First Energy commits to economic development initiatives.

Weekly Update Courtesy of Utility Regulatory News #3987: Citing FirstEnergy Corp.’s agreement to hold ratepayers harmless from costs incurred in switching from one regional transmission organization (RTO) to another, and pointing to the company’s pledges to devote more funding to local economic development programs, the Ohio Public Utilities Commission has signed off on a modified bidding structure by which FirstEnergy’s operating subsidiaries procure supply for their standard service offer (SSO) customers. FirstEnergy’s Ohio operating companies are Ohio Edison Co., Cleveland Electric Illuminating Co., and Detroit Edison Co.

The new SSO procurement process will be based on a twice-yearly competitive bid protocol that will utilize an independent bid manager and rely on a descending clock format. Pursuant to settlement, FirstEnergy agreed not to reflect in resulting rates $42 million in exit fees and integration costs it is incurring as it moves from the Midwest Independent System Operator RTO to the PJM Interconnection RTO. The utility also assented to forgoing recovery of certain “legacy” regional transmission expansion planning charges. In addition, FirstEnergy said that during the three-year period the new SSO bidding arrangement is in place, the utility will provide at least $25 million for economic development and job retention programs.

As part of that commitment, FirstEnergy said it would target automakers, offering those consuming more than 45 million kilowatt-hours at a single site in 2009 a monthly discount for increases in production. For the full story, subscribe to URN.

Posted: September 29th, 2010 under Uncategorized, energy policy, regulation, retail competition, transmission regulation.
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Frugal utilities rise to the top, but anticipate cap-ex turnaround.

America’s power and gas companies cut capital spending in 2009 by more than 10 percent compared to 2008, according a report published in the September issue of Public Utilities Fortnightly magazine (www.fortnightly.com). However, as regulatory and economic uncertainties diminish during 2010 and 2011, many companies are resuming major construction programs that were delayed during the recession.

The sixth-annual Fortnightly 40 study, sponsored by Accenture, ranked the four-year shareholder value performance of U.S. investor-owned utilities (IOUs) and merchant power companies. The C Three Group of Atlanta, which along with Public Utilities Fortnightly developed the F40 financial model, analyzed the annual reports of 84 power and gas companies to compare a series of shareholder-value metrics — such as profit margin, dividend yield, return on equity (ROE), return on assets (ROA) and sustainable growth.

Among the F40 study’s results, the report showed that cumulative capital expenditures among all 84 companies in the survey declined by nearly $10 billion from 2008 to 2009, with a corresponding improvement in free cash flow. As a whole the industry’s cap-ex totaled $83.9 billion in 2009, versus the previous year’s expenditure of $93.8 billion. Accordingly, the average F40-ranked company in 2009 generated $300 million in free cash, compared to negative-$100 million in 2008.

Despite the industry’s cap-ex retrenchment through 2009, rebounding electricity sales and a stabilizing economic outlook subsequently have allowed some companies to expedite projects that previously were deferred, according to Jean Reaves Rollins, managing partner with the C Three Group. “Well over 10,000 MW of new generating capacity has been announced or placed in the licensing process in the past 12 months,” she said. “We expect to see more announcements as the implications of clean air standards become clearer.”

Moody’s senior vice president James Hempstead echoed the observation. “Many big companies are actively revising their views and strategic assessments as to how much capacity will be refurbished, repowered or mothballed,” he said. “There could be a significant amount of capital expense on the sidelines that hasn’t been incorporated into plans yet.”

F40-ranked Dominion Resources (#9) provides a clear example; CFO Mark McGettrick told Fortnightly the company purchases more wholesale electricity than almost every other utility in America, but nonetheless the company is proceeding cautiously with construction plans. “We have a lot of catching up to do on the generation side,” McGettrick said. “We have a construction plan through 2012 … but environmental regulations are a moving target, particularly regarding CO2 emissions.” He said Dominion is “taking a wait-and-see approach” toward investments affected by potential changes in federal environmental and energy policies.

