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Power Market Turmoil Takes Bite Out of Profits

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 default.

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 &amp 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 &amp Electric and PSI Energy among others.

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 [EL98-53].

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."

Susan Parker

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