The Monongahela Power and Potomac Edison units of FirstEnergy (NYSE: FE) applied Nov. 16 at the West Virginia Public Service Commission to transfer certain generating assets controlled by affiliates of FirstEnergy to their retail service.
In the Nov. 16 petition, the companies identified a significant deficit in the generating capacity available to serve their customers. To address this deficit, the companies propose a generation resource transaction that will increase Mon Power’s net installed capacity by 1,476 MW. “This capacity increase will facilitate Mon Power’s continued provision of reliable, low-cost electricity for years to come, and will provide a number of important customer and economic benefits,” the companies said. “The Transaction arose from the Companies’ resource planning efforts detailed in the 2012 Resource Plan filed with the Commission on August 31, 2012 (‘Resource Plan’).
The centerpiece of the transaction is Mon Power’s acquisition of the 79.46% ownership interest currently held by Allegheny Energy Supply Co. LLC (AE Supply) in the coal-fired Harrison power plant in northern West Virginia. This acquisition, when added to Mon Power’s existing ownership in Harrison, will make Mon Power the sole owner of Harrison. At the same time, AE Supply will acquire Mon Power’s 7.69% ownership interest in the coal-fired Pleasants plant, resulting in AE Supply’s sole ownership of Pleasants.
A third component of the transaction is a temporary transaction surcharge to be implemented on closing of the transaction and to remain in effect until new base rates reflecting the full amount of the surcharge are placed into effect. Mon Power’s net investment in the transaction is in excess of $1.1bn. Without immediate rate relief to provide for recovery of and on this investment, together with the additional expense to operate Harrison, Mon Power said it will not proceed with the transaction. The companies project that the surcharge, if implemented on May 1, 2013, along with the rate decrease expected to arise from the companies’ pending 2012 Expanded Net Energy Cost (ENEC) proceeding, would reduce overall customer rates by 1.3%. The companies’ pre-filed testimony in the 2012 ENEC case lays out the benefits of this rate implementation strategy.
The companies propose that the transaction be closed not later than May 1, 2013. To achieve this closing date and to allow time for the Federal Energy Regulatory Commission to issue its order after the West Virginia commission enters its order, the companies recommend that the PSC enter an order approving the transaction and related relief by April 15, 2013.
As reflected in the companies’ Resource Plan filed with the PSC on Aug. 31, their forecasted capacity requirement in 2013 is 3,021 MW, while Mon Power’s available capacity resources are only 2,083 MW. This equates to a 938 MW deficit of capacity needed to serve West Virginia customers. This projected deficit continues to increase each year, reducing the companies’ capacity resource coverage to only 60% of their projected need by 2026 without decisive action, the application said.
“First and foremost, the Transaction will provide Mon Power with a net increase in installed capacity of 1,476 MW (1,189 MW of unforced capacity), comprised of a 1,576 MW increase in installed capacity from the Harrison Acquisition and a 100 MW decrease in installed capacity from the Pleasants Sale,” the application argued. “This net capacity increase is expected to provide Mon Power with sufficient generation resources to meet the Companies’ capacity requirements through 2018 based upon current estimates. The Transaction also will permit the Companies to meet their customer load requirements, preventing the need to rely on unpredictable energy market prices to such a significant degree. By consolidating ownership of each of the plants in a single owner, the Transaction will simplify the ownership, procurement, and operational structures of both facilities.”
Companies say Harrison in pretty good shape for clean-air needs
Harrison and its workforce have excelled in both safety and operational performance, and its many recent improvements – including a cooling tower rebuild, water remediation projects, and initial investments to comply with the U.S. EPA’s Mercury and Air Toxics Standards (MATS) – reflect the outstanding upkeep and continuing modernization of the facility, positioning it well for years of productive service, the utilities noted. These investments complement Harrison’s existing environmental controls, including wet flue gas desulfurization (WFGD) scrubbers, selective catalytic reduction (SCR), and electrostatic precipitators (ESP) facilities to control SOX, NOx, and particulate matter.
