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How much is FirstEnergy's Harrison power station worth?

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Updated Nov. 28 to reflect filing on timeline by Consumer Advocate Division.

How much is Harrison power station worth?

Reasonable people can disagree, when it comes to a unique asset — in this case, a 40-year-old, 1,984-megawatt coal-fired power plant in the Harrison County community of Haywood.

But the question is important because Columbus, Ohio-based FirstEnergy wants subsidiary Mon Power, which supplies electricity to northern and eastern parts of West Virginia, to buy the 80 percent it does not own of Harrison from another subsidiary, Allegheny Energy Supply Co.

FirstEnergy filed its long-awaited "generation resource transaction" proposal, 600 pages worth, earlier this month with the Public Service Commission of West Virginia.

The stated purpose of the proposal is to meet Mon Power's needs into the future. The utility estimates that, given current generation assets and anticipated demand growth, it would have to buy more than 6 million megawatt-hours, or 40 percent of demand, in 2026. It would be 1,400 megawatts short of meeting peak demand.

Some observers see the proposal as a move to shift a risky coal-fired generation asset out of the de-regulating Ohio market, where it will have to compete, into the regulated West Virginia market, where the PSC would assure it a guaranteed return through rates.

"This plant is actually a long-term liability that they want to unload onto West Virginia where it will be guaranteed to recover its cost regardless of whether or not it's competitive," said West Virginia Citizen Action Group Executive Director Gary Zuckett in a media release.

The value of the Harrison plant will be one of several important points that will be hashed out among intervenors in the case, which so far include the West Virginia Citizen Action Group and the commission's Consumer Advocate Division.

So, what is Harrison worth?

There are a few traditional ways to go about valuation, according to Navigant Capital Advisors. FirstEnergy included Navigant's appraisal of the Harrison station in its filing.

A "cost approach," based on the current expected cost to recreate the asset minus depreciation, is given little weight by buyers of existing power plants, the appraisal says.

A "market approach" looks at transactions of similar assets. According to the appraisal, there simply aren't enough transactions with enough publicly available information to be meaningful.

Navigant used instead an "income approach," which estimates future revenues the asset will generate. Harrison is expected to operate for 27 more years.

Using the income approach, the consultants estimated the fair market value of the entire Harrison plant at $1.68 billion; AE Supply's 80-percent share would be worth $1.33 billion.

Having arrived at that market value, FirstEnergy offers rather to sell it to Mon Power for the lower book value, estimated at $1.16 billion.

Along with other parts of the proposed transaction — primarily, that Mon Power would sell its 8 percent interest in Pleasants power station to AE Supply — the net cost to Mon Power comes to $1.1 billion. Mon Power's generation capacity would increase by 1,476 megawatts.

What's the counteroffer?

Whatever Harrison is "worth" according to an appraisal, what it's "worth" to MonPower may be clearer alongside some alternatives.

That is, is Harrison the best answer to Mon Power's future needs? Is there a more cost-effective solution?

A resource plan the company filed with the commission in August takes a brief, not comprehensive, look at some possible alternatives.

Utilities have been building natural gas combined cycle power plants, for example. The resource plan acknowledges this but assumes that such a plant would run only 25 percent of the time — making it expensive. But major utility Southern Co. reported for the first quarter that it ran its natural gas combined cycle plants 70 percent of the time when gas prices were very low, and AEP reported running its combined cycle plants 85 percent of the time. Under those conditions, such plants are giving more "bang for the buck" than FirstEnergy assumes and could be competitive with Harrison.

In addition, while FirstEnergy energy efficiency promotions in other states are reducing demand significantly — it is required with other utilities by Ohio state law, for example, to reduce demand by more than 4 percent over a five-year period — the August resource plan dismissed energy efficiency as a solution for any part of the shortfall.

"Programs to reduce demand simply cannot fulfill the need for supply-side resources on this scale," the plan reads.

PSC Consumer Advocate Byron Harris has suggested another approach: that the value of 80 percent of Harrison to Mon Power could be arrived at by seeking bids for any means of meeting the utility's coming shortfall, an approach that would in fact be comprehensive.

"They should put out a Request for Proposal," Harris said. "Utilities do this all the time. That will tell you what it's worth."

Other issues

Some other important aspects of the proposal will draw attention.

One aspect is that FirstEnergy wants to wrap this up quickly, by mid-April, in order to close the deal by May 1. That would give Mon Power the benefit of owning the generation when prices rise for summer, the company has said.

The CAD filed with the commission on Nov. 27 protesting that the short timeline is inadequate for a consultant to be hired and perform the needed analysis, noting, "Evaluation of the proposed acquisition/sale will involve an analysis of petitioners' forecasted electricity requirements and the supply-side and demand-side resources available to meet the forecasted requirements."

Another aspect is that, while Mon Power's and Potomac Edison's customer rates were scheduled to fall on Jan. 1 because earlier utility "underrecoveries" for fuel and purchased power — which move independently of the base rates that pay for capital costs — have finally been recovered, the company proposes to instead to keep rates the same and divert the difference toward purchasing Harrison.

Billy Jack Gregg said in testimony he filed on behalf of the CAD in a related case that that muddies the waters improperly.

"(Fuel and purchased power) revenues should not be used to cover base rate items," Gregg wrote. "If base rates need to be increased to pay for the asset swap or the acquisition of other capacity, the company should file a base rate case, where all of the elements of the cost of service can be examined in detail … ."

Gregg also said there's no hurry. Rates for purchasing power in the market are at historic lows right now because of the low price of natural gas.

FirstEnergy's generation resource transaction case will unfold well into 2013. Follow it under case number 12-1571-E-PC on the PSC's website.

And look for a similar proposal from AEP in December.