Via Hand Delivery

Hon. Henry Ogden, Esq. Acting Secretary
State of New Jersey, Board of Public Utilities
Two Gateway Center
Newark, New Jersey 07102

 

Re: I/M/O Atlantic City Electric  Company Regarding
the Sale of Certain Fossil Generation Assets.
BPU Docket No. EM000260106

 

 

Dear Secretary Ogden:

Please accept this brief letter memorandum submitted on behalf of the Division of the Ratepayer Advocate ("Ratepayer Advocate"), setting forth the Ratepayer Advocate’s reply comments in this phase of the above-captioned proceeding, pursuant to the schedule set forth in the scheduling letter dated October 25, 2001. Please stamp the extra copy as "filed" and return it to our messenger.

Introduction

In its initial supplemental comments, Atlantic City Electric Company ("Atlantic’, "ACE","or Company") has presented nothing which substantially refutes the arguments set forth in the Supplemental Initial Comments submitted by the Ratepayer Advocate on December 21, 2001.

Pursuant to the Electric Discount and Energy Competition Act ("EDECA"; P.L. 1999, c. 23; codified at N.J.S.A. 48:3-49 et seq.), Atlantic has an obligation to maximize the market value of its generating assets. The Board of Public Utilities ("Board", or "BPU") must find that the sales price reflects the "full market value" of the assets and that the sale is in the best interest of Atlantic’s ratepayers. N.J.S.A. 48:3-59(c)(1)&(2). Furthermore, Atlantic has an obligation to mitigate its stranded costs. See N.J.S.A. 48:3-50(c)(4), -61(f). As demonstrated below and in the Ratepayer Advocate’s earlier comments, Atlantic’s proposed sale fails to meet the standards set forth in the EDECA. Therefore, the Ratepayer Advocate respectfully submits that the transaction, as proposed, is not in the public interest and should not be approved by the Board unless the allocated sales price for the B.L. England plant is adjusted so that it reflects its full market value.

 

POINT I

ATLANTIC HAS NOT CONCLUSIVELY DEMONSTRATED THAT THE POTENTIAL ADDITIONAL COSTS ATTRIBUTABLE TO COMPLIANCE WITH ENVIRONMENTAL PROTECTION REQUIREMENTS WILL, IN FACT, BE INCURRED.

Although Atlantic asserts that compliance with environmental laws will increase the operating cost of the B.L. England plant, neither Atlantic or NRG Energy, Inc. ("NRG") have conclusively demonstrated that the cited additional costs will, in fact, be incurred. ASIC, pp. 16-19. Atlantic cited several environmental concerns which it claims may adversely affect the sale price for the B.L. England plant, such as the New Jersey Department of Environmental Protection’s ("NJDEP") review of fuel use and nitrogen oxide controls, an ongoing United States Environmental Protection Agency ("US EPA") "new source review" process, and site remediation concerns. ASIC, pp. 16-17; P-7.

Atlantic specifically pointed out that the NJDEP is working with the Company to determine whether the use of coal with a lower sulfur content may be required to reduce emissions. ASIC, p.16. Atlantic further contends that a successful test burn of the low-sulfur coal may lead the NJDEP to impose "more stringent fuel use requirements...and increased long-term operating costs." Id., citing P-7, p. 6. However, Atlantic fails to note that the NJDEP test burns are still in progress and no conclusions should be drawn at this time as to what the NJDEP may ultimately require. As Atlantic witness Mr. Thomas Shaw testified, B.L. England’s fuel use permit is still under review by the NJDEP. T23.

Even if the use of low sulfur coal is required as a permanent solution, the estimates provided for the cost of such coal are unsupported by any data. For example, although NRG representatives testified that they believed fuel costs may increase, the source of their cost data is "information provided by the seller" without any supporting documentation. T98. In sum, at this point in time, it is uncertain whether the NJDEP will require the continued use of low-sulfur coal. Even if low-sulfur coal were required going forward, the projections of fuel-related cost increases offered by NRG are unsubstantiated, lacking any supporting documentation.

The US EPA’s new source review process and the NJDEP’s nitrogen oxide controls permitting process for the B.L. England plant are also still ongoing. P-7, p. 7. The Ratepayer Advocate submits that it is premature to speculate about what added costs, if any, may result from any NJDEP or US EPA action.

