Pam Kasey Exposes Fraud of Harrison “Negotiation,” But There’s More

Pam Kasey has an excellent account of how cross examination of FirstEnergy employees last week exposed the fraud of “negotiations” between Mon Power and Allegheny Energy Supply over the Harrison plant transaction.

Ms. Kasey exposes how Mon Power employees, who were supposed to be fighting for their company’s interest against a separate company, Allegheny Energy Supply, actually rolled over for AES at every turn.  Remember that both companies are subsidiaries of Ohio-based FirstEnergy.  Common sense would tell you that executives who all have the same boss will end up doing what is best for that boss and FirstEnergy’s bottom line.  That’s apparently what happened.

Williamson [lawyer for intervenor WV Energy Users Group] asked Szwed [former Mon Power employee] several pointed questions related to the vigor with which he and Delmar [Mon Power employee] negotiated the best possible deal for Mon Power and its ratepayers.

His first question concerned what may prove to be the most contested point in the post-hearing briefs to be filed in July: the fact that the value of the share of Harrison on AE Supply’s books, $767,000/MW, is more than twice the value of the share on Mon Power’s books at $319,000/MW — yet it’s the price Mon Power proposes to pay. The difference is an accounting adjustment that was made when FirstEnergy bought previous parent Allegheny Energy in 2011.

The PSC’s 2010 order approving the acquisition specifically forbade attempts to recover such an acquisition adjustment. Given that order, a negotiator would have had a strong position arguing that Mon Power can’t pay more than $319,000/MW for Harrison because it wouldn’t be able to recover the extra from ratepayers.

“Did you negotiate (about) potential concern regarding the merger acquisition adjustment being in dispute with respect to its recoverability?” Williamson asked Mon Power negotiator Szwed.

“No,” Szwed responded. “Our focus was on securing the megawatts in the asset at the book cost” — that is, AE Supply’s book cost, not Mon Power’s.

“Did you discuss with AE Supply how the purchase accounting adjustment might impact ratepayers?” Williamson followed up.

Again: No

“Did you discuss with AE Supply any issues associated with ADIT liability and taxes?” Williamson asked, regarding a tax issue that some intervenors say could save ratepayers $400 million.

Szwed: No.

“Did you discuss how to structure the transaction, in the sense of, would it be a sale from AE Supply to Mon Power or could a stock exchange be structured?” Williamson probed, looking for negotiations about something fundamental.

Again: No.

In earlier cross examination of Delmar, Citizen Action Group counsel William DePaulo asked about the possibility of Mon Power gaining control it desires over the dispatch and maintenance of Harrison through 51 percent ownership rather than 100 percent, a level more in line with the amount of capacity Mon Power needs. He suggested the commission could order that.

“There would likely be no transaction,” Delmar said.

Szwed and Delmar made no indication of having taken tough positions on behalf of Mon Power’s ratepayers.

Ms. Kasey presents a clear picture of Mon Power’s failure to negotiate, but she misses a larger issue that Consumer Advocate Byron Harris pointed out in his initial testimony:

Q. WHAT ARE THE LEGAL STANDARDS GOVERNING THE COMMISSION’S REVIEW THE PROPOSED TRANSACTIONS?
A. The legal standards governing the Commission’s review of the proposed transactions are set forth in several sections of the W. Va. Code, chiefly in W. Va. Code § 24-2-12. That section of the Code states, in pertinent part:
“Unless the consent and approval of the public service commission of West
Virginia is first obtained: . . . (c) no public utility subject to the provisions
of this chapter, except railroads other than street railroads, may assign,
transfer, lease, sell, or otherwise dispose of its franchises, licenses,
permits, plants, equipment, business or other property or any part thereof.
. . ; (f) no public utility subject to the provisions of this chapter, except
railroads other than street railroads, may, by any means, direct or indirect,
enter into any contract or arrangement for management, construction,
engineering, supply or financial services or for the furnishing of any other
service, property or thing, with any affiliated corporation, person or
interest.. .”
The Code establishes a three-part test that the Commission is to apply in
reviewing the proposed transaction and determining what action to take with regard to it, providing:
“The commission may grant its consent in advance or exempt from the
requirements of this section all . . . transaction[s] referred to in this
section, upon proper showing that [1] the terms and conditions thereof are
reasonable and [2] that neither party thereto is given an undue advantage over the other, and [3] do not adversely affect the public in this state. (numeric designations added). [emphasis mine]

Later, Mr. Harris states:

Fourth, with respect to the second element of the standard set forth in W. Va. Code § 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.

Mr. Harris concludes that the charade of the FirstEnergy internal “negotiation” over the price of the Harrison plant ended up giving AES “an inordinately high profit” which the WV PSC has interpreted as evidence that there was no arms length transaction as required by WV law.

So, what this means is that the fake negotiation was meant to hide clear collusion between Mon Power and AES which resulted in a transaction that is a violation of WV law, and which the WV PSC cannot approve.

Ruh roh.

5 thoughts on “Pam Kasey Exposes Fraud of Harrison “Negotiation,” But There’s More

  1. So if “the PSC cannot approve it” why were you telling us yesterday we need to get involved if we wanna save any space for net metered solar and wind &water–were you talking about something other than this Harrison plant transfer?

    • Mary,

      Just because WV law says the PSC can’t approve a transaction between affiliated companies that is not at arms’ length doesn’t mean they won’t approve it. If the PSC approves an illegal transaction, then intervenors would have to appeal the ruling to the WV Supreme Court. In the past, the WV Court has been very reluctant to hear appeals of PSC rulings. This failure to exercise judicial oversight of the PSC has effectively created a situation where the WV PSC is often a power unto itself.

      Clearly, Mr. Harris believes that this transaction is illegal, and so do I. That doesn’t mean the WV PSC won’t approve it.

      All the more reason for supporters of the future of renewable power in WV must stand up and be heard.

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