Category Archive for "Coal business"

This is a special guest post, cross-posted from the Energy Forward Blog at the West Virginia University College of Law’s Center for Energy and Sustainable Development.

By James VanNostrand, Director, WVU College of Law Center for Energy and Sustainable Development

As reported by Ken Ward Jr. in the Charleston Gazette, a number of questions are being raised about FirstEnergy’s proposal to transfer ownership of 80% of the Harrison coal plant to Mon Power. The Harrison coal plant is a huge, 1984-megawatt (MW) facility built in the early 1970s in Haywood, West Virginia. Mon Power currently owns 20% of the plant, and the remaining 80% is owned by an unregulated FirstEnergy affiliate, Allegheny Energy Supply Company. Due to coal plant closings, Mon Power is purportedly 938 MW short of capacity, and is proposing to acquire the 1576 MW installed capacity in Harrison that it does not already own. (As part of the deal, Mon Power is proposing to sell 100 MW of capacity in its Pleasants Power Station to AE Supply, for a net capacity addition of 1476 MW.) Approval of the proposed deal is currently pending before the West Virginia Public Service Commission (PSC).

From this author’s analysis of the application to the PSC, the proposed deal is a bad one for Mon Power ratepayers (and the author is one such ratepayer), and should be rejected by the PSC. Perhaps the terms of the deal can be rehabilitated through conditions that the PSC could attach to its approval. As currently proposed, however, the application is sorely deficient, and fails to meet the “public interest” standard necessary for its approval. The deficiencies include the following:

The Proposed transaction would give Mon Power more capacity than it needs, thereby precluding any role for energy efficiency, natural gas-fired generation, or wholesale market purchases. As noted above, Mon Power claims to be 938 MW short of capacity in 2013, and the transaction would add 1476 MW of new capacity (1576 MW from Harrison, less 100 MW of Pleasant being sold). Thus, Mon Power’s capacity needs will be much more than filled by additional coal plant capacity. Given the excess capacity situation that would be created, there will be a strong disincentive for FirstEnergy to promote energy efficiency (which would simply exacerbate the excess capacity position). Moreover, there will be no room in Mon Power’s resource strategy for the possibility of including some natural gas-fired generation in its portfolio of resources. Finally, there will be no room in Mon Power’s resource strategy for wholesale market purchases, which are substantially cheaper than the Harrison plant acquisition. PJM wholesale prices are down 29% over the past year, due largely to cheap natural gas-fired generation, and wholesale prices are likely to remain relatively low for the foreseeable future. By filling its entire capacity needs (and then some) with the Harrison plant purchase, Mon Power will be precluded from pursuing other, cheaper options, such as energy efficiency, natural gas-fired generation, and purchases from the wholesale market. The Center for Energy and Sustainable Development has prepared a Discussion Paper on Integrated Resource Planning that highlights the reasons for a diversified portfolio mix, including natural gas-fired generation, renewable energy resources, and energy efficiency.

FirstEnergy completely ignores energy efficiency as an alternative, even for a portion of the needed capacity. FirstEnergy’s “Resource Plan” states that “demand side resource options are not a viable solution capable of meeting Mon Power’s obligations . . . [as they] do not address energy shortfalls as significant as the shortfall faced by Mon Power.” [Resource Plan, p. 56] Admittedly, energy efficiency programs cannot be ramped up quickly enough to make up a [claimed] capacity deficit of 938 MW. But energy efficiency, at 3-4¢/kWh, is substantially less than the 7.4¢/kWh that FirstEnergy is proposing to charge Mon Power customers for Harrison’s output. FirstEnergy needs to start treating energy efficiency as a resource, alongside supply-side options; this is a good proceeding to illustrate the comparative advantages of investments in energy efficiency versus buying an over-priced 40+ year-old coal plant. FirstEnergy has virtually no energy efficiency program offerings for its West Virginia customers, to help them manage their energy costs. First Energy’s energy efficiency programs in West Virginia were established to save 0.5% in 5 years, which is lower than the level being achieved in 40 other states. As far as actual results, FirstEnergy didn’t even reach 0.1% savings in the first year. The Center for Energy and Sustainable Development has prepared a Discussion Paper on Energy Efficiency that makes the case for increased investments in energy efficiency in West Virginia, and by FirstEnergy in particular.

