RE: Direct Testimony of Nachj~ Kaizfer, on Behalf of the Sierra Club E-ENEC

Transcription

1 Ms. Ingrid Ferrell Executive Secretary Public Service Commission of West Virginia 201 Brooks Street Charleston, WV RE: Direct Testimony of Nachj~ Kaizfer, on Behalf of the Sierra Club E-ENEC Dear Ms. Ferrell, Please find attached the original and 12 copies of the Direct Testimony of Nachy Kanfer on Behalf of the Sierra Club. Copies will be served upon all parties of record in accordance with the attached certificate of sei-vice. If there are any questions or concerns about this filing, please do not hesitate to contact me. Sincerely, cc: Parties of Record Is/ J. Michael Becher J. Michael Becher W.Va. State Bar Counsel for. Sie~i-u Club

2 Sierra Club Exhibit BEFORE THE PUBLIC SERVICE COMMISSION OF WEST VIRGINIA CHARLESTON, WEST VIRGINIA APPALACHIAN POWER COMPANY and WHEELING POWER COMPANY, Petition to Initiate the Annual Review and to Update the ENEC Rates Currently in Effect Case No E-ENEC b - DIREC TESTIMONY OF NACHY KANFER ON BEHALF OF SIERRA CLUB JULY 9,2018

3 1 2 Q: A: Please state your name and business address. My name is Nahaliel ("Nachy") Kanfer, and my business address is 2330 Victory 3 Parkway, Suite 401, Cincinnati, Ohio Q: A: By whom are you employed and in what capacity? I am employed by the Sierra Club's Beyond Coal Campaign as Acting Regional Director for the Eastern Region Q: What are your duties and responsibilities in your position? A: My primary responsibility is to implement the goals, policies, and programs of the Beyond Coal Campaign within the Eastern Region, which includes the state of West Virginia and 12 other states from Michigan to Florida. My direct reports include seven managers and non-managers in those states, and my overall project team consists of approximately 35 staff, two of whom are based here in West Virginia. My duties also 13 include establishing communication and, where appropriate, coordination and cooperation with other organizations whose activities relate to the goals, policies, and programs of the Sierra Club, including electric utilities, independent energy generators, state and local governments, the federal government, other environmental organizations, and consumer and other citizens groups. Q: Please describe your education and professional background. A: I hold a Bachelor of Arts degree from Yale University and a Master of Business Administration degree from the University of Michigan's Ross School of Business. My professional career was originally focused on international development, particularly in the Middle East. In 2008, I returned to the United States to work with the Sierra Club, initially as an Associate Regional Representative for the state of Ohio and, beginning in 2011, as the Deputy Director for the Central Region. In 2015, I became the Deputy Director for the East Region. In 2018, I became Acting Regional Director for the Eastern Region.

4 Q: Have you testified previously before the West Virginia Public Service Commission? A: No. Q: Have you testified previously before other state Public Service Commissions? A: Yes. I have testified before the Indiana Utility Regulatory Commission and the Kentucky Public Service Commission Q: A: Q: A: On whose behalf are you testifying in this proceeding? I am testifying on behalf of Sierra Club. What is the purpose of your testimony? My testimony addresses policy issues related to cost recovery under Appalachian Power Company's Ohio Valley Electric Corporation ("OVEC.*) contract. Q: What are your recommendations? A: First, I recommend that the Commission allow Appalachian Power Company and Wheeling Power Company (the "Companies") to charge their West Virginia customers for the costs of Appalachian Power's OVEC contract through Expanded Net Energy Cost ("ENEC") rates only to the extent that the Companies have demonstrated that energy obtained through the OVEC contract is priced at or below market prices. when the total costs of OVEC purchases are included. Second, I recommend that the Commission affirmatively prohibit the Companies from charging their customers any costs that would have been borne by FirstEnergy Solutions ("FEY) had it not sought to exit the OVEC contract. Such costs could include increased debt costs andor any acquisition cost for FES's share of OVEC. As I explain further below, FES and the other joint venturers made a long-term investment in OVEC. West Virginia customers should be protected from any losses that the joint venturers are now incurring, and that are presently the responsibility of FES. 26 Page 2

5 Q: What is the Ohio Valley Electric Corporation? A: OVEC owns and, along with its wholly owned subsidiary Indiana Kentucky Electric Corporation, operates two coal-fired power plants, the six-unit, approximately 1,300 megawatt ( MW ) Clifty Creek plant near Madison, Indiana and the five-unit, approximately 1,100 MW Kyger Creek plant near Cheshire, Ohio. These OVEC units began operating in the 1950s. OVEC also maintains a transmission system that connects these generating units to the networks of other utilities. Q: What was the original purpose of OVEC and how has that purpose changed? A: In the 1950s, OVEC was organized to provide power to a federal atomic program. The Department of Energy s power purchase agreement with OVEC terminated in At the time of the Department of Energy termination, all obligations of the federal government to OVEC were settled. After that termination, participating utilities, including Appalachian Power, entered into a renewed agreement, referred to as the Inter- Company Power Agreement ( ICPA ), under which the utilities share the costs and benefits of OVEC ownership. In 2004, the OVEC owners extended the ICPA by 20 years, from March 2006 to March extended the ICPA, this time to In August 2011, the owners once again Q: What is Appalachian Power Company s relationship to OVEC? A: Appalachian Power is one of about a dozen Sponsoring Companies under the ICPA. As a Sponsoring Company, Appalachian Power is responsible for 15.69% of the benefits and requirements related to OVEC. This means that Appalachian Power is entitled to Ohio Valley Electric Corporation 2016 Annual Report. page 1, available at: 16-Signed.pdf. According to OVEC, the contract to provide OVEC-generated power to the DOE was terminated in 2003 and all obligations were settled at that time. OVEC 2017 FERC Form 1. page 123.2, available at: 17FERCForm I Annual.pdf. OVEC 2005 FERC Form 1, page 123.2, available at: AnnuaLpdf OVEC 2016 Annual Report, page 1. Page 3

