FirstEnergy: Harrison may run less if Mon Power doesn’t buy it - Beckley, Bluefield & Lewisburg News, Weather, Sports

FirstEnergy: Harrison may run less if Mon Power doesn’t buy it

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Final testimony is in for Mon Power's billion-dollar proposal to buy the Harrison power station outright.

The case before the Public Service Commission of West Virginia is very roughly analogous to this: Should a family that expects to have a bunch of kids buy a huge house now? Or should it rent for a while? Or buy a smaller house and plan to move or add on later?

A negotiation like that involves important assumptions about current and future income and housing markets, the outlook for the local economy and the likelihood and wisdom of having so many kids.

The decision ultimately determines family finances and lifestyle — yet, ignoring the finer points, it's the kind of decision the PSC will have to make soon on behalf of Mon Power and Potomac Edison ratepayers.

The two companies filed a proposal with the commission last fall in which Mon Power would meet growing power demand for both utilities by buying the 80 percent it does not own of the coal-fired Harrison power station near Clarksburg from sister FirstEnergy subsidiary Allegheny Energy Supply.

Taking other parts of the proposal into account, Mon Power would net 1,476 megawatts of generation capacity for $1.2 billion.

Those "finer points" ignored above include the importance of fuel diversity; the wisdom of acquiring a large coal plant at a time when environmental regulation is raising the cost of burning coal, natural gas is expected to be cheap for the coming decades and ratepayers in states across the country are  benefiting from aggressive utility efficiency measures; exactly how to arrive at the value of a big, unique asset; and whether the decision will affect the plant's operation and the local economy.

Intervenors in the case filed their direct testimony earlier this month. The 270 pages of rebuttal testimony filed by the companies on May 17 is the last formal filing before the evidentiary hearing on May 29-31.

Rebuttal comes from nine witnesses for the companies, summarized by the testimony of Michael Delmar, FirstEnergy Services Co. director of regulated generation and dispatch.

A note on energy and capacity

Documents in the case refer often to energy markets and capacity markets, and the outcome will depend to some extent on views of where those markets are headed.

The two markets exist because electric utilities not only have to generate or buy enough electricity to meet their day-to-day demand but also have to own or control under contract enough generation capacity to meet peak demand.

Mon Power right now is about 2.5 million megawatt-hours per year short of meeting its day-to-day energy demand and about 900 megawatts short of capacity to meet peak demand. Based on an assumed growth rate of 1.4 percent, the utility expects to be more than 6 million megawatt-hours and 1,400 megawatts short in 2026.

It can cover its energy and capacity shortfalls in the regional PJM Interconnection energy and capacity markets.

Alternatively, it could engage in power purchase agreements with other generators, build new generation capacity that relies on any of a number of fuels, buy existing generation capacity, and provide incentives for energy efficiency.

If energy and capacity markets will be low, it make the most sense to cover those in the market — to rent, in a sense. If they will be high, it makes the most sense to own.

Fuel diversity

The proposal further deepens Mon Power's near-total reliance on coal, a lack of fuel diversity that led to sharp rate increases when coal prices spiked a few years ago.

Some intervenors have said Mon Power doesn't need to rush into this coal-based solution to the shortfall. The current low prices for energy and capacity give time to piece together a solution that brings rate-stabilizing diversity to the generation mix, they say, and incorporates money-saving efficiency measures.

Delmar views that as a failure to take the shortfall seriously. Capacity prices appear to be rising, he said. He portrayed the ownership of Harrison as a hedge against market volatility and possible future high prices, and contrasted that with what he called the intervenors' "hodgepodge incremental approach."

To the extent the Harrison plant provides more energy and capacity than Mon Power needs now, he said, the company would sell that energy and capacity on the market, bringing those revenues in to keep rates down.

But he essentially dismissed fuel diversity as a value.

"While fuel diversity can play a role in managing cost variability among fuel sources, fuel diversity is not an end unto itself," he wrote, giving the issue two paragraphs in his 66 pages of testimony.

