Re-regulating Coal

Plants in West Virginia:
A Boon to FirstEnergy, a
Burden to Ratepayers

?f?s Institute for Energy Economics
and Financial Analysis
i213? 

K?s. 

September 2016

By Cathy Kunkel, Energy Analyst

Ohio-based FirstEnergy Corp. has announced plans to seek approval from the West Virginia
Public Service Commission to sell all or a portion of its 1,300 megawatt (MW) Pleasants Power
Station to FirstEnergy’s West Virginia-regulated subsidiary Mon Power. The coal-fired plant is
currently owned by a FirstEnergy deregulated subsidiary, Allegheny Energy Supply.
Mon Power made a similar acquisition three years ago when it purchased a 79.46% share of
the 1,984 MW coal-fired Harrison Power Station from Allegheny Energy Supply (Mon Power
already owned the other 20.54% of the plant). In seeking Public Service Commission approval
for that transaction, Mon Power argued that ownership of the additional share of Harrison
would provide a net benefit to Mon Power and Potomac Edison’s customers (Potomac
Edison is another FirstEnergy subsidiary and its rates in West Virginia are set to be identical to
Mon Power’s). In October 2013, the West Virginia Public Service Commission, in a 2-1
decision, approved the purchase.
FirstEnergy CEO Chuck Jones has described the Harrison transfer as a “model” for what it
seeks to do with the Pleasants plant.
IEEFA has evaluated the operating performance of the
Harrison plant and found that the transaction thus far has
not produced benefits to Mon Power and Potomac Edison
electricity customers. Instead, IEEFA estimates that
customers have lost more than $160 million relative to what
they would have otherwise paid for electricity. The deal has
shielded FirstEnergy from suffering a similar loss had the
plant continued to be owned by Allegheny Energy Supply.
This analysis only looks at one aspect of the deal, whether
the revenues from owning Harrison outweigh the costs, and
does not consider other criticisms made at the time of the
purchase, such as the failure to diversify Mon Power’s fuel
mix.
The Pleasants transfer plan is part of a larger strategy by
FirstEnergy to re-regulate unprofitable assets in deregulated
markets as a way to ensure ratepayer subsidies. The
company has pursued similar schemes previously in West
Virginia and also in Ohio.
The FirstEnergy/Pleasants scheme will likely cost ratepayers dearly, much as these other deals
either have or will if they are allowed to proceed.
Put simply, FirstEnergy is shifting risks from shareholders to ratepayers.

