EC November 2015

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McKinsey's take on the future of mining......dim.....but then, that's good if you're speculating for a possible big gain on future market changes
by William V. DePaulo, Esq. 19 Nov '15

19 Nov '15

Is there hidden treasure in the mining industry? Low equity prices may offer important M&A opportunities for the mining industry. November 2015 | byMichael Birshan, Guillaume Decaix, Nelson Ferreira, and Harry Robinson *Where is the mining industry* headed? Commodity prices are now far below their 2011 peaks—metallurgical coal by more than 70 percent, seaborne iron ore by more than 65 percent, and copper and gold by more than 30 percent—and the mining industry’s stock-market valuation has followed prices down. The big mining houses have been working hard on cutting costs, reducing capital expenditures, and boosting productivity. Still, the specter of a return to the bleak pre-China-boom period of sustained low profitability hangs over the industry. Amidst this gloom, there is an alternative reading of the industry’s mid- to long-term prospects. Our commodity-by-commodity modeling suggests that stock-market sentiment may have overshot—once again. In many commodities, declining ore quality and limited accessibility of new deposits will squeeze supply in coming years, potentially driving a commodity-price rebound as global demand continues to rise. If lessons of previous cycles hold, mining equity prices could be expected to spike as well. Such an outlook provides a moment of real opportunity. Growth is the big strategic conundrum in the mining sector. Exploration productivity has underperformed expectations for a full decade, project execution has been slow and costly, and government interventions to increase the take from new-project revenues has caused substantial slowdowns or outright withdrawal from prospective geographies. For mining leaders looking to grow or reposition their portfolios, current low equity prices could represent an important opportunity. We do not know exactly when the mining sector will rebound, and our analysis suggests the outlook is not equally rosy for all commodities, but the recent sparks of M&A interest indicate that some industry participants have a similar view and suggest that more of this kind of activity is likely as bid-ask spreads narrow. Building a picture of the industry’s prospects Equity prices are down . . . The metals and mining industry has a history of large swings in capital-market performance (Exhibit 1). From 1973 to 2000, industry total returns to shareholders (TRS) were low—below cost of capital in many years—and volatility was high. Exhibit 1 - Enlarge This pattern changed dramatically in the first decade of the new millennium, the China-driven “supercycle.” TRS doubled, while volatility increased further. From 2012 onward, however, slower demand growth in China has triggered a steep fall in the mining industry’s TRS. Mining and steel depart from comparable capital-intensive peers, overperforming in the boom periods and underperforming at other times, but always with substantially higher volatility than these other sectors. Valuing cyclical companies is challenging, because swings in product price radically affect profitability.1 <http://www.mckinsey.com/Insights/Energy_Resources_Materials/Is_there_hidden…> The mining sector is no exception; extreme commodity-price movements during the supercycle have made the sector very difficult to value. As a result, the market heavily weights the short term, and equity prices largely track commodity prices. Indeed, our analysis shows that the correlation between the two is significantly higher for mining companies than for similarly capital-intensive industries, such as oil and gas (Exhibit 2). Exhibit 2 - Enlarge . . . but demand and production continue to grow A look at mining fundamentals offers a less gloomy view. Demand for metals continues to grow worldwide, albeit at a slower pace, as does production. For almost all commodities, production is at record levels. For example, since 2003, copper production grew by almost 40 percent, coal by 55 percent, and seaborne iron-ore production by 70 percent. The slower rate of demand growth in China has let growing supply overtake demand in a number of commodities, and this overcapacity has pulled prices down—for now. Our analysis suggests that the steadily deteriorating quality of accessible resources, combined with the current cuts in new mine investment, will likely squeeze supply in the face of slow, steady demand growth, causing prices to rebound. So where is the industry really headed? To get beyond generalizations, we have developed a new approach to modeling the industry. This approach combines insights from three areas: drivers of supply and demand, mining cost and capital