The price for the Harrison plant acquisition is inflated far above what utility regulators ever would allow, by reference to generally accepted ratemaking principles. The net book value of the plant, based on “original cost depreciated” (the basis for ratemaking under the FERC Uniform System of Accounts, and followed by virtually every PUC in the country), is $574 million [$1.24 billion less $667.3 million in accumulated depreciation]. FirstEnergy is proposing to include an “acquisition adjustment” of $589.6 million that would more than double the acquisition cost of the plant for West Virginia ratepayers, to $1.163 billion. This “acquisition adjustment” is purportedly based upon “a purchase accounting fair value measurement component . . . related to the completion of the FirstEnergy/Allegheny merger in February 2011.” [Wise Testimony, p. 7] FirstEnergy claims that without PSC approval to include the unamortized portion of the acquisition adjustment in rate based until it is fully amortized, “Mon Power will not proceed with the transaction.” [Wise Testimony, p. 7] As a regulatory attorney for 22 years in the Pacific Northwest who has handled the regulatory approvals for 7 different merger deals in front of 6 different PUCs in the West, this author can represent that these “fair value adjustments,” also known as “goodwill” adjustments, are NEVER recovered from utility ratepayers. Regulatory ratemaking principles simply do not allow it; rates are based on original cost depreciated of rate base assets, not some “fair market value adjustment” based on some utility deciding to overpay to acquire another utility. There is no basis for ratepayers being burdened with FirstEnergy’s foolish decision to overpay to acquire Allegheny. Most regulatory approvals of mergers, and all 7 of the deals in which this author was involved, impose conditions precluding the utility from ever seeking to recover such acquisition adjustments in rates. While this author has not personally reviewed the order approving the FirstEnergy/Allegheny merger, it is my understanding that FirstEnergy agreed to such a condition in connection with receiving regulatory approval of the merger.

The numbers for the transaction defy common sense, apart from what generally accepted ratemaking principles or the Uniform System of Accounts require. The value of the 20% of the Harrison plant already owned by Mon Power on its books is $319/kW, while the proposed purchase price for the remaining 80% is $767/kW. This price disparity is inexplicable, given that there is nothing physically different in the four-fifths of the plant not owned by Mon Power versus the one fifth of the plant that Mon Power already owns. Are the electrons coming from the Allegheny Energy Supply side of the plant really worth 2½ times the value of the electrons from the Mon Power side of the plant? Try explaining that to the average FirstEnergy ratepayer in West Virginia.

The price for the Harrison plant acquisition is substantially overstated and does not reflect the current value of the plant. Recent, comparable coal plant transactions provide some guidance on what used coal plants are selling for these days. It is interesting that FirstEnergy claims an upward $589.6 million adjustment to the price of Harrison based on “accounting fair value” at the time of the FirstEnergy/Allegheny merger, yet does not want to consider what the Harrison plant’s fair market value might be today. Such an “accounting fair value” adjustment would go in the other direction, as Harrison is currently worth far less than the price being sought by FirstEnergy from Mon Power ratepayers. Based on recent transactions, even the original cost depreciated figure of $574 million is substantially higher than market value, and a bad deal for Mon Power customers.