 FirstEnergy’s transfer of the Harrison power plant in 2013 from one subsidiary, Allegheny
Energy Supply, to another, Mon Power, appears to have been driven by FirstEnergy’s desire
to shift the risk of low wholesale electricity prices from FirstEnergy shareholders to Mon Power
ratepayers. Under Allegheny Energy Supply ownership, Harrison sold all of its electricity into
the energy and capacity markets operated by the regional grid operator, PJM
Interconnection. At times of low wholesale electricity prices, Allegheny Energy Supply’s
profitability suffered. By selling Harrison to the regulated Mon Power, FirstEnergy ensured that
Mon Power and Potomac Edison’s West Virginia customers would cover Harrison’s costs,
including a rate of return (i.e. profit), no matter what energy prices happened to be. In
addition, Mon Power and Potomac Edison’s regulated rates could be raised in the event of a
revenue shortfall.
The Harrison transaction came during a period when historically low natural gas prices,
combined with stagnating demand for electricity, had driven down wholesale electricity
market prices and made it more difficult for coal-fired power plants to compete—market
conditions that continue today. A September 2013 report by Fitch Ratings estimated that
FirstEnergy’s deregulated coal-fired power plants lost 63% of their value from 2008 to 2013 as
a result of unfavorable market conditions.1 A report by UBS Investment Research put
FirstEnergy’s deregulated subsidiary FirstEnergy Solutions at “zero equity value.”2
In response to these market conditions that were making it harder for deregulated coal and
nuclear plants to compete, FirstEnergy management implemented a strategy of “reregulation”—essentially seeking ratepayer subsidies for its uncompetitive plants. This began
with the approval of the Harrison transaction3 in 2013 and continued in 2014 when FirstEnergy
applied for approval from the Public Utilities Commission of Ohio for a deal that would require
the customers of FirstEnergy’s regulated distribution utilities in Ohio pay for the costs of
operating FirstEnergy’s deregulated, struggling W.H. Sammis coal plant, Davis-Besse nuclear
plant, and its stakes in the Clifty Creek and Kyger Creek coal plants.4 (This issue is currently
pending before the PUCO).
In implementing its re-regulation strategy, FirstEnergy subsidiary Mon Power needed to
persuade the West Virginia Public Service Commission that transferring the Harrison power
plant to Mon Power was in the public interest. Mon Power argued to the commission that
purchasing Harrison was the best way to meet its customers’ future power needs and that
the transaction had “the potential to significantly reduce customer rates.”5 Opponents
Fitch Ratings, “The Erosion in Power Plant Valuations,” September 25, 2013.
UBS Investment Research, “FirstEnergy Corp: Competitive Dis-Synergies”, July 30, 2014.
3 The transaction also included the sale of 7.69% of the Pleasants power plant to Allegheny Energy Supply, which already
owned the other 92.31% of the plant.
4 In testimony, FirstEnergy witness Donald Moul explained, “The economic viability of the Plants [Sammis and Davis-Besse]
is in doubt. Market-based revenues for energy and capacity have been at historic lows and are insufficient to permit
[deregulated subsidiary] FES to continue operating the Plants and to make the necessary investments.” (Direct testimony
of Donald Moul, Public Utilities Commission of Ohio Case No. 14-1297-EL-SSO, August 4, 2014, p. 2 lines 17-19)
5 Monongahela Power Company and the Potomac Edison Company, Petition for Approval of a Generation Resource
Transaction and Related Relief, West Virginia Public Service Commission Case No. 12-1571-E-PC, November 16, 2012,
p. 21.
1
2

 argued that Mon Power had failed to fairly evaluate other options, instead biasing its analysis
in favor of its parent company’s preferred solution. Dissenting Commissioner Ryan Palmer
described Mon Power’s modeling as “flawed and results-driven” and wrote, “[r]ushing into
the expensive, long-term commitment proposed … without a more thorough evaluation of
other options … is unreasonable.”6
Now, FirstEnergy is planning to transfer all or a portion of another deregulated coal plant, the
1,300 MW Pleasants Power Station, to Mon Power, a move that would result in the reregulation of the Pleasants plant, ensuring that ratepayers would cover all of the plants’
costs, regardless of whether it is competitive in the wholesale market. In December 2015,
Mon Power filed an Integrated Resource Plan with the West Virginia Public Service
Commission in which it argued that the best option for supplying Mon Power’s future
capacity needs would be to purchase an existing coal plant to meet a projected 850 MW
capacity shortfall. On FirstEnergy’s first quarter 2016 earnings call, CEO Chuck Jones provided
more specificity on this point:
We filed our integrated resource plan with West Virginia. I think later this year, they'll
start taking a look at it seriously, and it's up to the West Virginia Commission to decide
would Pleasants be the appropriate solution. Obviously, we have a model in place
already with Harrison…

6

Dissenting Opinion of Commissioner Palmer, West Virginia Public Service Commission Case No. 12-1571-E-PC, October
7, 2013.

