FirstEnergy argues for protection of Davis-Besse and Sammis power plants

The sale of the coal-fired Sammis plant and the Davis-Besse nuclear plant might not have much benefit for Ohio ratepayers in terms of security of power supply since any buyers of the plants might decide it is more economic to shut them than operate them.

That is a point made by Donald Moul, Senior Vice President of Fossil Operations and Environmental for FirstEnergy Generation, in Oct. 19 testimony filed at the Public Utilities Commission of Ohio. This is rebuttal testimony in a case where FirstEnergy Corp. (NYSE: FE), through its Ohio Edison unit, is seeking commission approval for power purchase agreement authority where ratepayers in this deregulated state would pay for power out of these plants over the long term, ensuring their survival and therefore rate stability in the state.

American Electric Power (NYSE: AEP) has a similar proposal before the commission related to several of its coal-fired power plants.

The purpose of the Moul rebuttal testimony was to respond to testimony of: Dr. Joseph Kalt on behalf of PJM Power Providers Group/Electric Power Supply Assn.; Tyler Comings on behalf of the Sierra Club questioning the financial need of the Davis-Besse and the W.H. Sammis plants; supplemental testimony of Kalt regarding the impact of the results of PJM Interconnection‘s Capacity Performance Plan on the plants’ financial viability; the testimony of Kalt suggesting that the plants are inefficient in PJM’s energy markets; the testimony of Comings that FirstEnergy Solutions (FES) is free to terminate any purchase power agreement (PPA) early without consequences; and the testimony of Dr. Joseph Bowring on behalf of the Independent Market Monitor for PJM regarding the proposed transaction’s alleged impacts on wholesale markets.

Wrote Moul on the idea that selling these plants would be a solution: “Any purchaser would face the same short-term uncertainty that FES faces with the Plants. If a purchaser does not know if the Plants will be recovering their avoidable costs, FES cannot expect to get proper value for the Plants. It is possible FES may get an offer for only $1 million. In that case, a business owner gets more from retirement, through salvage and maintaining control of the site for future development.

“My opinion is based on actual experience. FES is all too familiar with the circumstances in which a plant is prematurely retired instead of being sold. Over the past 3 years, FES has retired a total of 27 units at 12 different plants”:

  • In September 2012, FES retired 17 units at eight plants including the coal-fired Albright, Armstrong, Bay Shore, Burger, Eastlake, Rivesville, RP Smith and Willow Island plants;
  • In October 2013, FES retired five units at two coal plants, Hatfield and Mitchell in Pennsylvania; and
  • In April 2015, FES retired two coal units at Ashtabula and Lakeshore and the remaining three units at Eastlake, all located in Ohio.

Sammis and Davis-Besse are baseload plants with low variable costs that typically dispatch low in the supply stack, he said. FES has operated the plants for 4 years and is confident, based on that experience, that its cost forecasts for them are conservatively high and are expected to cover all future costs. The actual costs of the plants are expected to be similar to or lower than the forecasted costs, with environmental egulations not having a material effect.

Moul added: “The market risk the Companies’ customers face over the next fifteen years comes from volatile natural gas prices, which is why it would not make sense for the generating assets supporting Rider RRS to include natural gas-fired units. If natural gas-fired units had been included, Rider RRS would not work effectively as a hedge against future natural gas price volatility. In contrast, the costs to operate Sammis and Davis-Besse are well-known. The largest cost components at Davis-Besse are labor and depreciation, which are not subject to volatile swings. Davis-Besse’s fuel costs are locked in through the Economic Stability Program period. The Davis-Besse forecast realistically represents what Davis-Besse’s costs will actually be. Likewise, there is no reason to believe that the cost of the Sammis plant’s largest cost component – fuel – will materially increase over the next 15 years, although the Companies’ cost forecast conservatively assumes coal costs will increase. Indeed, while the Sammis plant’s current average cost for medium sulfur Northern Appalachian coal is [figures redacted], the Companies’ forecast assumes medium sulfur Northern Appalachian coal prices start at [also redacted].”

Under this proposal, FES is committed to deliver the plants’ energy, capacity, ancillary services and environmental attributes to the companies for a 15-year Delivery Period which runs from June 1, 2016, to May 31, 2031. Other than the highly unlikely event that FES learns after consummation of the transaction that FES lacks a governmental approval required with respect to its obligations under the agreement, there are no exceptions to FES’s 15-year commitment, Moul said. If FES terminated the PPA early, it would be in breach and would be responsible to pay the companies the difference between contract payments and the amount of revenue that the companies would have received for the output of the plants.

Moul also wrote: “Dr. Kalt mistakenly describes the Plants as less economical to operate than gas-fired plants. As I discussed above, the Plants are economical in PJM’s markets, i.e., they have low variable costs that make them competitive from a dispatch perspective. In fact, they typically dispatch before many gas-fired plants. Dr. Kalt cannot argue that the Plants will easily cover their avoidable costs over the next fifteen years while simultaneously arguing that the Plants are uneconomic in PJM’s markets. The Plants are not crowding out new gas-fired generation. Moreover, natural gas infrastructure will need to be built in Ohio over the coming decades to support new gas-fired plants in Ohio. This is a difficult process, as evidenced by the inability of the Avon Lake power plant owned by NRG Energy to quickly build a gas pipeline to support its conversion to natural gas. As Ohio transitions to more natural gas-fired generation over the coming decades, this Economic Stability Program will ensure that the Plants will continue to provide reliable and affordable generation in Ohio.

