A growing rank of utilities led by Ohio-based FirstEnergy Corp.reported last week that they were bracing for some majorsecond-quarter losses as a result of the turmoil that roiled theelectricity markets late last month.

FirstEnergy estimated it expects second-quarter net income forthe entire corporation to take a hit of about $80 million. Likeother utilities, it was caught short of electricity due to a majorheat wave and power-plant outages that rocked the eastern half ofthe nation in the final weeks of June. The company was forced tobuy power on the spot market just as prices spiked from an averageof $30 per MWh to thousands of dollars. (See NGI June 6, 1998)

First Energy, whose electric utility subsidiaries include OhioEdison, Pennsylvania Power, Cleveland Electric Illuminating andToledo Edison. was among the handful of utilities that began filing8-K reports with the Securities and Exchange Commission (SEC) lastweek giving a sneak preview of anticipated second-quarter losses.Some said they expect the effects of the market turbulence to spillover into the third quarter because of futures obligations.

In its 8-K report, FirstEnergy said it anticipates a shortfallof about $53 million, or 24 cents per common share, because it wasforced to buy “significant amounts of power on the spot market atprices that substantially exceed[ed] the amounts expected to berecovered from retail customers.”

Some market sources reported that trading prices for power inlate June soared to $7,000 per MWh. The East Central AreaReliability Council (ECAR), however, was reporting $10,000 as thehighest price demanded for a MWh of power, according to one source.

The company’s trading arm, FirstEnergy Trading and PowerMarketing, may incur about $27 million, or 12 cents per share, incredit losses as a result of a small power marketer, Federal EnergySales Inc. of Ohio, defaulting on its contract to supply power,according to the 8-K report. “This exposes Trading to potentiallysignificant credit losses and substantial costs to replacecontracts that may not be fulfilled by other marketers,” thecompany told the SEC, adding that Trading has filed suit againstFederal Energy Sales and will file suit against others should theydefault.

PacifiCorp, a Portland, OR, utility, anticipates a 30% plunge insecond-quarter earnings, largely due to the market upheavel of lastmonth. It’s been reported that the company, which also filed an 8-Klast week, lost a minimum of $13 million in trading during thefinal days of June. In addition, Illinova Corp., whose primarysubsidiary is Illinois Power, is expected to experience asignificant earnings decrease in the second quarter due to theunprecedented purchased power prices and an extended outage at itsClinton nuclear power station, reported Standard &amp Poor’s.

The situation is grabbing the attention of state regulators – inOhio and Indiana – and the Federal Energy Regulatory Commission aswell, which has been asked to convene an emergency conference toexamine the events that led to the crisis in the electricitymarket. FERC hasn’t responded yet to the requests made by CinergyCorp. affiliates, Cincinnati Gas &amp Electric and PSI Energy amongothers.

Hoosier Energy Rural Electric Cooperative, which paid $2,500 forpower in June, seconded a request by Illinois Power for FERC toamend every wholesale power market-based rate schedule so that theprice at which power can be sold during system emergencies iscapped at $200 per Mwh.

“The Commission must stop these huge price fluctuationsimmediately. It represents a raw abuse of market power that ifallowed to continue will undermine the financial viability offranchised utilities, destabilize wholesale power markets andultimately thwart electric restructuring,” it told the Commission[EL98-53].

Hoosier Energy suggested that FERC’s practice of awarding a”multitude” of market-based rate schedules to power marketers wasto blame, if only in part, for the recent huge runup in powerprices. In approving those schedules, the Commission “did not takeinto account the inherent market power that a wholesale seller hasduring extreme conditions in which the franchised utility – with alegal obligation to serve firm retail load – has deficientgeneration within its control area to meet that load. In thiscircumstance, sellers have market power and use this power, as wesaw last [month], to charge prices that are unconscionable and thatfranchised utilities, particularly consumer-owned utilities, cannotafford to pay.”

Susan Parker

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