expenditure (capex) inflation, and pricing regimes and price premiums. Supply and demand Projecting out both supply and demand drivers over the next decade, we conclude that geological shortage is likely to be a stronger determinant of future price movements than variations in demand. We examined geological factors such as grade erosion and depletion on a mine-by-mine basis, and the combination of declining resource levels and delays in new projects raises the likelihood of increasingly severe shortages. The commodities likely to be most severely affected by ore-quality decline are copper, gold, and phosphate rock. (We also looked at how competitive behaviors among producers and substitution patterns for different metals could affect the supply-demand balance, but these generally have less impact than the geological factors constraining supply.) Cost inflation The principal drivers of cost inflation vary by commodity, so we have identified and projected the most important costs for each commodity. In the 2000 to 2013 period, cash cost inflation for the marginal producer has been close to 20 percent annually for copper, iron ore, and potash (coal has been lower at around 11 percent), primarily due to the geological factors just described. Inflation is influenced by external factors (for example, local consumer prices, increase in wages and diesel prices, and local-currency appreciation versus the US dollar) and internal ones (for example, productivity, metal grade, and geological mine conditions). Assuming a scenario of lower oil and diesel prices and a strengthening US dollar versus the local currencies of mining producers, our analysis suggests that external cost factors will be flat, or even negative, for most commodities. Inflation due to internal factors, however, is here to stay. Even with productivity gains, mines will increasingly suffer from declining ore grades and deteriorating mine conditions, such as deeper shafts, worsening stripping ratios, and longer hauling distances. We expect the level of geological cost inflation will continue to be the main determinant of cost increases, and that total inflation will average 4 to 7 percent per year going forward. Price regimes Price projections in minerals are typically based on reversion to historical price levels at a pace derived from supply and demand projections, plus political and environmental factors. Taking this approach has shortcomings. First, it does not take account of geological inflation. Second, these elements give an incomplete picture of margin evolution, which is crucial to capital-investment decisions—decisions that can substantially change the future balance of supply and demand. To fill this gap, our modeling looks separately at the two building blocks of commodity pricing. The first is the evolution of the cash cost of each commodity’s marginal producer, explicitly considering geological inflation per commodity. The second is the “price regime”—that is, the margin over cash cost that marginal producers will earn—which marries a commodity’s historical price dynamics with our simulation of its future supply-demand balance. There are four basic price regimes. The lowest is cash cost: price levels are close to the cash cost of the marginal producer, and there is minimal incentive to invest. The next one is brownfield inducement pricing, with prices high enough to justify extending the life of existing mines. More attractive to miners is greenfield inducement pricing, which would justify investing in new greenfield projects. The final regime is fly-up pricing, where demand grows so fast and capacity utilization is so tight that prices temporarily soar well above levels dictated by the cost curve. Mapping the price regimes for each commodity over the past 20 years, as well as the price premiums associated with those regimes (that is, the commodity’s price minus the cost of the marginal producer), can indicate what might lie ahead. Our analysis shows that while a single commodity can go through different price regimes, the price premiums associated with each regime are much more stable than commodity prices themselves. Better insights can therefore come from exploring the structural factors that influence which price regime will be in place than from attempting to predict actual commodity prices. The expected future price regime, the associated price premium, and our view on future costs can then be used to simulate industry cash flows for each commodity. By aggregating this information across mining commodities, we have developed an overall outlook for the industry—and the picture it reveals is not as bleak as current equity prices would suggest. The road to recovery Indeed, when all drivers are considered, our analysis suggests that after a 6 percent per year decline between 2011 and 2014, industry-wide