Analysis: SWEPCO Broke the Law, Tries to Spin Facts

coal plantOn Monday, Southwestern Electric Power Company held a press conference, announcing its plan to appeal the Arkansas Court of Appeals’ decision to reject the permit for the John W. Turk coal-powered plant in Hempstead County. The Arkansas Supreme Court will decide whether it will review the case.

I noticed many factual errors and “spins” during Monday’s press conference and in SWEPCO’s media packet and court filing. (Click here to read SWEPCO’s court filing.) Below I summarize the case’s facts, SWEPCO’s incorrect arguments and spins, and my responses to them.

FACTS:

  1. The Arkansas law states that approval of a major utility facility must be done in a single proceeding, so that big projects don’t effectively become a “done deal” through multiple piecemeal approvals, prior to the public having a chance to review them. SWEPCO split the Turk plant approval process into multiple proceedings.
  2. In the Arkansas Public Service Commission (APSC) proceeding that granted the certificate allowing construction of the plant (CECPN proceeding), APSC’s own efficiency expert said that building a new natural gas plant is cheaper than building a new coal plant.  As a neutral expert testifying on behalf of the public, he recommended the natural gas plant option as the most cost-effective option.
  3. Entegra owns a very large natural gas plant in Union County, which reportedly sits idle 5 months out of a year. It tried to make a case at the APSC that it can supply power cheaper than SWEPCO. At SWEPCO’s urging, APSC disallowed Entegra from intervening in the permit docket, so that it was not allowed to even make its case.
  4. Prior to the CECPN proceeding, SWEPCO sought the APSC’s agreement that the company would not have enough generation capacity without some form of new generation.  In that Resource Planning proceeding, SWEPCO asked for approval of 600 MW of need—the exact amount the Turk plant would supply.  As soon as the Resource Planning proceeding was done, but before the Turk permitting proceeding opened, SWEPCO bought the land to site the Turk plant, indicating its confidence in receiving the CECPN. One of the key decisions settled in a CECPN proceeding is where a power plant should be sited.
  5. When the Hempstead County Hunting Club appealed SWEPCO’s permit to build the plant, SWEPCO tried to bypass the Arkansas Court of Appeals and asked the Supreme Court to review the case. The Supreme Court denied the request.
  6. The Court of Appeals ruled 6-0 against APSC and SWEPCO, saying that they did not follow the law. (Click here to read the Court’s decision).

Below are some incorrect arguments and spins made by SWEPCO, followed by my responses:

  • SWEPCO Argument: The Court of Appeals changed the rules. Response: The Court of Appeals never changed the rules. The Arkansas law states that approval of major utility facilities requires a single proceeding.  Indeed, the core finding of the Court of Appeals is that this law is plain on its face.  Here (with emphasis added) is what the General Assembly wrote into Arkansas law as the purpose of the statute:

“The General Assembly, therefore, declares that it shall be the purpose of this subchapter to provide a forum with exclusive and final jurisdiction . . . for the expeditious resolution of all matters concerning the location, financing, construction, and operation of electric generating plants and electric and gas transmission lines and associated facilities in a single proceeding to which access will be open to individuals, groups, state and regional agencies, local governments, and other public bodies to enable them to participate in these decisions.”  Arkansas Code, Section 23-18-502(e).

