FirstEnergy Harrison Plant Deal About Much More than Rates

Last night, I watched this clip of The State Journal’s Bray Cary interviewing Byron Harris, WV Consumer Advocate, about the FirstEnergy Harrison Power Station coal dump.  This piece is an excellent example of the distortion of energy issues that often pops up in the WV media.

Cary states that the Harrison Power Station deal is some kind of accounting trick that FirstEnergy is trying to pull the cheat rate payers out of their hard earned dollars.  This fits very neatly into the narrative of evil corporations taking our money.  This point of view is somewhat accurate, but it explains very little about what FirstEnergy is really trying to do.  It is startling to see such superficial analysis from The State Journal, which claims to be a business-oriented magazine and which also has provided some really excellent analysis on its own energy blog Grounded.

Because Mr. Cary’s line of questioning focuses only on the “rip off” story angle, Mr. Harris is confined to talking only about FirstEnergy’s deceptive accounting and the ultimate rate impacts of the power company’s plan.

Let’s be clear.  Mr. Cary is simply wrong when he claims that this is just a paper transaction among FirstEnergy subsidiaries.  The transfer of the 80% of the Harrison Power Station currently owned by Allegheny Supply Company to Mon Power is a transfer of an obsolete, risky plant from a company that is forced to compete on an open power market to a WV-regulated utility which can recover all of its purchase price directly from rate payers, in addition to a guaranteed rate of return on equity.  Allegheny Supply Company’s coal-fired electricity is now being dramatically undercut by gas-fired power on PJM’s electricity markets.  FirstEnergy simply can’t sell the electricity from the plant for much longer if the plant’s power has to compete on the same terms as other power sources.  The “sale” to Mon Power will be made with our money Mr. Cary, and that ain’t just a paper transaction.

This is not some corporate accounting game.  It is a move by FirstEnergy to recover the cost of the Harrison plant before the free market drives it out of business.  You can see the trend of decline clearly in the capacity factor trends for the three Harrison plant generating units in the graph FirstEnergy provides in its resource plan.  That graph, on page 46 of the report, shows that the percentage of time the three units varied from year to year, but went from capacity factors of 82%, 87% and 72% respectively in 2006 to capacity factors of 64%, 69% and 59% respectively in 2011.

Mr. Harris did provide a very useful piece of information in the interview.  He stated that if the Harrison plant deal happens the way FirstEnergy wants it to happen, the average Mon Power residential rate payer (who power companies claim pays a monthly bill of around $110) will see a rate increase of $6.75.  The problem is that this rate increase will be locked in for the next 20 years, because investing in a coal-fired electric generating plant is something that no one else in the US is doing right now.  Neither Mr. Cary nor Mr. Harris points out this fundamental problem with the Harrison plant deal.

Mr. Cary may be so focused on the rate ripoff because he doesn’t think West Virginians are smart enough to understand what is really going on.  It is not clear from his interview questions whether he is patronizing his viewers, or he doesn’t understand the realities of the situation himself.

There is more important math we should be focused on, and it is right there in the FirstEnergy “resource plan.”  What FirstEnergy wants rate payers to do is invest in its Harrison power plant.  This is a long term investment, because FirstEnergy claims the plant has a remaining useful life of 27 years, and it is clear from the Exelon deal in Maryland that the company won’t be able to sell the plant to anyone else without a huge loss over that time period.  When someone offers you a “sure thing” investment deal, you should look around to see if any other investors are making the same choice.  In the case of coal-fired generating plants, no one, particularly investment experts, is investing in new coal-fired power.  That is a clear warning sign.

So the real question should be – among the possible alternatives is buying the Harrison plant the best choice.  There are some serious questions we could ask about FirstEnergy’s demand projections that lead directly to their claim that they need more system capacity to handle future electricity demand, but it is clear that the Mon Power and Potomac Edison will need some new capacity over the next 20 years.

After generating a number of assumptions, FirstEnergy uses a standard method of comparison in the power industry called levelized cost.  The levelized cost of a generating investment is the net present value of all of the costs, both initial capital costs and all operating costs, associated with that investment.  While this method is highly dependent on your initial assumptions, and doesn’t do a very good job of reflecting future uncertainties about prices and fuel supplies, it is a pretty good way of assessing alternatives.

Except that FirstEnergy doesn’t really do an apples to apples, oranges to oranges levelized cost analysis.  In calculating the levelized cost of either converting their Albright coal burner to gas turbine or building new combined cycle natural gas plants, FirstEnergy assumes that these plants will run less than half of the time, or a range of capacity factors between 25% and 50% depending on the price of gas.  When calculating the levelized cost of Mon Power rate payers buying the Harrison plant, FirstEnergy assumes capacity factors between 65% and 85%, depending on the price of coal.  As you can see from the figures I cited above, even a 65% capacity factor is higher than the actual capacity factors for two of the three Harrison units in 2011.  Many gas fired generating plants on PJM are currently operating at capacity factors of over 70%.

Want to see how badly FirstEnergy has rigged its analysis?  Here is the table of actual capacity factors on PJM as a whole taken from the PJM market monitor’s State of the Market Report, September 2012:

Sept 2012 capacity factors

So what was the actual capacity factor for combined cycle natural gas plants in PJM so far this year?  Right – 63.8%.  And what was the capacity factor for all steam powered plants, almost entirely coal-fired?  Right – 45.5%.  So the actual 2012 capacity factors for natural gas generation or coal generation aren’t even included in FirstEnergy’s levelized cost analysis.

Want to hear something worse?  FirstEnergy claims that they can’t calculate a comparative figure for demand management programs or use of energy efficiency to reduce demand, because these investments are demand side alternatives.  Well, that’s exactly the point.  Neither of these investments involve any future fuel costs, because they don’t have any.  By the way, FirstEnergy could have gotten the comparative figures from the WV Department of Energy’s draft energy plan that was released a few months ago.  Here are the general figures comparing the levelized cost of efficiency investments to the levelized costs of coal fired power plants, taken from the draft plan:

Americans spend approximately $215 billion/year on the production of electricity at a price of 6 to 12 cents per kilowatt hour. Investments in efficiency only amount to approximately $2.6 billion/year at a cost of around 3 cents per kilowatt hour saved.

No wonder FirstEnergy didn’t want to include demand side efficiency as an alternative in the Harrison plant deal.

It’s clear that FirstEnergy has cheated on every single calculation it has used in its Harrison plant scam.  Maybe the next time Mr. Cary interviews someone about this situation, he could ask some real business questions about the bad investment FirstEnergy is trying to sell West Virginia rate payers.

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