Does the utility industry have the financial strength sufficient to meet the combined challenges of: (1) sharply increasing and highly volatile fuel and purchased-power costs; (2) significant...
The Electric Competition Debate in...Ohio
the state, particularly those under the FirstEnergy Corp. banner, feel the performance calculation wouldn't give them full recovery. For them, Johnson and Mead offer the financial integrity approach. If a utility picks that approach, the PUC would determine revenues to be recovered and adjust the total each year.
The recovery method clearly is written for FirstEnergy.
"The difficult issue here in Ohio is the tremendous difference in the financial position between the utilities in the south and the FirstEnergy Group in the north," says Mead. "If there is a circumstance in which we are talking about the survival of the company, then through the financial integrity model the PUC and the utility will work together¼ to make sure there's adequate shareholder return and there is a margin of profit in their rates."
"It calculates a revenue that is needed in order to keep the company more or less solvent," Rose adds. "FirstEnergy¼ is probably the one with the biggest problem in the state."
When Centerior (Toledo Edison Co. and Cleveland Electric Illuminating Co.) merged with Ohio Edison Co. to form FirstEnergy, the company announced billions in write-offs, which included nuclear costs and regulatory assets. It's likely if the utility had no stranded cost recovery, it could go into bankruptcy.
Anthony J. Alexander, FirstEnergy executive vice president, says the financial integrity model offers a means to deal with stranded investment recovery.
"Is it adequate?" he asks. "I can't tell you that¼ I think it's much easier to identify these government-imposed costs that are on utility books right now. We know what they are. They're clearly identified."
Looking at Ohio's two securitization bills gives a complete list of what the state government has put on utilities' books, he says. "And those ought to be dealt with."
He says First Energy has a regulatory plan to address stranded costs, for Ohio Edison (Case No. 95-830-el-unc) and Toledo Edison/CEI (Case Nos. 96-1211-el-unc and 96-1322-el-mer).
"In the rate plans that we have, basically what we've done is agreed to essentially reduce customer charges by about $1 billion between now and 2005 [and] to write off a little over $4 billion of assets in that time frame," Alexander says, "then at the end of 2005, reduce base rates by about 20 percent."
Alexander says he can't tell whether the plans would survive restructuring legislation. "We didn't identify stranded cost, even in the rate plan. What we did was did was identify a bogey number that we agreed we would take off of our books. I think that goes a long way toward getting to the government-imposed cost and mandated costs that are on the books of utilities in the state of Ohio, particularly ours.
"I'm not sure the Johnson-Mead proposal is right for the state of Ohio," he adds. "The fact of the matter is it has some problems in it. It doesn't deal with everything as effectively as it should or could. It deals with things like stranded cost and it deals with things like tax reform which are two critical issues. I'm not sure the proposal