PennFuture's E-cubed is a commentary biweekly email publication  concerning 
the
current themes and trends in the energy market. 


June 14, 2001
Vol. 3, No. 11
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A Rock and a Hard  Place
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Today, the Pennsylvania Public Utility Commission (PUC) voted  3-0 to approve 
a settlement*proposed by FirstEnergy, GPU, the Office of Consumer  Advocate, 
the Industrial Intervenor groups and PennFuture*to resolve the  
FirstEnergy/GPU merger and provider of last resort rate increase requests. 
The  PUC was faced with a seemingly intractable choice: grant a rate increase 
that  violates the rate cap and risk unraveling every utility rate cap and 
stranded  cost recovery decision in Pennsylvania, or just saying &no8 and 
risk*according  to GPU*creating a financially unstable distribution utility. 
In approving the  settlement, the PUC resolved the thorny issues raised by 
the cases without  excusing GPU,s failure to adequately plan its provider of 
last resort service.  Considering the circumstances, the result is good for 
consumers, the companies  and the environment. 

But while Pennsylvania PUC approval was a major hurdle,  the New Jersey Board 
of Public Utilities must still approve the merger as well,  and such approval 
is anything but a sure thing. 

Now that the PUC has made its decision, let,s break  through the rhetoric, 
assess the real issues in the proceeding and see how the  settlement 
addresses them.

The Problem
No matter who you are, how  you look at it, or who you might blame, the 
fundamental problem in this case is  that GPU divested its generating assets 
in 1998 and failed to protect its  shareholders and customers from the 
possibility of rising wholesale prices. In  fact, wholesale prices did rise, 
the retail generation rate caps remained  intact, no competitive default 
service was established, and GPU had insufficient  long-term or lower-priced 
generation contracts in place. Alone among  Pennsylvania,s major utilities, 
GPU was spending much more to buy wholesale  generation than it was paid to 
sell that generation to its native load  customers. 

The real problem then was that GPU was running out of cash  or credit to buy 
wholesale generation to meet its obligations. Although the  company as a 
whole continued to fare well financially, it became clear only  towards the 
end of the proceedings that the Commission and the public interest  required 
a solution which would enable GPU to continue to deliver provider of  last 
resort generation service, and to do so without breaking the rate caps. If  
the Commission didn,t find a solution by June 15, GPU could have been frozen 
out  of the capital markets and would have come back to the Commission for 
emergency  rate relief*requiring a whole new set of proceedings concerning 
the same facts.  

The Solution 
The preferred solution  was to merge GPU and FirstEnergy and to establish an 
accounting deferral for GPU  energy costs. The merger is a good solution in 
part because it overcomes the  cash flow necessary to buy generation on the 
market. Any cash generated by a  modest rate increase trickles in over time 
and is of secondary importance, so  any modest rate increase wasn,t going to 
solve the problem.  FirstEnergy, a huge generation owner, can provide some of 
the needed  generation*even at market prices*without requiring the GPU 
utilities to pay cash  on time. With a merged company, there is plenty of 
room for internal accounting  flexibility. And, as a huge wholesale 
generation player, FirstEnergy can also  better manage wholesale purchasing.

The deferral is a good solution, too, because the rate  caps remain 100% 
intact. Consumers won,t pay more for electricity. Finally, GPU  will be able 
to re-enter the capital markets, and although they are given a  lifeline, GPU 
shareholders are not taken off the hook for the company,s past  performance.

Thus, on May 24, 2001, the Commission approved the merger  itself and allowed 
GPU to establish deferral of generation expenses for  accounting purposes. 
The issues to be addressed in the settlement, as directed  by the Commission 
in its Order, concerned passing on merger-related benefits to  consumers and 
GPU,s generation costs. Today,s settlement addresses these  directives by 
extending the distribution rate cap from 2004 through 2007, rather  than 
violating the generation rate caps; providing a mechanism for GPU to write  
off and/or recover its generation expenses from existing revenues over time;  
establishing a demand-side response program to minimize future generation  
expenses for the company and all consumers; and committing the company to  
contribute $5 million now to the GPU Sustainable Development Funds and 
invest  another $10 million in renewable energy projects. 

How the Deferral Accounting Works 
The  deferral provisions allow GPU to retain unrecovered generation costs on 
its  books until 2010 but doesn,t require GPU consumers to pay more as a 
result. The  rate caps are left 100% intact. Some excess generation costs 
will be reduced on  the company,s books if future energy prices decrease 
sufficiently. 

