WV PSC Harrison Order: “Results-Driven”

In his cogent and concise dissent from the WV PSC’s majority order, Commissioner Ryan Palmer describes FirstEnergy’s analysis supporting its claims that Mon Power needs to buy all of the Harrison Power Station as “results-driven.”  The same can be said of the final order entered yesterday in the case by Commissioners Albert and McKinney.

To support their foregone support for FirstEnergy’s plans, Mr. McKinney and Mr. Albert had to tie themselves in knots creating a series of “facts” that would support their approval of the FirstEnergy/WV Consumer Advocate/Sierra Club deal that would result in dumping more coal-fired electricity on Mon Power and Potomac Edison rate payers.

WV PSC orders are structured with sections titled “Discussion,” “Findings of Fact,” and “Conclusions of Law.” In these orders, the commissioners who support a decision must establish a set of facts that were established in the case and then apply the relevant WV laws to those facts to serve as the rational basis for their final decision.  The result is a somewhat repetitive document that seems to restate the same points over and over.  For the purposes of this post, I will focus on the Discussion section of the Harrison case order, because that is where Mr. McKinney and Mr. Albert lay out why they believe certain facts were or were not established by evidence in the case.  It is in the Discussion section where we see their dishonest representation of the case required to fit their flawed conclusions.

So let’s start with the law on which both the majority (Mr. McKinney and Mr. Albert) and the dissenter (Mr. Palmer) base their discussions: §24 Section 2 Subsection 12 of the WV Code, referred to in both documents as §24-2-12.  Here are the relevant paragraphs of §24-2-12 to which all the commissioners refer:

Unless the consent and approval of the public service commission of West Virginia is first obtained: … (b) no public utility subject to the provisions of this chapter, except railroads other than street railroads, may purchase, lease, or in any other manner acquire control, direct or indirect, over the franchises, licenses, permits, plants, equipment, business or other property of any other utility; (c) no public utility subject to the provisions of this chapter, … may assign, transfer, lease, sell, or otherwise dispose of its franchises, licenses, permits, plants, equipment, business or other property or any part thereof; …(d) no public utility subject to the provisions of this chapter, … may, by any means, direct or indirect, merge or consolidate its franchises, licenses, permits, plants, equipment, business or other property with that of any other public utility; …(f) no public utility subject to the provisions of this chapter, … 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; … [emphasis mine]

And:

The commission may grant its consent in advance or exempt from the requirements of this section all assignments, transfers, leases, sales or other disposition of the whole or any part of the franchises, licenses, permits, plants, equipment, business or other property of any public utility, or any merger or consolidation thereof and every contract, purchase of stocks, arrangement, transfer or acquisition of control, or other transaction referred to in this section, upon proper showing that the terms and conditions thereof are reasonable and that neither party thereto is given an undue advantage over the other, and do not adversely affect the public in this state. [emphasis mine]

So in §24-2-12, the WV Legislature requires Mon Power to get PSC approval for the purchase of the Harrison Power Station, the sale of the Pleasants Power Station and for any financing arrangements that are made in the deal.  In making its decision, the Legislature requires that the PSC must determine three things: the terms of the deal are reasonable, neither party gains an “undue advantage” from the deal and “the public in this state” is not “adversely” affected by the deal.  These three legal standards must be met if the PSC approves the Harrison deal.

Thus, Commissioner Palmer concludes his dissent by showing the reasons why FirstEnergy has not met the legal standards for approval of their Harrison deal:

Based on the foregoing discussions regarding the acquisition purchase price, departure from Commission policy, violation of the Merger Stipulation, flawed cost modeling, homogeneous fuel portfolio, negative impact on the Companies’ financial condition, and a lack of urgency, I dissent from the decision of the Majority. The record in this case does not contain the required showing under W. Va. Code §24-2-12 that the terms of the Joint Stipulation as filed or as modified by the Majority are reasonable, nor do I believe that the Companies have shown that the transaction will not adversely affect the public in this State.

The Majority Order

The majority of the commissioners (Mr. McKinney and Mr. Albert) must show that their final order meets the legal standards set out in §24-2-12.  They have a much harder task, because FirstEnergy failed to make the case that its deal meets these standards.

Keep in mind here that the burden of proof that the deal meets the legal standards is on FirstEnergy, not the intervenors or opponents of the deal.  It is the job of the applicant power company to provide clear evidence that the deal (in this case the stipulation agreement of FirstEnergy, the Sierra Club, the WV Consumer Advocate and others) is reasonable, does not hurt the WV public and that no party to the deal gets an undue advantage.

