What killed FirstEnergy's coal plants?

Mar 02 - Pittsburgh Post-Gazette (PA)

There are several suspects in the case of Tunnel Ridge vs. Allegheny Energy Supply , a lawsuit that aims to identify what killed two southwestern Pennsylvania coal plants in 2013 -- and, by extension, a multimillion-dollar coal contract.

Was it, as the power plants' owner FirstEnergy Corp. said, environmental regulations that did them in? Was it competition from cheap natural gas that took Hatfield's Ferry and Mitchell power stations off the grid before their time? Was it fewer consumers wanting less electricity after the recession?

The who-done-it is buried in a contract dispute between a coal company that had an agreement to feed fuel to FirstEnergy's subsidiary, Allegheny Energy Supply Co. , until 2020 and the utility, which unilaterally cancelled that contract last summer claiming that factors beyond its control -- specifically government regulations -- made operating those and other power plants "unfeasible."

"The true reason Allegheny Energy cancelled the agreement," Tunnel Ridge wrote in its lawsuit filed Jan. 15 in Allegheny County Court of Common Pleas , is "its desire to purchase coal at a lower price."

When the two parties negotiated their initial deal in 2008, coal from this region was in its third consecutive year of substantial price increases. It was trading at $97 per ton with no signs of slowing down. Allegheny Energy penned the agreement to protect itself against the price escalation.

Tunnel Ridge , in turn, got a long-term customer to justify spending "hundreds of millions of dollars" on building out a longwall mine that would stretch along its coal reserves from Ohio County, W.Va. , to Washington County, Pa. The mine went into business in May 2012 .

Since then, the coal industry's back flip has ushered in an era of oversupply, shrinking demand and low prices. So far this month, this region's coal was being sold on the spot market for about $61 a ton, a 37 percent drop from its 2008 average.

With about 60 gigawatts of the nation's coal-fired capacity scheduled to retire by 2020, according to estimates by the U.S. Energy Information Administration , the kinds of conflicts in this lawsuit are bound to multiply. As in this case, the argument for breaking a coal contract is likely to hinge on a concept called force majeure, which allows parties out of their obligations if an event beyond their control prevents them from delivering on their promises.

Because the coal industry is so vulnerable to shifting environmental regulations, coal contracts have for years included such developments in their force majeure clauses.

Now, the Tunnel Ridge case and others likely to follow, will aim to parse the impact of impending regulations -- such as requirements to control mercury and air toxics from power plants and, soon, carbon dioxide pollution -- from the undeniable economic hardship facing both coal and electric industries.

It doesn't help that both environmental regulations and market conditions are often mentioned in the same breath when companies announce power plant retirements.

When Akron -based FirstEnergy revealed its plans to close Hatfield's Ferry and Mitchell by October 2013 , the company wrote, "The decision is based on the cost of compliance with current and future environmental regulations in conjunction with the continued low market price for electricity."

The legal question might be which factor dominated the decision.

In the contract cancellation letter that FirstEnergy sent to Tunnel Ridge , it blamed the federal Mercury and Air Toxics Standards Rule, which goes into effect this year, for the plants' early demise.

But Tunnel Ridge wasn't buying it.

" FirstEnergy closed the Hatfield and Mitchell plants in October 2013 because they were operating at a loss and would continue to lose money regardless of any expenditures that would have been incurred to comply with any environmental regulation," Tunnel Ridge wrote in its lawsuit.

"The closure of these plants had nothing to do with the purported economic unfeasibility of retrofitting them for compliance."

"We disagree with that, obviously," said Andrew Noble , an attorney with Downtown-based Meyer, Unkovic & Scott LLP , who is part of a team representing FirstEnergy . "We hopefully will be able to show that, no, it really was the government regulation because it would have cost so much to modify these plants to comply with the rules" that in the greater economic context, these retrofits would not make sense.

Representatives from FirstEnergy and Tunnel Ridge , which is a division of Oklahoma -based Alliance Resource Partners LP , declined to comment on the pending litigation.

But in its complaint, Tunnel Ridge said it has suffered "tens of millions in compensatory damages" from FirstEnergy's contract cancellation.

Despite the alleged breach of contract, Tunnel Ridge continued to sell coal to FirstEnergy plants.

In the first 11 months of last year, the latest data available from the Energy Information Administration , the Tunnel Ridge Mine supplied coal to 13 different power plants, including five FirstEnergy facilities in West Virginia , Pennsylvania , and Ohio .

According to the data supplied by power plant operators, the mine has long-term contracts with FirstEnergy for two West Virginia plants expiring in 2020. It's unclear if other deals between the two parties are also in danger.

Certainly, Tunnel Ridge isn't FirstEnergy's only problem.

The energy company disclosed in its annual report earlier this month that it has asserted the force majeure claim with several of its coal suppliers and warned that if that argument doesn't fly and if negotiations with coal vendors fail, FirstEnergy "could be materially adversely impacted."

Already in 2014, FirstEnergy has agreed to pay about $70 million in liquidated damages on coal transportation agreements that it no longer needed and it has recorded a $67 million pre-tax charge for terminating a long-term fuel supply agreement last July.

In an apparent reference to the Tunnel Ridge lawsuit, the energy company wrote, "At this time, FirstEnergy cannot estimate the loss or range of loss regarding the ongoing litigation with respect to this agreement."

It might be half a dozen years before the Tunnel Ridge lawsuit is resolved, if the companies don't reach a settlement, Mr. Noble said.

Anya Litvak : alitvak@post-gazette.com or 412-263-1455.

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