Power Market Turmoil Takes Bite Out of Profits
A growing rank of utilities led by Ohio-based FirstEnergy Corp.
reported last week that they were bracing for some major
second-quarter losses as a result of the turmoil that roiled the
electricity markets late last month.
FirstEnergy estimated it expects second-quarter net income for
the entire corporation to take a hit of about $80 million. Like
other utilities, it was caught short of electricity due to a major
heat wave and power-plant outages that rocked the eastern half of
the nation in the final weeks of June. The company was forced to
buy power on the spot market just as prices spiked from an average
of $30 per MWh to thousands of dollars. (See NGI June 6, 1998)
First Energy, whose electric utility subsidiaries include Ohio
Edison, Pennsylvania Power, Cleveland Electric Illuminating and
Toledo Edison. was among the handful of utilities that began filing
8-K reports with the Securities and Exchange Commission (SEC) last
week giving a sneak preview of anticipated second-quarter losses.
Some said they expect the effects of the market turbulence to spill
over into the third quarter because of futures obligations.
In its 8-K report, FirstEnergy said it anticipates a shortfall
of about $53 million, or 24 cents per common share, because it was
forced to buy "significant amounts of power on the spot market at
prices that substantially exceed[ed] the amounts expected to be
recovered from retail customers."
Some market sources reported that trading prices for power in
late June soared to $7,000 per MWh. The East Central Area
Reliability Council (ECAR), however, was reporting $10,000 as the
highest price demanded for a MWh of power, according to one source.
The company's trading arm, FirstEnergy Trading and Power
Marketing, may incur about $27 million, or 12 cents per share, in
credit losses as a result of a small power marketer, Federal Energy
Sales Inc. of Ohio, defaulting on its contract to supply power,
according to the 8-K report. "This exposes Trading to potentially
significant credit losses and substantial costs to replace
contracts that may not be fulfilled by other marketers," the
company told the SEC, adding that Trading has filed suit against
Federal Energy Sales and will file suit against others should they
PacifiCorp, a Portland, OR, utility, anticipates a 30% plunge in
second-quarter earnings, largely due to the market upheavel of last
month. It's been reported that the company, which also filed an 8-K
last week, lost a minimum of $13 million in trading during the
final days of June. In addition, Illinova Corp., whose primary
subsidiary is Illinois Power, is expected to experience a
significant earnings decrease in the second quarter due to the
unprecedented purchased power prices and an extended outage at its
Clinton nuclear power station, reported Standard & Poor's.
The situation is grabbing the attention of state regulators - in
Ohio and Indiana - and the Federal Energy Regulatory Commission as
well, which has been asked to convene an emergency conference to
examine the events that led to the crisis in the electricity
market. FERC hasn't responded yet to the requests made by Cinergy
Corp. affiliates, Cincinnati Gas & Electric and PSI Energy among
Hoosier Energy Rural Electric Cooperative, which paid $2,500 for
power in June, seconded a request by Illinois Power for FERC to
amend every wholesale power market-based rate schedule so that the
price at which power can be sold during system emergencies is
capped at $200 per Mwh.
"The Commission must stop these huge price fluctuations
immediately. It represents a raw abuse of market power that if
allowed to continue will undermine the financial viability of
franchised utilities, destabilize wholesale power markets and
ultimately thwart electric restructuring," it told the Commission
Hoosier Energy suggested that FERC's practice of awarding a
"multitude" of market-based rate schedules to power marketers was
to blame, if only in part, for the recent huge runup in power
prices. In approving those schedules, the Commission "did not take
into account the inherent market power that a wholesale seller has
during extreme conditions in which the franchised utility - with a
legal obligation to serve firm retail load - has deficient
generation within its control area to meet that load. In this
circumstance, sellers have market power and use this power, as we
saw last [month], to charge prices that are unconscionable and that
franchised utilities, particularly consumer-owned utilities, cannot
afford to pay."