There is also another obstacle that the majority commissioners have to slide around – their order approving the merger of FirstEnergy and Mon Power’s prior owner Allegheny Energy.  In that merger case two years ago, the WV PSC told FirstEnergy that it could not recover any costs associated with the merger from WV rate payers.  This is Mr. Palmer’s reference to the “Merger Stipulation” in the quote above.

The Merger Order

The majority commissioners attempt to sidestep their two-year old merger order by constructing a straw man which they promptly shoot down.  While Mr. McKinney and Mr. Albert acknowledge that the Harrison deal is for $257 million more than the real asset value of the plant, they claim that the previous merger case is irrelevant to the Harrison case:

The Merger Stipulation was not intended and could not reasonably be extended to apply to all possible future affiliated asset transfers, such as the Transaction, that would have to come before us for approval. [emphasis mine]

Well, of course the Merger Stipulation would not apply to all possible future transfers.  But it would apply to transfers that were based on asset valuations created in the merger.  Claiming that opponents of the deal presented the merger stipulation as a blanket ban on inflated asset transfers forever simply misstates the record in the current case.  The only objections based on the merger stipulation that were raised during the Harrison case were raised because FirstEnergy said it was basing its valuation of the plant on the valuation created in the merger case.

In order to drive home their claim that any price above Harrison’s real book value is allowable, Mr. McKinney and Mr. Albert must shoot down the clear fact that FirstEnergy based its own inflated value on the merger valuation.  The majority commissioners do this by re-writing FirstEnergy’s filings for them:

It is unfortunate that from the initial filing, MP/PE have confused the difference between Mon Power inheriting an Acquisition Adjustment that is “necessary” or created solely because of the fair-value adjustments made by AE Supply at the time of the First Energy/Allegheny Energy Merger (that would be contrary to the Merger Stipulation) and a request to sell an asset to Mon Power at a price in excess of the net original cost book value. This confusion comes from MP/PE initially appearing to claim that the justification for the purchase price of Harrison is the fair value of the plant recorded on the AE Supply books at the time of the Merger.

and

MP/PE should have focused less, or not at all, on the higher value recorded on the AE Supply books, and focused instead on the fact that they were requesting approval to purchase Harrison at a price in excess of net original cost and that they believed that the price was a fair price regardless of the unrelated merger accounting.

So here we have two PSC Commissioners basing their decision on what an applicant “should have” said, instead of what the applicant actually presented as evidence in the case.  The same commissioners opine that FirstEnergy’s mistaken evidence was “unfortunate.” But the evidence was only “unfortunate” because it undercut FirstEnergy’s own case, which Mr. McKinney and Mr. Albert are anxious to repair.

Results Driven Analysis of Alternatives

The majority commissioners analyzed alternatives to the Harrison purchase by following FirstEnergy’s results driven methodology.  I have covered the fundamental flaws in this analysis repeatedly in past posts, but the repetition of them in the final order is stunning.  Here are the main problems:

  1. The order considered only single solution alternatives, ignoring combinations of power purchases and efficiency investments and construction of gas-fired power plants,
  2. The order claims that “…the record is clear that energy efficiency and demand response can cover only the tip of the iceberg of MP/PE capacity and energy deficiency” despite the fact that evidence was presented in the case that FirstEnergy’s current WV efficiency targets are far below targets in other states,
  3. The order repeats FirstEnergy’s rigging of capacity factors for gas-fired power plants by limiting their capacity factors to the current 50% level even if the US imposed carbon costs on generators which could cause capacity factors for gas plants to rise even faster,
  4. The order repeats the FirstEnergy propaganda that its 40 year old Harrison Power Station, whose cost and efficiency is burdened by pollution control systems designed to limit the health dangers imposed by burning coal, is a “great asset” as FirstEnergy CEO Tony Alexander exclaimed earlier this year.

The Undue Advantage

Mr. McKinney and Mr. Albert get themselves in a real tangle when they try to maneuver around the “undue advantage” ban in §24-2-12.  Keep in mind that in this case, FirstEnergy has the burden of proof.  The company has to present reasonable evidence that FirstEnergy and Allegheny Energy Supply did not gain an undue advantage over Mon Power in the Harrison deal.  If the company fails to present reasonable evidence, then the PSC can’t approve the deal.

