There are a lot of things wrong with FirstEnergy’s scheme to sell 80% of the obsolete Harrison Power Station to WV rate payers. For the purposes of my next blog posts, I will try to devote these posts to individual issues, rather than testimony by specific experts.
The WV PSC’s Consumer Advocate, Byron Harris, devoted much of his testimony to the ridiculously inflated value that FirstEnergy has claimed for the Harrison plant. The Consumer Advocate Division also sponsored testimony by other experts who focused on other issues, many of them more important than the price tag issue, but I will refer to those experts’ testimony more extensively in other posts.
Mr. Harris, in his role as Consumer Advocate, tends to focus rather too narrowly on short term rate impacts of cases that come before the PSC, as I have pointed out in the past. While I believe that broader issues of forcing WV’s power companies to diversify their power sources, and the common sense strategy of reducing demand using investments in efficiency and demand management are much more effective ways of reducing consumer costs in the long term, Mr. Harris seems to focus in on narrower, shorter term problems.
In the Harrison case, Mr. Harris’s narrow focus is not wasted, because he provides an in depth look at FirstEnergy’s deceit in the settlement of the WV PSC case which approved the merger of Allegheny Energy and FirstEnergy.
Mr. Harris cites the following clause from the merger agreement which FirstEnergy was ordered to implement, and to which FirstEnergy agreed:
i. Non-Recoverv of Acquisition Premium/Goodwill. FirstEnergy agrees that in future base rate proceedings of Mon Power or Potomac Edison in West Virginia, the regulatory capital structure used for Mon Power and Potomac Edison will not reflect any acquisition premium or “goodwill” associated with the Merger transaction.
And here is Mr. Harris’s conclusion concerning FirstEnergy’s attempt to “sell” the Harrison plant to Mon Power at a price of $1.2 billion instead of the plant’s book value of $550 million:
I believe the transaction violates the Commission order in the FE/Allegheny merger case because the price at which the Companies seek to acquire AE Supply’s interest in the Harrison units is clearly the result of the acquisition premium that FE paid for Allegheny Energy’s assets.
There is a lot more detail concerning the value of the plant and the craven manipulation of appraisals by corporate accounting firms KPMG and Navigant that is well worth reading. I particularly liked Mr. Harris’s observation concerning KPMG’s decision to provide a higher of two possible valuations based only on discussions with FirstEnergy’s management. That sounds like an “independent” appraisal.
Mr. Harris also points out that FirstEnergy’s “sale” of the Harrison plant from one subsidiary to another violates WV law. Here is how he applies a prior PSC ruling on a similar transaction to the FirstEnergy case:
Fourth, with respect to the second element of the standard set forth in W. Va. Code 3 24-2-12, i.e., neither party is given an undue advantage over the other, the Commission has determined that means that “the transaction was negotiated at arms length.” However, the Commission has also found that inter-utility contracts that include an inordinately high profit embedded in the contract’s rates are not only unreasonable (under the statutory test’s first prong) but also indicate that the contract was not the product of arms-length negotiations and therefore failed the second prong of the statutory analysis as well. [emphasis mine]
Mr. Harris’s ultimate recommendation is that the WV PSC require Mon Power to solicit bids from third party companies to provide both the electricity and plant capacity that the company claims it needs. He does not present a case for any particular solution, just that it be competitively bid. That is a weakness of his position, but the Consumer Advocate Division also presented testimony from Richard Hornby of Synapse Energy Economics that covers some broader aspects of the FirstEnergy scheme. I’ll cover those in a later post.
The CAD also presented testimony by Billy Jack Gregg, former CAD director. Mr. Gregg’s testimony is particularly interesting, because he provides a detailed picture of what FirstEnergy’s real strategy is with its proposed deal. In addition to “buying” Harrison, Mon Power would be “selling” its small share of the Pleasants Power Station near St. Marys to Allegheny Energy Supply Company. As Mr. Gregg points out, the Pleasants plant is newer, cheaper to operate and, because its coal is delivered by barge instead of by rail, its coal costs are cheaper.
It is clear from Mr. Gregg’s analysis that FirstEnergy is dumping its higher priced, older, higher cost Harrison plant on WV rate payers and cherry picking its newer, lower cost Pleasants Power Station to produce electricity for the PJM wholesale market.
Mr. Harris’s provides this explanation for FirstEnergy’s desperation:
While the Companies have promoted the proposed transaction as a solution to their long term capacity and energy needs, I believe it is apparent that the real motivation of the transaction is to provide cash to the Companies’ deregulated affiliates, principally AE Supply. In short, the purpose of the transaction is to “bail out” the Companies’ unregulated affiliates.
Or, as I put it two months ago, FirstEnergy Needs a Bailout – Badly.