6 % of the energy, capacity, and ancillary services from the OVEC units and in turn is responsible for 15.69% of all of OVEC's costs, including debt and decommissioning costs. Appalachian Power is responsible for the third largest share of OVEC among the individual Sponsoring Companies. Q: Is Appalachian Power seeking cost recovery related to OVEC in this proceeding? A: Yes. The pre-filed testimony of Companies witness Nancy Heimberger states (at Page 6) that the Companies' purchased power forecast includes costs associated with "planned purchases under long-term agreements," which includes "planned purcliases" of "energy from Ohio Valley Electric Corporation (OVEC)." as well as from hydro, solar, and wind farms, including the Beech Ridge, Bluff Point, Camp Grove, and Fowler Ridge wind facilities. Q: Did this Commission approve AEP's or Appalachian Power's decision to enter into the current OVEC Inter-Company Power Agreement? A: I do not know for sure, but Schedule lo.ol(c), an attachment to the ICPA, lists the approvals that Appalachian Power sought at the time of the 2011 extension: Filing with, or consent or approval of, the Federal Energy Regulatory Commi s si on Approval of the Virginia State Corporation Commission Filing with the Public Service Commission of West Virginia.5 I take this to mean that Appalachian Power intended to seek the Virginia Commission's '.approval," and planned only to %le*' the contract with the West Virginia Commission. 23 Exhibit NK-01, Appalachian Power Company's Schedule 10.01(~)~ an attachment to the OVEC Inter- Company Power Agreement (2011). Page 4

7 1 Q: Why is the lack of Commission approval of AEP s or Appalachian Power s decision to enter into the ICPA significant in your opinion? A. When the Department of Energy program ended, AEP and Appalachian Power made the decision to enter into a renewed ICPA that, among other commitments, extended its term to 2040 because they apparently thought doing so would be in the companies shareholders interest. Accordingly, AEP s shareholders, not the Companies customers, should bear the risk of that decision. In this context, I observe that OVEC appears to have incurred over $1 billion in costs to install flue gas desulfurization ( FGD ) at both plants in the last ten years, and there is no public indication that this 6 Comniission assessed the prudence of OVEC s decision to install FGD around the time that decision was made. Instead, the FGD installation appears to have been made by OVEC as a decision of an unregulated independent power producer. Q: Why are the historic capital expenditure decisions relevant to this ENEC docket? A: If the decision to install FGD at the OVEC plants had undergone traditional prudence review at this Commission, such review would be a strong indication that OVEC s Sponsoring Companies understand OVEC to be subject to traditional public utility regulation, not exempt from such regulation as a private, joint venture among corporations. The absence of such historic oversight would show that AEP and the other Sponsoring Companies have treated OVEC as a joint venture among private corporations. This is relevant to this ENEC docket to the extent the Companies are seeking here to charge their customers the costs of above-market power purchases from OVEC. 23 OVEC press releases, Kyger Creek Plant To Reduce Emissions Through New Scrubber System, Oct. 28, 201 1, and Clifty Creek Plant To Reduce Emissions Through New Scrubber System, Mar. 25,2013, available at: pdf, pdf. Page 5

8 1 2 Q: Is the ICPA a conventional power purchase agreement? Why is any distinction between a conventional power purchase agreement and the ICPA important? A: The OVEC ICPA is not a conventional power purchase agreement in the sense that it does not involve arms' length transactions undertaken by unrelated entities. Under the ICPA, the entities that purchase power are OVEC's Sponsoring Companies themselves, which are OVEC owners or affiliates or subsidiaries of OVEC owners. As OVEC itself has explained to FERC: [The] ICPA is more accurately viewed not as a conventional purchased power agreement, but a joint venture whose participants have committed to support the operation of OVEC's facilities from "cradle to grave." I This distinction is important here because it highlights that OVEC's Sponsoring Conipanies have not treated the OVEC plants as traditionally regulated generation units, decisions on which would have been subject to prudence reviews before this Commission. Q: Have the Companies sought the Commission's prior approval for a decision to enter into some of the other power purchase agreements for which the Companies seek cost recovery in this ENEC proceeding? A: Yes. The Companies sought the Commission's prior approval for power purchase agreements involving the Beech Ridge, Bluff Point, Camp Grove, and Fowler Ridge wind facilities.8 Exhibit NK-02. OVEC FERC Complaint, page 7. Appalachian Power Co. and Wheeling Power Co., Case. No E-PC, 2017 WL , at *1 (Comm'n Order dated March ); see also Appalachian Power Co., Wheeling Power Co., and Beech Ridge Energy, LLC, W. Va. P.S.C. Case No E-PC, 2008 WL , at *5 (Comm'n Order dated Dec ). Appalachian and Wheeling, 2017 WL , at *l; Appalachian Power, 2008 WL at * 1: Appalachiai? Power, 2007 WL Page 6

9 Q: How should the Commission address the Companies request to pass through OVEC costs to customers in this ENEC docket? A: The Companies should pass through OVEC costs to customers only if they demonstrate that customers benefit from such transactions. To show that their customers benefit, the Companies must show that OVEC prices are reasonable when compared to market energy prices. Specifically, the Companies should be permitted to charge customers for OVEC costs only in the event that they show that Appalachian Power paid the lower of the price of OVEC s power and the market price for non-affiliated power, when all OVEC costs are included in the calculation Q: In 2017, 2016, and 2015 did Appalachian Power pay above-market prices for OVEC energy? A: Yes. In each of these years Appalachian Power paid approximately double the market price of energy for its OVEC purchase^.^ According to Appalachian Power s FERC Form 1 filing, in 2017, Appalachian Power purchased 1,873,082 megawatt hours ( MWhs ) of energy from OVEC at a total cost of $100,952,902, which equates to $54 per MWh. In 2017, Appalachian Power also purchased 6,966,057 MWhs of energy from PJM Interconnection at a total cost of $211,568,093, which equates to $30 per MWh. Thus, in 2017 Appalachian Power paid nearly double the market price of energy for its OVEC purchases. In 2016, Appalachian Power purchased 1,486,281 MWhs of energy from OVEC at a total cost of $87,968,963, which equates to $59 per MWh. In 2016, Appalachian Power also purchased 7,329,346 MWhs of energy from PJM Interconnection at a total cost of $197,706,500, which equates to $27 per MWh. Thus, in 2016, Appalachian Power paid over double the market price of energy for its OVEC purchases. Exhibit NK-03, Appalachian Power 2017,2016. and 2015 FERC Form 1 filings (excerpts). Page 7