“All in all, these environmental controls position Harrison to achieve MATS compliance primarily through modifications to existing equipment, rather than the full-scale environmental control investments that some coal-fired facilities need, and they highlight Harrison’s standing as a technologically advanced, West Virginia-based supercritical facility,” the utilities said.
In terms of needed new emissions controls, to achieve the more stringent PM standards, the existing ESP transformer rectifier sets will be retrofitted with high frequency transformer rectifiers. This will reduce air-in leakage and increase the efficiency of Harrison’s ESP process. Once this upgrade is complete, the units will be tested to determine if they meet the new PM limit. If the units exceed the PM standard, Mon Power expects to install an additional 15-foot ESP field to each of the three units. In addition, Mon Power will make any needed repairs to duct work to reduce air-in leakage and improve precipitator performance. Also, instead of adding equipment to control acid mist at Harrison, SO2 will be controlled as a surrogate for HCl using Harrison’s existing WFGD systems. Currently, the Harrison SO2 emission rates are marginally within the new limit. In order to ensure compliance, some additional equipment will be added to the WFGD system. Collectively, these improvements are estimated to cost up to $244m.
State Consumer Advocate has slammed value placed on Harrison
The total estimated purchase price for the Harrison acquisition, as outlined in the Nov. 16 application, is $1.251bn. Mon Power would pay the lower of market value or book value at closing. An independent valuation of Harrison conducted by Navigant Capital Advisors estimates the fair market value of AE Supply’s interest in Harrison as of Dec. 31, 2012, at $1.333bn, which is higher than AE Supply’s projected book value as of May 1, 2013 of $1.164bn.
Mon Power will need about $1.102bn to finance the transaction, which includes the $1.175bn net transaction price of the Harrison acquisition and Pleasants sale, less a $73.5m note. Approximately 45% will be financed by direct equity contribution to Mon Power (with no issuance of new shares of common stock by Mon Power) and the remaining 55% will be financed by debt.
On Oct. 31, the West Virginia Consumer Advocate Division (CAD) filed its reaction to the Aug. 31 Resource Plan, which was not a particularly positive one. The companies in the Aug. 31 plan stated that they propose to meet the future needs of their customers through several transactions with their affiliates, which the companies describe as the “Transaction”:
- The purchase from Allegheny Supply of 1,567 MW of Harrison coal plant capacity;
- The sale of 100 MW of capacity in the Pleasants coal plant to Allegheny Supply; and
- The transfer from of 177 MW of purchase power rights for generation produced by Ohio Valley Electric Corp. (OVEC) from Allegheny Supply and FirstEnergy Generation Corp. OVEC is owned by several utilities and runs the Clifty Creek and Kyger Creek coal plants.
CAD, which also refers to the Resource Plan as an integrated resource plan (IRP), didn’t like much of this proposal. “Even though the Companies’ IRP provides the Commission with a ‘heads-up’ about its future plans, the document submitted by the Companies fall well short of being an objective analysis of the panoply of resources available to the Companies,” it said. “In a nutshell, the analysis contained in the Plan relies upon questionable assumptions and omissions, all with the apparent purpose of tilting the analysis in favor of the Companies’ proposed Transaction.”
If the companies obtain 1,653 MW of generating capacity in 2013 at Harrison as proposed, customers will not enjoy the benefits of the current extraordinarily low price of capacity available through PJM through at least June 2014, the division said on Oct. 31.
It also appears that the FirstEnergy companies have limited their review of resource alternatives to only those resources available from their affiliates or generating resources they can build on their own, CAD said.
