Harrison Day 2: Let’s talk price - Business, Government Legal News from throughout WV

Harrison Day 2: Let’s talk price

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The price of the Harrison power station and how to arrive at a fair one, if Mon Power were to buy it, were among important issues aired on the May 30 second day of evidentiary hearing before the Public Service Commission of West Virginia.

Price is one of the major points of contention in Mon Power's billion-dollar proposal to buy the coal-fired Harrison station. The utility says buying the 80 percent it does not own of Harrison from sister FirstEnergy subsidiary Allegheny Energy Supply is the most cost-effective way to meet current and growing shortfalls in meeting the electricity needs of its own and Potomac Edison's ratepayers.

Thursday was the second day of the three-day hearing.

First, more on the negotiations

Statements on the first hearing day from FirstEnergy Service Co. Director of Regulated Generation and Dispatch Michael Delmar indicated that he and a colleague, Stanley Szwed, conducted the negotiations with AE Supply on Mon Power's behalf. His testimony seemed to say that no representative directly from Mon Power was involved.

Szwed, who since has retired from his position as vice president of compliance and regulated services and chief FERC compliance officer, refined that understanding Thursday under cross examination.

He said he communicated regularly during the negotiations with his immediate supervisor, Charles Jones, who served in part as president of Mon Power, and that he also kept then–President of West Virginia Operations James Haney informed.

Szwed took issue with any notion that actual negotiations between the affiliates did not take place.

"From a personal standpoint, knowing the involvement that myself and my staff had in working this issue through starting six to eight months before that, focused on the Resource Plan, trying to do the best we could do to lay out the right type of plan to solve the capacity deficiency, I thought that was a mischaracterization of what we did."

The price

The value of the Harrison megawatts on AE Supply's books is more than twice the value of the Harrison megawatts on Mon Power's books. 

That adjustment was made when FirstEnergy acquired previous owner Allegheny Energy in 2011 and has to do with this: The expected future income from the plant, as managed by competitive generator AE Supply, was higher than the cost-minus-depreciation value that the plant is allowed to recover in West Virginia's regulated market.

In the proposal, Mon Power would pay AE Supply's higher book value.

The question is, why should Mon Power pay more than double for megawatts at the same plant due to what looks like an accounting artifact?

The question is especially colored by the fact that, in its 2010 order approving FirstEnergy's acquisition of Allegheny Energy, the commission explicitly forbade the company from ever seeking a "goodwill adjustment."

Discussion on this question revolves around terms like that one, and "acquisition premium" and "fair value adjustment," that have important meanings and implications to accountants.

"My concern was primarily, in an affiliate transaction that is presumptively transacted at book value, whether that book value amount should include the fair value write-up of $589 million," said Stephen J. Baron, a witness for the West Virginia Energy Users Group of large industrial electricity users.

Chairman Mike Albert seemed to indicate that he is not concerned that his commission's order would be violated by the proposed price when he told witness David Schlissel, who said it appeared to him to have been violated, "Read (FirstEnergy witness Harvey) Wagner's rebuttal and see if it changes anything."

Wagner, under cross examination, said on the subject: "That was the cost to FirstEnergy of acquiring the Allegheny assets. Too often I think in reading through the testimony the fair value adjustment look like a magic hocus pocus thing and it's not. It really represents what FirstEnergy paid."

Szwed noted that the Federal Energy Regulatory Commission has specific rules about transactions such as this one, between affiliates.

"Going back to FERC guidance, the price that would have to be paid would be the lower of book or market," he said.

At the same time, he expressed pride in the fact that he and Delmar stood fast at book value for Mon Power in the negotiations.

"AE Supply felt it was worth more and pushed hard to negotiate a higher price but we stuck to maintaining the notion of book value," he said.

Requests for Proposal

Numerous intervenors have gotten behind the idea that the question of how much Mon Power should pay to resolve its shortfalls and how much AE Supply should expect to receive for its share of Harrison could be resolved to everyone's satisfaction if the company issued Requests for Proposal, or RFPs. If a larger pool of interested parties were invited to offer solutions and bid their prices, that would establish the market with complete certainty.

Delmar has said in the past that the market estimates and projections FirstEnergy has included in its Resource Plan and its filing for this case were sufficient. He also has said there isn't time to do RFPs, and he elaborated on that on Thursday in response to a question from Commissioner Jon McKinney.

"It takes time to issue it, you have to give folks time to respond to it, and then it takes time for us to (do due) diligence," he said.

"Let's say it's a robust return and we get 50 responses and 15 of them are power plants," he said. "You gotta go visit, kick the tires, make sure you do enough diligence to make sure there's nothing that you don't know about — which is the obvious benefit we have with Harrison because we do know about it."

Louisville Gas and Electric issued an RFP in September, he said, which of course it had begun planning before that.

"As of last week when we spoke to them, they're still not done," he said. "So we're talking nine, 10 months or maybe more. And the issue came up, if the offer you're looking at was not an existing plant, you've got a construction period as well."

Schlissel, witness for the West Virginia Citizens' Action Group, said an RFP is a better determinant of value than an analyst's estimate.

"Put it out for bid, see what the market says," he said.

He noted that there's a risk that market opportunities will be lost during the time it takes to conduct an RFP — but that there's also a chance new market opportunities will arise during that time.

Several intervenors have noted that prices in the power markets are known to be affordable for the coming several years, giving plenty of time to satisfy all parties by going through the RFP process.

 "I don't think in this context that … relying on the market for the next few years is a negative," Schlissel said. "I think there are opportunities, given the low capacity and energy prices."

Other notes

The value of fuel diversity is continually discussed in a transaction that would tie Mon Power's generation almost entirely to coal.

Asked whether the Harrison plant would be a worthy investment at any price, Schlissel wavered, saying, "It's a very risky proposition to me for the long-term.

"I think that the commission should be more than concerned, worried, about that. If we were sitting here and it were gas, not coal, my testimony would be the same. It's important to diversify your fuel sources. That is a major lesson that we have learned the last five years, 10 years."

The proposal is an inflexible plan, he added.

"The decision the commission and company makes is going to tie the company to a path for a long time."

Regarding energy efficiency that could meet part of the shortfall, many studies have shown that it costs utilities less to reduce demand by offering incentives to their customers to install efficiency measures than it costs to increase supply to meet that demand. States across the nation have saved ratepayers money by mandating aggressive utility efficiency programs.

FirstEnergy regularly makes it clear that it complies with such state mandates under protest. FirstEnergy Service Co. manager of development and compliance in the energy efficiency group Edward C. Miller, contributed on Thursday, " I don't believe utilities should be mandated to necessarily promote energy efficiency. … I believe energy efficiency products are being marketed, advertised, communicated by the companies that sell their products or services."

Miller said he's read news stories about power plants being idled because of the slow economy and because of increasing efficiency.

Asked by Commissioner Ryan Palmer whether that doesn't support the idea that efficiency measures could in fact help reduce the need for generation capacity, Miller said, "I don't know if I can agree, just because of the sheer magnitude that would be required. … I don't disagree there are impacts but it's a dynamic that has a lot of variables associated with it."

The hearing is expected to wrap up on Friday and may be viewed on the commission's website.

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