10 In 2015, Appalachian Power purchased 1,302,739 megawatt hours of energy from OVEC at a total cost of $87,226,381, which equates to $67 per MWh. In 2015, Appalachian Power also purchased 6,986,191 MWhs of energy from PJM Interconnection at a total cost of $261,886,590, which equates to $37 per MWh. Thus, in 2015, Appalachian Power paid almost double the market price of energy for its OVEC purchases Q: Does the FES bankruptcy have the potential to affect Appalachian Power's OVEC costs? A: Yes. As background, FES, like Appalachian Power, is a Sponsoring Company under the OVEC ICPA. FES is responsible for 4.85% of OVEC costs, and receives the same share of OVEC output. In April 2018, FES filed for bankruptcy protection in federal bankruptcy court in Ohio and asked the bankruptcy court to "reject" the ICPA and thus terminate FES's obligation to pay ongoing OVEC costs. In support of that request, FES stated that it is losing $12 million per year on its 4.85% OVEC share, and that OVEC energy is priced at "more than double" the market price." In response to FES's effort to reject the ICPA, OVEC stated to FERC that the costs for remaining OVEC Sponsoring Companies, like Appalachian Power, could increase by hundreds of millions of dollars.i2 According to OVEC, because of the way the ICPA was drafted, OVEC would likely cover the shortfall created by FES's departure by issuing more debt at higher interest rates or taking other actions, all of which would result in increased costs to the remaining OVEC Sponsoring Companies, like Appalachian Power. 21 lo Exhibit NK-04, FES OVEC Bankruptcy Rejection Motion. FES OVEC Bankruptcy Rejection Motion, pages 9, 12. l2 OVEC FERC Complaint, page 23. Page 8

11 1 2 Q: How would FES's departure increase costs for other OVEC Sponsoring Companies? 3 A: OVEC describes the risk of higher costs in its complaint against FES that was filed at FERC, in which OVEC attempts to block FES from exiting the ICPA: If FirstEnergy is allowed to reject its obligations under the ICPA, OVEC and the remaining Sponsoring Companies would need to come up with some way to close the gap in OVEC's recovery of its costs, which would likely result in further increased debt and borrowing costs for OVEC's remaining Sponsoring Companies, with a disproportionately adverse effect on the costs of OVEC's power and energy to them and their customers. OVEC would be faced with a number of options, including potentially borrowing additional funds (including to refinance FirstEnergy 's portion of maturities as they come due at ever-increasing borrowing costs), attempting to locate a new Sponsoring Company to replace FirstEnergy's ownership interest at a discount, andor a renegotiation of the ICPA with all Sponsoring Companies to reallocate the revenue shortfall associated with FirstEnergy 's rejection of the contract. All of these options would raise and reallocate the costs of power and energy generated by the OVEC facilities. 13 In other words, even though Appalachian Power's purchases of energy from OVEC already cost approximately double the price of PJM market purchases, those costs could go even higher in the event FES exits the ICPA. 26 l3 OVEC FERC Complaint, pages Page 9

12 1 2 Q: contract? What is your recommendation related to any FES exit from the OVEC A: The costs associated with an FES exit from OVEC should not be borne by the Companies' West Virginia customers. Like Appalachian Power, FES made a long-tern1 investment in the OVEC units and has now sought protection from a bankruptcy court to 6 avoid having to continue to purchase power from OVEC at a loss. As a result, Appalachian Power could pay higher debt costs or absorb a share of FES's obligations. This Commission should make clear that the Companies' customers will not be responsible for these or any other increased costs to Appalachian Power that stem from an FES exit. Q: Do you have any other policy observations related to Appalachian Power's OVEC costs? A: Yes. Appalachian Power's OVEC obligation is a long-term, above-market contract. A reasonable utility would evaluate whether it would serve its and customers' interests to 15 exit the obligation, and how this might be accomplished. Requiring West Virginia customers year after year to cover Appalachian Power's losses on its OVEC investment creates a moral hazard because it provides the company no incentive to seek the mostfavorable exit from the OVEC contract. This is another reason to review carefully whether Appalachian Power's energy purchases from OVEC are reasonable. Q: Does this conclude your direct testimony? A: Yes. Page 10

13 CERTIFICATE OF SERVICE I, J. Michael Becher, hereby certify that I served the foregoing Direct Testimony of Nachy Kanfer on all parties by U.S. Mail, this 9th day of July, 2018 to the following addresses: William C. Porth, Esq. Counsel, Appalachian Power Company and Wheeling Power Company Robinson & McElwee PLLC PO Box 1791 Charleston, WV Address: wcp@ramlaw.com Tom White, Esq. Consumer Advocate Division 700 Union Building 723 Kanawha Boulevard, East Charleston, WV Einail Address: twhite@cad.state.wv.us Derrick P. Williamson, Esq. Counsel, WVEUG Spilman Thomas & Battle, PLLC Bent Creek Blvd., Suite 101 Mechanicsburg, PA Address: dwilliamson@spilmanlaw.com Barry A. Naum, Esq. Counsel, WVEUG Spilman Thomas & Battle, PLLC Bent Creek Boulevard, Suite 10 1 Mechanicsburg, PA Address: bnaum@spilmanlaw.com Susan J. Riggs, Esq. Counsel, WVEUG Spilman Thomas & Battle PO Box 273 Charleston, WV Address: sriggs@spilmanlaw.com Thomas E. Scan, Esq. Counsel, SWVA, hc.