The commissioners’ confusion is evident in the mangled reasoning of their first paragraph in their discussion of the undue advantage issue:

Although WVCAG did not provide evidence of unfair advantage to AE Supply, it seems to argue that Commission approval of the Transaction places interests of owners ahead of the interests of customers. The Commission sees no basis for this criticism.

There is no burden on any intervenor to present evidence about unfair advantage if the applicant fails in its burden of proof.  It was not up to WV CAG to prove unfair advantage; WV law requires that FirstEnergy subsidiary AE Supply prove that it did not derive undue advantage from the deal.

The statement that the undue advantage ban applies between owners and customers is also a misstatement of the statute.  §24-2-12 clearly states that it applies only to the actual parties to the deal.

The majority commissioners bring into their confused arguments the issue of what fraction of Harrison it made sense for Mon Power to purchase.  If where were problems with only owning 20% of Harrison as a minority owner, this problem could have been solved by purchasing only another 31%, not the entire 80% that AE Supply wanted to sell.

Mr. Albert and Mr. McKinney state simply that the transfer of anything less than 80% of the Harrison plant to Mon Power was impossible and unreasonable because AE Supply said the deal was all or nothing.  Isn’t it clearly a case of “undue advantage” when Mon Power pays hundreds of millions more for an asset just because AE Supply won’t sell anything less than the remaining 80% of the plant?

If this were truly an arm’s length transaction, the sensible thing for Mon Power to do would have been to drop this deal and let AE Supply take its chances selling Harrison on the open market.  AE Supply and FirstEnergy were not going to do that, because they might not even get Harrison’s book value, if they could even find a willing buyer.

FirstEnergy’s own evidence and cross-examination by intervenors clearly showed that there was no negotiation, arms length or otherwise, between AE Supply and Mon Power on any of these important issues.  But, as I pointed out in an earlier post, the lack of negotiation, while important evidence, is not necessary to satisfy the requirement of §24-2-12.  The simple existence of an advantage, in this case buying more of Harrison than 51% and at a price that was above the plant’s book value, created a presumption that this advantage was “undue” unless FirstEnergy could prove otherwise, which it clearly could not.

The Piece de Resistance

Mr. McKinney and Mr. Albert faced one issue that they could not skate around – the fact that buying the Harrison plant is going to cost Mon Power and Potomac Edison customers much more money, for many years, than simply buying lower cost electricity from the wholesale market on PJM Interconnection.  There was no way around that fact.  The majority commissioners once again repeat FirstEnergy’s propaganda that electricity prices are bound to rise (for some reason they can’t really explain) and that off-system sales of excess electricity will be refunded to WV rate payers.  But they can’t simply deny that if prices for electricity stay low or fall, the relative excess cost of the Harrison purchase will be even worse and less money will come back to rate payers from off-system sales.

There is nothing the majority commissioners can do about the fact that the Harrison plant simply costs more than buying electricity from PJM’s markets.  So they simply ignore it and move on to the refunds for off-system sales.  They have devised the piece de resistance of their muddled catastrophe of a final order.

They have placed certain new conditions on the FirstEnergy/Consumer Advocate/Sierra Club deal that the commissioners claim will protect WV rate payers from the significant risks of the transaction.  Condition 3 is a laughably unnecessary Rube Goldberg invention to which even FirstEnergy will probably object, if they can understand it.  No one I have yet spoken with can even begin to explain to me what Condition 3 means.  Condition 3 appears to create a mechanism for compensating rate payers if FirstEnergy’s rosy (and entirely unrealistic) electricity price forecasts don’t come true.  The condition appears to require FirstEnergy to pay down the extra money rate payers are spending on Harrison if off-system sales of excess power from the plant fail to offset the plant’s higher costs.  The explanation is so muddy it is hard to tell exactly what Commissioners McKinney and Albert are trying to say.

And so, Condition 3 is the crowning piece de resistance to the whole final order: incomprehensible, ineffectual, misguided and based on misrepresented facts.

In contrast, Commissioner Palmer’s dissent is closely reasoned, clear and well documented.  And it is much shorter and much more readable.

Update: Keryn has a more detailed discussion of all three conditions over at StopPATH WV.

4 thoughts on “WV PSC Harrison Order: “Results-Driven”

    • There are several steps that could be taken at this point. WV law allows any party in the case to file a motion for reconsideration. Ultimately, a PSC decision can be appealed only to the WV Supreme Court. And that may be a real possibility in this case.

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