He said a resource plan the companies filed in August showed that the proposed Harrison purchase comes at a lower levelized (apples-to-apples) cost than, say, building a new natural gas-fired plant.

Some intervenors dispute the soundness of the assumptions that play into that analysis.

Delmar also reiterated the company's position that energy efficiency and demand response — commitments from electricity users to cut back during peak periods, reducing the amount of capacity needed — as "not a practical solution."

Plant dumping?

Some have raised suspicions that parent company FirstEnergy is attempting to move coal-fired generation capacity that is subject to increasing environmental rules out of the deregulating Ohio market where it has to compete with other generation and moving it into the regulated West Virginia market where it would receive a guaranteed rate of return from ratepayers.

Delmar said no intervenor has presented evidence that this proposal is not the result of an "arm's length" negotiation between Mon Power and AE Supply. He said he assisted in the negotiations and that he saw both parties advancing their own interests.

He also said that, although the proposed transaction was at one point part of AE Supply's debt reduction strategy, other actions have made the sale no longer critical to that effort.

The price

Finally, with regard to the proposed price of the plant, intervenors have observed that it is out of line with other coal-fired power plant sales over the past year. Delmar referenced testimony from Judah L. Rose, managing director at consultants ICF Resources, showing that, compared with the recently sold plants,  Harrison is closer to its coal supply and has better environmental controls.

Intervenors also have charged that the proposed price includes a "goodwill adjustment" that prices AE Supply's Harrison megawatts twice as high the value of the Harrison megawatts on Mon Power's books — and that such an adjustment was specifically forbidden by the commission when it approved FirstEnergy's acquisition of Allegheny Energy in 2010.

It's not a goodwill adjustment, according to testimony from Harvey L. Wagner, who retired as chief accounting officer at FirstEnergy Services Co. in 2013. Rather, the difference in book values between AE Supply's megawatts and Mon Power's megawatts is an accounting artifact related to the expected future revenues to a competitive entity, on the one hand, and to a regulated entity on the other.

If the commissioners approve the transaction, it will be up to them to decide whether that accounting artifact should require Mon Power ratepayers to pay twice as much for generation capacity procured from a deregulated entity than they're currently paying in rates for generation capacity at the same facility.

Related to both price and fuel diversity, the suggestion that Mon Power should put its proposal to the market test by issuing requests for proposal, or RFPs, that would solicit alternative solutions to the shortfalls has drawn considerable interest among intervenors as the case has developed.

Delmar responded that that's not necessary because the August Resource Plan already took all of the relevant market opportunities into account.

Harrison is an adequate solution now, he said, placing time considerations over identification of an optimal solution.

"If the commission believes that the companies have demonstrated that a capacity shortfall exists and Harrison is a solid solution, one that brings with it the promise of additional net revenues and local economic benefits, then the intervenors' various RFP recommendations are completely unhelpful and would only delay the companies' efforts to address the need and prolong and even increase their customers' exposure to market risk," he wrote.

Plant management

Some intervenors have argued that claims that the proposed purchase would secure Harrison's operation and so benefit the local economy, including the region's coal producers, are untrue — that the plant would run the same whether Mon Power is full owner or AE Supply is the majority owner.

Delmar counters that the plant would run differently in the two scenarios.

The obligations and motivations of Mon Power as a rate-regulated utility and AE Supply as a competitive generator differ, he said.

"Competitive generator majority ownership may present a less predictable future, with the prospect that the majority owner would be motivated to idle Harrison in response to market conditions, reduce operation and maintenance activities, and delay, defer, or make different decisions on needed staffing or capital improvements," he wrote. "Any of these decisions have the very real potential to diminish levels of local economic activity and community support as compared with 100 percent regulated ownership."

The evidentiary hearing will take place May 29-31 in Charleston and may be viewed by webcast on the commission's website.