14 Jenkins Fenstermaker PLLC 325 8th Street, 2nd floor Huntington, WV Address: Charles K. Gould, Esq. Counsel, SWVA, Inc. Jenkins Fenstermaker PLLC 325 8th Street, 2nd floor Huntington, WV Address: 2

15 Sierra Club Exhibit NK-01

16 ...., *...I..,+:x.-...\.,.: :'-.:,.,.f'.*...?.-.1. I.-.-,... -1, _..* ^ , r,-.,...!,;jt-'...,i. -*a< f : Case No E-ENEC FEKC PDF (Unofficial) 4/27/2011 2: 17:59 PM Exhibit NK-0 1 (Excerpted) AMENDED AND ICESTATED XNGR-COMPANY POWER AG- DATED AS OF SEPTEMBER 10,2010 AMONG c OM0 VALLEY ELECTRJC CORPORATION, ALLEGHENY ENERGY SUPPLY COMPANY, L.L.C. APPALACHIAN POWER COMPANY,. BUCKEYEi POWER GENERATING, LLC, COLrnUS SOUTHERN POWER COMPANY, TfDE DAYTON POWER AND LfGEFT COMPANY, DUKE ENERGY OHIO, INC., FIRSENERGY GENEMTTON COW, I[NDW\IA MTCHfGAN POWER COh4PANY, rntucky Ll-r.EITIES CUMPM: LOUISVILLE GAS AND ELECTRIC COMPANY, MONONGAHELA POWER COMPANY, om0 POWER CONLPANY: PENINSULA G mwnon COOPERATIVE, and SOUTHEW INDiANA GAS ANf, ELECTRIC COWANY

17 ~ FERC PDF (Unofficial) 4/27/2011 2:17:59 PM..., ase No EC; Exhibit NK-0 1 (Excerpted) -., SCJ3XDULE lo.ol(c) Appalachian Power Company Filing with, or consent or approval of, the Federal Energy Regulatory Commission Approval of the Virginia State Corporation C O~~~SS~OR, Filing with the Public Service Comission of West Virginia..

18 Sierra Club Exhibit N K-02

19 FERC PDF (Unofficial) 3/26/2018 3:11:06 PM Case No E-ENEC Exhibit NK-02 UNITED STATES OF AMERICA BEFORE THE FEDERAL ENERGY REGULATORY COMMISSION Ohio Valley Electric Corporation, 1 1 Complainant, ) ) Docket No. EL18- V. 1 1 FirstEnergy Solutions Corp., 1 1 Respondent. ) COMPLAINT OR, IN THE ALTERNATIVE, REQUEST FOR DECLARATORY ORDER Pursuant to section 306 of the Federal Power Act ( FPA ) and Rule 206 of the Federal Energy Regulatory Commission s ( FERC or the Commission ) Rules of Practice and Procedure,* Ohio Valley Electric Corporation and its wholly-owned subsidiary, Indiana- Kentucky Electric Corporation (collectively, OVEC ), respectfully submits this Complaint ( Complaint ) against FirstEnergy Solutions Corp. ( FirstEnergy ). FirstEnergy is a counterparty to the Inter-Company Power Agreement (YCPA )3, a long-term power supply and cost-recovery agreement under which FirstEnergy is obligated to pay for its contractual share of the costs incurred by OVEC to meet its obligations under the ICPA. The Complaint asks the Coinmission to find that FirstEnergy s anticipated breach of the ICPA would amount to a termination of FirstEnergy s purchase obligation in violation of the filed rate doctrine and 16 U.S.C. Q 82Se. * 18 C.F.R. Q The ICPA is included as Attachment A to this pleading

20 FERC PDF (Unofficial) 3/26/2018 3:11:06 PM Case No E-ENEC Exhibit NK-02 the ICPA. FirstEnergy has announced its intention to declare bankruptcy in the next few weeks and is expected to seek rejection of the ICPA in the bankruptcy The Commission has the authority and obligation to ensure enforcement of the ICPAs because the ICPA is a wholesale power arrangement subject to FERC s exclusive jurisdiction - and not jurisdiction of a bankruptcy court - and because the ICPA, as a filed rate, is binding upon the seller and purchaser alike. Neither commercial nor equitable concerns are a defense by the purchaser against its obligation to pay the filed rate.6 In fact, the Commission s failure to enforce the filed tariff rate against a customer, even where parties had agreed to a different rate, would amount to unlawful discrimination. As discussed infra, moreover, if the Commission failed to intercede, the result would necessitate a change to the filed rate reflected in the ICPA, a potential increase in costs to OVEC s other customers, and in some cases resultant higher consumer rates, all in the amount of hundreds of millions of dollars over the remaining life of the contract. The United States District Court for the Southern District of New York - the court to have most recently addressed the question - has held that a bankruptcy court s rejection of a FERC-jurisdictional power supply contract directly interferes with FERC s exclusive jurisdiction and regulatory authority over wholesale power contracts or otherwise constitutes See Samuel Riehn. FirstEnergy Confirms FES Bankruptcy, Seeking Alpha (Mar ), available at htl~s://seekinaal.ha.con7iarliclel ilrs~enerrv-c~~~~rr~s-f~s-ban~~u~~~~~. Section 309 of the FPA, 16 U.S.C h, gives the Commission the power perform any and all acts...necessary or appropriate to carry out its obligations under the Act, including its obligation to ensure adherence to the filed rate. Thus, for example, if the Commission has erroneously permitted a utility to undercharge a customer. the Commission has the inherent authority to correct its error and order the customer to pay a surcharge as a means to address the resulting undercollection. See, e.g., Cambridge Electric Light Co., 66 FERC m at 62,162 (1994) (citing United Gas Improvement Co. v. Calleiy Properties, Inc., 382 U.S. 223, 229 (1965)). Maislin Indus., US, Inc. 1%. Primary Steel, Inc., 497 US. 116, (1990). Id. at

