The Citizens Utility Board, which is a consumer advocacy group, told the Wisconsin Public Service Commission on Dec. 6 that it has some issues with Wisconsin Public Service Corp.’s (WPSC) plan to purchase Fox Energy Co. LLC and its Fox Energy Center, a 600-MW natural gas-fired combined-cycle facility located near Kaukauna, Wisc.
On Oct. 12, WPSC filed an application with the commission to purchase Fox at a total cost of $440m, comprised of $390m under the purchase and sale agreement for the plant and certain related ancillary agreements, and a separate $50m payment by WPSC to the current plant owners to terminate the current agreement under which WPSC purchases Fox capacity and energy.
The facility uses two General Electric International (GEII) model 7FB.01 combustion turbine generators (CT). The 7FB.01 CT makes up only 2% of all 7F-type CTs installed, and is no longer offered by GEII as a “heavy duty gas turbine,” the board noted. WPSC has said that the CTs did experience some component failures in 2010, said the board in its heavily redacted testimony.
WPSC has purchased 500 MW of the capacity and energy produced by Fox under an existing tolling agreement since June 2005. The tolling agreement is set to expire in two phases, half on May 31, 2015, and the other half on May 31, 2016. In addition, a WPSC purchase of 335 MW from the Kewaunee nuclear plant expires at the end of 2013, and WPSC anticipates it soon may decommission certain of its smaller coal facilities, representing another 467 MW of its resource portfolio. WPSC said that absent the acquisition of replacement resources it faces a capacity shortfall, with the shortfall amount redacted from the CUB testimony.
CUB said it recognizes that WPSC will be losing a substantial amount of capacity over the next few years as existing long-term purchase agreements expire and decisions are made regarding the possible retirement of certain coal plants. In general, it said the application clearly addresses the circumstances that will result in the need for new resources, and explains the rationale behind the company’s general criteria for replacement resources. The application appears to fairly and comprehensively explain the contractual and technical details of the proposed purchase of Fox, and its cost to ratepayers.
But, CUB said it does have three concerns with the application.
- First, the application does not adequately address the option of entering into a new long-term purchase agreement with the current owners of Fox.
- Second, the application does not adequately address how it arrived at the final amount for each element of the purchase price and why such amounts are reasonable.
- Finally, CUB said that certain elements of the purchase price, including the $ delta between the plant’s depreciated book value and the net asset purchase price, should not be recovered from ratepayers unless and until WPSC has provided an adequate explanation as to the reasonableness of such amounts, and in any case any final amounts approved by the commission for inclusion in rates should be the lower of the WPSC estimates and the valuation conducted by an independent third-party expert.
CUB said that new tolling agreement is a back-up plan
“The application does not state that the current Fox owners are unwilling to negotiate either a new long-term purchase agreement or a long-term extension of the current tolling agreement, and if so under what terms and conditions,” CUB wrote. “However, we do know that the owners negotiated a new tolling agreement that will become effective in the event the proposed transaction is not consummated, under the same terms and conditions contained in the existing tolling agreement and for a term that could extend through [redacted].”
Before the commission approves the proposed transaction it should require WPSC to explain why a new long-term purchase agreement for Fox is not an available option, and if it is an option, to provide an economic analysis of that option consistent with the analysis used in the application for the other options, CUB added. If it turns out that a new long-term Fox purchase agreement has a lower present value revenue requirement (PVRR) than the proposed transaction, WPSC could still explain why it believes, based on other qualitative considerations, the proposed transaction is still the best option for ratepayers, the board added.
WPSC did provide in the application some information regarding how it arrived at the purchase price, including a discussion of why it compares favorably with the purchase price paid by Wisconsin Power and Light (WPL) for the Riverside Energy Center, a similarly-sized natural gas combined-cycle facility, CUB wrote.
Because the transaction provides for a new tolling agreement through at least July 2016 in the event the transaction does not close for any reason other than lender consent, under the same terms and conditions contained in the existing tolling agreement, it is not clear why WPSC simply does not wait until the existing tolling agreement expires by its terms at that time and then purchase the plant, CUB said.
“CUB appreciates the level of detail already provided by WPSC in its application regarding its proposed purchase of Fox,” it concluded. “For the reasons stated above, CUB believes some additional information should be provided, and in particular an economic analysis of the option of entering into a new long-term purchase agreement for Fox should be conducted, so that the Commission can make a more informed decision about whether the proposed purchase of Fox under its proposed terms and conditions is the best option for ratepayers.”
WPSC is a unit of Integrys Energy Group (NYSE: TEG).
Utility says the plant is in generally good condition
WPSC said in its heavily-redacted Oct. 2 application that the Fox Energy Center is a 593 MW natural gas-fired combined cycle facility, with a summer rating of about 548 MW and a winter rating of about 638 MW. Based on summer conditions, at its design point the facility can produce about 500 MW (net plant output) in combined cycle operation, with an additional 50 MW of peaking capacity available while duct firing.
The plant is currently owned by Fox Energy Co. LLC, which is jointly owned by Fox River Power LLC, a subsidiary of Tyr Energy Inc., and Fox Energy OP LP, an indirect subsidiary of General Electric.
In referring to the plant’s operational history, the application said that: “With respect to ‘real-world’ performance, the Fox Energy Center has demonstrated a strong record of efficient plant operations at near ‘new and clean’ output levels.” WPS said it concluded that Fox Energy Center’s major equipment is in good and serviceable condition. “As with any existing facility that has accrued significant service hours (and/or fired starts), there are items which may require periodic monitoring and/or near-term corrective action,” it added.