mining revenues could grow at around 4 to 6 percent over the next decade. EBITDA performance for the industry overall is also projected to rebound over the same period, at 3 to 4 percent per year, held back by steady cost increases. So the mining industry will likely continue growing, albeit with lower margins. The outlook for different commodities clearly varies significantly, but applying this modeling approach to 11 important metals and minerals suggests that several of them are well positioned to achieve attractive returns again (Exhibit 3). Exhibit 3 - Enlarge Phosphate and some base metals such as zinc and copper seem to have a more attractive short-term outlook. Prices of bulk minerals, the stars of the previous boom decade, are nowadays close to cash-cost regimes. In any case, our analysis shows more than half the mining commodities studied in healthier, greenfield price regimes by the end of the decade; the exceptions include aluminum, nickel, iron ore, and potash. Building an action plan Investing countercyclically, whether in M&A or organic growth, is an often-stated mantra that is rarely executed. Today’s relatively low share prices for metals and mining companies and the expectation of increased commodity prices over the medium to long term should encourage miners to pursue M&A now. For those who do, here are three points to consider. 1. Weigh the merits of diversification Whether diversification across commodities provides benefits to mining companies—and their shareholders—has been debated over the years. In 2008, for instance, miners with precious metals or oil in the portfolio were buoyed despite the falloff in most mining commodities. However, achieving effective diversification has become more difficult. Commodities closely tied to the build-out of China’s infrastructure have become more tightly correlated. With such a high degree of correlation between commodities, many companies cannot convincingly claim to have a diversified portfolio. True diversification involves finding exposure to commodities that counterbalance one another or at least move in ways that are uncorrelated. Two opportunities for diversification are still open to the major mining houses. The first is fertilizer, where prices move differently from those of other mining products, driven by food consumption rather than infrastructure investment. The second is precious metals, where prices demonstrate limited correlation with those of other commodities during times of economic crisis. 2. Consider nonoperating stakes Miners should consider whether the split-ownership model prevalent in oil and gas could provide opportunity. Indeed, some mining companies active in the oil sector are already involved in such partnerships on oil-production assets. These smaller nonoperating stakes are less common in the mining industry, and a broader uptake could offer mining companies two advantages. First, they reduce risk, as the minority owner can rely on the expertise of an operator with greater local knowledge. Second, they potentially allow greater diversification faster and more cost-effectively, since the same amount of capital can buy multiple minority participations without paying control premiums. 3. Act while the stars are aligned Mining companies are currently well resourced for M&A. As Exhibit 4 shows, the financial capacity of mining companies relative to asset prices is starting to increase again. While the ratio is far away from the 2011 peak, when many players took advantage of the opportunity to acquire distressed assets from cash-strapped players, it is gradually increasing above historical average values. Exhibit 4 - Enlarge The mining industry has a history of procyclical investments, which have in many cases ended with disappointing shareholder returns. While it’s well recognized that swimming against the tide of the cycle is difficult, the companies that are able to move successfully today could reverse that record. About the authors *Michael Birshan* is a principal in McKinsey’s London office, *Guillaume Decaix* is a principal in the Rio de Janeiro office, *Nelson Ferreira* is a principal in the São Paulo office, and *Harry Robinson* is a director in the Southern California office and global head of the Metals & Mining Practice. The authors wish to thank Marcelo Azevedo, Tiago Berni, Henrique Ceotto, Friso De Clercq, Mark Dominik, Alessandro Mady, and Siddharth Periwal for their contributions to this article. - PDF - Print - E-mail <http://www.mckinsey.com/Insights/Energy_Resources_Materials/Is_there_hidden…> - Share Related articles [image: Productivity-in-mining-operations_1536x1536_Thumbnail] <http://www.mckinsey.com/insights/energy_resources_materials/productivity_in…> article Productivity in mining operations: Reversing the downward trend <http://www.mckinsey.com/insights/energy_resources_materials/productivity_in…> May 2015—A new metric shows just how far mining productivity has declined. It also points to ways to improve productivity more effectively.more <http://www.mckinsey.com/insights/energy_resources_materials/productivity_in…> [image: Riding-the-resource-wave_1536x1536_Thumbnail] <http://www.mckinsey.com/insights/sustainability/riding_the_resource_wave> article Riding the resource wave: How extractive companies can succeed in the new resource era <http://www.mckinsey.com/insights/sustainability/riding_the_resource_wave> August 2014—With economic and social expectations rising in resource-rich countries, extractive companies must re-think how they do business.more <http://www.mckinsey.com/insights/sustainability/riding_the_resource_wave> [image: MGIResourceDrivenEconomiesC_1536x1152_Thumbnail] <http://www.mckinsey.com/insights/energy_resources_materials/reverse_the_cur…> report Reverse the curse: Maximizing the potential of resource-driven economies <http://www.mckinsey.com/insights/energy_resources_materials/reverse_the_cur…> December 2013—In 20 years, almost half of the world’s countries could depend on their resource endowments for growth. These economies have a huge opportunity to transform their prospects, and a new model could help governments capture the coming resource windfall instead of squandering it. more <http://www.mckinsey.com/insights/energy_resources_materials/reverse_the_cur…> - includes: - [image: MGIResourceRevol2013_LargeFeature_1536x1152_Thumbnail] <http://www.mckinsey.com/insights/energy_resources_materials/resource_revolu…> report Resource revolution: Tracking global commodity markets <http://www.mckinsey.com/insights/energy_resources_materials/resource_revolu…> September 2013—Commodity prices, though off recent peaks, still reflect emerging-market demand, a challenging geology, innovative technology, and improved resource productivity.more <http://www.mckinsey.com/insights/energy_resources_materials/resource_revolu…> - includes: - - PDF - Print - E-mail <http://www.mckinsey.com/Insights/Energy_Resources_Materials/Is_there_hidden…> - Share McKinsey Insights [image: McKinsey Insights] <http://www.mckinsey.com/features/ipad_and_android_app> Get our latest thinking on your iPhone, iPad, or Android device. more <http://www.mckinsey.com/features/ipad_and_android_app> For iOS <https://itunes.apple.com/us/app/id674902075?mt=8> For Android <https://play.google.com/store/apps/details?id=com.mckinsey.mckinseyinsights> About this content The material on this page draws on the research and experience of McKinsey consultants and other sources. To learn more about our expertise, please visit the Metals & Mining Practice <http://www.mckinsey.com/client_service/metals_and_mining>. Most Popular 1. The new consumer decision journey <http://www.mckinsey.com/insights/marketing_sales/the_new_consumer_decision_…> 2. What it takes to deliver breakthrough customer experiences <http://www.mckinsey.com/insights/organization/what_it_takes_to_deliver_brea…> 3. A better way to understand internal rate of return <http://www.mckinsey.com/insights/corporate_finance/a_better_way_to_understa…> 4. The digital future of consumer-packaged-goods companies <http://www.mckinsey.com/insights/consumer_and_retail/the_digital_future_of_…> - includes: - 5. Five myths about the Chinese economy <http://www.mckinsey.com/insights/winning_in_emerging_markets/five_myths_abo…> Stay connected - E-mail alerts <http://www.mckinsey.com/user_registration/edit_subscriptions> - Twitter <https://twitter.com/McKinsey> - Facebook <https://www.facebook.com/mckinsey> - LinkedIn <https://www.linkedin.com/company/mckinsey-&-company> - McKinsey Insights <http://www.mckinsey.com/features/ipad_and_android_app> - YouTube <http://www.youtube.com/mckinsey> - RSS <http://www.mckinsey.com/Insights/rss.aspx> About Insights & Publications - The creation of knowledge supports McKinsey’s core mission: helping our clients achieve distinctive, lasting, and substantial performance improvements. We publish our insights and those of external experts to help advance the practice of management and provide leaders with facts on which to base business and policy decisions. Views expressed by third-party authors are theirs alone. - Contact us <http://www.mckinsey.com/contact_us> - Frequently asked questions <http://www.mckinsey.com/frequently_asked_questions> - Site map <http://www.mckinsey.com/site_map> - Terms of use <http://www.mckinsey.com/terms_of_use> - Local language information <http://www.mckinsey.com/local_language_information> - Privacy policy <http://www.mckinsey.com/privacy_policy> - © 1996-2015 McKinsey & Company William V. DePaulo, Esq. 122 N Court Street, Suite 300 Lewisburg, WV 24901 Tel 304-342-5588 Fax 866-850-1501 william.depaulo(a)gmail.com www.passeggiata.com www.casasanta.org

