Utility, critics debate where the buck stops

Metropolitan Edison Co. says it's being pinched by skyrocketing energy prices, and it needs an unscheduled rate increase to catch up.

Critics say Met-Ed made bad decisions and is trying to renege on a deal it made with Pennsylvania's energy users.

Met-Ed and its sister utility, Pennsylvania

The rate case will be complicated. It hinges on conflicting interpretations of the 1998 deregulation agreements between the state and the two utilities.

The premise of those agreements was that utilities could charge customers for the cost of generation facilities they had built in previous years. In exchange, the utilities would cap what they charge customers for generation until those costs were recovered.

Met-Ed and Penelec argue that the 1998 deal still allows them to seek an increase in generation fees if 80 percent of their customers are not served by alternate suppliers and wholesale costs have risen to certain levels.

But the two utilities failed to protect themselves against a rise in prices with adequate hedges, critics say. The majority of Met-Ed and Penelec power is not under longterm contracts.

"We all are going to have to ask the question, 'Why didn't they hedge a greater percentage of their load?' " said David Kleppinger, outside counsel to the Industrial Energy Consumers of Pennsylvania.

The utilities gambled by not hedging and lost the bet, Kleppinger said.

Kleppinger said the utilities will have to meet a tough burden of proof: that wholesale costs have spiraled out of the utilities' control and they are no longer getting a fair return.

Kleppinger rejected the utilities' claim that they can seek a rate increase because they have been unable to find alternate suppliers willing to serve 80 percent of their customers. The lack of competitive suppliers has been obvious for years, and it does not automatically entitle the companies to a rate increase, he said.

Sonny Popowsky, the state's consumer advocate, also said the utilities are responsible if they are suffering from high wholesale prices.

"It's a self-inflicted wound," he said.

FirstEnergy spokesman Scott Surgeoner declined to respond directly to that criticism. But he said the utilities' past business decisions benefited consumers. The companies earned $775 million from the sale of generation facilities in their restructuring and used the entire amount to offset the charge that consumers pay to facilitate the transition to deregulation, he said.

This is the second time FirstEnergy has sought special permission to recover unexpected generation costs. In the first attempt, at the start of this decade, the company made similar arguments. At the time, the company proposed deferrals and adjustments of funds that would have allowed it to recover without directly raising generation rates, according to a FirstEnergy filing with the U.S. Securities and Exchange Commission.

FirstEnergy argued then that it was facing a price crunch because of factors beyond its control, according to a 2002 Commonwealth Court opinion on the matter.

Commonwealth Court rejected the company's proposal. FirstEnergy's claim that wholesale costs were out of its control was incorrect because its situation was the result of conscious business decisions, including the choice not to sign more long-term power contracts, the court ruled.

One of the biggest providers of low-cost power to MetEd and Penelec is a member of their corporate family but it wants to wean them off its supply. The company, a separate FirstEnergy subsidiary; has informed the utilities that it can't continue to indefinitely sell them such a large amount of discounted power, according to the FirstEnergy SEC filing. The supply company serves about 30 percent of the combined Met-Ed and Penelec load, Surgeoner said.

The utilities want to do more than raise generation rates. Transmission rates also would rise, accounting for almost half the proposed increase. Met-Ed proposed lowering distribution rates by $37.5 million, largely because it is passing on savings related to a merger. But the utilities are also proposing fees to assist financially ailing customers, cover the cost of compliance with government regulations and pay for damage caused by storms, Surgeoner said.

About the rate-hike proposal

Metropolitan Edison Co. and Pennsylvania Electric Co. recently asked state regulators for rate hikes. Both companies are subsidiaries of Akron, Ohio-based FirstEnergy Corp.

Met-Ed serves most of Adams, Lebanon and York counties. It also serves parts of Cumberland, Dauphin, Lancaster and Perry counties. Met-Ed asked state regulators for an overall electricity rate increase of at least 19 percent for 2007. A typical commercial customers monthly bill could rise by 19.3 percent. Atypical industrial bill could rise by 16.4 percent.

The requested increase affects all portions of an electric bill - distribution, transmission and generation. Distribution prices would drop, but transmission and generation charges would rise. Generation prices also could rise in 2008, 2009 and 2010.