Is the $3 billion rate case just a deal-sweetener for the sale of FirstEnergy?

                 Sherlock Holmes
March 24, 2004

Shari Weir, Cleveland Program Director
Ohio Citizen Action

On March 17, the Northeast Ohio Public Energy Council -- speaking for 455,000 electric customers in 113 communities -- filed its initial brief in FirstEnergy's pending $3 billion rate case. The brief includes a startling observation, quoted here in full:

"Unlike certain other FirstEnergy Stipulations filed with this Commission, the [plan] is silent as to whether it binds successors and assigns of Applicants and FirstEnergy. Mr. Alexander admitted this point on cross-examination when he stated that:
"I don't believe there is a provision dealing with successors and assigns in the rate plan as it was originally proposed," Tr. Vol. X at p. 117.
"This is a potential large loophole in the [plan]. One cannot be certain whether FirstEnergy Corp. and the Applicants will continue to exist over the next four (4) years as independent companies, or whether they will be acquired as a results of a merger.

"The prospect of a takeover of FirstEnergy by an acquiror that may wish to jettison its predecessor's [plan] is more than a remote possibility. In fact, FirstEnergy itself demonstrated this same acquiror behavior when, as past of its acquisition of GPU, it filed for a rate increase for GPU's Pennsylvania operating utilities with the Pennsylvania Public Utilities Commission contemporaneously with the merger, in early 2001. Not expressly binding successors and assigns is unreasonable. This is not rate certainty."

Initial brief, Case 03-2144-EL-ATA, Northern Ohio Public Energy Council, 1.53 MB pdf, March 17, 2004, p. 15.

The Northeast Ohio Public Energy Council is correct, of course, that this omission alone makes a joke of the company's 'rate stabilization' claims.

Bag of sugarA corollary is far worse, however: That the plan is simply a deal-sweetener for the sale of FirstEnergy to another utility.

In this light, other things become clear. When FirstEnergy first proposed its $3 billion rate case on October 21, it gave the Commission an ultimatum. FirstEnergy said that if the Commission didn't OK it by December 31, 2003, the company would withdraw it. A public outcry over the rate hike forced a delay, and FirstEnergy made a new ultimatum: OK it by March 31, 2004, or the company will withdraw it. Then, last Friday, March 19, FirstEnergy said April 30 was the deadline.

Obviously, all three ultimatums were bluffs, since FirstEnergy would hurt its own interests by withdrawing the plan at any point. FirstEnergy knows it could make more money under its plan than under free market rates, or it would not have proposed the plan.

Why is the company frantic to resolve this now, when the rates in question won't cut in until 2006? It's understandable if the rate case is not about 'rate stabilization' but about sweetening a merger this spring -- not in 2006.

FirstEnergy's schedule

Mar 8: U.S. Nuclear Regulatory Commission approves the restart of Davis-Besse.
Mar 30: FirstEnergy's 'poison pill' plan terminates.
Apr 30: Public Utilities Commission of Ohio approves the $3 billion rate case.
May 18: FirstEnergy Annual Meeting, at which the company weakens its takeover defenses of supermajority voting and staggered board terms.

After May 18, if things go as planned, the sale of the company can proceed. Unfortunately, with FirstEnergy, things never go as planned.

What if it becomes clear that this massive rate case is only about helping a utility buy out FirstEnergy? In that case, the recipient of the $3 billion is not FirstEnergy, but the other utility. The Public Utilities Commission would be giving away the largest state subsidy for a private company in U.S. history. And neither the Commission nor ratepayers know the name of the company that would receive this subsidy.

How to know for sure

There is an easy way to test these conclusions.

Public Utilities Commission Chairman Alan Schriber could let it be known that he intends to close the 'successors' loophole in the plan, and then listen for the reaction from Akron. It wouldn't take long.