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WV PSC Staff analyst: Harrison power plant two times too expensive

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  • Many WV coal counties losing revenue

    Many WV coal counties losing revenue

    Monday, August 8 2016 10:15 AM EDT2016-08-08 14:15:05 GMT

    As Appalachian coal production continues its drastic decline, West Virginia’s coal-producing counties are  not only losing people as lifelong residents are forced to flee their homes in order to find work, but in many cases, they’re also relinquishing millions of dollars from their budgets.

    As Appalachian coal production continues its drastic decline, West Virginia’s coal-producing counties are  not only losing people as lifelong residents are forced to flee their homes in order to find work, but in many cases, they’re also relinquishing millions of dollars from their budgets.

The $1.2 billion that Mon Power proposes to pay and pass through to ratepayers for the Harrison power plant is too much by half.  

A fairer price? Less than $600 million.

That's one of several fundamental points in direct testimony filed on April 26 by intervenors in Mon Power's petition before the Public Service Commission of West Virginia.

Mon Power has a generation capacity deficit in 2013 of 938 megawatts, projected by the company to increase to 1,400 MW by 2026. The utility, which also supplies power to Potomac Edison ratepayers, proposed in November to address that shortfall through a plan that has several elements: mainly, to buy the 80 percent of the Harrison coal-fired power station it does not own from sister FirstEnergy subsidiary AE Supply and to sell the 8 percent it owns of Pleasants station to AE Supply.

The proposal would add 1,476 MW to Mon Power's generation portfolio. That's more than enough to meet its 2026 projection of need; far more, if the potential of energy efficiency incentives over the period were taken into account.

The company's hired analysis concluded that acquiring Harrison would be cheaper than buying in the market, building new capacity, converting existing stations to use other fuels, or promoting efficiency — though intervenors argue that the analysis was skewed and incomplete.

This case is important. The commission's decision will affect rates, fuel diversity and incentives to pursue or not pursue energy efficiency for decades.

The price, and its propriety

How to place a value on a giant, unique asset?

There are a number of ways to triangulate it. Mon Power's consultants Navigant Capital Advisors chose an "income approach" — that's an estimate of the future revenues the plant will generate. That estimate came to $1.68 billion; AE Supply's 80 percent would be worth $1.33 billion. FirstEnergy offered to transfer the asset between its subsidiaries at what it said was book value, a lower $1.2 billion.

Intervenors say an alternative, straightforward cost-minus-depreciation valuation would come to less than $600 million.

The book value includes a $590 million "acquisition adjustment" related to FirstEnergy's 2011 merger with Allegheny Energy.

But the commission's 2010 order approving the merger specifically enjoined FirstEnergy from seeking any such acquisition premium.

"If the proposed transaction is not a direct violation of the commission order in the 2010 merger case, it is clearly a violation of the spirit of the commission's intent in that proceeding," PSC Staff Utilities Analyst Edwin Oxley pointed out in his direct testimony, a point also raised by others.

Oxley observed, moreover, that the proposed price is not the "arm's length" result of a true negotiation.

"There is little doubt that First Energy, who undoubtedly has control over the terms of the transaction, would steer the results that would most favorably benefit the system and the parent," Oxley said.

The proposed purchase price likely is substantially higher than the price AE Supply could get in a market transaction with a non-affiliated purchaser, said engineer and industry consultant David Schlissel, referencing three sales of similar plants in the past year at much lower prices. Schlissel filed testimony on behalf of intervenors the West Virginia Citizen Action Group and the Sierra Club.

Even at a much lower price, ratepayers still would be exposed to numerous risks, he said: among them, that coal prices will go higher than forecast and that unforeseen environmental regulations, including on greenhouse gases, will necessitate further capital expenditures.

Cynical observers have suggested this proposal, and a similar proposal from Appalachian Power, are motivated for the two Ohio-based utility companies by a desire to move coal-fired power assets out of their Ohio utilities' portfolios, where deregulation now forces them to compete, to West Virginia's regulated market where the commission will guarantee the companies a return from ratepayers for the coming several decades.

"The transaction represents an effort to bail out the companies' unregulated affiliates," said PSC Consumer Advocate Byron Harris flatly in his testimony.

An alternative plan with energy efficiency and demand response, plus purchases from the market as needed, would cost $510 million less through 2034 than the proposal, in Schlissel's analysis.

"Obtaining needed capacity and energy from the Harrison plant through the proposed (generation resource transaction) is the most expensive option," he said.

