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FirstEnergy Solutions Adopting More "Conservative" Retail Strategy Post-Vortex
FirstEnergy is taking a more "conservative" approach to its competitive business, including its competitive retail supplier, in response to evolving market dynamics, Leila Vespoli, Executive Vice President of Markets, said during an earnings call yesterday
Among other things, FirstEnergy CEO Anthony Alexander said that FirstEnergy Solutions is evaluating its target level of retail sales, including the markets and channels in which it concentrates its efforts, and its hedge position, given the "significant volatility" now within the wholesale energy markets, the "ever-changing" market rules, and as the market approaches mid-2015 and beyond, the anticipated shutdowns of generation within the market.
Vespoli reported that FirstEnergy Solutions has increased the risk premium that is built into its retail sales price, "which should naturally adjust our glide path strategy to produce a slightly more open position."
FES currently has 56 million megawatt-hours of committed sales in 2015 and 32 million megawatt-hours committed in 2016.
FES has also taken deliberate action to essentially close, for the remainder of 2014, a small unhedged portion that it had typically left open going into each month. "As we move into the summer months, we have taken additional actions to layer in further hedges that supplement our position for retail load. Our peaking units are also available for additional support in the event of an extremely hot summer and more volatile prices," Vespoli said.
FES has also purchased additional outage insurance, "something that we haven't felt necessary for about 15 years," to mitigate the impact of volatile prices during the summer, Vespoli said.
FES had already been shifting its retail focus to higher-margin channels, as reflected in first quarter volumes.
FES direct sales to large and medium-sized commercial and industrial customers decreased 6% as a result of its strategy to be more selective in light of current market conditions. This decrease was offset in the first quarter by sales in other channels.
Mass Market sales were 19% higher, reflecting the acquisition of new customers primarily in Pennsylvania and Ohio, as well as weather-related usage
Notably, "structured sales" (a wholesale channel) increased 42% compared to the first quarter of 2013 as a result of more municipal, cooperative and bilateral sales, partially offset by lower unit prices due to extreme weather and market conditions that reduced the gains on various structured financial sales.
Governmental aggregation sales increased 7% and POLR sales increased 8%, both reflecting higher weather-related usage.
FES reported that customer usage was about 6% higher than normal during the first quarter, which required incremental market purchases since it had hedged based on normal weather. Higher market purchases, reflecting weather and to a lesser extent FES's small open position of less than 3%, decreased earnings by about $42 million ($0.10 per share), net of increased sales revenues.
Additionally, FES said that PJM ancillaries negatively impacted the competitive business by about $21 million ($0.05 per share), reflecting a pass-through of some of these costs to industrial and commercial customers, as well as its decision not to seek reimbursement from residential customers.
See FirstEnergy's quarterly report (p. 18). for a quarterly breakdown of FES sales by customer group and state
See page 17 of quarterly report for current average migration at FE's utilities
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May 7, 2014
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Reporting by Karen Abbott • kabbott@energychoicematters.com
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