going forwardwhether our current customers would see credits or charges on their bill goingforward, but they would no longer be tied to Davis-Besse, Sammis and the OVECunits."

Themost recent filing also includes a provision that would allow PUCO to reducethe charge/credit of the rider in the event that during the eight-year term ofthe plan, less than 3,200 MW of formerly rate-based nuclear or fossilgeneration remains in operation.

Inaddition, the spokesman said since the new plan "strictly involvesadjustments to retail rates," it would be under PUCO, not FERC,jurisdiction.

JefferiesLLC analyst Anthony Crowdell wrote in a May 3 report that the revenue from thisplan "could help improve the parent credit ratios and minimize equityneeds, but we would need some time to see if the PUCO will be supportive."

WallStreet has said that FirstEnergy would need to issue approximately $2 billionin equity to support its balance sheet and credit metrics absent the PPA.

"WithFERC revoking the [waiver] coupled with the company's plan to highlight itsregulated business, this 'Plan B' will still support the parent and utilitycredit ratios and potentially minimize the equity needs of the company,"Crowdell wrote.

Theanalyst said it's possible that FES could be "downgraded to sub-investmentgrade" given its equity needs and the fact that the utilities and not FESwould collect the rider revenue.

"FESis going to continue to work to maintain a cash-flow positive business,"Colafella said, adding the company is still going to bid Davis-Besse and Sammisinto the upcoming PJM capacityauction.