The Monongahela Power unit of FirstEnergy (NYSE: FE) wants West Virginia Public Service Commission approval of a new fuel procurement arrangement between Mon Power and FirstEnergy Generation (FE Genco).
Under that arrangement, FE Genco employees would provide the same fuel procurement and inventory management services for Mon Power’s jointly- and wholly-owned plants that has been provided by Allegheny Energy Service Corp. FirstEnergy in February 2011 took over the parent of Allegheny Energy Service and Mon Power, Allegheny Energy (NYSE: AYE), precipitating this change.
The Federal Energy Regulatory Commission has already approved a waiver of certain affiliate restrictions needed to implement the fuel arrangement, and has recognized the substantial benefits to customers of Mon Power and affiliated Potomac Edison Co. associated with this change, Mon Power said in an April 20 filing at the West Virginia PSC.
The coal-fired stations covered by a FERC-granted waiver include the Fort Martin in Monongalia County, W.Va.; Albright in Preston County, W.Va.; Willow Island in Pleasants County, W.Va.; and Rivesville in Marion County, W.Va., each of which Mon Power owns in its entirety.
Also covered are three stations in which Mon Power has a partial ownership interest. Those three plants are: Harrison coal plant in Haywood, W.Va. (Mon Power 20.54%; AE Supply 79.46%); Pleasants coal plant in Willow Island, W.Va. (Mon Power 7.69%; AE Supply 92.31%); and the Bath County pumped storage hydro plant in Warm Springs, Va., (Dominion 60%; Allegheny Generating 40%). Allegheny Generating is part owned by Mon Power.
“Mon Power has a pressing need to involve FE Genco in the development and completion of certain confidential fuel procurement and inventory management transactions generally described in Confidential Appendix 1 to this Petition (the ‘Near-Term Transactions’),” the April 20 filing said. “Mon Power believes that having the flexibility to utilize one or more of the Near-Term Transactions by June 1, 2012 will create demonstrable benefits for the Companies’ customers – benefits that will be reflected as cost savings in future [Expanded Net Energy Cost (ENEC)] proceedings as compared with Mon Power’s opportunities absent FE Genco’s involvement. Accordingly, Mon Power respectfully requests that the Commission grant interim approval of the Near-Term Transactions generally described in Confidential Appendix 1 on an expedited basis, subject to the completion of the Commission’s review of this Petition and its further review of any such transactions in future fuel cost recovery proceedings.”
Mon Power outlines benefits of combined procurement
As before, FE Genco will under this new agreement make use of joint solicitations to maximize bargaining power and contract values. Prior to making a joint fuel solicitation, Mon Power and FE Genco, on behalf of FirstEnergy’s market-regulated generation, will each determine their individual fuel requirements, which are then reflected in the joint solicitation. The fuel, including coal, obtained through the solicitation is then allocated between Mon Power and its market-regulated affiliates on a pro-rata basis according to the predefined procurement objectives for each entity.
In the case of fuel transfers among Mon Power and its market-regulated affiliates, the FERC approval requires that the pricing structure be designed to result in no harm to the regulated utility, no matter what the situation. Under the new Fuel Arrangement, any fuel transferred from a market-regulated unit to Mon Power for use at a wholly owned unit would be at the lower of cost or market price; conversely, any fuel that Mon Power would transfer from a wholly owned unit to a market-regulated unit would be transferred at the higher of cost or market price. This approach to pricing is typically referred to as asymmetric pricing.
Under the new Fuel Arrangement, Mon Power also retains the option to direct FE Genco to secure fuel through alternate means should Mon Power choose not to participate in a particular joint solicitation or procurement for the wholly owned units. Mon Power would have final decision-making authority with regard to fuel procurement and inventory levels at the wholly owned units.
An obvious benefit of this new, combined fuel procurement is the economies of scale associated with greater purchasing power and the ability to spread costs over a larger base (in this case, the combined FirstEnergy and Allegheny Energy generating fleet), the company noted. This ability has the potential to reduce overall coal costs, and thereby to directly benefit the companies’ customers in ENEC proceedings.
Integrated fuel procurement also enables Mon Power to obtain favorable terms and conditions it may not otherwise be able to obtain if acting independently. Another related benefit is the ability to prevent suppliers from identifying the volumes needed by any single generating facility. “When a supplier is unable to link a particular solicitation with a specific facility, then it is less able to predicate its pricing and negotiating strategy on knowledge of the origin of competing supplies, the imminence of need, and existing transportation costs,” the company pointed out.
Another cited efficiency available under the Fuel Arrangement is FE Genco’s role in inventory management. If a regulated station’s fuel supplier is temporarily unable to deliver scheduled volumes, fuel initially intended for a jointly owned unit or market-regulated unit can be delivered to the regulated station rather than allowing that station’s inventory levels to reach unacceptably low levels. Conversely, if a regulated station is underperforming on a forecasted burn, or cannot unload due to equipment problems, coal initially intended for that station can be redirected to a jointly owned unit or market-regulated unit, thereby saving the regulated station from potential damages related to its inability to meet the volume obligations required under the contract.
Scrubbers take a lot of differing coal specs out of the equation
Nearly all of the affected power plants are equipped with flue gas desulfurization technology (scrubbers), and historically have had materially similar specifications for ash, moisture, and Btu content. These factors allow FE Genco to utilize fuels with a wide range of sulfur contents across much of the FE generation fleet, and thus be able to consume at least a minimum amount of nearly every coal in the portfolio at the majority of the generating stations.
“Although it is not generally the practice of FE Genco to transfer fuel between market-regulated or ‘merchant’ stations and the Wholly Owned Units, the Fuel Arrangement, as approved by the FERC, would permit this situation, as long as asymmetric pricing is used,” Mon Power said. “In accordance with the FERC waiver, where Mon Power is to purchase coal for a Wholly Owned Unit, which was initially intended for a market-regulated unit, then Mon Power would pay the lesser of cost or market price of that transferred coal. Asymmetric pricing would also apply in the event that coal initially intended for a Wholly Owned Unit is transferred to a market-regulated unit, but in that case, the market-regulated unit would pay Mon Power the higher of cost or market price for the coal.”
Mon Power’s coal requirements are slightly less than 15% of the FirstEnergy companies’ total requirements. This means that Mon Power, as part of a joint fuel procurement process, would reap the benefits of solicitations roughly seven times the size of the ones it could enter into on its own, the company wrote. More favorable pricing and more favorable transportation are the likely outcomes for Mon Power, as compared with Mon Power’s bargaining power on a stand-alone basis.