The West Virginia Public Service Commission, with restrictions, on Oct. 7 approved a Monongahela Power application to transfer to its ownership the part of the coal-fired Harrison power plant it does not already own.
Mon Power, a unit of FirstEnergy (NYSE: FE), filed for this approval in November 2012 to address a looming generating capacity gap in part caused by the shutdown of some its other coal-fired capacity due to age and looming environmental regulations. Harrison has a full suite of emissions controls, including scrubber equipment added in the 1990s, so it is considered about as safe as any coal-fired capacity can be from near-term shutdown.
The commission has authorizes Mon Power and Potomac Edison, a FirstEnergy subsidiary with no generation of its own, to complete a generation resource transaction involving Mon Power’s ownership interests in the Harrison and Pleasants coal plants, to impose a temporary transaction surcharge until rates from the next base rate case are in effect, to enter into certain affiliated agreements, and to adopt modified Expanded Net Energy Cost (ENEC) rates. This deal increases the net installed capacity of Mon Power by 1,476 MW.
The transaction consists of:
- acquisition by Mon Power of the 79.46% interest currently held by FirstEnergy’s unregulated Allegheny Energy Supply Co. LLC in Harrison, resulting in Mon Power being the sole owner of Harrison;
- acquisition by AE Supply of the 7.69% ownership interest held by Mon Power in Pleasants, resulting in AE Supply being the sole owner of Pleasants;
- approval of certain affiliated agreements; and
- implementation of a temporary base rate surcharge to recover the ongoing net capital and operating costs related to the transaction, effective as of the closing of the transaction, and to remain in effect until new base rates are placed into effect.
The Mon Power net investment in the transaction is in excess of $1.1bn.
Some of the debate in this case was whether Harrison might have to shut if it wasn’t protected somewhat by being in Mon Power’s rate base. Said the commission in the Oct. 7 decision: “A recent example of a decision to shut down a power plant rather than invest in additional emission controls is the AE Supply decision to deactivate Hatfield’s Ferry. Hatfield’s Ferry is located near Masontown, West Virginia. Hatfield’s Ferry is similar in size and vintage to Harrison and is the first low-heat rate, supercritical coal-fired plant slated for deactivation. The announced reason for the deactivation of a relatively low operating cost plant is that the additional investment to comply with new EPA regulations is too high. Hatfield’s Ferry and Fort Martin had just recently, in 2010, been retrofitted with sulfur scrubbers at a combined cost of $1.3 billion for the two plants. Because it is a competitive power plant, Regulators and the Legislature in Pennsylvania had little control over the decision to deactivate the plant.”
West Virginia commission imposes conditions on this approval
The conditions required by the commission before it would approve the transaction as set forth in a joint stipulation, the impairment entry to reduce the acquisition adjustment to $257m, and the establishment of a surcharge to allow for recovery of the non-ENEC cost components of Harrison ownership by Mon Power, are:
- FirstEnergy and Mon Power must agree through written verified statements filed in the record in this case within ten days of the date of the Oct. 7 order that they understand and agree that if FirstEnergy does not make additional equity investment in Mon Power to cover the decline in equity caused by the write-off of the $332m (pre-tax) acquisition adjustment, Mon Power must agree not to pay, and First Energy must agree that it will not receive, any dividends from Mon Power until the equity to total capital ratio of Mon Power returns to 45%.
- FirstEnergy, AE Supply, Mon Power and Potomac Edison must agree through written verified statements filed in the record in this case within ten days of the date of this order that they understand and agree to allow the initial $257m acquisition adjustment to be subject to adjustment through a refund from FirstEnergy or AE Supply if the FERC determines that purchase price paid by Mon Power exceeds the fair market valuation of Harrison. If the FERC makes such a determination, the portion of the $257m acquisition adjustment that exceeds fair market value will be returned to Mon Power by either FirstEnergy or AE Supply, and the refund will be credited to the acquisition adjustment account.
- FirstEnergy, Mon Power and Potomac Edison must agree through verified written statements filed within ten days of this order that they understand and agree that the return on, and return of, the $257m acquisition adjustment will be allowed in base rates only to the extent that 50% of the net margins from off-system transactions from the additional Harrison capacity acquired by Mon Power will support that return. The full return requirement will be allowed each year subject to prospective adjustment based on a review of the achieved net margins from off-system sales in relation to the amount of return requirement built into the initial surcharge, and thereafter base rates.