I don’t usually post about the WV coal industry, unless there is a connection to electricity issues. In the past week, just such a story dropped into my lap. WV Coal Association Chairman James Laurita, Morgantown coal baron, filed for Chapter 11 reorganization in federal bankruptcy court. Here is a link to Ken Ward’s post about the situation, including some very interesting links to the bankruptcy filing, in particular an affidavit filed by Longview CEO Jeffery Keffer.
I’ll let you draw your own conclusions about the situation after you read Mr. Keffer’s affidavit. To me, the whole Longview project looks like one big charlie foxtrot from start to finish. Laurita is the current scion of the family that has owned MEPCo, a coal company that operates in the Morgantown area. It appears that MEPCo had no experience with operating a coal-fired power plant, but that is just what they contracted for in the 2000s.
Remember that the 2000s were the go-go years of deregulated electricity. Suckers were pulled into the market by hucksters like Enron’s Ken Lay and Jeffrey Skilling. It appears that the Laurita family took the bait and ventured into a quagmire. They contracted with Siemans and Foster Wheeler, to international power plant giants, to build them a $2 billion plant with a rated capacity of only 695 megawatts.
Those numbers alone indicate how crazy the scheme must have been. Laurita, of course, blames the contractors for all his problems. But that is just like a coal industry executive. And now everyone is suing everyone else.
Throughout the bankruptcy filing, Laurita continues to claim that if the plant were working perfectly, his companies would be making money. Meanwhile, here in the real world, things are different.
Here’s how Mr. Keffer explains the current situation:
31. The Debtors’ ability to manage through the challenges arising from the Contractors’ Failures have also been affected by the current economic environment. Wholesale electricity prices have fallen significantly since construction on the Power Facility began in 2007 as a result of, among other things, the broader recession that commenced around that time, resulting in reduced electricity demand and substantial reductions in natural gas prices. Lower natural gas prices have been caused, at least in part, by the rapid expansion of natural gas production and natural gas inventories arising from the discovery of new shale deposits and the development of new extraction techniques. The presence of low-price natural gas reduces the variable costs of natural-gas fired power facilities and reduces the wholesale market price for all generators. Year-to-date, the average price per megawatt for electricity sold into the PJM on a day-ahead basis was approximately $33 per megawatt-hour—approximately 52 percent of the average power price forecasted for 2013 when construction began on the Power Facility in 2007.
32. Wholesale coal prices have also continued to fall as global markets face oversupply and as U.S. power generators have continued to shift away from coal fired technologies. The Debtors believe this shift results from, among other things, increased costs associated with environmental and regulatory compliance and pressures resulting from fierce industry competition with natural gas-fired power facilities. The coal industry as a whole has idled mines and reduced production in order to compete.
33. Moreover, the power generation and coal production industries are highly competitive on both a regional and national level. For example, Mepco does not compete solely with other regional mines, but also competes against national and international competitors that transport coal into the region. Similarly, Longview Power competes to deliver electricity to PJM against other coal-fired power generation stations as well as natural gas-fired power, nuclear power, and renewable energy, among other sources. This competitive environment has added anadditional layer of complexity to the Debtors’ existing challenges.
Translation: “We drank the kool-aid in the early 2000s and thought that Cheney would kill renewable power forever and that the Cheney administration would create the perfect environment for coal-fired generation.” Instead of taking responsibility for making a $2 billion mistake, Keffer starts the next paragraph this way:
34. The Debtors, however, believe they can compete effectively once they are no longer hamstrung by the Contractors’ Failures. As noted above, the Power Facility uses designs, equipment, processes, and technology that have made it one of the most efficient coal-fired power plants in the country—when the Power Facility can operate at full capacity.
Note that “when” in the last sentence. That should be an “if.” And we know that “if” is fantasy. The drop in demand is not the result of “the recession,” but a long term trend, something acknowledged by everyone in the electricity business (except Mr. Laurita and Mr. Keffer).
Early in his affidavit, Mr. Keffer states: “the Power Facility has only had a capacity factor of 68 percent since Longview Power took possession [in December 2011].” Hey, compared with other coal fired merchant plants in PJM, that 68% capacity factor looks pretty good.
The current capacity factor for “steam” generators, almost entirely coal fired plants, in the most recent quarterly report by the PJM market monitor is 48.5%. The market monitor lists the Jan-June 2012 capacity factor for PJM steam generators at 41.4%. If Longview can’t make money with a capacity factor significantly higher than other coal fired generators, the company’s prospects for the future look grim, contractor problems or not.