A contention that FirstEnergy’s (NYSE: FE) Harrison power plant in northern West Virginia could run effectively as a merchant generator is wrong, said James Laurita Jr., chairman of the West Virginia Coal Association.
The association on May 17 filed at the West Virginia Public Service Commission rebuttal testimony. This filing came in a case where FirstEnergy’s Monongahela Power is asking that the majority stake in the coal-fired Harrison plant that it does not currently own be transferred to its regulated service from an unregulated FirstEnergy affiliate.
Laurita, a coal operator in northern West Virginia, responded in part to PSC staff witness Edwin Oxley’s contention that the ownership of Harrison should have no impact on its operating dispatch costs.
“Placing the Harrison plant into the rate base provides more certainty of operation for the plant, as well as the coal supply,” Laurita wrote. “More certainty translates to typically more long term investment by the plant and coal suppliers which translates to increased economic activity in the region. Without Harrison, the local produced coal would need to be shipped to other stations in the region, which are primarily located long the Monongahela and Ohio rivers at a materially higher freight cost, making them less competitive.”
Laurita added: “Likewise, the Harrison Power Station would be negatively impacted if it had to rely upon coals produced outside its locale as the added freight costs would be material. Both the local coal producers and the Harrison Power Station are connected at the hip so to speak, and need each other to survive. If the Harrison Power Station were to remain primarily a merchant generator, the capacity factors would more than likely be lower, particularly during times of lower demand. Merchant generators tend to look at current and short term cash flows rather than longer term views. If the plant were part of the rate base, a view towards longer term reliability and their financial impacts are more typical, and short periods of economic losses are acceptable, if in the long run, it is best for the plant’s reliability and costs.”
Laurita also responded to the testimony of state Consumer Advocate Division witness Byron Harris that coal-fired power plants in other regions were sold at very low prices, lower than the price Mon Power would pay for Harrison under this deal. “It’s important to note that these plants by and large were generally old, smaller, needed substantial environmental upgrades, and more importantly, have very high delivered fuel costs,” Laurita pointed out. “The fuel costs for a fossil fuel plant are over 80% of the costs to operate the plant. These plants are located hundreds of miles from their fuel sources. If you lived in the desert, and had an opportunity to purchase a vehicle, but had little access to low cost fuel, you wouldn’t pay much for the vehicle would you. It’s important to note that a significant factor in these plants low selling price was their remote location from their fuel source. Plants that are located in close proximity to reliable and low cost fuel sources have a significant economic advantage, and therefore a higher value.”
CONSOL Energy official also supports Harrison transfer request
Filing companion testimony on behalf of the WVCA was Christopher Marsh, a Vice President with CONSOL Energy (NYSE: CNX), which supplies much of the coal for Harrison via beltline out of its nearby Robinson Run longwall mine, which works the high-sulfur Pittsburgh coal seam.
CONSOL Energy believes that Mon Power’s full ownership of Harrison provides both economic benefit to the ratepayers and social benefits to the northern West Virginia region, Marsh wrote. The reasons include:
- Long term capital investment – As a current minority owner, Mon Power does not have the ability to control the overall investment strategy of Harrison. This may create disconnects between the interests of the plant and its stakeholders, including the ratepayers, and those of the controlling company. The controlling company may decide to avoid making investments to comply with new environmental regulations or may make an investment at another plant that is sufficient to meet its larger compliance requirements. As a result, Mon Power as a minority owner could be left with a stranded or underutilized asset, Marsh noted.
- Capacity markets – Mon Power’s strategy is to offer its capacity resources in a manner that they clear the auction and provide electricity for customers. A merchant generator wants to maximize the vaIue of its capacity through higher capacity prices. “Despite other testimony, merchant generation does not always clear in the capacity auction nor does a Merchant Generator have a responsibility to generate,” Marsh contended.
- Energy markets – A merchant generator’s strategy is to maximize net income and must consider how it covers its total cost of operation. When energy margins are low, a merchant generator could decide to idle a plant and reduce maintenance costs rather than operate on small net revenue margins.
Also, said Marsh, there are two other reasons why this transaction has a positive effect:
- Merchant generating units make commercial decisions based on revenues, expenses, and profitability. Mon Power would base its decisions not only on profitability but on community impact, employee impact, ratepayer effect, etc.
- A power purchase request for proposals (RFP) as an alternative to the Harrison acquisition may not support generating assets in West Virginia. With out-of-state assets, West Virginia loses control over permitting, taxes, etc., Marsh pointed out.
Mon Power currently owns a 20.54% interest in Harrison, 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 Pleasants, a 1,300-MW pulverized coal facility located in Willow Island, W.Va., along the Ohio River. Under the proposed deal, Mon Power will purchase Allegheny Energy Supply’s (AE Supply) 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.
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.
The FirstEnergy companies also 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) in northern West Virginia.