Harrison Day 1: Delmar on the negotiations, CO2, fuel diversity - Business, Government Legal News from throughout WV

Harrison Day 1: Delmar on the negotiations, CO2, fuel diversity

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FirstEnergy Director of Regulation Generation and Dispatch Michael B. Delmar on the stand May 29 before the Public Service Commission of West Virginia. FirstEnergy Director of Regulation Generation and Dispatch Michael B. Delmar on the stand May 29 before the Public Service Commission of West Virginia.

Mon Power's proposed purchase of the Harrison power station is not as much the very best option for ratepayers that resulted from a rigorous analysis as it is a good-enough option that offers some benefits.

That seemed to be the flavor of statements from FirstEnergy's Michael B. Delmar in the May 29 first day of the evidentiary hearing before the Public Service Commission of West Virginia.

The hearing provides parties in the case the opportunity to cross examine each other on their testimony regarding Mon Power's billion-dollar proposal to buy the coal-fired Harrison station to meet current and growing shortfalls in meeting the electricity needs of its own and Potomac Edison's ratepayers.

Opponents of the plan say that it would further deepen the utility's near-total dependence on one fuel, that the plant is overvalued, and that the deal would provide far more capacity than the utility needs and so preclude incentives for energy efficiency that would reduce monthly power bills.

Twenty-six witnesses are scheduled to speak, according to commission Chairman Michael Albert, in the hearing that is expected to go three days.

Most of the first day was spent on cross examination of Delmar, FirstEnergy director of regulated generation and dispatch, who has represented the overview in the companies' filings.

Background on the negotiation

Questions from Derrick Williamson, counsel for the West Virginia Energy Users Group of large industrial users, probed the process by which the negotiations took place between Mon Power and AE Supply — negotiations for a transaction that FirstEnergy characterizes as "arm's length" but that critics have said has the appearance of dumping a coal-fired plant that can't compete with cheap natural gas out of a competitive market onto ratepayers in an assured regulated market.

Who exactly was involved in the negotiations? How much did FirstEnergy senior management know? How was the transaction as now proposed shaped during the negotiations?

Several interesting points came out of that line of questioning. Among them, Mon Power leadership was never involved in the negotiations on its behalf. And it seems as though Delmar and a colleague who conducted the negotiations on Mon Power's behalf took the deal that AE Supply offered — accepting AE Supply's stance that it would not tolerate being a minority owner, for example, without counter-offering to buy only as much of the Harrison plant as Mon Power really needs.

Williamson stressed the point that the commission could approve the transaction with conditions. That could include that Mon Power become only 51 percent owner of the plant.

Joint ownership, future power market

PSC Deputy Consumer Advocate Jackie Roberts pressed several somewhat technical points with Delmar.

Delmar has testified that the Harrison plant might run less of the time or be updated less under majority ownership by competitive generator AE Supply than if it were fully owned by regulated generator Mon Power — that is, that Mon Power and the region's economy would benefit from Mon Power's majority or full ownership.

Roberts called that into question by bringing out an earlier filing in which FirstEnergy assured federal regulators that Mon Power ratepayers would not be harmed by joint plant ownership with a competitive generator.

She also drilled with Delmar into the assertion more than one at FirstEnergy have made that, if Mon Power buys the coal-fired Harrison plant and other power turns out to be cheaper, that would be okay — the utility would just buy cheaper power in the market.

Roberts' point was that that would not exactly be okay: Ratepayers still would be paying for the billion-dollar plant that, in that event, would not be running.

Risk of greenhouse gas regulation

William DePaulo, cross examining Delmar for the West Virginia Citizens' Action Group, asked about the effect that widely expected regulation of greenhouse gas emissions would have on the cost of running the Harrison plant.

"We chose not to include any regulation that we didn't see some form of, at least in a draft from (Environmental Protection Agency)," Delmar said.

"To the extent that you excluded that, you biased coal (over) every other fuel that had a smaller cost," DePaulo said.

"It treated all choices equal in terms of (carbon dioxide emissions, or CO2)," Delmar responded.

"One thing is an absolute certainty," DePaulo pressed: "The risk associated with CO2, whether it turns out to be zero or $20 a ton, that risk is being transferred to West Virginia ratepayers by this transaction. Correct, or not?"

"To the extent you perceive that there is a risk and that legislation will penalize one type of generation over another," Delmar said.

Efficiency, fuel diversity

The issues of energy efficiency and fuel diversity were explored with Delmar by Zachary Fabish on behalf of the Sierra Club.

There wasn't any one response that clarified Delmar's thinking on these important approaches that could minimize rates and maximize rate stability.

The overall meaning of Delmar's responses seemed to be that energy efficiency was not considered because it can't meet the entire shortfall and that the company's analysis only considered solutions that in and of themselves could meet the shortfall. And, on fuel diversity, that the value of the rate-stabilizing influence of spreading generation across a range of fuels was not built into the analysis.

That testimony seems to indicate the companies' feeling that the proposed Harrison purchase as a solution to Mon Power's shortfalls is not as much the best solution that resulted from a rigorous analysis, but that it's a good-enough solution.

The commissioners

An evidentiary hearing's best aspect may the opportunity it affords to fathom the thoughts of the commissioners, who do not speak with the media.

Commissioner Jon McKinney asked a couple of questions of Steven Staub, vice president and treasurer for First Energy Service Co. and all of the operating companies, related to interest rates. Among them, following on a comment Staub made in his direct testimony that interest costs have come down since Mon Power's last base rate case, "Why should the commission not take a new look at a reasonable return on equity?"  — calling into question the 10.5 percent return on equity currently provided in the base rates.

Staub did not answer the question. He said the point in his testimony was that, if Mon Power is going to take on the large cost of Harrison, it's going to need a strong return on equity and a favorable regulatory environment.

Commissioner Ryan Palmer, questioning West Virginia Coal Association Chairman James Laurita: "How can I be comfortable committing the company's ratepayers to a future almost solely tied to coal-fired generation?" and, later, also on the subject of near-total dependence on one fuel, "How can I be confident that prices are going to remain economical, especially in light of recent volatility?"

Laurita essentially said that the 2008 spike in coal prices was related mainly to regulations of a type that doesn't affect northern Appalachia, where the coal Harrison relies on comes from, as much as it does central Appalachia.

As for Chairman Albert: Not to place too much meaning on a small word choice, he spoke of the effect of the proposed transaction at the beginning of the hearing using "will" rather than "would."

Later, he said, "There was an awful lot of testimony (this morning, in the public portion), everybody said we can save the world by energy efficiency and demand response." It's a comment that seems to indicate his thoughts on those solutions.

The hearing is expected to continue through Friday and may be viewed by webcast on the commission's website.

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