“The industry is in a holding pattern, but the end is in sight,” said Michael T. Burr, Public Utilities Fortnightly’s editor-in-chief and author of the F40 report. “Companies are waiting to see what happens with the economy and with shale-gas developments. They’re waiting on the outcome of elections in November, and they’re waiting for energy policy leadership from Washington. Once we get clarity on those issues, we’ll know whether the Big Build is returning.”

The 2010 Fortnightly 40 Ranking

Companies leading the F40 ranking in 2010 included DPL, Exelon and Energen. Ranked among the top 10 companies for the first time was Mirant (#4) — which recently agreed to be acquired by RRI Energy. And NRG Energy jumped into the 11^th position after appearing in the top 40 rankings (#32) for the first time last year. Such shifts exemplify an ongoing trend among the F40 ranks, with growth-oriented unregulated businesses driving stronger long-term shareholder performance. For the past four years, the top 10 companies in the F40 have earned an increasing share of their revenues from unregulated resources, compared with a decreasing share among the bottom 10 ranked companies.

In other trends, Southern Company and Edison International — both of which increased their cap-ex budgets substantially in 2009 and produced negative cash flow at least two years in a row — dropped to the bottom half of the F40, after previously holding strong positions in the top 15. And volatility in natural gas prices sent rankings downward for some gas utilities, including Delta Natural Gas, Equitable Resources and New Jersey Resources.

In general, however, the F40 metrics — combined with supplementary 2009 and 2010 data from the C Three Group, Accenture, Moody’s and the Edison Electric Institute — showed that F40 ranked companies remain financially robust despite some adverse results in 2009. For example:

• Slumping electricity sales drove ROA figures for the F40 companies downward by about one-fifth last year, from an average of about 6 percent in 2008 to 4.75 percent in 2009;
• Stock prices for the F40 companies have underperformed the broader market since January 2009 — although they outperformed the Dow Jones Utilities Index by nearly 10 percent;
• F40 companies outperformed all other categories of power and gas companies in most measures of credit quality, including debt-coverage ratios; and
• Except for a few companies that face substantial regulatory risk, credit ratings have held steady for most companies in the F40 rankings.

“There’s no homogeneous answer to what drives long-term performance,” said Robert Laurens, senior executive in Accenture’s strategy practice. “The most successful companies are those that execute a strategy that’s consistent with the company’s core competencies and its market context — whether it’s a regulated or non-regulated business.”

Fortnightly 40 RankingsFull Financial Data, Historic Trends and Supplemental Analysis from the C-Three Group LLC, Accenture and Moody’s available in the FULL REPORT. Not a subscriber? Click FREE TRIAL to gain immediate access.

* Indicates statistical tie among category ranks. Because the 40th position was a tie, the 2010 Fortnightly 40 includes 41 companies.

Copyright 2010, PUR Inc., Vienna, VA, All Rights Reserved.

Permission to cite the F40 table in whole or in part is granted to publications that acknowledge the source as follows: Public Utilities Fortnightly magazine, September 2010 (www.fortnightly.com). Sponsored by Accenture, with methodology and analysis provided by the C Three Group.

Posted: September 2nd, 2010 under Current News, Uncategorized, credit crunch, credit ratings, energy policy, finance, recession, regulation, utility stocks.
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PSC guidelines to give customers “apples to apples” comparisons

Weekly Update courtesy of Utility Regulatory News #3979: Determining that electric ratepayers in the state were receiving little meaningful information in the “price to compare” (PTC) line item of their bills, the Maryland Public Service Commission has announced new guidelines for how such PTC data should be presented.