21 FERC PDF (Unofficial) 3/26/2018 3:11:06 PM Case No E-ENEC Exhibit NK-02 a collateral attack on the filed rate. But even under the narrowest reading of FERC s authority vis-i-vis that of the bankruptcy courts. FERC s authority is exclusive where the actions of the debtor would result in changes to a FERC-filed rate. If the Cornmission declines to act on OVEC s Complaint, OVEC alternatively requests, under Rule 207(a)(2) of FERC s Rules of Practice and Procedure and section 554(e) of the Administrative Procedure Act ( APA ), that the Commission issue a declaratory order finding that it has exclusive jurisdiction over the ICPA. Such an order is within the Commission s authority as it would resolve the substantial marketplace uncertainty created by FirstEnergy s anticipated bankruptcy filing and potential attempt to reject the ICPA. Even assuming, arguendo, under the broadest possible interpretation of a bankruptcy court s jurisdiction to authorize rejection of the ICPA, the bankruptcy court nonetheless must consider determinations by this Commission whether or not rejection of the contract would be in the public interest. Thus, OVEC also makes this alternative request for declaratory order: Should the Commission determine that it does not have exclusive authority over the ICPA, OVEC requests that the Commission issue a declaratory order advising the bankruptcy court that rejection of the ICPA would be contrary to the public interest. And, should the Commission conclude that it needs more information to make that determination, OVEC would support FERC s initiation of proceedings in which affected parties could submit comments and briefs on the issue. 117 ye Calpine Cor?., 337 B.R. 27,36 (S.D.N.Y. Jan ). 112 remiranf Corp., 378 F.3d 51 1, 519 (51h Cir. 2004). Io 18 C.F.R (a)(2). 5 usc 5 554(e) (2012). hi re Mirant Corp., 378 F.3d at ; h re Mirant Corp B.R. 100, 108 (N.D. Tx. 2004) (on remand).

22 FERC PDF (Unofficial) 3/26/2018 3:11:06 PM Case No E-ENEC Exhibit NK-02 All of these points are discussed in more detail, infra. Briefly, OVEC requests the following relief 1. A Commission order granting OVEC's Complaint (1) by making a finding that FirstEnergy's anticipatory breach of the ICPA constitutes a violation of its obligations under that agreement, and (2) by making a determination that permitting FirstEnergy to terminate its obligations under the ICPA would be contrary to the public interest in violation of the Mobile Sierra doctrine (and to establish such additional procedures as may be necessary to make the latter determination) ; 2. Alternatively, a Commission order declaring that it has exclusive jurisdiction to ascertain whether FirstEnergy's anticipatory breach of its purchase obligation under the ICPA: by rejection of the contract in bankruptcy or otherwise, (1) is a matter exclusively within the jurisdiction of the Commission, and (2) that such termination would be contrary to the public interest in violation of the Mobile Sierra doctrine (and to establish such additional procedures as may be necessary to make the latter determination); and 3. Alternatively, should the Commission determine that it lacks exclusive jurisdiction, to initiate proceedings to ascertain whether termination of FirstEnergy's purchase obligations under the ICPA would be contrary to the public interest in violation of the Mobile Sierra doctrine (and to establish such additional procedures for the development of a record as may be necessary to make the latter determination) and to advise the bankruptcy court both of its intention to make such a determination and of its ultimate conclusions. I. SERVICE AND COMMUNICATIONS All correspondence and communications to the Complainant in this docket should be addressed to the following individuals, whose names should be entered on the official service list maintained by the Secretary in connection with these proceedings: l3 il OVEC requests waiver of 18 C.F.R. Q @)(3), to the extent necessary, to allow the placement of four OVEC representatives on the official service list in this docket. 4

23 FERC PDF (Unofficial) 3/26/2018 3:11:06 PM Case No E-ENEC Exhibit NK-02 David D Alessandro Brian Chisling Harvey L. Reiter Simpson Thacher & Bartlett LLP Jonathan P. Trotta 425 Lexington Avenue M. Denyse Zosa New York, NY Stinson Leonard Street LLP (212) Pennsylvania Ave., NW stblaw.com Suite 800 Washington, DC (202) st inson. com harvey.reiter@stinson.com stinson.com ~ c ~ ~ s e s t. ~ r ~ ~ ss a ~ ~ n. ~ ~ ~ ~ 11. BACKGROUND OVEC owns and operates two coal-fired generating power plants, the Kyger Creek plant in Ohio and the Clifty Creek plant in Indiana, with a combined capacity of approximately 2,400 MW. OVEC has approximately 660 employees (and has approximately 650 retired employees and surviving spouses receiving pension and other benefits from OVEC). OVEC and its wholly-owned subsidiary, Indiana-Kentucky Electric Corporation ( IKEC ), were formed on October 1, 1952 for the purpose of providing electric power in support of the operation of uranium enrichment facilities then under construction by the Atomic Energy Commission ( AEC ) near Portsmouth, Ohio. The MC s facilities are now operated by the Department of Energy ( DOE ), as successor to the AEC. OVEC and AEC entered into a power supply agreement supporting the AEC s Portsmouth facilities on October 15, 1952 ( DOE Power Agreement ). OVEC and OVEC s owners or their utility-company affiliates (called Sponsoring Companies ) signed the ICPA on July 10, 1953 to support the DOE Power Agreement and provide for excess energy sales to the Sponsoring Companies of power and energy not utilized by DOE or its predecessors. Initially set for 25 years, this agreement was later 5