  • SWEPCO Argument: The Hempstead County Hunting Club and its partners should have challenged Order No. 13, not Order No. 11, because the “final order rule” requires a challenge to a final order.  Response:  This may be the most frivolous argument out there.  The APSC, which is arguing on SWEPCO’s side of the case, wrote Orders No. 11 and 13.  Here is how the APSC characterized Order 11, at the beginning of Order No. 13:  “On November 21, 2007, the Commission issued its final Order No. 11 in the above-styled Docket.” (Click here to read Order No. 13.)  Not only is Order 11 an appealable “final order,” it is actually the Order that matters for this case.  As recently as July 1, 2009, SWEPCO filed a required report on the progress of permits for the Turk plant, referencing the requirements of Order No. 11.  Clearly, Order No. 11 is the key order.  Put it this way:  believe you me, if the Hunt Clubs had challenged Order 13 and not Order 11, SWEPCO would be yelling from the mountaintops that the case should be dismissed because they should have challenged Order 11.
  • SWEPCO Argument: The Arkansas law that requires a single proceeding approval process for major utility facilities has not been previously interpreted by the courts, thus the Court of Appeals should not decide by “first impression.” Response: Um, the legislature writes laws, which take effect whether or not the Court has addressed them in a particular lawsuit.  Thi s one has been on the books, easy for everyone to see, since 1977.  Just because no one has previously challenged the law does not mean it has no effect, or that ruling on its plain meaning changes it.  The law requires a single proceeding. Period.
  • SWEPCO Argument: Transmission lines are major utility facilities, thus each requires a separate approval, which must be done in a separate proceeding. Response: Since transmission lines are hooked to the Turk plant and are a necessary part of that project, both common sense and the law dictate that they should be considered in the same single proceeding.
  • SWEPCO Argument: The Texas Public Utility Commission (TPUC) agreed that the plant is the best option. Response: TPUC approved the plant under the condition that Texas ratepayers will be charged only up to $1.522 billion in construction costs (plus other conditions). SWEPCO requested the TPUC to eliminate the $1.5 billion limit. TPUC denied SWEPCO’s request. SWEPCO then sued TPUC to eliminate the limit. Texas Industrial Electric Consumers counter-sued SWEPCO. The TPUC, apparently more concerned than the APSC about how things might turn out financially, also limited the amount Texas ratepayers would pay for carbon dioxide pollution from the plant.  It is not just Arkansans who are concerned about the costs of this plant.
  • SWEPCO Argument: Paul Chodak, SWEPCO’s president and chief operating officer, indicated verbally to a reporter that the plant costs $1.3 billion. Response: SWEPCO reports in official filings that the plant is over $1.6 billion, excluding certain financing costs that could easily top $300 million. SWEPCO’s share of the construction cost of the plant may currently be estimated at $1.3 billion, but when you include transmission lines as well as the share that must be paid by SWEPCO’s partners, the plant is over $1.6 billion. SWEPCO is stressing $1.3 billion to make the plant appear cheaper than it actually is. In order to get the air permit for the plant, SWEPCO also had to agree to over $400 million in upgrades to another coal plant.  Arguably, those costs, plus the financing costs, push the Turk bill well above $2 billion.  Had SWEPCO initially come forward with a $2 billion cost, by comparison the other options would have looked much, much better to the APSC.  The company should come clean as to the total cost of this project, much of which will be passed on to Arkansas ratepayers.
  • SWEPCO Argument: SWEPCO’s Arkansas customers are using 22% more power than they did 10 years ago. Response: The Arkansas customers are a small share of the total customers to be served by this plant. Furthermore, unlike SWEPCO’s Texas jurisdiction, where energy efficiency programs have operated for over ten years, almost nothing has been done in Arkansas to reduce electricity demand through energy efficiency (and even in Texas, the programs have been aimed at lowering summer peaks, not lowering overall demand of the type that would be served by the Turk plant).  Possibly the biggest thing happening right now in the electricity utility sector is depressed electricity demand, with some projections that demand will be permanently lower than previously expected.  A very recent conference of coal producers noted that coal sales are down about 10% and that huge utility stockpiles could keep coal demand down for years.  The Obama Administration plans at least 16 new appliance and equipment standards that will further depress demand, and numerous bills in Congress tackle electricity demand from many angles.  The situation today is dramatically different from 2005, when the basic modeling was performed at the economic peak to predict demand for the Turk plant.  As for SWEPCO, recently, Fitch downgraded SWEPCO’s bond rating from neutral to negative because of (1) lower electricity demand, and (2) the construction costs related to the Turk plant and other smaller construction projects.
  • SWEPCO Argument: The Turk plant is the best future for long-term affordable power for SWEPCO customers. Response: See Facts 2 and 3. Arkansas should find out what it would cost to use the existing Arkansas-based Entegra gas plant to meet whatever need might remain for SWEPCO after economically depressed demand and energy efficiency are factored in.  These costs might run as little as $150 million to resolve transmission issues related to the Entegra’s plant, rather than  $2+ billion.  The economic downturn may provide the time necessary to resolve those transmission issues before higher electric demand hits.
  • SWEPCO Argument: The organizations that oppose the plant are national organizations or members of an elite club. Response: Who is SWEPCO calling elitist outsiders?!  SWEPCO is headquartered in Shreveport, Louisiana. It is a subsidiary of American Electric Power (AEP), which is located in Columbus, Ohio. Current market capitalization of AEP is about $13 billion dollars; they own more transmission lines than any other energy company in the U. S. They ARE NOT Arkansas-based businesses. Paul Chodak, SWEPCO’s president and chief operating officer who spoke to the press, makes at least half a million a year in compensation, according to public filings. Mike Morris, AEP’s president, makes $1.2 million a year.  SWEPCO and AEP are out-of-state, multi-billion dollar corporations. These are the folks arguing that Arkansas ratepayers need protecting, not from multi-billion-dollar monopoly energy companies currently seeking hundreds of millions of dollars of rate increases in numerous jurisdictions, but from non-profit, largely volunteer organizations.  One way SWEPCO and AEP advance their arguments is by wining and dining supportive legislators like Senator Barbara Horn and Representative David Powers, who were present at Monday’s press conference.
  • SWEPCO Argument: The Turk plant will bring jobs to Hempstead County. Response: The plant will only bring 110 long-term positions with an estimated annual payroll of $4.6 million. That’s just 4 times what Mike Morris makes and 8 times what Paul Chodak makes. How much profit will the Turk plant remove from Arkansas and send to Shreveport and Columbus?  How much in Arkansas ratepayer funds will be exported to Wyoming for coal over the next 30 years?  What will the jobs impact on Arkansas of these two money-suckers be, compared to investing in in-state energy efficiency building improvements and renewable resources?
  • SWEPCO Argument: SWEPCO has spent $713 million on plant construction. The costs have been prudently incurred. Response: The Hempstead County Hunting Club challenged SWEPCO’s CECPN immediately following the issue of the split decision on the permit. The Club also has another suit against SWEPCO. The Sierra Club and Audubon Arkansas challenged SWEPCO’s air permit after the Arkansas Department of Environmental Quality issued it. The groups also intervened on SWEPCO’s request for a $50+ million rate increase, about half of which will pay for the Turk plant. The Court of Appeals ruled unanimously against SWEPCO. With numerous appeals against the construction, SWEPCO incurred the costs in a risky and imprudent manner. And until an in-depth review occurs, we are not sure they really spent $713 million for the exact purposes claimed.
  • SWEPCO Argument: SWEPCO will continue to construct because it has CECPN from the APSC. Response: Since the Court of Appeals rejected SWEPCO’s CECPN, it has no permit to construct. SWEPCO can construct while it seeks a review from the Arkansas Supreme Court, but any cost incurred after the Appellate Court’s decision is extremely risky and imprudent.

