Is Appalachian Power’s plan to buy Amos and Mitchell a good one? - Business, Government Legal News from throughout WV

Is Appalachian Power’s plan to buy Amos and Mitchell a good one?

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Appalachian Power Co.'s proposed purchase of shares of the Amos and Mitchell coal-fired power plants raises an important question.

Might there be a lower-cost solution to meeting the utility's anticipated customer demand?

Appalachian Power doesn't think so, and, although it has not yet filed its case with the Public Service Commission of West Virginia, it is promoting the proposal on its website and in the media.

This is a good opportunity for an integrated resource plan, say some observers.

A little background

For 60 years, an AEP power pool has allocated the costs and product of generation among subsidiaries Appalachian Power, Kentucky Power, Indiana Michigan Power and Ohio Power. Generally, Ohio Power has had a generation surplus; Appalachian Power, a deficit.

Appalachian Power came to feel that the pool wasn't working for it, according to spokesperson Jeri Matheney.

Generation got more complicated over the decades, with some utility's coal-fired plants scrubbed and some unscrubbed and other inequities emerging among the members. Also, a couple of bad winters set new peak demand levels for Appalachian and increased its costs in the pool.

Appalachian Power raised the issue at the end of 2010, Matheney said, and discussions led to an agreement to dissolve the pool as of Jan. 1, 2014.

That will leave Appalachian Power something like 2,300 megawatts short, according a PSC filing by Consumer Advocate Byron Harris — the difference between about 6,400 megawatts of generation capacity it owns and the anticipated need two years from now.

Meanwhile, Ohio is deregulating electricity.

Unlike in West Virginia's regulated market, where utilities provide power in assigned service territories, customers in a deregulated market can choose their electric service providers. Also unlike West Virginia's regulated market, where the PSC reviews each utility's accounting of its costs and approves rates accordingly, utilities in deregulated markets bear the outcomes of their investment decisions in rate competition with other utilities.

In the transition to competition, AEP's Ohio Power has split its generation business from its transmission and distribution business and is prepared to release some generation assets.

Heavy reliance on coal

Appalachian Power proposes to meet its coming generation capacity deficit by purchasing from Ohio Power the 876 megawatts' capacity it owns of the John Amos plant near Charleston as well as 80 percent, or 1,248 MW, of the Mitchell Power Station at Moundsville — about 2,100 MW of coal-fired capacity in all.

Along with other changes — planned coal plant retirements, the recent start-up of the Dresden natural gas-fired plant in Ohio and conversion of the Clinch River plant in Virginia from coal to gas — Appalachian Power's "capacity position" would go from about 7,300 MW now to about 8,200 MW in 2015. The capacity position includes contracted capacity and adjusts intermittent renewable capacity downward.

In that scenario, coal's share of Appalachian's capacity position would drop from about 73 percent to 70 percent; gas's would rise from 15 percent to 19 percent.

But those numbers obscure a deeper dynamic. Large, modern coal-fired plants like Appalachian's typically run almost always, while much of the utility's gas-fired capacity will run only during peak periods.

Coal's share of actual generation is and would remain far higher. Based on data from the U.S. Energy Information Administration, coal generated well over 90 percent of Appalachian's power in 2010 and 2011 and, subject to variabilities in fuel prices, would remain in the high 80s in 2015 under the proposal.

The acquired coal-fired Amos and Mitchell generation would represent more than a quarter of Appalachian Power's generation at that time.

Appalachian makes its case

Appalachian  Power believes these plants are the most economical solution to its coming capacity deficit.

Although the utility experienced a per-ton coal price increase of 46 percent from 2007 to 2011, according to an online fact sheet, it sees that the EIA's projections are less dramatic — an 18 percent price rise on an energy-content basis from 2010 to 2030.

And while new environmental regulations are coming, these plants already are in compliance with current and anticipated regulations. The outcome of efforts to regulate coal ash disposal are not yet known, but "it's not going to be like adding a $1 billion scrubber," Matheney said.

She did not respond to a follow-up question about greenhouse gas regulations in time for this story.

Alternative to buying these plants, Matheney said, Appalachian Power could get power on the open market, but the price would be more volatile. "Our regulators like a little more security in knowing what the costs would be," she said. Or it could build new capacity of its own, she added, asserting that building even inexpensive gas-fired capacity is more expensive than buying existing, environmentally compliant coal-fired capacity.

Appalachian Power already was buying capacity from the pool as a renter — under the proposal, it would be an owner. By that logic, Matheney argued, rates should not be affected. Asked if the operation of these coal-fired plants might be more expensive than the pool average, she said, "Yes, but by buying the capacity, we were paying a higher price for it than paying as an owner. … We don't expect a big increase."

Others skeptical

"Maybe this in fact is the plan that's in the best interest of West Virginia ratepayers but, given the escalations in coal prices that we've seen, I'm not convinced that that's the case," said Energy Efficient West Virginia coordinator Cathy Kunkel. Although her organization focuses on efficiency, Kunkel is following this issue closely because, she said, once you start seeing efficiency as a resource, it's a short leap to looking at the total resource mix.

In Ohio's deregulated market, Kunkel said, these plants would receive a market price for their power — if they weren't able to compete, they would become a liability. But in West Virginia's regulated environment, she said, utilities are guaranteed a rate of return on their investments.

So "this proposal has the effect of shielding these coal plants from market forces — which right now are not favoring coal," she said.

Calhoun County-based utility industry observer Bill Howley, who writes The Power Line blog, was more blunt.

"Everybody else in the electricity industry is fleeing coal-fired power and moving into gas-fired generation investment.  So why should the PSC allow West Virginia's consumers to be investing in coal-fired power plants?" Howley asked. "It makes no sense."

Integrated resource planning would help

Appalachian Power has been hit hard by coal's price hikes — so hard that it sought and received from the state Legislature this year authorization to securitize $350 million in fuel-based debt.

In the same legislative session, the utility opposed Senate Bill 162, introduced in January by Sen. Dan Foster, D-Kanawha, which would have required the state's electric utilities to file "least cost" plans that might prevent such heavy reliance on one fuel.

Also known as integrated resource planning, or IRP, the analyses mandated by Foster's bill would have evaluated "a full range of scenarios to determine the mix of resources that will meet future electricity demand at the lowest system cost within an acceptable range of risk," every two years starting this year.

Twenty-seven states use IRP, according to Synapse Energy Economics.

Implemented a decade ago, IRP would have shifted Appalachian Power to a more diverse fuel mix, James Van Nostrand, West Virginia University professor and director of the College of Law's Center for Energy and Sustainable Development, wrote this spring in his Energy Forward blog.

Appalachian Power opposed Foster's legislation, which died in committee.

"It didn't necessarily say what planning horizon to use, which is what concerned us," Matheney said.

Kunkel would like to see such an analysis conducted by Appalachian Power for meeting its generation capacity obligation.

"I think more information is going to need to come out to determine what other options Appalachian Power has considered other than buying these plants," she said.

In an IRP, "Appalachian Power would have to demonstrate that these resources compare favorably with all the other resource options available to it including, most importantly, energy efficiency," Van Nostrand said. "I can't believe that increasing reliance on coal can be demonstrated to strike the right balance of costs and risks over time."

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