The coal and nuclear power generator may default in April.
By Leonard S. Hyman and William I. Tilles:
FirsEnergy, the Ohio-based utility holding company, has sent an SOS to the Department of Energy. It wants the DOE to issue an emergency order to PJM, the electricity grid trading organization. PJM, it says, should compensate FirstEnergy Solutions (FES), FirstEnergy’s unregulated generating subsidiary, for the added reliability that FES’s nuclear and coal-fired facilities provide to PJM, and to protect the jobs of the workers at the plants. (Not to mention the jobs of the coal miners and the financial well-being of the coal supplier.)
Does this sound familiar? Yes, it is the same argument made by DOE Secretary Rick Perry in his ill-fated attempt to get the Federal Energy Regulatory Commission to back his plan to rescue coal and nuclear plants, cloaked in a reliability-improvement scheme. But the Trump appointees at the FERC sank this scheme.
As for FirstEnergy’s request, it looks like a last-minute attempt to avoid a bankruptcy filing for FES, something that had been talked about publicly for some time.
FES produces half of its electricity from four aged nuclear power stations and another 30% from coal. These facilities have had a hard time competing in the market. FirstEnergy’s management has made no secret that a financial reorganization for FES was in the cards.
On January 23, Moody’s slammed FES with a three-notch downgrade, to “Ca,” just above default. It “reflects the increased likelihood of a default occurring within the next few months,” Moody’s said. FES needs to make a $100 million bond payment on April 2, but may not be able to, which could trigger a default.
Let’s for a minute consider the history behind this move. FirstEnergy was formed in 1997 when Ohio Edison, a coal burning utility, bought Centerior, a troubled northern Ohio utility with some big nuclear problems. It expanded further with the purchase of GPU, the owner of Three Mile Island, in 2001. Then FirstEnergy decided to double down on coal, buying Allegheny Energy, a coal-burning utility.
These mergers were typical of the time and the region. Eat nor be eaten. Join the PJM transmission system in order to sell cheap Midwestern coal and nuclear-produced electricity to eastern markets. Get the generation out from under the regulated utility, so that it could make big money in competitive markets.
The strategy, however, did not work as planned. Too many other outfits joined PJM with the intent of selling cheap Midwestern coal and nuclear power to the east, and the eastern market did not expand. Natural gas production in the east made gas-fired power cheap. Renewables made a dent in the market, too. The additions to the market made base-load coal and nuclear less valuable. And on top of that, the threat of global climate change made coal-fired power plants look less and less like a long term option. As a result of these events, power prices fell and FES headed into it owns financial crisis, as did many other power producers.
So, what constitutes good public policy here?
Will reliability at PJM suffer greatly if the DOE does not bail out FES by, essentially, putting a tax on all other power producers and their customers in PJM? PJM thinks not.
Should consumers be forced to rescue competitive businesses from the consequences of their own profit-motivated but failed decisions? Doing so creates a moral hazard issue, of course, opening the way to more requests from failing businesses.
On the other hand, the government, in the past, rescued Lockheed, General Motors (out of bankruptcy), Chrysler (out of bankruptcy), and big banks too numerous to mention, all in the name of stabilizing the economy, maintaining the defense establishment, and saving jobs. Don’t coal miners and nuclear operators deserve the same consideration?
We have our own opinion on the reasonableness of the rescue plea, but its reasonableness is not the issue. Do we want to create a capitalist system in which the capitalists win when they are right and the public loses when they are wrong?
The whole purpose of electricity deregulation was to remove the risk of bad judgment from the consumer and put it on the producer. If that was the wrong move, then we need to re-regulate, not make ad hoc rescue decisions. If it was the right move, then stick with it. That is the real choice. By Leonard S. Hyman and William I. Tilles.
With natural gas production in the US surging since 2007, the US became a net exporter of natural gas in 2017. And this is just the beginning. Read… Momentous Shift in US Natural Gas, with Global Consequences
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