 IEEFA has examined whether Mon Power’s acquisition of 79% of the Harrison power plant has
produced a net benefit or a net cost to ratepayers since it took effect in October 2013. This
analysis is based on the cost of owning and operating Harrison, net of the revenues earned
from selling Harrison’s output into the PJM markets.
Mon Power sells the output of all of its power plants into PJM. It then purchases from PJM the
electricity that it needs to meet its customers’ demand. Mon Power’s rates are set to cover all
of Mon Power’s costs (including a rate of return, i.e. profit), net of its revenues from power
sales. That is, Mon Power’s rates are set as follows:
Rate = Cost of owning power plants (Depreciation, Taxes, Maintenance, Interest, Profit
on invested funds) + Cost of operating power plants (fuel, etc.) + Cost of
transmission & distribution of electricity + Cost of purchasing power from PJM –
Revenues from power sales into PJM
In purchasing the 79% share of the Harrison power plant, Mon Power was essentially betting
customers’ money that the cost of owning and operating that additional portion of the plant
would be more than offset by the revenues generated by selling that power into the PJM
energy and capacity markets.
The bet has not panned out.
IEEFA finds that the acquisition of 79% of the Harrison plant has failed to produce a net
benefit to Mon Power and Potomac Edison customers7. The rapidly rising natural gas prices
projected8 by FirstEnergy in its application to the Public Service Commission for approval of
the Harrison acquisition (to support its contention that wholesale electricity prices were likely
to rise) have failed to materialize (see Figure 1). Instead, wholesale electricity prices have
remained low, driven by low wholesale natural gas prices and relatively flat electricity
demand. These market conditions are expected to continue for the foreseeable future (see
Figure 2).9

This report refers specifically to Potomac Edison’s customers in West Virginia. Potomac Edison’s customers in Maryland
are unaffected by the Harrison transaction.
8 Rebuttal Testimony of Judah Rose on behalf of Monongahela Power and the Potomac Edison Company, West Virginia
Public Service Commission Case No. 12-1571-E-PC, May 17, 2013.
9 PJM’s 2016 Load Forecast projects that summer peak demand in PJM will not regain 2006 levels until after 2030. (“PJM
Load Forecast Report”, January 2016).
7

 Figure 1: Projections of natural gas prices made in 2013 by FirstEnergy witness Judah Rose
have greatly exceeded actual natural gas prices.

Figure 2. Energy prices (historical and projected) at PJM’s AEP-Dayton hub in Ohio are not
expected to regain pre-2009 levels for the next decade.10

10

Day-ahead energy prices and OTC Global Holdings futures prices obtained from SNL Financial.

 As a result of low wholesale electricity prices, the revenues generated by the Harrison plant
have declined since its acquisition by Mon Power. Figure 3 shows the “dark spread”—the
revenues earned from power sales net of the plant’s fuel costs—for the share of the Harrison
plant Mon Power acquired in October 2013.11 The two spikes in the graph correspond to
“polar vortex” cold-weather events in the winters of 2014 and 2015 that drove significant, but
short-lived, increases in power prices. Since April 2015, the dark spread has averaged less
than $10 million per month and is trending downward. The plant would be a net benefit to
ratepayers only if this were enough money to cover FirstEnergy’s non-fuel costs from owning
the plant, including nonfuel operation &
Figure 3: The “dark spread” (revenues from power sales less fuel
maintenance costs,
costs) for the share of the Harrison plant acquired by Mon Power
depreciation,
in 2013.
amortization, and a
return on investment. As
shown in Figure 4 (page
7), it is not.
Figure 4 shows the
monthly net benefit/cost
to FirstEnergy’s West
Virginia customers of
ownership of 79% of
Harrison.12 This figure is
based on detailed
monthly data provided
by Mon Power, as well as
IEEFA’s estimates based
on recent plant
performance.13

This figure is based entirely on monthly data provided by Mon Power regarding Harrison’s energy market revenue,
capacity market revenue, ancillary market revenue and fuel expense (including allowances), provided in quarterly filings to
the West Virginia Public Service Commission in Case No. 14-0702-E-42T.
12 The monthly costs/benefits in Figure 4 reflect the monthly costs to operate 79% of Harrison and the corresponding share
of the plant’s monthly revenues. Because of regulatory lags in rate-setting and deferrals of certain costs, this does not
reflect the amount charged to ratepayers in any given month. For example, in the Joint Stipulation in Case No. 15-1351-EP (Paragraph 13a), the company agreed to defer until 2017 recovering part of Harrison’s expenses from the period
October 2013 to February 2015. Nevertheless, the total net cost shown in Figure 4 reflects a cost that will ultimately be
borne by ratepayers.
13 This figure uses data provided by Mon Power for fixed costs of the transferred portion of Harrison for the period October
2013 through February 2015 and for fuel costs and PJM revenues for the entire period October 2013 through June 2016
(See Direct Testimony of Kevin Wise, Case No. 15-1351-E-P, August 14, 2015; and quarterly filings in Case No. 14-0702E-42T). Monthly non-fuel expenses for March 2015 through June 2016 were estimated based on recent plant
performance. Income taxes and the pre-tax return were calculated based on values established in the most recent base
rate case (see Exhibit 2a to the Joint Stipulation in Case No. 14-0702-E-42T).
11