24 FERC PDF (Unofficial) 3/26/2018 3:11:06 PM Case No E-ENEC Exhibit NK-02 extended through December 3 1, The current term of the ICPA extends through June 30, On September 29, 2000, DOE notified OVEC of its cancellation of the DOE Power Agreement, effective April 30, Since the termination of the DOE Power Agreement, OVEC s entire generating capacity has been exclusively available to the Sponsoring Companies under the terms of the ICPA. The ICPA, and all amendments thereto, constitute a FERC-filed, cost-based power agreement.i4 The current Sponsoring Companies of OVEC are as follows (and share the following OVEC power participation ratio benefits and payment obligations under the ICPA): Sponsoring Company YO Share Allegheny Energy Supply Company LLC 3.01% Appalachian Power Company 15.69% Buckeye Power Generating, LLC 18.00% The Dayton Power and Light Company 4.90% Duke Energy Ohio, Inc. 9.00% FirstEnergy Solutions Corp. 4.85% Indiana Michigan Power Company 7.85% Kentucky Utilities Company 2.50% Louisville Gas and Electric Company 5.63% Monongahela Power Company 0.49% Ohio Power Company 19.93% Peninsula Generation Cooperative 6.65% Southern Indiana Gas and Electric Company 1 SO% % Parent Entity FE AEP Buckeye AES Duke FE AEP PPL PPL FE AEP Wolverine Vectren Under the ICPA, OVEC must make Available Energy available to each Sponsoring Company in proportion to said Sponsoring Company s Power Participation Ratio. 16 While no I4 The Commission accepted the ICPA in a delegated letter order issued on May Ohio Valley Elec. Coip., Docket Nos. ER , ERl and ERl (May ) (delegated letter order). l5 The abbreviations of the Sponsoring Companies parent entities are as follows: American Electric Power Company, Inc. ( MI ); The AES Corporation ( AES ); Buckeye Power, Inc. ( Buckeye ); Duke Energy Corporation ( Duke ); FirstEnergy Corp. ( FE ); PPL Corporation ( PPL ); Vectren Corporation ( Vectren ); Wolverine Power Supply Cooperative, Inc. ( Wolverine ). l6 ICPA, Section

25 FERC PDF (Unofficial) 3/26/2018 3:11:06 PM Case No E-ENEC Exhibit NK-02 Sponsoring Company is obligated to avail itself of any Available Energy, 7 they are each individually responsible for their proportionate share of the fixed and operating costs of the project, including the costs of additions, upgrades, repairs, employee benefits (including post- retirement benefits obligations) and eventually decomrnissioning.is In addition, they are responsible for adjustment charges for Minimum Loading Event Costs if they fail to take their Power Participant Ratio share of the facilities energy output. Their obligations under the ICPA are individual, not joint.2o That is, each Sponsoring Company is responsible only for its assigned pro rata portion of the OVEC s costs. FirstEnergy s proportionate share of the OVEC costs - including the eventual and substantial costs of environmentally sound decommissioning is just under 58. In these respects the ICPA is more accurately viewed not as a conventional purchased power agreement, but a joint venture whose participants have committed to support the operation of OVEC s facilities from cradle to grave. The unique nature of the agreement - the fact that the rights and obligations of all the parties to the ICPA are several and not joint or joint and for the life of the generating facilities - is directly related to OVEC s breach claim in the event FirstEnergy is able to reject the ICPA in bankruptcy. In November 2016, Moody s announced that it had placed the ratings of the Ohio Valley Electric Corporation (OVEC) under review for downgrade, an action it said was prompted by the downgrade of FirstEnergy Corp s (FirstEnergy) subsidiaries FirstEnergy Solutions Cop. (FES: Caal negative) and Allegheny Energy Supply Company, LLC (AES: B1 l7 Id. 18 See id., Sections 7.01, and l9 Id.. Section I& Section Id.. Section (identifying FirstEnergy s Power Participation Ratio as 4.85%). 22 ~d., Section

26 FERC PDF (Unofficial) 3/26/2018 3:11:06 PM Case No E-ENEC Exhibit NK-02 negative) which together are contractually obligated to cover about 8% of OVEC s expenditure~. ~~ FirstEnergy, Moody s noted, had publicly announced its intention to exit its merchant business entirely within 18 months even if it requires a restructuring or bankruptcy at FES. 24 In Moody s view, because each of the OVEC s Sponsoring Company s obligations are several, OVEC is similar in nature to a municipal joint action agency, and thus Moody ascribes a credit rating to OVEC tied to its weakest link, or (in other words) OVEC s lowest rated Sponsoring Company, FirstEnergy Solutions Corp., which contributes just under 5% of revenues. FirstEnergy s efforts to exit the merchant generation business continue to have real impact on OVEC. Just last month, FirstEnergy Corporation s CEO announced that the company s merchant generation business is likely headed for bankruptcy protection by the end of March. 2s While I cannot speak for the unregulated business, he stated, I would be shocked if they go beyond the end of March without some type of Based on this announcement - and the clear implication that FirstEnergy would reject the ICPA in bankruptcy - Moody s lowered the subsidiary s rating from below investment grade to likely in default. 27 Standard & Poor s Financial Services LLC had already downgraded FirstEnergy s bond rating for the same Moody s Investor Services Rating Action (November 4, 2016), included as Attachment B to this filing. 24 Id. 25 Gavin Bade, FirstEnergy CEO says generation subsidiary headed for bankruptcy protection, Utility Dive (Feb ), available ut httds://a wa..utilit~di\c.coinincu.sifrstciicrev-cco-savs-~enc~a~ioii-anbsidiarv-hcadcd-i orbankruptcv-nl otectjoii/s Samuel Riehn, FirstEnergy Confirms FES Bankruptcy, Seeking Alpha (Mar ), available at l?tt~s://scek~n~ai~3~~~.c~~~/article/~ 1 S?i~35-firs~cncr~\-confirms-~cs-h~ni<rii~t~~~. Id. 8