To facilitate retail competition and customer choice programs pursuant to industry restructuring, Maryland electric utilities had been instructed to list on each billing statement a line item denoting the PTC, so as to provide customers with a baseline supply cost with which to compare offers from alternative electric suppliers. However, no particular method had been ordered for ascertaining the PTC, such that the PTC varied from utility to utility in terms of both its measurement and presentation. In most cases, the commission observed, the PTC represented just a simple weighted average of a utility’s standard offer service (SOS) supply cost. However, because SOS solicitation protocols have changed over the years, with several tranches now fulfilled in any one year for varying lengths of time, the commission found that the weighted average approach no longer reflected a utility’s true costs. That is, it said, existing PTCs were more likely to compare apples to oranges than apples to apples. Thus, to bring the PTC more in line with actual SOS procurement practices, the commission directed utilities to replace their present PTCs with the following: (1) both current and known future SOS prices, properly identified and with their effective dates; (2) the date beyond which no SOS price is yet known; and (3) a weighted average of known SOS prices, with the date through which such average is valid.

The utilities were told that they must update their PTCs whenever appropriate, as when a new supply tranche comes up for auction. The commission required the utilities to modify their Web sites to show the new PTC data as well. For the full story subscribe to URN.

Posted: August 13th, 2010 under Uncategorized, regulation, retail competition.
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Temporary credits moderate customer impact

Weekly Update Courtesy of Utility Regulatory News #3979: The South Carolina Public Service Commission has hailed a settlement agreement that, although raising South Carolina Electric & Gas Co.’s (SCE&G’s) electric rates by more than $100 million, defers much of the increase for two years. The commission averred that the poor state of the economy made any increase, much less a $100 million one, difficult for ratepayers. However, it expressed optimism that the two-year period over which the increase will be implemented will provide enough time for economic conditions to improve so that the impact of the increase will be muted. Under the approved settlement, SCE&G customers will be afforded several interim billing credits in the first two years of the rate-effective period. In year one, rates will rise by only $51.8 million, thanks to a $25 million decrement for a weather normalization program for residential and small commercial customers and a further reduction of $24.36 million as part of a two-year economic impact zone investment tax credit (EIZITC).The two credits combined will limit the overall increase in the first year to just 2.5%. In year two, the weather normalization credit will expire, with revenues thus rising by $25 million, but the second half of the EIZITC will remain in effect. Consequently, after the 2.5% increase in the first year, rates will go up by an additional 1.2% in the second year. At the close of the second year, with the end of the EIZITC, rates will rise again, by $24 million, or about 1.18%, commensurate with the EIZITC, and the full $100 million increase will apply thereafter. Upon expiration of all the credits, the total percentage increase will be about 4.88%.The commission commented that while the credit mechanisms were key aspects of the rate plan, the weather normalization program being introduced was equally important, as it would offer an additional tool for handling billing volatility during a severe economic downturn. For the full story Subscribe to URN.

Posted: August 13th, 2010 under Uncategorized, regulation.
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State RPS provisions might violate Commerce Clause.

Weekly update courtesy of URN #3976: Determining that purchases of power from renewable resources are of regional, not just statewide, importance, and citing the possible implications of a recently filed civil lawsuit, the Massachusetts Department of Public Utilities (DPU) has temporarily ceased enforcement efforts of regulations that require electric distribution companies to solicit long-term “green” power supply contracts only from developers within the state.

The DPU explained that Massachusetts law has established through its renewable portfolio standard program a certain minimum threshold amount of energy that electric utilities must procure from renewable resources, such as wind, solar, and biomass. However, the law presently restricts long-term purchases of such to being from renewable power suppliers whose facilities are located within Massachusetts, or at least within state or federal waters. But the DPU acknowledged that a competitive energy services marketer has challenged that limitation in a federal district court, alleging that the law discriminates against out-of-state generators and thus violates the Commerce Clause of the U.S. Constitution.

In light of that pending litigation, and asserting that it was reasonable to facilitate the ongoing development of renewable energy sources throughout the region, the DPU ruled that existing in-state purchase requirements should be lifted, at least for the interim. It therefore authorized electric utilities to reopen their renewable power solicitations so as to consider bids from eligible out-of-state generators in addition to in-state suppliers. Subscribe to Utility Regulatory News for the full story.

Posted: June 30th, 2010 under Uncategorized, energy policy, green energy, regulation, renewable energy credits, renewables.
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