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FirstEnergy unimpressed with fuel diversity as price hedge

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In Mon Power's proposal to buy the coal-fired Harrison power station, the risk of dependence on one fuel and the importance of fuel diversity have been raised by some intervenors in the case.

Mon Power and parent company FirstEnergy are not concerned.

"While fuel diversity can play a role in managing cost variability among fuel sources, fuel diversity is not an end unto itself," wrote Director of Regulated Generation and Dispatch Michael Delmar in May 17 rebuttal testimony in the case before the Public Service Commission of West Virginia.

Mon Power's generation capacity is essentially all based on coal.

That includes all of the Fort Martin power station, 20 percent of Harrison and 8 percent of Pleasants. The utility has a small stake in the Bath County Pumped Storage Station in Virginia, but that facility is more like a battery that holds supply for later use than it is a generating station.

That comes to about 1,600 megawatts of coal-fired generation capacity; the proposed purchase of the remaining 80 percent of Harrison would add nearly 1,500 megawatts, not only further committing the utility to coal but precluding any opportunity for diversification for the coming decade.

Generation data is not broken down by utility by the U.S. Energy Information Administration in a way that can be accessed easily.

But the agency's data by state show that West Virginia gets more of its electricity from coal than other states in the region, and that that gap that is growing as utilities in other states diversify their generation into natural gas and renewable sources.

The state got 97 percent of its generation from coal in 2012. Kentucky got 92 percent from coal, and the shares fall from there.

It's an arrangement in West Virginia that provides a nice market for coal, but that it is widely acknowledged to put ratepayers at risk.

"Fuel diversity is key to affordable and reliable electricity," reads the website of the shareholder-owned electric company trade group Edison Electric Institute. "A diverse fuel mix protects electric companies and consumers from contingencies such as fuel unavailability, price fluctuations and changes in regulatory practices."

It's a concept often expressed more colloquially as "don't put all your eggs in one basket."

It's also a concept West Virginians experienced in their wallets when coal prices spiked a few years ago. Spot prices that had been $50 to $60 a ton in 2005, 2006 and 2007 for Central Appalachian coal went up to $140/ton in 2008, leading to double-digit rate increases.

Residential electric rates in the state rose 68 percent for AEP utilities Appalachian Power and Wheeling Power from 2000 to 2011, according to a recent discussion paper from James Van Nostrand, director of the Center for Energy and Sustainable Development at the West Virginia University College of Law and a former utility lawyer and utility regulator, and 39 percent, from a higher baseline, for FirstEnergy utilities Mon Power and Potomac Edison.

"West Virginians have not been well served in recent years by the heavy dependence of local utilities on coal for electricity generation," Van Nostrand wrote.

Asked about the risk to ratepayers of further deepening Mon Power's dependence on one fuel source, whether it would be coal or any other, FirstEnergy Vice President of Compliance and Regulated Services Jim Haney said he doesn't see much risk.

"I don't view it as much of an issue of different types of fuel as one that we know historically has been really low cost and I don't really see anything coming in the future that would cause it to be the most expensive fuel out there," Haney said.

And, he said, Mon Power will always have the option of buying power in the market even if the cost of buying the Harrison plant were built into rates.

"If the price of coal would go up and be much higher than the price of gas, which I don't see, but if it did, we could still buy on the market and the prices would not spike as much as you might think," Haney said. "Whatever savings or cost, we would pass along to the customer based on what the price is in the market."

PSC case number 12-1571 goes to evidentiary hearing May 29-31. The hearing may be viewed on the commission's website.