27 FERC PDF (Unofficial) 3/26/2018 3:11:06 PM Case No E-ENEC Exhibit NK-02 reason last summer.28 That a bankruptcy filing by FirstEnergy would likely be coupled with an attempt to reject the ICPA is obvious and widely expected. OVEC s negative outlook from Fitch Ratings Inc. s rating service expressly reflects the risk of revenue shortfall should one of OVEC s sponsors opt to file for bankruptcy and reject their obligation under OVEC s...icpa. 29 OVEC is making this filing in direct response to the expectation that FirstEnergy will seek to reject the ICPA in its bankruptcy case JURISDICTION The Commission should exercise exclusive jurisdiction over this Complaint because FirstEnergy s anticipated bankruptcy rejection of the ICPA has already harmed OVEC, will adversely affect OVEC s other Sponsoring Companies and their customers, and because the Commission has exclusive jurisdiction to address changes to the ICPA, including termination of FirstEnergy s purchase obligation. In cases involving contract interpretation, the Commission generally possesses concurrent jurisdiction with courts with respect to a legal action for breach of a filed ~ontract.~ The Commission enjoys primary jurisdiction over disputes involving construction of a contract subject to its jurisdiction.31 Whether the Commission should exercise primary jurisdiction in such cases is within its own discretion.32 The Commission considers the following three factors 28 John Funk, FirstEnergy Solutions downgraded on bankruptcy expectation, FE parent seen as stable, Cleveland Plain Dealer (Aug ). available at ht~~~://a.u;~~.cle~clarld.com/busincss/in~l~~.ssf/~~~l7/08/~rctenc~,~~ solutions ~ ~ ~ ~ ~ i ~ ~ r ~ ~. h ~ ~ n ~. 29 Fitch Ratings Inc., Press Release on OVEC (Aug 9% 2017), included as Attachment C to this filing. The press release adds Fitch s view that the obligations held by FirstEnergy Solutions Corp (FES; CC; 4.85% share) and Allegheny Energy Supply Co (AES; B/Stable; 3.01% share) pose a greater concern in Fitch s opinion, given FirstEnergy Corp. s (FE; BBB- /Outlook Stable) plans to exit the merchant power business. O Pan Am. Petrol. Corp. v. Super. Ct. ofdel., 366 US. 656 (1961). 31 See, e.g., United States 11. W. Puc. R.R. Co., 352 U.S. 59 (1956); AEP Gene}-uting Co., 32 FERC 4[ 61,364 (1985), i*eh g granted on other grounds, 36 FERC (1 986). 32 K Pac. R.R. Co., supra: 352 U.S. at

28 FERC PDF (Unofficial) 3/26/2018 3:11:06 PM Case No E-ENEC Exhibit NK-02 in deciding whether to assert primary jurisdiction over contractual issues otherwise pending before the courts: i. whether the Commission possesses some special expertise which makes the case peculiarly appropriate for Commission decision; ii whether there is a need of uniformity of interpretation of the type of question raised by the dispute; and whether the case is important in relation to the regulatory responsibilities of the Commission.33 Where, as in this case. there is no dispute about the meaning of the contract. however, the usual considerations about whether the Commission should exert primary jurisdiction (or defer to the courts for ordinary contract interpretation issues) are not present.34 Instead. as in this case, the issue is exclusively the Commission s to resolve. As discussed itzfia. FirstEnergy s anticipated rejection of the ICPA is effectively a collateral attack on the filed rate in the contract. In such instances, the Comiission s jurisdiction is not merely primary, but exclusive. The only question, therefore. is whether the Commission should consider OVEC s Complaint before the anticipatory breach occur^.'^ The answer is that [tlhe disclaimer of a contractual duty is a breach of contract even if the time specified in the contract for performing the duty has not yet arrived. It is what is called anticipatory breach. And here, it is obvious that FirstEnergy will attempt to seek to reject the ICPA in bankruptcy. Thus, this dispute involves FirstEnergy s anticipated breach of the ICPA, a filed rate subject to the Commission s exclusive jurisdiction. 33 Ark. La. Gas Co. v. Hall, 7 FERC 61,175, 61,322 (1979). 34 See In re Calpine Corp., 337 B.R. at 36, discussed in Section IV, infia. 3.i Under bankruptcy law, rejection of a contract constitutes an anticipatory breach of the contract giving rise to rejection damages as a result of the rejecting party s (here FirstEnergy) future non-performance. 36 Combs v. Int 1 Ins. Co., 354 F. 3d 568, (61h Cir. 2004), quoting Wis. Power &Light Co. 11. Century Indem. Co., 130 F.3d 787, 793 (7th Cir. 1997) (emphasis added). 10

29 FERC PDF (Unofficial) 3/26/2018 3:11:06 PM Case No E-ENEC Exhibit NK-02 IV. COMPLAINT FOR ANTICIPATORY BmACH This Commission has the authority and obligation to ensure enforcement of the ICPA,37 because the ICPA is a wholesale power arrangement subject to FERC's exclusive jurisdiction - and not jurisdiction of a bankruptcy court - and because the ICPA, as a filed rate, is "binding upon the seller and purchaser alike."38 Neither commercial nor equitable concerns are a defense by the purchaser against its obligation to pay the filed rate.39 In fact, the Commission's failure to enforce the filed tariff rate against a customer, even where parties had agreed to a different rate, would amount to unlawful discrimination.4o The foregoing does not mean that the Commission lacks the authority itself to modify or terminate a filed rate, but where that filed rate is embodied in, and fixed. by a voluntary agreement, the burden - a very steep one - is on the party seeking the change to demonstrate that the change is in the public interest." That is the situation here, as ICPA Article 9.09 expressly provides that absent the consent of all parties, those seeking changes to the provisions of the agreement must meet the Mobile-Sierr*a public interest test. A. The Public Interest Standard Regarding the public interest standard, OVEC urges the Commission to find, not only that it has exclusive jurisdiction over any attempt by FirstEnergy to reject its 37 Section 309 of the FPA, 16 U.S.C. 825h. gives the Commission the power "perform any and all acts... necessary or appropriate to carry out" its obligations under the Act, including its obligation to ensure adherence to the filed rate. Thus, for example, if the Commission has erroneously permitted a utility to undercharge a customer, the Commission has the inherent authority to correct its error and order the customer to pay a surcharge as a means to address the resulting undercollection. See, e.g., Cambridge Electric Light Co., 66 FERC 61,346 at 62,162 (1994) (citing United Gas Improvement Co. 19. Calley Properties, Inc., 382 U.S (1965)). 38 Nw. Pub. Sen. Co. v. Montana-Dakota Utils.Co., 181 F.2d 19 (8th Cir. 1950), afd, 341 U.S. 246 (1951). 39 Mclislin Indus. US, Inc. v. Primary Steel, Inc., 497 US 116, (1990) 40 Id. at See United Gas Pipeline Co. 1'. Mobile GUJ Sen.. Corp., 350 US. 332 (1956), Federal Power Comm'n 1'. Sierm Pacific Power Co., 350 U.S. 348 (1956) and NRG PowerMktg. 1'. Maine Pub. Utils. Comnik. 585 U.S. 165 (2010). 11

