Why are base electricity rates rising for Illuminating Company customers but decreasing elsewhere?

COLUMBUS, Ohio—FirstEnergy will raise its base electricity rates by a net total of $34 million per year for the next few years, after winning state regulators’ blessing for the plan last week.

But, on closer inspection, only customers with one of FirstEnergy’s three Ohio subsidiaries – the Illuminating Company – will see their base electric rates go up, by around $5 per month for the average residential user.

Ratepayers with the other two subsidiaries, Ohio Edison and Toledo Edison, will have their base rates go down by a few dollars per month, on average.

What it gets down to …

That doesn’t necessarily mean Ohio Edison or Toledo Edison ratepayers will pay less for their electricity going forward than they do now. FirstEnergy’s new base rates, which will be in place for as long as four years, are just one component affecting their customers’ power bills. Among several other things, ratepayers will still have to deal with spiking electricity prices.

But the PUCO’s ruling will prevent FirstEnergy’s 2 million-plus customers in Ohio from seeing their electric bills jump by a collective $190 million per year, as the Akron-based utility initially proposed.

At the same time, though, the PUCO also didn’t side with organizations like the Ohio Consumers’ Counsel, the state’s utility customer watchdog group, which had called for FirstEnergy to slash its annual rates by more than $132 million in total – in part, as punishment for the company’s involvement in the massive House Bill 6 bribery scandal.

So, why did state regulators end up giving FirstEnergy less than what it wanted, but more than what the company’s critics sought? And why did they decide to raise base rates slightly for Illuminating Company customers, but lower them modestly for Toledo Edison and Ohio Edison ratepayers?

Why only some got an increase

The reason Illuminating Company customers are seeing a base rate increase is that its costs of maintaining its electricity grid in Northeast Ohio have exceeded what was anticipated in their 17-year-old base rate, according to FirstEnergy filings and testimony in their rate case.

Specifically, the cost of labor and materials such as steel and copper have each risen significantly since 2007. Those higher costs added up over the years, given the Cleveland area’s dense population, comparatively complex and older infrastructure, and higher reliability expectations from commercial and industrial customers, FirstEnergy asserted.

Ohio Edison and Toledo Edison, by contrast, have seen their costs and investments rise more slowly. That’s for a number of reasons, including that they each cover more suburban and rural areas than the Illuminating Company and have seen their equipment last longer than expected.

Another reason Ohio Edison and Toledo Edison customers are getting a decrease is each of those two companies has significant surplus cash reserves. The Illuminating Company, on the other hand, had a reserve deficit of $187 million.

Limited investor profits

FirstEnergy sought a $190 million rate hike, in part, so the publicly traded company could make more profits for its shareholders.

FirstEnergy argued to the PUCO that its current rates, approved in 2007, resulted in a rate of return last year of only 1.3% for Toledo Edison and 0.1% for Ohio Edison, while the Illuminating Company’s return was in the red by 4.7%. Instead, the company asked the PUCO’s permission to make a profit margin of 10.8% per year going forward – a figure it calculated based, among other things, on the profits made by shareholders in other utility companies.

The PUCO, however, ruled that FirstEnergy could make a profit margin of 9.63%, siding with commission staff and a third-party auditing firm that concluded that a 10.8% profit margin would be excessive.

While that’s only a bit more than 1 percentage point less than what FirstEnergy asked for, that profit-margin reduction means customers will pay $70.2 million less in total each year than what the company wanted, according to statistics reviewed by The Plain Dealer and cleveland.com.

‘Vegetation management’ costs

The PUCO blocked FirstEnergy from continuing to earn profits on nearly $270 million in tree-trimming and line-clearing work done between 2007 and 2021. The decision means that, under the new rate case, ratepayers will save about $12.7 million every year.

For years, FirstEnergy has not only charged customers to pay the costs of “vegetation management” work, but it has also collected a profit off of such work from ratepayers as well.

The PUCO ruled FirstEnergy must stop doing that, siding with arguments made by commission staff and independent auditors that customers should only pay the actual cost of such routine maintenance work.

‘A measured approach’

While the PUCO balked at many of FirstEnergy’s arguments, it didn’t give FirstEnergy’s critics everything they wanted, either.

The Ohio Consumers’ Counsel and the Northwest Ohio Aggregation Coalition argued that the PUCO should cut FirstEnergy’s profit margin by an additional 0.50% as punishment for the company admitting to bribing top state officials to secure its policy priorities – including HB6, a 2019 energy law that gave FirstEnergy a financial windfall.

The OCC and NOAC, in a joint brief to the PUCO, noted that the reason the PUCO hasn’t comprehensively reviewed FirstEnergy’s rates since 2007 is that the commission ruled in 2019 that the company didn’t need to.

That decision came after FirstEnergy executives urged then-PUCO Chair Sam Randazzo, who was secretly being paid millions by FirstEnergy, to scuttle the rate case, fearing that changes in economic conditions would result in a substantial reduction in Ohio base rates.

Those since-fired executives are now facing federal and state corruption charges; Randazzo, who resigned from the PUCO in late 2020, was also charged, but committed suicide last year.

“After the HB 6 scandal, Ohioans deserved real relief. The evidence showed that consumers across all three FirstEnergy territories –including Cleveland Illuminating –should be seeing rate decreases,” said Ohio Consumers’ Counsel Maureen Willis in a statement. “Instead, many FirstEnergy consumers will be paying more. Ohio families are struggling with costs, and they need a (Public Utilities) Commission that puts affordability front and center.”

The PUCO, in its order, rejected critics’ call to slash FirstEnergy’s profit margin. But it also didn’t accept FirstEnergy’s argument that the company’s post-HB6 reforms to improve ethics and increase transparency should work in its favor.

“This Commission has taken a measured approach in response to that conduct,” the PUCO’s order stated, noting that last week it ordered FirstEnergy to pay $250 million in penalties related to the scandal.