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Wall Street Lowers Ratings of JCP&L, State's Second-Largest Utility

Downgrade will drive up cost of borrowing money, just as JCP&L, other utilities, need to invest in hardening grid

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Wall Street is growing more skeptical of the finances of Jersey Central Power & Light, the state’s second-largest electric utility and perhaps the most despised by its more than 1 million customers.

Fitch Ratings yesterday downgraded the credit ratings of the utility’s parent, FirstEnergy Corp., based in Akron OH, as well as JCP&L's, citing numerous issues with both companies.

The problems ranged from lower power prices from its parent’s fleet of generating units, higher environmental compliance costs for its coal plants, and the uncertainty of the utility receiving any increase in a rate case pending before the New Jersey Board of Public Utilities.

The downgrading of the credit ratings -- for JCP&L to BBB- from BBB -- will drive up borrowing costs for the utility and its parent. This comes at a time when JCP&L and other utilities have to make sizable investments in hardening the power grid to prevent widespread outages from storms like Hurricane Sandy.

The BPU already has initiated a proceeding to determine what actions are needed to upgrade the power grid, a system that left more than 7 million people in New Jersey without power, many for up to a week or more. JCP&L probably came under the most criticism for its storm-restoration efforts, in part because its franchise territory was the hardest hit by the storm.

During Hurricane Sandy, 90 percent of JCP&L’s customers lost power during the storm at some point, some for two weeks or longer. The utility also was harshly criticized by local officials for failing to inform then in a timely or accurate manner when customer power would be restored.

“Sure, it’s significant,’’ said Paul Patterson, an energy analyst at Glenrock Associates in New York, talking about the ratings downgrade. “All things being equal, a downgrade is nothing to dismiss,’’ he said, especially if it is following by other rating agencies, such as Moody’s and Standard & Poor's.

In its current rate case pending before the BPU, the utility, which serves customers in central and northern parts of the state, already faces some hard questions. The case was initiated when the New Jersey Division of Rate Counsel questioned whether the company was earning more than it should under its state-approved regulatory rate of return, an issue disputed by the utility.

There was some good news, however. JCP&L’s Rating Outlook has been revised to stable from negative, according to Fitch Ratings, and it assumed the utility would recover prudently incurred storm costs, which totaled $603 million.

“The company has spent approximately $800 million on restoring service and recovery from the hurricanes and other major storms of 2011 and 2012,’’ said Ron Morano, a spokesman for JCP&L. “The magnitude of these costs is undeniable. Costs recovery from these extraordinary events is the subject of current proceedings before the New Jersey BPU. We believe Fitch's action reflects its focus on the outcome of these proceedings.’’

The bad news is the rating agency expects no increase in the current case before the BPU. JCP&L initially requested a rate increase of $31.5 million, a relatively small amount that would boost customers’ bills by 1.4 percent. The request, however, did not include efforts to recover the $600-plus million it incurred in restoring power after Sandy.

The utility has frequently been the subject of criticism from regulatory officials, who question whether its parent is investing enough in its energy infrastructure to maintain reliability during major storms. The Division of Rate Counsel is expected to argue for a decrease in what JCP&L customers pay on their monthly bills.

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