In a transaction announced in March 2013, Dynegy is acquiring 4561 MW of super-critical coal capacity from Ameren for $825 million, or a cost per kW of $180.88

In a transaction announced in March 2013, Energy Capital Partners is acquiring 2868 MW of super-critical coal capacity and 1424 of natural gas-fired capacity from Dominion for $650 million, or a cost per kW of $130

In a transaction announced in August 2012, Riverstone Holdings is acquiring 2265 MW of super-critical coal capacity from Exelon for $400 million, or a cost per kW of $176.60

Under FirstEnergy’s proposed transaction price of $1.163 billion, the cost per kW is $785.91, or almost 5 times higher than the average per kW price from recent transactions. Even using original cost depreciated for Harrison of $574 million, the cost per kW would be $388, or almost 2½ times higher than the average per kW price from recent transactions. The market value of Harrison, based on the average price from the above recent transactions ($171.45 per kW) is $253 million.

Continue reading…

About two dozen protesters opposed to coal development in Montana occupy the state Capitol Rotunda on Monday, Aug. 13, 2012, in Helena, Mont. Protesters plan a week-long sit-in at the Capitol. (AP Photo/Matt Gouras)

This week’s announcement of a deal to ship about 9 million tons of Appalachian steam coal to power plants in India certainly got a lot of media attention, in part because the story was promoted by the office of Kentucky Governor Steve Beshear, who said of the arrangement:

It’s no secret that the coal industry is in a state of flux in America, what with erratic market conditions, the uncertain regulatory atmosphere and the ever-changing energy picture. But international markets need coal, and this private partnership is a great example of a new market for Kentucky resources. My administration has worked hard to strengthen ties with India, and we’re looking forward to a long and successful partnership with many more economic opportunities.

For those who might have missed it, here are the basics of the story, as reported by Platts:

Kentucky and West Virginia coal mines will sell 9 million short tons of Central Appalachian steam coal annually to India for 25 years under a $7 billion deal unveiled Wednesday.

A significant portion of the coal will be produced by privately owned Booth Energy, which operates mines in both states, according to Ed Hatfield, president of Cincinnati-based River Trading.

New Jersey-based FJS Energy LLC signed the long-term coal sales agreement with India’s Abhijeet Group. Although India produces coal, domestic production cannot keep up with demand.

Anand Kumar, executive director for Abhijeet, said during a news conference that the partnership “is an example of the strong potential between American producers and Indian customers. We see a significant growth of our mutually rewarding relationship.”

Obviously, this is good news for the companies involved and for the men and women who work for them, at mines like the ones that Booth Energy operates in West Virginia under the name Argus Energy. But how big of a deal is this really, what does it mean for the coal market in Appalachia, and what is perhaps the more important part of the story — the potential impacts on global warming — that nobody is giving much attention?

Well, consider that in the most recent year for which data is available (2010), Kentucky exported just 5.5 millions of the 101.4 million tons the state’s operators produced. West Virginia, which leads the nation in coal exports, shipped 23,8 million tons (out of a total production of nearly 135 million tons) overseas. So this deal alone will increase annual exports from the two states combined by nearly a third. That’s pretty big.

But does the deal live up to the hype that some are giving it, in newspaper stories that say stuff like this:

That’s a significant announcement for Appalachian mining companies, which have seen layoffs because of low demand for power-generating coal, and for India, which needs fuel to feed its growing hunger for electricity.

“I think that’s very, very confidence building to know that other countries depend on us,” said West Virginia Coal Association President Bill Raney.

Well, consider what Erica Peterson over at public radio in Kentucky explained in her initial story (Erica also did a fascinating follow-up story about the connections between this deal and one Kentucky lawmaker):

But is it a big enough deal? Over the past decade, Appalachia’s coal industry has been struggling. And energy analyst James Stevenson of IHS says this deal won’t quite close that gap.

“You’ve lost sort of 50, 60 million tons of production,” he said. “This is nine million, obviously that’s a small percentage of that. But probably the better upside here is that this could be the first of a number of deals.”

The most recent United Mine Workers of America Journal (it’s not online yet, sorry) list nearly 16 million tons of production cuts announced by Appalachian state mine operators since November 2011 alone.