FirstEnergy: Keep rates the same, use extra to buy coal plants - Business, Government Legal News from throughout WV

FirstEnergy: Keep rates the same, use extra to buy coal plants

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Updated Sept. 4 to clarify the description of Ohio's Energy Efficiency Resource Standards.

FirstEnergy detailed its proposal for Mon Power to buy 1,660 megawatts of coal-fired generation in a resource plan it filed Aug. 31 with the Public Service Commission of West Virginia.

And in anticipation of approval, the company asked in its annual fuel cost adjustment filing to keep rates at the present level — rather than reduce them, as cheaper natural gas makes possible — and to put the excess money toward the purchase.

"Without the proposed generation resource transaction, purchased power costs would decrease by $66 million, lowering overall rates by about 5.4 percent in 2013," explained spokesman Todd Meyers.

That would mean the monthly bill for the average residential user of about 1,200 kilowatt-hours — not 1,000 kWh, an often-used but outdated figure — would drop more than $6, from about $118 to about $112.

Instead, Mon Power proposes to keep collecting that $6/month/household and to apply the $66 million to the total $1.13 billion cost of the proposed transaction.

"That would keep bills steady through much of 2013," Meyers said. "If the proposed transaction is not approved, that $66 million would be refunded back to customers, so they wouldn't be affected.

Meeting energy and capacity needs

An electric utility has to be prepared to meet customers' day-to-day energy demand as well as their peak demand.

Mon Power will be about 2.6 million megawatt-hours short of meeting energy demand in 2013, given the generating capacity it currently is set up to own or control, according to Mike Delmar, director of Regulated Generation and Dispatch for FirstEnergy and Mon Power, and about 940 megawatts short of capacity to meet peak demand.

That's okay. The utility will make purchases in the regional PJM Interconnection market to meet those energy and capacity shortfalls, and prices are low.

But looking ahead, based on an assumed annual growth rate of 1.4 percent, the utility will be more than 6 million megawatt-hours short in 2026, Delmar said; an annual growth rate of 1.2 percent for peak demand puts it 1,400 megawatts short of capacity in 2026.  

That leaves the utility open to price volatility, Meyers said.

To address that exposure, FirstEnergy compared levelized — lifecycle capital and operations and maintenance — costs  for a number of scenarios.

The filing shows that the company believes the most cost-effective option, at $74/MWh, is a package in which Mon Power buys about 80 percent it does not own of the Harrison Power Station, sells 8 percent it owns of the Pleasants Power Station and acquires 177 megawatts of "participation rights" to capacity in Ohio, for a net gain of about 1,660 megawatts of coal-fired capacity.

Purchasing electricity from the market comes out essentially the same at $75/MWh.

And building new natural gas combined cycle generation would cost $115/MWh.

Given planned and unplanned outages, the 1,660-MW package would meet Mon Power's assumed capacity needs through 2024 and its assumed energy needs well beyond that.

Policy analyst and Energy Efficient West Virginia Coordinator Cathy Kunkel is following the proposal and is not convinced.

"According to their own analysis, the cost of purchasing power off of PJM is $75/Mwh and the cost of buying coal plants is $74," Kunkel said. "When you start looking at the sensitivities and assumptions, it's hardly a compelling case."

The utility assumes 2015 fuel prices of $2.89 per million British thermal units, or mmBtu, for coal and $4.15/mmBtu for gas plus $0.36 for delivery, and escalates prices by 2.5 percent per year after, according to Meyers.

It assumes Harrison would run at 80 percent capacity and new gas combined cycle generation at 25 percent capacity. That low combined cycle figure results in a high per-MWh calculation outcome;  Meyers said it is in line with historical generation, but PSC Consumer Advocate Byron Harris said it is "extremely low," given recent years' experience.

The company notes that the analysis is sensitive to commodity prices. Natural gas at a lower $3/mmBtu in 2015 and gas combined cycle generation run at 50 percent capacity results in a levelized cost of $69/MWh, while coal at $3/mmBtu in 2015 and Harrison run at 65 percent capacity results in a levelized cost of $81/MWh.

