FirstEnergy loses decision in ICG dispute, shuts coal capacity

Allegheny Energy Supply Co. LLC (AE Supply) lost an Oct. 19 procedural decision in a long-running court dispute with units of Arch Coal (NYSE: ACI) over a contract force majeure related to coal supply for the Harrison power plant in northern West Virginia, said AE Supply parent FirstEnergy (NYSE: FE) in its Nov. 8 Form 10-Q filing at the SEC.

In December 2006, AE Supply and its Monongahela Power (MP) affiliate filed a complaint in the Court of Common Pleas of Allegheny County, Pa., against International Coal Group and related companies. Arch Coal bought these companies in June 2011. Prior to the trial, ICG was dismissed as a defendant by the court, which issue can be the subject of a future appeal, FirstEnergy noted.

“As a result of defendants’ past and continued failure to supply the contracted coal, AE Supply and MP have incurred and will continue to incur significant additional costs for purchasing replacement coal,” the Form 10-Q added. “A non-jury trial was held from January 10, 2011 through February 1, 2011. At trial, AE Supply and MP presented evidence that they have incurred in excess of $80 million in damages for replacement coal purchased through the end of 2010 and will incur additional damages in excess of $150 million for future shortfalls. Defendants primarily claim that their performance is excused under a force majeure clause in the coal sales agreement and presented evidence at trial that they will continue to not provide the contracted yearly tonnage amounts.”

In May 2011, the court entered a verdict in favor of AE Supply and MP for $104m ($90m in future damages and $14m for replacement coal/interest). In August 2011, the Allegheny County Court denied all motions for post-trial relief. Also in August 2011, the defendants posted bond and filed a notice of appeal with the Superior Court. On Aug. 13, the Superior Court affirmed the $14m past damages award but vacated the $90m future damages award.

While the Superior Court found that the defendants still owed future damages, it remanded the calculation of those damages back to the trial court. The specific amount of those future damages is not known at this time, but they are expected to be calculated at a market price of coal that is significantly lower than the price used by the trial court, the Form 10-Q said. On Aug. 27, AE Supply and MP filed an application for reargument en banc with the Superior Court, which was denied on Oct. 19. “AE Supply and MP will file a Petition for Allowance of Appeal with the Pennsylvania Supreme Court within 30 days,” said the Form 10-Q. “A ruling by the Supreme Court on whether it will hear the case is expected in the second quarter of 2013. AE Supply and MP intend to vigorously pursue this matter through appeal.”

FirstEnergy wants to transfer coal capacity in West Virginia

In other matters, MP and Potomac Edison (PE) filed a resource plan with the West Virginia Public Service Commission in August detailing both supply and demand forecasts and noting a substantial capacity deficiency. MP and PE plan to file a petition for approval of a generation resource transaction with the West Virginia PSC in November that involves a net ownership transfer of 1,476 MW of coal-fired capacity to MP. The proposed transfer would involve MP’s acquisition of the remaining ownership of the Harrison plant from AE Supply and the sale of MP’s minority interest in the Pleasants plant to AE Supply.

“The proposed transfer would implement what we believe to be a cost-effective plan to assist MP in meeting its energy and capacity obligations with its own generation resources, eliminating the need to make additional electricity and capacity purchases from the spot market which is expected to result in greater rate stability for MP’s customers,” the Form 10-Q said. “The plan is expected to remedy MP’s capacity and energy shortfalls, which are projected to increase due to an increase in annual load growth of approximately 1.4%.”

Also, as of Sept. 1, pursuant to previously announced plans, seven coal-fired power plants (Albright, Armstrong, Bay Shore except for Unit 1, Eastlake Units 4-5, R. Paul Smith, Rivesville and Willow Island) have been deactivated while three coal-fired power plants (Ashtabula, Eastlake except for Units 4 and 5, and Lake Shore) will remain active under reliability must-run arrangements with PJM.

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.