The settlement also increases the shopping credit  modestly, while 
correspondingly reducing the Competitive Transition Charge  (CTC), so some of 
the possible excess generation costs also may be recovered  from existing CTC 
revenue, which otherwise would have been applied against  company stranded 
costs. Doing so does not increase consumer payments, however,  because the 
1998 GPU Restructuring Settlement allowed CTC collection to continue  as long 
as 2020, in order to take into account the unknown level of non-utility  
generation (NUG) costs and divestiture proceeds that were a major portion of  
total GPU stranded costs. 

The settlement cuts off CTC collection for GPU in 2015,  rather than 
permitting CTC collection from Met Ed customers to continue until as  long as 
2020. (Best current estimates are that the Met Ed CTC would have  continued 
to about 2018.) Now, any stranded costs not recovered by 2015 must be  
written off, reducing consumer payment of stranded costs. This will provide 
a  modest improvement in the opportunity to shop and for a competitive market 
to  develop. Any remaining excess generation costs must be written off by 
2010.  

The settlement also redefines the way that NUG stranded  costs are 
calculated. Under the 1998 Restructuring Settlement, the amount by  which NUG 
payments exceed the market value capped rate are stranded costs. As  changed, 
only the portion of a NUG payment that exceeds the higher of the capped  rate 
or the market price is recoverable as stranded costs. This change corrects  
what turned out to be an inaccurate assumption that the market price of  
generation would always be below the capped rate, but it does not affect NUG  
contracts in any way. The NUGs still get whatever they are entitled to under  
their contracts without changes, and even benefit because their payor will  
become the financially stronger merged FirstEnergy instead of GPU. 

The Benefits
The primary, and crucial,  benefit to the consumer is that provider of last 
resort generation service will  continue within capped rates. The primary 
benefit to the company is that the  deferral accounting allows the company 
maximum flexibility to recover costs and  to write off unrecovered costs.

But perhaps the most important aspect of the settlement is  that it 
establishes a firm commitment and mechanism for FirstEnergy to address  the 
underlying problem by reducing its exposure to high energy costs with a  
comprehensive demand side response program. While the details of the program  
remain to be developed, the company commitment includes an effort to 
&maximize  the cost-effective reduction of peak load8 through interval and 
time-of-use  metering, appliance control technologies and open architecture. 
Its goals are to  include participation by all customer classes and 
competitive suppliers and to  be available by next summer. If no program 
agreement is reached, all parties may  address the issues in a future 
Commission proceeding. 

The other environmental benefits are real, if not as  comprehensive as one 
might have preferred. FirstEnergy will give $5 million in  company money to 
the GPU Sustainable Development Funds within 60 days. This  contribution is 
in addition to those already made by GPU, but replaces the .01  cents/kwh of 
GPU ratepayer money that might have been provided between 2005 and  2008 IF 
the Commission did not change distribution rates by that time.  

FirstEnergy, in consultation with PennFuture, will also  invest an additional 
$10 million in renewable energy. Like all provisions of the  settlement, the 
environmental provisions are subject to PUC oversight.  

What the Settlement Does Not Do
First,  the settlement does not really resolve what would happen in the event 
that the  merger falls through*if, for example, the New Jersey BPU rejects 
the merger. All  of the agreements would be tossed except the agreement to 
deal with the deferral  account for generation costs authorized by the 
Commission on May 24. GPU would  write off all generation costs prior to June 
1, 2001, while it would recover the  costs incurred after June 1, 2001 in a 
manner and at a time to be determined in  Commission proceedings. Nothing in 
this provision assumes a rate increase or  breaking the rate caps. For 
example, the costs could be recovered in a manner  comparable to the deferral 
accounting in the event that the merger is completed.  

The settlement also does not allow FirstEnergy to raid any  pension funds. 
Federal law and union contracts govern pension plan funding and  tolerate 
some withdrawals with major tax penalties. GPU unions support the  
settlement. 

The settlement does not shut down or clean up all of  FirstEnergy,s fossil 
generation plants, or figure out how to safely eliminate  FirstEnergy,s 
nuclear waste. 

Finally, the settlement does not establish lower  competitive wholesale and 
retail market prices in the FirstEnergy and GPU  territories or jump start 
the competitive market. 

Yeah, that would have been nice, too.  

E-cubed is available for reprint in newspapers and other publications.  
Authors
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PennFuture (www.pennfuture.org), with offices in  Harrisburg, Philadelphia 
and Pittsburgh, is a statewide public interest  membership organization, 
which advances policies to protect and improve the  state's environment and 
economy. PennFuture's activities include litigating  cases before regulatory 
bodies and in local, state and
federal courts,  advocating and advancing legislative action on a state and 
federal level, public  education and assisting citizens in public advocacy.
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 - vol3no11_61401.doc