“Companies failed to explore the availability of supply-side and demand-side resources through bilateral contracts or a market-bidding process,” it wrote. “The CAD believes Companies must explore all options for satisfying their energy and capacity requirements, not just through the narrow view of affiliate transactions. For decades, it has been a common utility practice to publish Requests For Proposals (RFPs) in order to determine the quantity and price of demand-side and supply-side resources. In this context it is important to remember that the PJM capacity auction is a base residual auction. It provides no information whatsoever about the energy/capacity available in the bilateral market or what the costs of acquiring such energy capacity would be in a bilateral market. Neither the CAD nor the Companies will be able to provide the Commission with evidence of the amount and cost of capacity and energy resources available in the bilateral marketplace. Such evidence will be essential to the Commission for it to evaluate the prudency of the Companies’ proposed Transaction.”
The companies have written-up the net book value of the Harrison plant by more than $500m, which they propose will be paid by ratepayers, CAD also stated. This will result in a windfall profit to FirstEnergy at the expense of ratepayers, it added. The companies had placed the net book value of Harrison as of June 30 at nearly $1.2bn.
“This is more than twice the book value for the Harrison Plant at December 31, 2010, just prior to the merger of Allegheny Energy and FirstEnergy (February 25, 2011),” CAD wrote. “The dramatic increase in the net book value is not due to major investments in the plant since it was acquired by FirstEnergy. Rather, as the Companies note in response to IRP-12 that the primary reason for the dramatic increase in the book value for the Harrison Plant is ‘primarily the result of a purchase accounting fair value measurement related to the completion of the FirstEnergy/Allegheny Energy merger in February 2011.’”
One way in which the companies have “skewed” their analysis in favor of the proposed affiliate transactions is to assume unrealistically low capacity factors for natural-gas fired combined cycle generators, CAD said. The companies’ baseline analysis assumes that a combined-cycle generator will only have a capacity factor of 25%.
FirstEnergy drops, for now, OVEC part of the plan
Currently, Harrison uses nearly 5 million tons of coal annually in normal operations, all of which is supplied from local West Virginia mines. Harrison is a 1,984-MW facility located in Haywood, W.Va. Unit 1 came on line in 1972 and has a capacity of 662 MW; Unit 2 came on line in 1973 and has a capacity of 661 MW; and Unit 3 came on line in 1974 and has a capacity of 661 MW. Mon Power currently owns 20.54% of Harrison’s capacity and desires to acquire the remaining 79.46% of the capacity owned by AE Supply.
Pleasants is a 1,300-MW pulverized coal facility located in Willow Island, W.Va. Pleasants has two turbine generating units, each of which came on line in 1979 and has a capacity of 650 MW. Both units have SCR NOx controls and WFGD SO2 controls, and both use an ESP to control particulate matter. Currently, Pleasants’ two units are jointly owned by Mon Power (7.69%) and AE Supply (92.31%).
In the Aug. 31 Resource Plan, the companies indicated that Mon Power may also acquire certain power participation rights and obligations from affiliates AE Supply and FirstEnergy Generation Corp. (FE Genco) in a transaction component referred to as the “OVEC Assignment.” OVEC is jointly owned by several electric utilities and is headquartered in Piketon, Ohio.
“The primary benefit of the OVEC Assignment was that it would extend the period during which Mon Power could meet its capacity obligations longer than the Harrison Acquisition alone,” said the Nov. 16 application. “Upon further examination, the Companies determined that removing the OVEC Assignment from the Transaction would help to simplify the Transaction, help to achieve the May 1, 2013 target date for Closing, and allow Mon Power to evaluate OVEC and other resource options later. Because the Harrison Acquisition will fulfill the Companies’ capacity and energy needs through 2018 without the OVEC Assignment, the decision whether or not to acquire the OVEC participation rights can be deferred until additional resources are needed. Although not pursuing the OVEC Assignment is in the best interest of the Companies’ customers now, the Companies may reconsider an investment in OVEC participation rights in the future; as the Companies explained in the Resource Plan, OVEC is known to be a reliable source of generation, has a competitive levelized cost profile, and is well-positioned to comply with impending environmental regulations.”