Monongahela Power is running into a lot of opposition with its pending application at the West Virginia Public Service Commission to acquire the part of the Harrison coal plant that it does not already control from another affiliate of mutual parent FirstEnergy (NYSE: FE).
The purchase of an 80% interest in the Harrison generating station at $1.2bn should not be approved for several reasons, said the state Consumer Advocate Division in a July 9 post-hearing brief:
- the statutory requirements of West Virginia Code have not been met;
- the transaction violates the commission’s order authorizing the merger of Mon Power and sister utility Potomac Edison into FirstEnergy;
- the companies’ projections of the cost-benefit to hedge market purchases of capacity and energy are seriously flawed making the transaction appear more economic than it is;
- it increases the Mon Power and Potomac Edison rate base by 100% and will not produce a reduction in rates; and
- the transaction results in the two utilities having a significant and potentially detrimental over-supply of capacity (600 MW) in a weak market making sales of capacity and energy sales less likely.
“Simply put, even if the Transaction satisfied the Statute and did not violate the Merger order, the Transaction cost is too great and the MWs are too many to impose on West Virginia ratepayers,” said the CAD brief. “Companies claim that their ownership of Harrison will provide meaningful benefits to West Virginia, including burning West Virginia coal and protecting jobs for West Virginia residents. The plain truth is that Harrison will operate – or not – depending upon whether it clears PJM markets and is dispatched by PJM. Companies’ are no longer last-century utilities that solely control whether their generating stations operate. As CAD witness [Billy Jack] Gregg testified, the Harrison plant will continue to operate as long as it is economic to do so, regardless of its owner.
CAD calls into question use of local West Virginia coals
With respect to supporting West Virginia coal, the FirstEnergy companies have made no commitment whatsoever to use West Virginia coal at Harrison. The companies do not even have a contract for Robinson Run mine coal after 2013, CAD noted. In response to data requests, the companies confirmed that they are not making a commitment to West Virginia coal, stating only that they will continue to utilize West Virginia coal as long as it meets their procurement objectives.
Robinson Run is a Pittsburgh-seam longwall mine of CONSOL Energy (NYSE: CNX) that is located next to the Harrison plant, in Harrison County in northern West Virginia. FirstEnergy witnesses said there are plenty of coal reserves around the plant that could be developed for local supply, but CAD emphasized that there are no coal contracts in place for beyond 2013 and that the plant owners have tried for years to diversify coal supply beyond the local coal. “Companies gave no explanation of why they have not entered into coal contracts for Harrison for 2014 and after, but the supply and price risks of not having coal contracts with Robinson Run (or an acceptable alternate supplier) are too great for the Commission to approve this transaction until they are in place,” CAD stated.
In their November 2012 application for this approval, the companies identify a significant deficit in the generating capacity available to serve their respective customers and propose 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.
Mon Power and Potomac Edison cite several advantages to the deal
In their July 9 brief, the FirstEnergy companies said the transaction benefits include:
- it will help ensure an ample supply of reliable, low-cost electricity for the companies’ West Virginia customers, minimizing Mon Power’s market reliance on outside sources to make up for an ever-growing shortfall in capacity and energy;
- it is the lowest cost alternative available to manage Mon Power’s market price risk and provide reliable, reasonably-priced capacity and energy in the long term;
- owning 100% of Harrison will still allow the companies to take advantage of low energy prices on behalf of customers if they occur; and
- unless Mon Power acquires other sources of generation, Mon Power’s dependency upon market purchases of energy will also increase substantially – to as much as a “staggering” 40% by 2026.
PSC staff says this is a bad deal for ratepayers, but not for FirstEnergy
PSC staff was also critical of this deal in their July 9 brief. “FirstEnergy has stated often that the transfer of the Harrison Power Station (Harrison) is about mitigation of market risk,” the brief said. “Staff absolutely agrees. This case is about the mitigation of market risk, but not about mitigating Mon Power and PE’s risk of market exposure. Instead, it is about the risk FirstEnergy Solutions and FirstEnergy, the parent, face from owning too many large coal-fired power plants at a time when those assets are perceived as having an uncertain future.”
Staff added: “The day after PJM released the results of the 2016-2017 base residual auction, financial research agencies declared FirstEnergy to be one of the big losers due to much lower than expected clearing price of capacity in that auction. FirstEnergy may once again face the potential downgrading of its credit rating. With the lower than expected capacity prices, FirstEnergy will have a hard time collecting the expenses related to the Harrison Station unless they can do so through the energy market. Selling Harrison to Mon Power will not only shift that risk away from FirstEnergy and its merchant generating subsidiary, making it a regulated asset will ensure collection of the fixed-costs associated with the plant regardless of the economics affecting the plant’s future. While there is nothing wrong with a transaction having a benefit for both sides of the transaction, it is this Commission’s duty to ensure a transaction is first and foremost beneficial to Mon Power, PE and their ratepayers. As the transaction is currently structured, too much market risk is being transferred to ratepayers without enough benefit and for that reason alone, the transaction fails the test outlined in [West Virginia Code].”
The Sierra Club, no surprise, in its July 9 brief attacked the deal, saying it “wildly and indefensibly” overinflates the value of Harrison and should be rejected.
The West Virginia Coal Association, in its pro-deal July 9 brief, didn’t show any worries about non-local coals for Harrison. “Some witness testimony advocated diversity of supply or don’t ‘put all your eggs in one basket,’” WVCA wrote. “That adage doesn’t apply here. Diversity of supply is only relevant if the main supply is inadequate or at risk. Such is not the case at Harrison. The coal supply is abundant; the reserves are abundant and are readily available. The reserves at Consol’s Robinson Run Mine are in excess of 30-50 years. There are no transportation unknowns or vulnerabilities with coal use at Harrison. In fact, a mine-mouth power station, of which there are few in this country, has essentially zero (0) transportation costs. Some of the alternatives suggested by witnesses advocating diversity would create problems for Mon Power and its customers because transporting coal by barge, rail or truck to other facility is expensive and is subject to unforeseen difficulties and interruptions.”
The West Virginia Citizens Action Group (WVCAG) said in its anti-deal July 9 brief: “WVCAG urges the [PSC] to reject the petition because the proposed assets transfers violate the express terms of the Commission’s order entered in Case No. 10-0713-E-PC relating to transfers of assets between affiliated entities; because the evidence in this proceeding does not satisfy minimally applicable statutory criteria, and because the proposed transfers are not reasonable under even the broadest reading of the discretion accorded the Commission by applicable statutes.”
The West Virginia Energy Users Group, representing major industrial power customers, criticized how the deal was negotiated by the Mon Power team, adding: “At best, given the purchase price proposed by FirstEnergy, it is uncertain that adding $1.1 billion to rate base for more coal-fired generation is reasonable given the risk of potential additional costs due to the so-called ‘War on Coal,’ the effect of which would be to shift the cost of that ‘war’ to ratepayers. In light of this risk, the current, relatively stable wholesale market prices available to meet the Companies’ needs seem reasonable. Further, the Companies’ ability to use that market as a hedge against the risk of costs associated with Mon Power’s existing coal-fired assets (which reflect most of its portfolio) might be a better approach in the short term.”