With respect to the potential remediation cost cited by Atlantic and its effect on the sale price, Atlantic’s own witness said that such site remediation costs were not among the "substantial environmental expenditures required." T28. In fact, Atlantic’s projection of the site remediation cost amounted to approximately $2.5 million, which is not a material sum in relation to the total asset sales price. RA-2; T13:3-21. In all, the environmental concerns raised by Atlantic and NRG are speculative and do not provide convincing support for a lower sales price for the B.L. England plant.

 

POINT II

ATLANTIC’S CLAIMS REGARDING THE VALUE OF THE B.L. ENGLAND PLANT DO NOT REFUTE THE FACT THAT THE SALES PRICE OF THE PLANT IS LOW IN COMPARISON TO OTHER RECENT FOSSIL AND COAL PLANT SALES.

Contrary to Atlantic’s assertions, Ratepayer Advocate witness Paul Chernick did not merely base his analysis of the B.L. England purchase price on a valuation of "bundles" of units. ASIC, p. 22. In his pre-filed testimony, Mr. Chernick compared the purchase price of the B.L. England plant on a per kilowatt basis with those for the Delmarva-NRG sale and the FirstEnergy-NRG sale assets. RA-5, pp. 11-13. Mr. Chernick categorized the bundled sales into individual plants and units. Id. Mr. Chernick found that the price for the B.L. England plant on a per kilowatt basis, at $153/kW, was significantly less than the sales price for the Indian River and Vienna plants in the Delmarva-NRG sale ($548/kW) and similar units included in the FirstEnergy-NRG sale ($519/kW). RA-5, pp. 11, 13.

With respect to the Indian River and Vienna plants included in the Delmarva-NRG sale, Mr. Chernick found that the differences in sales prices could not be explained by plant performance, since those units had lower capacity factors than the B.L. England plant. RA-5, pp. 11-12. Hence, contrary to Atlantic’s assertions in its Supplemental Initial Comments, Mr. Chernick provided ample support in his pre-filed testimony to support his claim that the Indian River and Vienna plants do not appear to be more valuable than the B.L. England plant. ASIC, p. 22. Similarly, in his comparison with the FirstEnergy-NRG sale, Mr. Chernick compared the B.L. England units with similar units included in that sale. RA-5, p. 13. Hence, Mr. Chernick’s comparison of the sales were not simple bundled valuations, but considered the individual characteristics of the units included in the bundled sales.

Finally, Mr. Chernick analyzed the B.L. England sales price in the context of similar recent sales. As set forth in Atlantic’s Supplemental Initial Comments, NRG provided some documentation at the hearing on December 11, 2001 outlining its approach to valuing the plants included in the Atlantic-NRG sale, including the B.L. England plant. ASIC, pp. 20-22; NRG-2. However, the documentation provided by NRG did not include raw data and other support for the assumptions and values used in its analysis. Hence, the valuation support offered by NRG and cited by Atlantic should be accorded little weight.

In contrast, Mr. Chernick based his analysis on other recent, similar sales rather than the undocumented approach followed by NRG. The fact that NRG might have used the same methodology to derive its valuations for the B.L. England, Keystone and Conemaugh plants is of little consequence, provided that the resulting values are comparable to other recent, similar sales. Using the benchmark of recent, similar sales, Mr. Chernick found that the sale prices for the Keystone and Conemaugh plants did not appear unreasonable, whereas the sales price for the B.L. England plant was far lower than that for recent similar sales. RA-5.

CONCLUSION

For all the reasons set forth above and in the Ratepayer Advocate’s earlier comments, the Ratepayer Advocate respectfully requests that the Board adjust the allocated sales price for the B.L. England plant so that it reflects the plant’s full market value. For example, as noted in the Ratepayer Advocate’s Supplemental Initial Comments, if B.L. England were valued on a comparable basis to the plants included in the recent FirstEnergy-NRG sale, the total value of B. L. England plant would be $178 million, which is over $100 million more than the $68.5 million price offered by NRG. RA-5, p. 14.

Respectfully submitted,
BLOSSOM A. PERETZ, ESQ.
RATEPAYER ADVOCATE

 

By: ___________________

            Kurt S. Lewandowski
            Asst. Deputy Ratepayer Advocate