03/27/03

FirstEnergy Corp.'s top financial officer said yesterday that the company's electricity customers are likely to see a rate increase when the current state-mandated rate freeze ends in three years and electricity prices are pegged to market rates.

Whether customers' total bills increase will depend on negotiations under way among state regulators, utilities and consumer groups.

"Customers are receiving generation charges that we feel are well below the market level right now," Chief Financial Officer Richard Marsh told analysts at a Chicago utility conference sponsored by Banc One Capital Markets.

FirstEnergy's commercial and industrial customers with contracts are paying an average of 1.8 cents per kilowatt-hour, Marsh said. "They are being served at rates far below even wholesale rates."

Residential customers served by Ohio Edison, Cleveland Electric Illuminating Co. and Toledo Edison are paying an average of 3.4 cents, he said.

But in New Jersey, where another FirstEnergy company operates in a deregulated market, power was selling in a recent auction at 5 cents to 5½ cents per kilowatt hour.

That is an indicator that rates could go up here when deregulation takes effect at the beginning of 2006, Marsh said.

But the state will have something to say about that, said Alan Schriber, chairman of the Public Utilities Commission of Ohio.

"We are not going to turn the clock back, but we are concerned about 'rate shock,' " said Schriber. "And we are working to ensure that rate increases are mitigated."

The PUCO has asked for comment from public-interest groups as well as utilities and hopes to make a ruling by summer's end, Schriber said.

"What we are looking for is some sort of mechanism to establish a standard service. We want it to be one which does not take us out of bounds of stability," he said. "Industry needs price stability, and so do the utilities."

When the rate freeze ends in January 2006, FirstEnergy will simultaneously lose another major source of money - the "transition cost" rider now tacked on to each customer's monthly bill. Those charges, totaling more than $8 billion over five years, are being permitted by the PUCO through 2005, largely to recover costs that FirstEnergy incurred in building a second nuclear power reactor at Perry that was never completed.

The PUCO allowed those charges - in combination with a rate freeze - to put FirstEnergy in a competitive position once rates are no longer regulated.

Analysts are worried that without the transition money, FirstEnergy's revenue stream will no longer be so robust.

But Marsh argued that FirstEnergy believes it will be able to get a higher price on the market because it will no longer be restricted to selling the electricity it generates only to its Ohio, Pennsylvania and New Jersey customers.

"You have to look at the pickup we can get by redeploying that generation," he said. "I can't give you a definitive answer, but our view is it is going to be a very manageable issue."

"We will go to the market," said company spokesman Ralph DiNicola.

Marsh also fielded questions yesterday regarding the restart of the Davis-Besse nuclear power station. Though he stuck with the company position that the plant will be ready to restart in April, Marsh said the company has negotiated contracts to buy replacement power through the summer at about $15 million per month as an "insurance policy."

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jfunk@plaind.com, 216-999-4138