APCo day 1: no negotiations, RFP, commodity price forecasts - WBOY.com: Clarksburg, Morgantown: News, Sports, Weather

APCo Day 1: No negotiations, RFP, commodity price forecasts

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Appalachian Power President and CEO Charles Patton Appalachian Power President and CEO Charles Patton

Two major witnesses defended and criticized Appalachian Power's proposed billion-dollar purchase of the Amos and Mitchell coal-fired power stations on July 16.

Cross examinations explored several key points on the first day of the evidentiary hearing before the Public Service Commission of West Virginia — among them, the vigor with which APCo executives negotiated on behalf of ratepayers, the market certainty that could be gained through a request for proposals and the validity of the company's commodity price forecasts that support coal as its best option.

APCo's proposal comes as the result of two changes in its options for generating or purchasing power.

One is the termination at the end of this year of parent company AEP's arrangement in which the various sister generating companies share power through a power pool, of which APCo is a purchasing member.

The other is the planned retirement of several power plants in 2015 that will leave APCo with generation capacity of about 6,500 megawatts.

The company could cover the difference between that and the 7,800 or so megawatts' capacity that would meet customer demand over the coming years through a combination of buying power in the spot market or under contract, buying existing or building new generation capacity and incentivizing energy efficiency.

The three-day hearing explores the merits of the company's proposed solution of buying one-third of Amos Unit 3 and half of all of the Mitchell plant, a total of about 1,650 MW of coal-fired generation located in West Virginia, for about $1.1 billion from sister company Ohio Power.

"There were no negotiations"

Transactions among affiliates received a critical look.

Jackie Roberts of the PSC's Consumer Advocate Division questioned Appalachian Power President and CEO Charles Patton about the extent to which APCo considered buying power plants from outside the AEP system.

Roberts' questions established that, while APCo considered outside-system plants, it rejected them on a qualitative basis before the quantitative analysis was performed. Most were shorter-use peaking plants that wouldn't meet the company's need for relatively continual baseload power.

At the same time, "things were going on in Ohio" in 2010 and 2011, Patton said, referring to deregulation that has forced the restructuring of Ohio electric utilities. "It became clear it could be possible to acquire Mitchell and Amos and, given what we knew about the net book value of those assets, there was nothing on the table that was equivalent."

However, having arrived at that solution of a transfer of assets within the AEP system, the vigor of the negotiations with sister company Ohio Power on APCo ratepayers' behalf appears to have been minimal.

"Did you make effort to negotiate the price?" Roberts asked.

"No," Patton said. "Remember, Appalachian Power isn't operating in a vacuum. Ohio Power is the other side and the idea of them selling the asset to us at below net book value doesn't appear to be very fair."

He said numerous times, along those lines, that he and his team were not negotiating on behalf of APCo ratepayers but, rather, participating in a higher-level decision of what was best for AEP as a whole.

Roberts also probed the timing. The date set between the companies for the transaction is Jan. 1, 2014. Because APCo's power needs are covered by a bridge agreement within AEP through May 31, 2015, Roberts asked why not put off the expense for ratepayers and set the transaction nearly a year and a half later?

"Quite simply because these are valuable assets and they are available today," Patton said. "Who knows if they will be available then?"

"But you didn't ask that question, whether it could occur on May 31, 2015, did you?" Roberts asked.

"No, I did not," Patton replied.

Asked later by Derrick Williamson, attorney for the West Virginia Energy Users Group of large industrial electricity users, whether any negotiations took place between the affiliates, Patton responded, "There were no negotiations."

Request for Proposals

The company chose not to issue a request for proposals to test the market, Patton said, because its evaluation of the outside-the-system plants it knew were available found them unsuitable, because it felt the book values of Amos and Mitchell were below market, and ultimately because its industry-standard computer model affirmed that assessment.

He offered as support for the idea that an RFP would turn up no new options that the fact that, with the company's proposal available to the public and the net book values known, no energy supplier has come forward to make a competing proposal.

PSC Chairman Michael Albert expressed some frustration over the level of emphasis that has been placed on RFPs by intervenors in this case and in a parallel FirstEnergy case that was heard in May, saying at one point that he is struggling with the concept.

Albert initiated a conversation with West Virginia Citizen Action Group witness and industry consultant David Schlissel, who analyzes RFPs and RFP bids as part of his consultancy.

"We're a state agency. We have to use (RFPs). They're wonderful for bags of hammers," he said. "But to do them for things where it requires some high-powered talent to assess something …"

Schlissel: "The world changed in the late 1990s with deregulation in that you have companies going out and doing more power plant sales and more power purchase agreements. All around the country, companies as a matter of course issue RFPs."

Albert, at another point: "How much effort and technology and analysis and strategy, how much of the things you all have done here do you expect a proponent to go out and do if the end result is to assess whether the company's choice is the best way?"

Schlissel: "If they honestly believe the company will buy their power, they will. If they don't think the company's serious, they probably won't."

And later Schlissel, turning it around: "What do you lose by making them do an RFP?"

Albert: "They suggest you may lose the opportunity to purchase the plants that are available … Somebody may come in and make an offer that's more attractive to (Ohio Power) and they take it."

Schlissel: "Based on my looking at the market and at prices, I don't think it's a big risk. I think a push to a rush to judgment is more of a risk than going out to the market."

Commodity price forecasts

APCo compared four portfolio options with the Amos and Mitchell option: reliance on the market through 2025; reliance on the market through 2017, with a model-optimized portfolio after that; transfer of only the Amos portion; and transfer of only the Mitchell portion.

Both company lawyer William Porth and commissioner Ryan Palmer questioned Schlissel about the criticisms in his written direct testimony, filed in June, of the price forecasts used in its comparisons.

APCo made its price forecasts in 2011, Schlissel said, when both natural gas and power market prices were higher. With the advantage of time, it's possible to see now how those forecasts for 2012 — the year for which the forecast was likeliest to be accurate — came out.

"They were way high," he said. "Way above what the actual figures were in 2012."

His updated price forecasts found that the "market" and "optimization" portfolios are lower-cost options than the proposal.

What's next

Two other points that were explored in some detail and likely will get further attention when company witness John McManus testifies have to do with environmental liabilities — those, in particular, represented by the coal ash impoundment at the Mitchell plant and by expected future limits on carbon emissions.

Also to be discussed during the hearing is Appalachian Power's closely related proposal to merge with Wheeling Power. If the two companies are allowed to merge, Appalachian Power's need for generating capacity will be greater than if they are not allowed to merge.

The commission expects to hear from 19 witnesses through Thursday. The webcast of the hearing may be viewed on the commission's website.