 The plant has produced a net cost to ratepayers in
28 of the 33 months from October 2013 through
June 2016. Cumulatively, over that period, the plant
has cost ratepayers approximately $164 million.
IEEFA estimates, further, that the acquisition has cost
every Mon Power and Potomac Edison residential
customer roughly $130, on average, and
commercial customers approximately $600.14 This
estimate does not reflect capital expenditures
made by Mon Power since its last rate case that will
be included in future rates. 15
Figure 4: Harrison has been a net loss to ratepayers over the period October 2013 through
June 2016

IEEFA does not anticipate a major turnaround in the Harrison plant’s poor financial
performance through the next decade. Low natural gas prices, combined with stagnating
demand for electricity in PJM, are expected to continue, and wholesale electricity prices are
expected to remain low, as shown in Figure 2. The plant will very likely require significant
additional capital expenditures in coming years as it ages. Under these conditions, the
Harrison plant will continue to cost ratepayers.

14

This estimate is based on allocating the cost of Harrison on a per MWh basis. Customer counts and MWh sales by
customer class were obtained from Mon Power and Potomac Edison’s 2015 annual reports to the West Virginia Public
Service Commission.
15 Mon Power’s most recent base rate case forecast capital expenditures at Harrison for compliance with the Mercury and
Air Toxics Standard (MATS) at $81 million for 2015-2017, and non-MATS capital expenditure at $144 million for 20142016. (Direct Testimony of Suzanne Paouncic, Case No. 14-0702-E-42T, June 6, 2014; Rule 42T Tariff Filing to Increase
Rates and Charges - Statement C, Case No. 14-0702-E-42T, April 30, 2014)

 Three years on, the acquisition of 79% of the Harrison power plant by FirstEnergy’s Mon Power
has yet to produce any financial benefit to Mon Power and Potomac Edison customers.
On the contrary, IEEFA estimates the deal has cost customers more than $160 million relative
to what they would otherwise have paid for electricity while at the same time shielding
FirstEnergy from suffering a comparable loss had the plant continued to be owned by
Allegheny Energy Supply.
It is highly unlikely that Harrison will provide a benefit to customers for the remainder of the
plant’s useful life.16
The poor financial performance of Harrison to date raises serious doubts about whether the
Harrison acquisition provides a good “model” for West Virginia to follow in evaluating
FirstEnergy’s plan to have Mon Power purchase the Pleasants power plant.

16

See Direct Testimony of David Schlissel (April 26, 2013), Direct Testimony of Richard Hornby (April 26, 2013) and
Supplemental Testimony of Catherine Kunkel (September 10, 2013) in Case No. 12-1571-E-PC.

 The Institute for Energy Economics and Financial Analysis (IEEFA) conducts research and
analyses on financial and economic issues related to energy and the environment. The
Institute’s mission is to accelerate the transition to a diverse, sustainable and profitable
energy economy and to reduce dependence on coal and other non-renewable energy
resources. More can be found at www.ieefa.org.

Cathy Kunkel, Energy Analyst, is an independent West Virginia-based consultant focusing on
energy efficiency and utility regulation. She has testified on multiple occasions before the
West Virginia Public Service Commission for the nonprofit coalition Energy Efficient West
Virginia. She has done graduate work for the Energy and Resources Group at the University of
California-Berkeley and is a former senior research associate at Lawrence Berkeley National
Laboratory. Kunkel has an undergraduate degree in physics from Princeton University and
graduate degree in physics from Cambridge University.