Energy efficiency and demand response

The option of meeting some of customers' needs through energy efficiency and demand response — customer commitments to reduce demand during peak periods — receives cursory mention in the filing.

Here is where West Virginia's lack of a law requiring utilities to conduct programs to reduce customer demand, such as the Energy Efficiency Resource Standards that are in place in Ohio and Pennsylvania, is costing ratepayers.

FirstEnergy assumes demand will grow 1.4 percent per year over the coming decades.

But Ohio law requires FirstEnergy and other utilities to reduce customer demand by 1 percent of the previous three years' average each year from 2014 through 2018 and by 2 percent each year through 2024. The same is true for capacity: Rather than allowing peak demand to grow unchecked, Ohio utilities have programs in place to slow its growth. 

If FirstEnergy utilities did that in West Virginia, energy and peak demand in future years would be lower, meaning less generation capacity would need to be acquired -- a savings for ratepayers.

"They're swimming completely upstream with what every other state in the country is doing, practically, in terms of trying to avoid huge capital costs by being smart, using utility investments in demand-side resources," said Harris.

Risks of coal-fired power

Critics of this proposal, and of a similar idea floated informally by AEP and Appalachian Power earlier this year, argue that coal is becoming increasingly expensive to burn.

By moving coal-fired assets from Ohio's deregulating power market, where  generation assets increasingly have to compete, to West Virginia's regulated market where the PSC builds a guaranteed return on assets into rates, FirstEnergy is protecting itself from the risk of regulation.

"This puts all the risk of future environmental requirements of coal plants in a state where they can recover those costs from customers," Harris said.

Asked to respond to that criticism, Delmar said, "Our chore in creating the resource plan was to produce a low-cost economic resource for Mon Power and that's what we set out to do, and in this instance a coal-fired resource was that answer. Had the answer been something different, our recommendation would have been different."

Prominent among anticipated risks for coal-fired power is the politically complicated yet looming establishment of a price on carbon emissions, Kunkel pointed out on reviewing an Aug. 20 FirstEnergy presentation on this proposal.

"Most analysts agree that the political momentum behind cap and trade legislation has waned, but it has not disappeared," the filing reads. "The companies believe that a carbon tax is likely to eventually be promulgated."

However, there is no estimate of resulting costs in the resource plan calculations supporting the resource transfer.

"That seems pretty shortsighted," Kunkel said. "Purchasing coal plants is purchasing an asset that's going to last at least 20 years, so that assumes there's not any carbon price for 20 years — and because the cost of firing a coal plant just barely squeaks under the market scenario, and if you included any sort of price on carbon I'm sure coal plants would be more expensive."

Because the option for building new natural gas combined cycle generation costs, given FirstEnergy's assumptions, 1.5 times as much as the company's preferred option, Delmar said he feels confident that carbon regulations would bring the costs closer together but would not put new gas generation ahead of the proposal.

Harris pointed out that the 177 megawatts of Ohio generation is from old, inefficient coal-fired plants and that the proposal leaves Mon Power completely undiversified.

"Mon Power will have absolutely no natural gas-fired generation," he said. "This is the kind of resource plan I would have expected to see a utility file in 1972 — not in 2012."

Next steps

This filing is a resource plan and prepares the commission for a formal proposal of the generation resource transfer, which FirstEnergy anticipates filing later this year.

 "It'll be our job to convince the commission that this is a good deal for West Virginia ratepayers, but we think it is," Meyers said.

Because the cost outcome for purchasing in the market and the proposed transfer came out essentially the same, "What this is going to come down to is weighing the cost of the resource acquisition versus the perceived riskiness of staying in the market," Kunkel said. "They have to make some case that staying in the market opens us up to severe financial risk."

Harris said he'd like to see the commission require a true integrated resource plan that fully analyzes the costs and benefits of energy efficiency and demand response alongside supply-side resources.

And he'd like to see utilities put out requests for proposal to fact-check their internal analyses of lowest-cost alternatives.

The resource plan and fuel adjustment, or Expanded Net Energy Cost, filings are on dockets 11-1274 and 12-1238 respectively on the commission's website. The ENEC case will decide new — or the same — rates for 2013.

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