Fuel diversity

Well above 80 percent of Mon Power's generation capacity relies on coal. The proposal would deepen that share.

"That increased reliance comes at a time when utilities across the country are looking to diversify away from coal in light of increased environmental regulations affecting the burning of coal," Oxley noted.

If the transaction goes through, "Mon Power will be dependent through at least 2026 on just two forty-year-old supercritical coal plants for more than 90 percent of its internally generated power," said Schlissel. "And much of the remainder of the companies' energy also will be coal-fired. Nothing in the companies' resource portfolio provides a hedge against the risks associated with this near total dependence on a single fuel source."

The hired analysis Mon Power filed of the cost of alternatives considered coal and nuclear that take years to build, did not take natural gas fully into account and failed to consider demand-side options such as energy efficiency and demand response, Schlissel wrote.

Harrison will burn W.Va. coal, regardless

Northern West Virginia coal producers Consol Energy and others have enjoyed Harrison as a captive market for their coal since the plant started up in the early 1970s.

Harrison got 90 percent of the 3.8 million tons of coal it burned in 2012 by conveyor from Consol's nearby Robinson Run #95 mine in 2012. The remainder came from other northern West Virginia mines.

The utilities and the coal industry have argued that Mon Power's ownership of Harrison will help to preserve that market for northern West Virginia coal.

"Moving the Harrison Power Station assets into Monongahela Power will ensure that we have a long-term, low-cost energy source for decades to come in Northern West Virginia," said James Laurita, president and CEO of Morgantown-based coal producer Mepco and chairman of the West Virginia Coal Association board, in his testimony. "Additionally, thousands of highly skilled, high-paying jobs will be protected and preserved for many years."

Oxley doesn't see that logic. Harrison will be just as likely to continue to burn coal whether Mon Power buys it or not, he said.

"Barring unforeseen events, the Harrison plant will operate and burn West Virginia coal if it is economical to do so as determined by its cost to dispatch," he wrote. "The ownership of the facility, whether it be by Mon Power or AE Supply, should have no impact on its operating dispatch costs."

That coal just about has to come from Robinson Run and other northern West Virginia mines, in the observation of Donald Walker, a technical analyst with the commission, because Harrison does not have barge availability and very limited rail; much more expensive truck transportation is its only real alternative.

Harrison may be the one at risk, not West Virginia coal. Walker expressed concerns that the plant does not have a long-term contract for Robinson Run coal, and noted that the mine could and does sell to other markets.

Bid it out: Analysts agree

Consumer Advocate Harris recommended that Mon Power issue a Request for Proposal, or RFP, to determine to everyone's satisfaction the most cost-effective means of meeting  ratepayers' future electricity needs. Other intervenors suggested the same.

"An RFP process is the only way that the commission can determine the costs and benefits of all of the options available to serve the companies' customers," Harris said. "For example, an RFP issued in 2012 by Louisville Gas and Electric and Kentucky Utilities garnered more than 30 proposals with a wide variety of capacity and resource options."

UBS utilities analysts agree.

The analysts noted in an April 29 investment research report on the direct testimony filings that Louisville Gas & Electric's RFP resulted in the decision to build a combined cycle gas turbine plant. That's the 640-MW Cane Run plant, scheduled to go into operation in 2015.

"While predictably challenging, we see the call for a more open solicitation as the most salient point raised," the UBS report concluded of the filings.

Mon Power has not offered "any credible reasons" why it should not issue an RFP, Harris said.

FirstEnergy Director of Regulated Generation and Dispatch Michael Delmar has said that would take too long. The company has urged haste, saying West Virginia ratepayers should begin benefiting this season from ownership of the plant.

Schlissel countered that there is no need for the transaction to occur immediately, if at all, except for the financial benefit to FirstEnergy. 

Next steps

FirstEnergy said it would thoroughly review the testimony and file its response when rebuttal testimony is due, by May 17.

"The proposed generation transaction is cost-effective and will allow Mon Power to meet its capacity and energy obligations with its own generation resources," said spokesman Todd Meyers. "This will eliminate the need to make additional purchases from the spot market and will result in greater rate stability for our customers. We believe the transaction is right for our customers, and intend to support that position."

The evidentiary hearing in the case will take place May 29-31 in Charleston. Documents in the case may be accessed on the PSC's website;  search for, or subscribe to, docket number 12-1571.

AEP subsidiary Appalachian Power has a similar case before the commission, docket number 12-1655.



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