The Federal Energy Regulatory Commission on April 23 signed off on a plan by subsidiaries of FirstEnergy (NYSE: FE) to transfer coal-fired assets in West Virginia to FirstEnergy’s Monongahela Power unit.
In November 2012, FirstEnergy Service Co., a subsidiary of FirstEnergy, on behalf of FirstEnergy’s indirect subsidiaries Allegheny Energy Supply Co. LLC (AE Supply) and Monongahela Power (Mon Power), filed a joint application with FERC under the Federal Power Act. Applicants requested commission authorization for restructuring transactions to realign the ownership of certain generating facilities within the FirstEnergy holding company system.
FERC ruled April 23 that that this transfer is consistent with the public interest. The West Virginia Public Service Commission is still reviewing the transaction.
Mon Power is a franchised public utility with captive customers that engages in the generation, transmission, distribution, and sale of electricity in northern West Virginia. Mon Power currently owns a 20.54% interest in the Harrison Power Station, a 1,984-MW pulverized coal facility located in Haywood, W.Va., along the West Fork River. It also owns a 7.69% interest in the Pleasants Power Station, a 1,300-MW pulverized coal facility located in Willow Island, W.Va., along the Ohio River.
AE Supply is a market-regulated merchant utility that develops, owns, and operates electric generating facilities and markets power in competitive wholesale and retail markets on its own behalf and through its subsidiaries. AE Supply and its subsidiaries own and operate approximately 7,015 MW of generation in the PJM Interconnection region. AE Supply owns a 79.46% interest in the Harrison facility and a 92.31% interest in Pleasants.
Under the proposed deal, Mon Power will purchase AE Supply’s 79.46% ownership interest in Harrison and become the sole owner of the plant. Also, Mon Power will sell its 7.69% interest in Pleasants to AE Supply and AE Supply will become the sole owner of the Pleasants plant. Applicants state that, at the time of closing, Mon Power will pay the lower of market value or AE Supply’s book value for AE Supply’s interest in the Harrison facility, and AE Supply will pay the higher of market value or book value for Mon Power’s 7.69% interest in the Pleasants facility. Applicants told FERC that eliminating their fractional shares of these facilities will facilitate more efficient internal reporting and decision-making.
The companies said that the Harrison acquisition is the most cost-effective way for Mon Power to prudently and reliably serve its growing West Virginia load and meet its full requirements service obligation to sister utility Potomac Edison. Applicants also state that the Harrison acquisition prudently manages Mon Power’s market risk and provides the most cost-effective alternative for adding long-term capacity resources to Mon Power’s portfolio.
More Harrison capacity more than replaces three shut coal plants
Applicants said this deal will result in a 1,189 MW net increase in unforced capacity for Mon Power, which will offset the 408 MW decrease it experienced in September 2012 as the result of the deactivation of three older subcritical coal plants (Willow Island, Albright and Rivesville). Also, applicants stated that the proposed transaction offers greater financial benefits for Mon Power’s customers than available alternatives and will provide Mon Power with sufficient generation resources to meet its capacity requirements through 2018.
The FirstEnergy applicants said that in the absence of the Harrison acquisition, Mon Power would suffer an unforced capacity shortfall that could result in Mon Power purchasing as much as 40% of its capacity needs from the market, which would greatly increase its market risk and the exposure of its customers to market energy and capacity prices.
FERC noted that the West Virginia Consumer Advocate Division, which also advises the state PSC, protested this deal. “In its protest, the Consumer Advocate Division argues that the Proposed Transaction will significantly increase retail rates for Mon Power’s and Potomac Edison’s West Virginia customers,” FERC said. “The Consumer Advocate Division states that, according to the West Virginia Petition, the Proposed Transaction will increase base rates for West Virginia customers by approximately $192 million. The Consumer Advocate Division states that the West Virginia Petition also claims that the Proposed Transaction will reduce the companies’ expanded net energy costs by approximately $129 million. Thus, according to the Consumer Advocate Division, the net retail rate impact of the Proposed Transaction would be an increase of approximately $63 million while the temporary transaction surcharge is in effect.”
FERC added: “The Consumer Advocate Division argues that one of the primary reasons for the rate increase is the high book value that Mon Power will pay for AE Supply’s interest in the Harrison Facility. The Consumer Advocate Division states that, less than two years ago, AE Supply recorded the book value of the Harrison plant at $554,186,117. The Consumer Advocate Division maintains that Mon Power will now purchase AE Supply’s interest in the Harrison Facility at a book value that is more than twice that amount. The Consumer Advocate Division further asserts that the impact on wholesale customers of any ruling from this Commission on the valuation issue ‘will pale in comparison with the effect on retail rates that could result from a [West Virginia Commission] ruling that adopts’ the Commission’s order in this case.”
FirstEnergy says this is a retail rate matter not subject to FERC review
In their response to the Consumer Advocate Division, the FirstEnergy applicants said that:
- The West Virginia PSC itself, which has intervened in this proceeding, did not ask FERC to defer its approval of the proposed transaction.
- The federal commission has regularly issued orders approving transactions independent of state commission approval of the same transaction.
- There is no merit to the Consumer Advocate Division’s suggestions that the West Virginia commission can be “steamrolled” by FERC or any utility, and asked the commission to ignore these types of insinuations, as well as any other allegations made in the Consumer Advocate Division’s protest.
- The Consumer Advocate Division’s other concerns on purchase price accounting focus on retail ratemaking and will be addressed by the West Virginia commission.
“We agree with Applicants that the Consumer Advocate Division’s concerns pertain to retail ratemaking,” FERC wrote. “The Commission’s consideration of the effect on rates under section 203 [of the Federal Power Act] does not concern a transaction’s retail rate impacts unless a state specifically asks the Commission to consider such rate impacts. The role of the relevant state commission is, among other things, to consider such effects. We note that, while the West Virginia Commission has intervened in this proceeding, it has not asked us to scrutinize such effects here. We also note that our approval of the Proposed Transaction in this proceeding will neither dictate the outcome in the West Virginia proceeding nor prevent the West Virginia Commission from examining the Proposed Transaction’s effects on retail rates.”