On Aug. 5, FirstEnergy Corp. announced it is eliminating the selling and renewal efforts of its retail subsidiary, FirstEnergy Solutions (FES), to nearly all commercial and industrial customers. The company instead intends to focus its efforts on government aggregation and “provider of last resort” (POLR) markets.FES’s announcement was not a surprise to those of us intimately involved in helping commercial and industrial customers contract for electric generation. Indeed, the signs of FES’s troubles had long presented themselves. Below are four problems for which FES had no adequate solution.
Henry Ford is famous for saying, “Any customer can have a car painted any color that he wants, so long as it is black.”In 2008, contracting for third-party electric generation became a viable option for FirstEnergy-Ohio commercial and industrial customers. At the time, any customer could contract with any electric generation provider it wanted, so long as the provider was FES. Competitors to FES were few and far between.
That changed in recent years. Established companies like Constellation NewEnergy, Direct Energy, and GDF Suez entered the market and fiercely fought for market share. Smaller companies, like Energy.me, used low overhead costs to their advantage in order to provide competitive pricing.
In response to ever-increasing competition, FES’s approach seemed to be “retain the customer at any cost.” FES management not only rewarded sales personnel for gaining business, but it also put extreme pressure on its staff to not lose existing customers. This philosophy prompted one FES employee to tell me that his “head (would) be handed to (him)” after he lost the business of a large food processing client of mine a few years ago.
Indeed, it became increasingly evident that FES was selling electric generation to our clients near — or possibly even below — wholesale market prices in order to retain market share. This proved to be an unsustainable business model.
FES built itself on all-in, fixed-price offerings. That is, a locked, fixed price that would not change regardless of market conditions or customer usage characteristics. This was appropriate when the FirstEnergy-Ohio market first opened up. Customers were used to paying a fixed price for electric generation under regulation, and gravitated toward products that mimicked the old pricing regime.However, as customers gained experience with contracting for electric generation, they became increasingly sophisticated and risk tolerant. Many customers wanted products that retained exposure to the wholesale market, or allowed them to better take advantage of their flexibility in scheduling load.
In my experience, FES actively discouraged more sophisticated products. This resulted in the company being flat-footed as market preferences shifted under its feet.
Low Wholesale Prices
When Northern Ohio was looking to plunge into competitive markets, it was at a time when wholesale electric prices were very high. This situation would have worked out extremely well for FES, since they could sell their generation at those high prices. However, just weeks before new rates went into effect, the full force of the Great Recession was felt, and wholesale electric prices plummeted.Along with the high wholesale prices, the profits FES thought it would capture vanished. Since that point, not only have wholesale prices not recovered to their pre-recession highs, they have continued moving downward with a few upward blips along the way.
FES was unable to find a way to generate adequate retail profits under unfavorable wholesale market conditions.
The Polar Vortex
Due to extremely cold weather last winter, the Regional Transmission Organization (RTO) that serves Ohio, PJM Interconnection, experienced higher than normal ancillary service costs in January. PJM passed these high costs along to generation suppliers, including FES.Nearly every supplier in the industry elected not to pass the high costs on to their fixed-rate customers. The notable exception was FES.
FES chose to pass these costs through to its fixed-rate commercial and industrial customers as a one-time fee it is calling the “RTO Expense Surcharge.” This is despite its contractual ability to do so being highly questionable.
It is my opinion that, faced with these high costs, FES decided to “take its ball and go home.” In other words, rather than eat the losses and soldier on like every other supplier, FES decided to exit the market and leave its customers with a dubious bill on the way out.
What FES’s Exit Means for Industrial and Commercial Customers
Due to a combination of missteps and bad luck, FES is leaving the retail commercial and industrial market. This leaves a big void in its wake.
Re-upping with FES every few years, without serious consideration of other alternatives, was a strategy employed by many Northern Ohio energy users. These users have been FES customers since deregulation began and will now have to work within a new reality.
FES’s market exit marks an opportunity for users to explore more sophisticated products with reputable suppliers. It also presents the threat of falling prey to smoke-and-mirrors products peddled by less reputable suppliers. And regardless of the supplier, it presents the threat of unconscionable commissions being embedded by unscrupulous brokers.
This new reality calls for careful evaluation of contract terms and counterparty risks. It also calls for careful consideration of who your energy partner will be to help you work through the process.