Notable is that NRG recently shelved the Avon Lake coal-to-gas conversion and plans to keep the plant on coal for the time being, with the addition of cheap emissions controls to meet clean-air needs in the meantime.

FirstEnergy says it can’t prop up these plants financially for much longer

Jason Lisowski, employed by FirstEnergy Service Co. as the Assistant Controller-FES/FEG at FirstEnergy Solutions, said in Oct. 19 rebuttal testimony that many of the company’s power plants, including Davis-Besse and Sammis, have been losing money in recent years.

He wrote: “Low energy and capacity prices over the last several years have placed a significant economic hardship on the Plants and other generating assets, which has required FES to make a number of decisions related to its fleet of power plants and future operations. In 2010, FES changed the operations of several of its Ohio coal-fired power plants located along Lake Erie to minimum three-day notice from Midwest Independent System Operator (‘MISO’), the Regional Transmission Operator at that time, and in response to customer demand. This meant that those plants were not dispatched unless MISO provided FES a minimum notification of 72 hours in advance of when the unit(s) would be needed. Market conditions did not improve, and despite now being in the PJM Interconnection, in 2012 FES announced plans to deactivate these plants, as well as several other generation stations (by April 15, 2015, all of these plants, which totaled 2,689 MWs of capacity, were deactivated).

“Also in 2010, FES announced it was cancelling its plans to repower units 4 and 5 (312 MWs) with biomass at the R.E. Burger plant in Shadyside, Ohio. In 2013, FES deactivated the Hatfield’s Ferry (1,710 MWs) and Mitchell Power Stations (370 MWs). Hatfield’s Ferry is particularly relevant to this discussion since it shares many similarities with Sammis. Just like Sammis, Hatfield’s Ferry had already invested in scrubbing technology. Also just like Sammis, Hatfield’s Ferry had large supercritical units. These decisions were made because those plants had incurred past near-term losses and negative cash flow that were expected to continue in the near-term.

“FES also made the decision to sell certain peaking facilities in 2011 for approximately $590 million, and sell 11 hydroelectric power stations with 527 MWs of total capacity in 2013 for approximately $395 million, of which the proceeds were used to improve FES’s balance sheet through paying down its debt and borrowings. … Despite these efforts to improve FES’s balance sheet, FES still required additional financial support.

“Generation units can sustain losses and negative cash flow in the short-term if the generation owner has sufficient cash liquidity and a balance sheet strong enough to support additional debt. However, the significant net losses and negative cash flow FES has incurred during 2009–2014 has weakened FES’ balance sheet to a point where it may no longer be able to utilize what remaining available liquidity (including debt and borrowing capabilities) it has to keep [Davis-Besse and Sammis] operating. Additionally, FES had already been borrowing funds to keep the Plants operating in the short-term from 2009–2014, and that has put FES in a position where it may no longer be able to continue borrowing funds for the next several years. Operating revenue is a source of funds that could keep the Plants operating in the short-term. However, that is only possible to the extent that such revenue is above the costs incurred to produce those revenues. The Plants have not had operating revenues that exceeded their costs over the last several years.”

FES received cash equity infusions from parent FirstEnergy Corp. of $1.5 billion in 2013 and $500 million in 2014, which helped its balance sheet. Despite this capital infusion, which was funded through FirstEnergy Corp.’s available liquidity, FES had only $2 million in cash and cash equivalents on hand as of the end of 2014. “FirstEnergy Corp. has already invested significant funds into FES,” Lisowski wrote. “It is not a sustainable business model to expect a parent entity to provide unlimited capital to its subsidiary. Each business must stand on its own, and FES must be in a position to repay its parent company for equity infusions. As a result, FES must continue to evaluate the cash flow and earnings contribution of its generation assets.”

Sammis is among the largest coal-fired power plants in Ohio. Its seven coal-fired units collectively produce 2,220 MW. Units 6 and 7 are designed to be baseload units rated at 1,200 MW in total, and Units 1-5 are load-following units rated at 1,020 MW in total. The plant uses an average of 18,000 tons of coal daily for an annual average of 6.6 million tons, including coal from Ohio mines.

Davis-Besse is a nuclear plant in northern Ohio along the shore of Lake Erie designed to be a baseload unit rated at 908 MW. Davis-Besse is owned by FirstEnergy Nuclear Generation LLC, a subsidiary of FES, and operated by FirstEnergy Nuclear Operating Co.

About Barry Cassell 20414 Articles
Barry Cassell is Chief Analyst for GenerationHub covering coal and emission controls issues, projects and policy. He has covered the coal and power generation industry for more than 24 years, beginning in November 2011 at GenerationHub and prior to that as editor of SNL Energy’s Coal Report. He was formerly with Coal Outlook for 15 years as the publication’s editor and contributing writer, and prior to that he was editor of Coal & Synfuels Technology and associate editor of The Energy Report. He has a bachelor’s degree from Central Michigan University.