West Virginia PSC staff recommends approval of FirstEnergy coal-buying plan

The staff at the West Virginia Public Service Commission has signed off on a FirstEnergy (NYSE: FE) plan to consolidate coal buying for the former Allegheny Energy plants to a central FirstEnergy fuels company.

On April 20, Monongahela Power, dba Allegheny Power, filed with the commission a petition for consent and approval of an affiliate arrangement relating to a fuel procurement agreement between Mon Power and FirstEnergy Generation Corp. (FE Genco). Under the arrangement, FE Genco employees would provide the same fuel procurement and inventory management services for the company’s jointly and wholly owned generating plants that Allegheny Energy Service Corp. had provided. The Federal Energy Regulatory Commission has already approved a waiver of certain affiliate restrictions needed to implement this arrangement, commission staff noted in a July 17 filing. FirstEnergy took over Allegheny Energy in February 2011.

Marian Russell, Utilities Analyst II with the commission’s Utilities Division, wrote: “Staff has reviewed Mon Power’s filing and its responses to data requests in this proceeding. Mon Power explains that when it comes to transferring fuel between companies it will practice asymmetric pricing, meaning that when transferring fuel from one of Mon Power’s Wholly Owned Units to a market-regulated affiliated unit pricing will be at the higher of actual cost or market price and when transferring to a Mon Power Wholly Owned Unit from a market-regulated affiliated unit, pricing will be at the lower of cost or market price.”

The FirstEnergy petition also stated in regards to the Wholly Owned Units that Mon Power will have the final decision-making authority with regards to fuel procurement and inventory levels. Mon Power stated that no party will receive an undue advantage over the other and the fuel arrangement will not adversely affect the public in West Virginia. In addition, the petition states that West Virginia ratepayers’ most obvious benefit is the economies of scale pricing that will be achieved through FE Genco’s ability to increase purchasing power and spreading the costs over a larger base. Mon Power said it will also have the ability to avoid contract penalties in coal agreements relating to contracted coal tonnage.

“The Utilities Division recommends the Commission provide its consent and approval of the affiliate arrangement relating to fuel procurement, without approving the specific terms and conditions of the agreement,” Russell wrote. “Furthermore, transactions governed by the pricing restrictions set forth in paragraph 13 of the Petition and further explained in the FERC filing and order, are subject to review in future [Expanded Net Energy Cost] and base rate proceedings and may be reviewed by the Commission for the reasonableness of the costs associated with the transactions.”

Mon Power has several coal-fired plants in West Virginia

Mon Power provides electric utility service to approximately 385,500 customers across the northern half of West Virginia. Mon Power wholly owns the coal-fired Albright, Willow Island and Rivesville plants. In addition, Mon Power jointly owns 20.54% of the coal-fired Harrison plant, 7.69% of the coal-fired Pleasants plant and 40.62% of the Bath County pumped storage hydro station.

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, Mon Power noted in the April 20 application. 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 the application. “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.

About Barry Cassell 20414 Articles
Barry Cassell is Chief Analyst for GenerationHub covering coal and emission controls issues, projects and policy. He has covered the coal and power generation industry for more than 24 years, beginning in November 2011 at GenerationHub and prior to that as editor of SNL Energy’s Coal Report. He was formerly with Coal Outlook for 15 years as the publication’s editor and contributing writer, and prior to that he was editor of Coal & Synfuels Technology and associate editor of The Energy Report. He has a bachelor’s degree from Central Michigan University.