ANALYSIS:

Of course, every argument SWEPCO makes now to the press has been made before to the six justices of the Court of Appeals.  SWEPCO could not convince even one judge of their position on any issue in the case. That is an unusually complete failure in any legal proceeding.  Sometimes even well-paid lawyers for a big client can’t produce any sound argument because the client simply and clearly acted in a way that failed to follow the law.

Mainstream media has come around to see the errors in SWEPCO’s arguments. Click the names below to read their opinions.

CONCLUSIONS:

  • APSC and SWEPCO failed to follow the law.
  • The Turk plant has always been estimated to cost Arkansans more to generate electricity.
  • SWEPCO says it spent $713 million on plant construction.  That was very risky and imprudent. The company continues to construct and incur costs in a risky and imprudent manner.
  • Arkansas ratepayers might get stuck with the bill for the recklessness of APSC and SWEPCO.  Almost certainly, SWEPCO will ask for repayment. After its imprudent gamble.
  • SWEPCO should stop breaking the law, spinning facts, and seeking excessive profits at the expense of Arkansas ratepayers.
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7 responses to “Analysis: SWEPCO Broke the Law, Tries to Spin Facts

  1. Oof! Well done, GreenAR!

  2. Can SWEPCO legally continue construction during the appeal? If the AR Supreme Court refuses to hear the case or upholds the Appeals Court ruling, then can SWEPCO pass on the costs associated with construction during that period to their rate payers?

  3. Very nice article!

    Along the same line as David’s question… who’s ultimately responsible for the billion-or-so SWEPCO will have spent by the time the Supreme Court either refuses the case or upholds the Appeals Court ruling? Can SWEPCO make the argument that the state is responsible for costs since they failed to hold proper hearings?

  4. David,
    While the Appeals Court has issued a ruling on the permit, it has not yet issued the “mandate” that implements the ruling by taking away the permit. That mandate will issue upon resolution of the appeal.

    HOWEVER, you are right that, during the time period after a sweeping, devastating legal loss and before an uncertain grant of review by the Supreme Court, it could be deemed very risky to spend a lot more money on construction. That will be an issue if (when) SWEPCO asks to raise rates to recover the money spent on construction. At that point, the PSC will have to determine if it was “prudent” to spend that money, because ratepayers shouldn’t be charged if the company made imprudent decisions, knowing what it knew at the time the decision was made. Indeed, the prudence of SWEPCO’s decisions is a question extending well prior to the Appeals Court decision.

  5. Jason,

    I don’t know off the top of my head, but I am unaware of any precedent that the utility would ask the PSC for any kind of payment; as a regulatory agency, it is simply not a source of revenue. If the Appeals Court ruling stands, the question will be either ratepayers pay for some or all of what SWEPCO has spent, or company stockholders, whose management developed and implemented the plan to build the plant and managed all of the regulatory approvals, eat some or all of the costs. (Or has SWEPCO managed to place significant financial risk onto its other partners?)

    Of course, one of the things that SWEPCO pays its lawyers to do is tell them what procedure should be followed and how to avoid the risk of violating the law, particularly where huge potential costs are involved. Who knows what the lawyers told SWEPCO and whether management listened. Legally, those managers ultimately bear the main responsibility when the investment strategy pays off, and when it doesn’t. As they say, “that is why they are paid the big bucks.”

  6. That was a nice read

  7. Thanks, Jona! I like your site, too!

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