NEW YORK--(BUSINESS WIRE)--Regulatory events in Ohio took another interesting turn with FirstEnergy Corporation's (FE's) filing for rehearing with the Public Utilities Commission of Ohio (PUCO) in its ESP IV rate case, according to Fitch Ratings.
FE's petition, filed May 2, 2016, eliminates the power purchase agreement (PPA) between its Ohio-based utilities and FirstEnergy Solutions (FES). The PPA would be replaced with a financial hedge to be entered into by the utilities. The elimination of the affiliate PPA is designed to obviate FERC jurisdictional issues and preserves projected customer benefits totaling $256 million.
All else equal, Fitch believes the proposal, if approved by the commission, would enhance consolidated FE's EBITDA and its credit profile to a similar degree as the PUCO-approved PPA. No revenue or cash flow would accrue to FES. Instead, the benefits/costs from the proposed hedge under the revised proposal would accrue to FE's Ohio utilities.
As proposed the hedge would provide rate stability for customers and inject a measure of commodity price risk into the utilities. FE's Ohio-based utilities -- Ohio Edison Company (OE), The Cleveland Electric Illuminating Company (CEI) and The Toledo Edison Company (TE) -- currently bear no commodity price risk under Ohio's regulatory compact. FE requests a ruling from PUCO by the end of this month. On a consolidated FE basis, this risk would be offset by the benefit of higher power prices to FES. If FE does not continue to operate at least 3,200-mw of baseload generation in the ATSI-zone, the commission may modify the RRS charge/credit.
Under FE's proposal, the affiliate PPA between FE's merchant business and its Ohio utilities would no longer exist. Rather, FE's Ohio utilities would collect the cost of generation as filed in FE's ESP IV testimony through the retail rate stability (RRS) rider, netted against expected energy and capacity prices subject to quarterly true-up. Should power prices increase significantly, the Ohio utilities would absorb all costs above the amount agreed upon for collection through the RRS rider, exposing them to potentially meaningful commodity price risk through May 2024.
Date of relevant committee: December 7, 2015
Additional information is available at 'www.fitchratings.com'.
Summary of Financial Statement Adjustments:
Fitch capitalizes annual operating lease expense using an 8x multiple and removes securitization related debt, revenue and expense. The net effect of these two items is an increase to consolidated FE debt of $144 million.
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