30 FERC PDF (Unofficial) 3/26/2018 3:11:06 PM Case No E-ENEC Exhibit NK-02 obligations under the ICPA, but that doing so would run contrary to the public interest in violation of the Mobile-Sierra doctrine. Under the Mobile-Sierra doctrine, [FERC] must presume that the [electricity] rate set in a freely negotiated wholesale-energy contract meets the just and reasonable requirement [of the [FPA], see 16 U.S.C d(a)], and the presumption may be overcome only if FERC concludes that the contract seriously harms the public This follows from the Federal Power Act s regulatory system, which is premised on contractual agreements voluntarily devised by the regulated companies; it Contemplates abrogation of these agreements only in circumstances of unequivocal public neces~ity. ~~ Hence, the presumption is that [iln wholesale markets, the party charging the rate and the party charged [are] often sophisticated businesses enjoying presumptively equal bargaining power, who could be expected to negotiate a just and reasonable rate as between the two of them. 44 There are only limited circumstances under which changing rates fixed by a voluntarily negotiated contract would be in the public interest under Mobile Sierra - such as when there is unfair dealing at the contract formation stage, or where contracts were executed during periods of market dysfunction and the market dysfunctions were caused by illegal action of one of the par tie^."^" Those circumstances are not present here. Not only would FirstEnergy be unable to satisfy the Mobile Sierra burden that termination of its obligations would be in the public interest, but FirstEnergy s rejection of the contract in bankruptcy would adversely affect the public interest in several ways. 42 Morgan Stanley 11. Pub. Util. Dist. No. I, 554 U.S. 527, 530, 128 S. Ct. 2733, 2736 (2008) Permian Basin Area Rate Cases, 390 U.S. 747, 822 (1 968). Morgan Stanley, supra, 128 S. Ct. at 2746 (quoting Verizon Commc n, Inc. v. FCC, 535 U.S. 467,479 (2002)). Morgan Stanley, 128 S. Ct. at

31 FERC PDF (Unofficial) 3/26/2018 3:11:06 PM Case No E-ENEC Exhibit NK-02 As an initial matter, because the Sponsoring Companies' obligations are several and not joint, if FirstEnergy is able to reject its obligations under the ICPA, the resulting cost shortfalls are not payable by the other Sponsoring Companies and will go unreimbursed every month over the life of the contract (i.e.. until at least 20401, absent the types of ameliorative changes to the filed rate discussed in Section IV.B, infra.46 This will further impact OVEC's credit rating (which already has been impacted by the prospect of contract rejection), further raising OVEC's borrowing costs. Those higher borrowing costs will directly result in higher costs to the remaining Sponsoring Companies and their customers. In the case of OVEC's rural electric cooperative Sponsoring Companies, for example, whose customers are their owners, all of these increased costs will be borne by the ultimate ratepayers. Moreover, the ICPA contemplates that the Sponsoring Companies will cover the eventual and substantial cost of environmentally sound decommissioning of the OVEC plants when they are retired from service in 2040 or thereafter. When assessing the potential environmental remediation costs - including the clean closure of the site's landfills and ponds - and all other ancillary charges that will be associated with restoring each location to a condition suitable for industrial use, OVEC has estimated that the costs for both sites currently exceed $240 million, assuming all expenditures would have occurred in Because the retirement of the units will not take place until 2040 under the ICPA, however, the final decommissioning costs are simply too difficult to quantify with any reasonable measure of certainty, though this figure will only increase in the future given 46 More specifically, OVEC is refersing to replacing FirstEnergy with a new Sponsoring Company at a discount. and/or renegotiation of the ICPA to reallocate the revenue shortfall associated with FirstEnergy's rejection of the contract. 13

32 FERC PDF (Unofficial) 3/26/2018 3:11:06 PM Case No E-ENEC Exhibit NK-02 potential changes in environmental regulations and other escalation of costs. And without FirstEnergy s ongoing contributions, those projected decommissioning costs are likely to escalate even further and by amounts that neither OVEC (nor any other party) can currently predict with an exact level of certainty. As indicated, OVEC currently has approximately 660 employees (and has approximately 650 retired employees and surviving spouses receiving pension and other benefits from OVEC). The ICPA requires the Sponsoring Companies to pay all salaries and benefits of such employees, as well as pensions and post-retirement benefits through 2040 and thereafter. Such obligations are likely to be significant and very difficult to estimate. Further, the ICPA similarly requires the Sponsoring Companies to pay all of OVEC s borrowing costs. As result of OVEC s construction of significant emissions control equipment at both of its plants, as of December 31, 2017, OVEC s outstanding debt obligations were approximately $1.4 billion. FirstEnergy s 4.85 % pro rata responsibility for this debt amounts to $67.9 million. However, if FirstEnergy is allowed to reject its obligations under the ICPA, OVEC and the remaining Sponsoring Companies would need to come up with some way to close the gap in OVEC s recovery of its costs, which would likely result in further increased debt and borrowing costs for OVEC s remaining Sponsoring Companies, with a disproportionately adverse effect on the costs of OVEC s power and energy to them and their customers. OVEC would be faced with a number of options, including potentially borrowing additional funds (including to refinance FirstEnergy s portion of maturities as they come due at ever-increasing borrowing costs), attempting to locate a new Sponsoring Company to replace FirstEnergy s ownership interest a discount, and/or a renegotiation of the ICPA with all Sponsoring Companies to reallocate 14