RISK – The Big Issue in the Harrison Case

In my previous post, we saw how FirstEnergy is trying to drive the square peg (the base load Harrison plant) into a round hole (the projected future peaking capacity shortfall) using a largely made up “resource plan.”

The big issue in this situation is the risk that FirstEnergy wants to transfer from its merchant generating subsidiary, Allegheny Energy Supply Company, to WV rate payers.  The transfer of the Harrison plant would add the costs of owning and operating the plant to WV rate payers for the next 27 years at least.  In those 27 years, we really have very little idea of what will happen with prices of natural gas, prices of electricity and capacity in PJM’s markets, or even with the growth of peak demand for electricity in West Virginia.  Go back to expert David Schlissel’s list of risks that I included in my earlier post for a full list of the risks that FE is trying to dump on us.

One thing is clear, however.  Right now, and for the next few years, as most of the experts testify, prices of electricity and capacity on PJM’s system will remain low.  For this reason, FE has lots of time to solicit bids for real solutions, and to develop its own demand management, efficiency and power purchase investments.  Mon Power is currently buying more electricity off the PJM grid than it is selling, and there is no reason why it can’t do so much more cheaply than the Harrison plant costs to produce the same energy, at least for the next few years.

Modern business management is rightly focused on managing risk.  Uncertainty about the future is the single biggest source of risk to be managed.  Companies manage risk by developing strategies that allow for small incremental investments to provide flexibility if things don’t turn out the way managers thought they would.

Here is how expert Jeffrey Loiter compared the Harrison transfer to the demand management/efficiency/power purchase alternative in his testimony:

Q: Apart from cost considerations, are there other benefits for West Virginia consumers that result from increasing efficiency investments?

A: Yes, there are several additional benefits.

  • Reducing economic risks posed by regulatory risk, fuel price volatility, and load forecast errors – Acquiring the Harrison plant (or any other large, central generating station) is an all-or-nothing proposition. Once the plant is purchased, the Company’s ratepayers are committed to paying for its entire cost and operation. This is true whether or not the load it purports to serve materializes and regardless of the price of natural gas, coal or any environmental control or compliance costs that may come into effect in the future. With the exception of commodity prices for coal and gas. the Company did not test the sensitivity of its analysis to these possible futures. Regardless, these analyses are of limited diagnostic value, because none of them look at expanded levels of efficiency and demand response. In contrast. energy efficiency and demand response resources can be developed and deployed incrementally to match actual conditions. This trades a large risk (i.e., a large revenue requirement over a long period of time for a unnecessary or uneconomic capital investment) for a smaller one (i.e., the potential need to acquire resources through market purchases or other shorter lead-time supply resources for a short period of time until additional resources can be developed, whether through additional demand side resources or facilities such as Harrison). [emphasis mine]

Most US companies also manage risk by hedging – making investments in different areas that will counteract negative impacts if your main investment turns out to cost more than you planned.  Expert Cathy Kunkel, in her testimony, explains:

Q. IN ADDITION TO BEING THE LOWEST COST RESOURCE, DO DEMAND-SIDE RESOURCES PROVIDE A HEDGE AGAINST RISK?

A. Yes. As stated by Company witness Delmar, there is “tremendous unpredictability” regarding “future fuel prices and future power prices.” Indeed, the Companies assert that one of the main purposes for the proposed transaction is to “provide a hedge for customers from exposure to changes in market capacity and energy prices.”   Since all traditional supply-side resources [fossil fuel based power plants] have inherent commodity price risk, the most effective hedge against uncertain future market and commodity prices would be investments tied to no specific fuel cost, including energy efficiency and demand response.

And, Ms. Kunkel goes on to point out the unique hedging power of demand management resources:

Q. THE COMPANIES HAVE STATED THAT THE PURCHASE OF HARRISON PROVIDES A HEDGE AGAINST CAPACITY MARKET VOLATILITY. WOULD DEMAND RESPONSE ALSO PROVIDE A HEDGE?

A. Yes; in fact, it provides a better hedge. Like the Harrison plant, demand response can be bid into the PJM capacity market; when capacity prices are high, the higher revenues from bidding in these resources can partially offset the higher cost of market purchases.

In addition, and unlike Harrison, more demand response is available for bidding into the market at higher prices. The bidding in of these additional resources will reduce the overall market clearing price below what it otherwise would have been, thereby mitigating the price spikes that are of concern to the Companies. [emphasis mine]

So, as much as FirstEnergy has tried to hide the fact, this case really boils down to who will end up with the risk of the long term, massive commitment to owning an aging base load power plant in a market that is increasing turning against this kind of power generation.  Or, as expert David Schlissel put it in his testimony:

The only risk that would be alleviated by the proposed GRT [the Harrison plant transfer to WV rate payers] would be the risk to Companies’ credit ratings and profits that is posed by Allegheny Energy Supply Company’s continued ownership of its share of the Harrison Power Station.

2 thoughts on “RISK – The Big Issue in the Harrison Case

  1. It strikes me that this is the West Virginia version of “socialized costs, privatized gains.” And one small aspect of this punishing long-term strategy that I haven’t seen mentioned: West Virginia’s aging population, relying more and more on Social Security and any retirement savings (ha! just ask the miners at Patriot Coal how that’s working out for them), will be harder and harder pressed to pay their ever-increasing electric bills – especially in a state that appears to actively discourage citizens from investing in the use of renewables. Talk about a short-term, shortsighted solution!

    Oh, but that’s right. FE and AEP only look as far as the next quarterly earnings report (and maybe the end of the fiscal year report, so they can cook up fabulous excuses for their idiotic salaries and gluttonous bonuses).

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