Staff of the West Virginia Public Service Commission and the state Consumer Advocate Division on Aug. 5 jointly asked the commission to issue an order asking the Monongahela Power and Potomac Edison subsidiaries of FirstEnergy (NYSE: FE) to show cause why they should not be required to file requests for proposals (RFPs) for all future capacity and energy requirements above 100 MW.
This comes after a period when the PSC has been allowing these two utilities, plus the Appalachian Power and Wheeling Power units of American Electric Power (NYSE: AEP) to fill resource needs with stranded, in-state coal assets. That has effectively boxed out resource additions from other sources.
The Aug. 5 request noted that the commission serves as a proxy for market forces, the operation of which would confound and limit the application of controls necessary to discipline the activities of a monopoly enterprise in a manner consistent with the public interest. This bargain, or “regulatory compact” that a utility strikes with the regulatory agency entitles it to operate as a monopoly in exchange for authority to earn a return on and of its investment. This long-standing paradigm also permits a utility a certain degree of latitude in a number of its practices including matters involving the acquisition of capacity and supply necessary to serve the companies’ customers.
But they added: “The Staff and CAD believes that these Companies, especially in light of the inexorable collapse of the coal industry driven primarily by the availability of cheaper and more plentiful natural gas, continue to rely on acquisition practices that are not in the best interests of the consuming public and the economy of the State. Historically, coal generation plants constituted base load generation for supplying customers. With the advent of shale gas, gas is now displacing coal in the economic dispatch order in the PJM markets, creating greater risk of economic dispatch for coal In today’s market.
“It simply makes sense for the Companies to issue an RFP for an acquisition of capacity and energy above 100 MW. The Companies could obtain competitive, cost-effective proposals for acquiring capacity and energy by using the RFP process. The use of an RFP could allow the Companies to move beyond past approaches and allow the competitive process to offer a variety of generation resources to meet customers’ needs.
“Perhaps one of the best explanations of the advantages of the RFP process was provided by Byron Harris, former Consumer Advocate, in his pre-filed direct testimony concerning the proposal for the First Energy Companies to acquire the Harrison [coal] plant. Mr. Harris stated, ‘[A]ny type of modeling analysis is necessarily an abstract representation of the cost of new capacity and/or demand-side resources. No model will ever be able to capture the dynamics of an open market, where existing resources can compete with new resources.’ Mr. Harris explained, ‘[T]he terms and conditions of resources procured under an RFP would be more likely to be reasonable because the term are set by market forces.’ Given that ratepayers ultimately bear the financial risks associated with acquiring capacity and energy, they should be allowed the benefits of the RFP process.”