Why FirstEnergy Subsidiaries Seek Bankruptcy for Merchant Power Business

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On Sunday, electric utility FirstEnergy Corp. (NYSE: FE) announced that its merchant power subsidiary, FirstEnergy Solutions, and its nuclear operating company voluntarily filed for Chapter 11 bankruptcy protection. Not included in the filing is FirstEnergy’s regulated utility business, nor are its Allegheny Energy Supply subsidiaries.

The bankruptcy filing follows a request sent last Friday to Energy Secretary Rick Perry seeking an emergency order under section 202 of the Federal Power Act to keep the coal-fired and nuclear-powered generation facilities open. The Act gives Secretary Perry the authority to require the continued use of power plants in special circumstances such as war, energy shortages or sudden surges in demand.

The Federal Energy Regulatory Commission (FERC) in January rejected a proposal from FirstEnergy to transfer a West Virginia coal-fired plant from the company’s merchant power business to its regulated business.

A report from the National Energy Technology Laboratory (NETL) last week warned of the “threat” to power generation in the event of a brutal cold spell if the area’s coal plants shut down. FirstEnergy announced last Wednesday that it plans to close three nuclear power plants in Ohio and Pennsylvania over the next four years unless the states took action to save them.

According to a report in the Washington Examiner cited by the Institute for Energy Economics and Financial Analysis (IEEFA), FirstEnergy wrote:

First Energy defined the “threat” to the grid as stemming from the the retirement of power plants that have many years of useful life “but cannot operate profitably under current market conditions …

Perry refused to approve a similar request last year from Robert Murray, CEO of Murray Coal, a primary supplier to FirstEnergy’s fleet of coal-fired plants. Murray wanted Perry to invoke Section 202 to keep the plants open in order to save jobs.

If FirstEnergy succeeds in getting Perry to order the plants to remain open, the company’s customers will almost certainly be paying more for electricity in exchange for protecting coal mining and power plant jobs. So far Perry has not been swayed by requests from the coal miners and power generators to intercede on their behalf. If he chooses to intervene this time it would be a precedent-setting move that could spawn a blizzard of similar requests from other struggling power companies that have resisted making investments natural gas plants and in renewables.