The offer by Allegheny Energy Supply Co. to sell much of the coal-fired Harrison power plant in northern West Virginia to regulated affiliate Monongahela Power is a good deal, despite the contentions of a witness for the West Virginia Consumer Advocate Division (CAD).
That was a point made by FirstEnergy (NYSE: FE) official Michael Delmar in heavily-redacted testimony filed Nov. 28 with the West Virginia Public Service Commission in an expanded net energy cost (ENEC) case. Billy Jack Gregg, working as a consultant for the CAD, had filed earlier testimony criticizing the proposed sale by non-regulated Allegheny Energy Supply of the Harrison capacity to Mon Power. Delmar is employed by FirstEnergy Service Co. as Director, Regulated Generation and Dispatch.
Among other things, Gregg said Allegheny Energy Supply is overpricing Harrison and that Mon Power and sister company Potomac Edison (which currently owns no generation) might be better off diversifying away from their already major coal dependence and acquire natural gas-fired capacity. He said the price AE Supply wants to charge for the Harrison capacity is way more than this asset was valued at prior to the merger of FirstEnergy and Allegheny Energy. After Gregg filed his testimony in the ENEC case on Oct. 31, Mon Power on Nov. 16 opened a separate docket asking the commission for approval of the Harrison transaction.
“While the Companies recognize that their proposal to acquire Allegheny Energy Supply Company’s ownership interest in the Harrison facility is the subject of a separate docket (Case No. 12-1571-E-PC) and that CAD and other parties will have an opportunity to review the Companies’ petition and supporting testimony in that case, two of Mr. Gregg’s observations seemed to me to warrant a response here,” wrote Delmar in the Nov. 28 filing in the ENEC case.
Delmar says emphasis should be on cheap, not fuel diversity
First, Gregg suggested that Mon Power’s current generation portfolio, which is “almost 100% dependent on coal,” needs to be “diversified for economic as well as environmental reasons,” Delmar noted. “For reasons I expressed in my pre-filed direct testimony in the generation resource plan docket, the Companies question Mr. Gregg’s apparent view that Mon Power’s resource planning decisions should be determined by fuel diversity or ‘environmental’ considerations,” wrote Delmar. “Although the Companies considered fuel diversity and environmental considerations in Mon Power’s resource planning efforts, it was by no means the primary factor in determining how to address Mon Power’s growing energy and capacity shortfall. Instead, the principal factor in determining Mon Power’s preferred approach to addressing its energy and capacity needs were cost and impact on customers – an approach borne out by the extensive levelized cost analysis found in the Companies’ 2012 Resource Plan.”
He added: “Mon Power did not feel it was prudent to ask customers to pay more for non-coal alternatives for the sake of fuel diversity – or in response to biased views of what is environmentally appropriate – without legal or regulatory direction to do so. Mon Power’s analysis clearly identified coal-fired generation as the lowest cost option to meet Mon Power’s energy and capacity needs. The Companies believe it is entirely reasonable to invest in proven coal-fired assets – especially an asset with the extensive environmental controls that Harrison has – and to continue Mon Power’s reliance on coal as its primary fuel.”
Second, Delmar rejected Gregg’s characterization of the proposed Harrison acquisition, particularly the contemplated acquisition cost for AE Supply’s interest in Harrison, as “outrageous.” Since Gregg did not have the benefit of the more recent Nov. 16 petition for approval of this transaction and its supporting documentation – particularly the third-party valuation of Harrison showing its fair market sales value to be far in excess of its current book value – perhaps the parties can look past the CAD’s “reflexive opposition” to an affiliate transaction at this point, Delmar wrote.
“If Mr. Gregg had evaluated the Petition before drafting and submitting his testimony in this case, he would have known that Mon Power plans to pay AE Supply the lower of market value or book value for its interest in Harrison as of the projected closing date of May 1, 2013,” Delmar said. “The Navigant Appraisal for Harrison shows that the fair market value of AE Supply’s interest in Harrison as of December 31, 2012, is $1.333 billion, which is higher than AE Supply’s projected book value as of May 1, 2013 of $1.164 billion. The transaction price represents a discount of $169 million to the fair market value of the asset – an outcome one might assume the CAD would appreciate, not assail.”
The CAD also needs to recognize that if a regulated utility’s market-regulated affiliate is expected to deal with the utility on an arm’s length basis, just as nonaffiliated companies in the generation asset market would, it cannot also be expected to sell an asset at a fraction of its market value, he added. “Yet in Mr. Gregg’s apparent position that Mon Power should only pay the pre-Merger book value of AE Supply’s interest in Harrison, he essentially contends that the Harrison acquisition is fair only if AE Supply is willing to accept a far, far greater discount (more than 50% additional discount) for the privilege of selling a valuable asset to an affiliate – when it would have absolutely no such obligation were it to sell the same asset to an unaffiliated company. I do not speak for AE Supply and its asset ownership decisions, but it seems obvious to me that AE Supply would be exceedingly unlikely to sell its Harrison interest to an unaffiliated entity for the pre-Merger book amount. Conversely, nor could Mon Power reasonably expect an unaffiliated generation asset owner to sell an existing generation asset like Harrison (even if such an asset existed) at such a dramatic discount to market value – it would make no economic sense.”
Harrison is an attractive asset for many reasons and an opportunity to acquire such an asset within Mon Power’s own service territory cannot easily be replicated, Delmar added. “As the Commission further explores the Transaction, and even as it considers the Company’s request to defer the ENEC decrease to coincide with a May 1, 2013 closing of the Transaction, it should not allow the CAD’S irrational position on this issue to cloud the financial realities of a good and reasonable transaction between affiliates,” he wrote. “If the Commission finds, as the Companies’ have, that acquiring Harrison is the right approach to resolving Mon Power’s capacity and energy deficiency, it should not allow the CAD’S unreasonable opposition to a fair price obscure the Transaction’s value.”
Harrison is a big, heavily emissions-controlled plant
Harrison is a supercritical coal power plant located in Haywood, W.Va., and was built in 1972. Harrison has a generating capacity of 1,984 MW. Only 20.54% of this capacity is currently owned by Mon Power. 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. Unit 3 came on line in 1974 and has a capacity of 661 MW. Coal for the units is delivered by truck from nearby mines. All three units have selective catalytic reduction (SCR) NOx controls and wet flue gas desulfurization (WFGD) SO2 controls. Each of the units also uses electrostatic precipitators (ESP) to control particulates.
Before the Rivesville, Willow Island and Albright coal plant deactivations this fall, Mon Power was 480 MW short on capacity, which increased by another 458 MW with the deactivations. The resulting 2013 shortfall will total 938 MW, increasing to over 1,400 MW by 2026 as load continues to grow.
The utilities told the commission that gas-fired generation was found to be the best new-build option, but that acquiring existing sources of generation can offer advantages over constructing new generation. Opportunities to acquire existing generating facilities are scarce since they require the intersection of a willing seller and an asset that meets the requirements of the prospective buyer, they added.
In the Nov. 16 petition for approval of the Harrison deal, the companies identified a significant deficit in the generating capacity. To address this deficit, the companies propose a generation resource transaction that will increase Mon Power’s net installed capacity by 1,476 MW.
The centerpiece of the transaction is Mon Power’s acquisition of the 79.46% ownership interest currently held by AE Supply in the Harrison plant. 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.
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.