The Monongahela Power and Potomac Edison subsidiaries of FirstEnergy (NYSE: FE) moved July 19 at the West Virginia Public Service Commission to fight off charges of critics of Mon Power’s proposed buy of the part of the coal-fired Harrison plant that it doesn’t already own.
The utilities said initial briefs from opposing parties “ignore or minimize the Transaction’s benefits.” The commission should review these parties’ criticisms very closely, and appreciate them for what they are, attempts to sabotage the transaction by seeking an unreasonable reduction in the already-below-market purchase price of the asset, or to replace a solid, high-value asset with the uncertainty and insufficiency of energy efficiency and demand response, said the utilities.
In their November 2012 application for this approval, the companies identified a significant deficit in their generating capacity and proposed this deal to address the deficit which will increase the net installed capacity of Mon Power by 1,476 MW. The transaction proposes: the acquisition by Mon Power of the 79.46% ownership interest currently held by Allegheny Energy Supply Co. LLC (AE Supply) in Harrison, resulting in Mon Power being the sole owner of Harrison; and a sale to AE Supply of the 7.69% ownership interest held by Mon Power in the coal-fired Pleasants plant, resulting in AE Supply being the sole owner of Pleasants. Hearings were held before the commission on May 29 through May 31.
“The parties opposing the Transaction vary in their criticisms, but show surprising unanimity in the view that a real capacity resource deficit exists, and that Harrison will resolve it for an extended period,” the utilities said in their July 19 brief. “Their initial briefs also share an absence of definitive solutions, and a distinct lack of urgency in effecting the Companies’ proposed solution. Furthermore, most of these parties attack the Transaction – especially the Harrison purchase price – on the basis that a transaction that may benefit a non-regulated affiliate is inherently suspect and borne of undue influence, no matter how credible the witnesses who developed it are, no matter how obvious the transaction’s benefits are to the utility and its customers, and no matter how fair the consideration is shown to be. This Reply will take on the most egregious of these instances, and especially those where the opponents have relied on mischaracterizations or irrational sentiments that are unsupported by the evidentiary record.”
Other than to require the companies to conduct a series of electricity requests for proposals (RFPs), which are unlikely to result in any solution and are useless in valuing Harrison, the transaction’s opponents offer the commission nothing, the utilities said. “However, the risks of doing nothing are immediate and real, and these risks only increase within the next few years as capacity prices and energy prices increase. Fortunately, the benefits of acquiring Harrison are just as real, and can be in place this year.”
Apart from the payment it will receive for its interest in Harrison, FirstEnergy’s non-regulated AE Supply unit is making no gain on the transaction at all, the utilities argued. “This is because the book value compensation AE Supply will receive for its ownership interest in Harrison is equal to the fair value for the exact same interest that FirstEnergy’s shareholders paid for it in February 2011, when the Merger was consummated: $1.164 billion. KPMG, in an independent, professional appraisal that had nothing to do with the Transaction, established the value of that interest for entirely different purposes (GAAP compliance) in the summer of 2011, nearly a year before the Transaction was first discussed.”
The merger in question was between FirstEnergy and Allegheny Energy, a deal that gave FirstEnergy control of Harrison and several other coal-fired power plants.
Comments from the PSC staff and the state Consumer Advocate Division (CAD) reveal that their concerns are fundamentally about price, the utilities said. “Both suggested that at a more favorable (that is, even further below market) price, they could support the Transaction,” the utilities argued. “The Staff indicated that it would not object to the Transaction at pre-Merger book value; it also argued that Mon Power should have negotiated a lower price to get the Transaction approved by the Commission. The CAD admits that Mon Power’s full ownership of Harrison would bring with it public benefits, including the same ‘rate stability’ that the Companies offered, in the form of protection from market price volatility.”
Consumer Advocate, PSC staff don’t like this deal
CAD, in its July 19 brief, said among other things the utilities are looking to buy the wrong kind of capacity in this case. “Companies are proposing an acquisition of almost 1500 MW of baseload capacity when intermediate or peaking generation is actually what they need,” said the CAD brief. “Given the cheap capacity prices over the next three years, this is a problem Companies have time to address and need not stake a $1 billion investment in the hopes that unrealistic load growth, off-system sales, and gas/coal capacity factors will occur as forecast. This is why the intervenors in this case focus so much on the cost-risk of acquiring Harrison.”
West Virginia PSC staff said in their July 19 brief: “As little as five or six years ago, these Companies in the TrAILCo proceeding told this Commission that the building of the TrAIL line could result in the building of four new coal-fired power plants in West Virginia and the surrounding area. Today, it seems as though another coal plant closing is announced every week. That is how quickly the entire face of the electric industry has changed in this country. Imagine what the state of the electric industry will be in five or ten more years. Authorizing this transaction as proposed by the Companies would be placing a large ratepayer bet on the assumptions the Companies made being correct.”
Limiting cost recovery to only depreciated original cost would significantly reduce that bet, PSC staff wrote. The bet could be further decreased by the commission ordering the companies to issue an RFP for the procurement of their capacity shortfall. Given the current and near term markets for capacity and energy in the PJM Interconnection region, there is little cost risk in purchasing the needed capacity and energy from those markets in the short term while the RFP is being issued and evaluated, staff noted.
Mon Power and Potomac Edison are not the only utilities running into trouble at the West Virginia PSC. The Appalachian Power (APCo) and Wheeling Power units of American Electric Power (NYSE: AEP) have a similar proposal before the commission that is running into pretty much the same negative blowback from the same parties that are criticizing the Mon Power/Potomac Edison proposal.
APCo is asking the PSC to let it acquire 1,667 MW of capacity from its deregulated affiliate, AEP Generating Co. This capacity consists of the remaining two-thirds of Amos Unit 3 (867 MW) and 50% of the Mitchell plant (800 MW). APCo currently owns Amos Units 1 and 2, both of which are 800 MW units, and has a one-third ownership interest in Amos Unit 3. APCo currently has no ownership interest in the Mitchell plant, which consists of two 800-MW units. Under the proposed transaction, APCo would acquire an undivided 50% share of both Mitchell units, for a total of 800 MW.