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APCo asset purchase: Vigor of negotiations questioned

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

The vigor with which Appalachian Power negotiated on behalf of ratepayers over its proposed billion-dollar purchase of the Amos and Mitchell power stations was questioned on the first morning of the evidentiary hearing before the Public Service Commission of West Virginia.

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 an AEP arrangement in which the various sister generating companies shared power through a power pool, of which Appalachian Power was a capacity-deficit member.

The other is several coming power plant retirements.

The hearing will explore the merits of Appalachian Power's proposal to meet customers' future demand by buying one-third of Amos Unit 3 and half of all of the Mitchell plant, both coal-fired plants located in West Virginia, for about $1.1 billion from Ohio Power.

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 about 20 witnesses through Thursday.

Among several members of the public who spoke in support of and in opposition to the transfer prior to the evidentiary portion of the hearing, West Virginia Coal Association President Bill Raney spoke in support, saying in part that the Mitchell plant sources nearly all of its coal in West Virginia but that Amos only gets only 40 percent from West Virginia. He urged the commission to approve the transfer but to require Appalachian Power to use its best efforts to supply its plants with West Virginia coal.

Cross examination of Appalachian Power President and CEO Charles Patton by Jackie Roberts on behalf of the PSC's Consumer Advocate Division took up most of the morning of the first day.

Roberts sought to establish the extent to which APCo considered power plants available from outside the AEP system and with what vigor APCo senior management negotiated on behalf of its ratepayers.  

Her questions seemed to establish with Patton that, while APCo senior management considered power plants from outside the system, it rejected them on a qualitative basis before the quantitative analysis was performed.

"Things were going on in Ohio" during that process, in 2010 and 2011, Patton said. "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."

The company chose not to issue a request for proposals to test the market because it had gone through the process of evaluating the outside-system plants that it knew were available, because it felt the net book value of Amos and Mitchell was below market, and ultimately because its industry-standard computer simulation affirmed that assessment, he said.

He offered as support the fact that, with the company's proposal available to the public and the net book value known, no energy supplier has come forward to make a competing offer.

However, 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."

The date set between the companies for the transaction is Jan. 1, 2014. Because APCo is covered by a bridge agreement 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 asset 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.

Cross examination of Patton will continue in the afternoon.