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from Jim Hightower: Will This Lord of the Manor Get Locked Up?
by Paul Wilson 12 Nov '15

12 Nov '15

Will This Lord of the Manor Get Locked Up? Former coal CEO Don Blankenship is in the hot seat for putting money above everything else. By Jim Hightower <http://otherwords.org/authors/jim-hightower/> [image: Jim Hightower] <http://otherwords.org/authors/jim-hightower/> Don Blankenship had it all. The West Virginia coal baron had personal wealth, absolute control over his workers, and unmatched political power that extended through every branch of state government — and deep into the back rooms of Washington policymakers. In the house of Big Coal, Master Blankenship lorded over the manor. But soon, he could be moving into an even bigger house — as in “the big house.” The former Massey Energy CEO is presently on trial for intentionally neglecting mine safety laws, conspiring to cover up the violations, and effectively causing an explosion of methane and coal dust that killed 29 miners in Massey’s Upper Big Branch mine in 2010. It was the worst mine disaster in modern American history. [image: Powered by Pollution, an OtherWords cartoon by Khalil Bendib] <http://otherwords.org/powered-by-pollution/> Powered by Pollution, an OtherWords cartoon by Khalil Bendib In a rare turn of events for the corporate world, the boss himself has now been brought before a jury of common West Virginians to answer criminal charges that could put him in prison for 31 years. This is no mere formality. Already, four of Blankenship’s top assistants have been convicted for criminally risking the miners’ lives. And federal prosecutors have testimony, documents, and audio recordings <http://www.nytimes.com/2015/10/17/us/coal-barons-trial-may-turn-on-his-secr…> revealing that the CEO himself was “plainly cheating” on rules to protect workers. Blankenship bares his soul on one tape, declaring that it’s OK to demand that miners increase production of coal at the expense of their own safety. “This game is about money,” he explained. Quite a few other gamers ought to be in the dock with Don — George W. Bush, for example, along with the bipartisan bunch of Congress critters who took Big Coal’s campaign cash in exchange for defunding, denigrating, and discouraging the federal regulators who dared to stand up to Blankenship. Those for-hire political fixers are co-conspirators in Massey Energy’s corporate murders. OtherWords columnist Jim Hightower is a radio commentator, writer, and public speaker. He’s also the editor of the populist newsletter, The Hightower Lowdown <http://www.hightowerlowdown.org/>, and a member of the Public Citizen board. OtherWords.org <http://otherwords.org/>. Tagged: coal <http://otherwords.org/tag/coal/>, corporate crime <http://otherwords.org/tag/corporate-crime/>, Massey coalmine <http://otherwords.org/tag/massey-coalmine/>, West Virginia <http://otherwords.org/tag/west-virginia/> -- Paul Wilson Project Healing Waters Fly-fishing Sierra Club Military Outdoors 504 Jefferson Ave Charles Town, WV 25414-1130 Cell: 304-279-1361 "There is no forward until you have gone back" ~Buddha "In all things of nature there is something of the marvelous" ~ Aristotle JUSTICE, ONLY JUSTICE, SHALT THOU PURSUE. Deuteronomy 16:20

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Fwd: [Coal Volunteers List] from High Country News; Bankruptcy expected for Arch Coal, a reflection of industry woes
by James Kotcon 11 Nov '15

11 Nov '15

Stock in Peabody coal was selling for over $1000 per share in 2011, not it is at $13.00 Arch Coal was at $3600 in 2011, now it is at $1.50. The WV Legislature is convinced that "Coal's Best Days Are Ahead!" Thanks to Paul for the story at the link below. JBK ---------- Forwarded message ---------- From: Paul Wilson <pjgrunt(a)gmail.com> Date: Tue, Nov 10, 2015 at 4:02 PM Subject: [Coal Volunteers List] from High Country News; Bankruptcy expected for Arch Coal, a reflection of industry woes To: Coal Alerts <coal-volunteers-list(a)sierraclub.org> Bankruptcy expected for Arch Coal, a reflection of industry woes <http://list.hcn.org/t?r=3391&c=3558&l=1&ctl=6B6C:9DD3FCF87D66B19654BB1AB8D5…> Climate policies make a rebound for coal unlikely. -- Paul Wilson Project Healing Waters Fly-fishing Sierra Club Military Outdoors 504 Jefferson Ave Charles Town, WV 25414-1130 Cell: 304-279-1361 "There is no forward until you have gone back" ~Buddha "In all things of nature there is something of the marvelous" ~ Aristotle JUSTICE, ONLY JUSTICE, SHALT THOU PURSUE. Deuteronomy 16:20 -- To access the Beyond Coal Campaign Resource Portal, go to: https://sites.google.com/a/sierraclub.org/beyond-coal-resource-portal/ To sign up for this list, email neha.mathew(a)sierraclub.org with the subject and message "SUBSCRIBE #coal-volunteer" --- You received this message because you are subscribed to the Google Groups "#Coal-Volunteers" group. To unsubscribe from this group and stop receiving emails from it, send an email to coal-volunteers-list+unsubscribe(a)sierraclub.org. To post to this group, send email to coal-volunteers-list(a)sierraclub.org.

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Fwd: I'll be retiring-- Internal Job Announcement - Director, Virginia Chapter
by James Kotcon 06 Nov '15

06 Nov '15

FYI. JBK ----- Original Message ----- *From:* Glen Besa <glen.besa(a)sierraclub.org> *To:* CONS-FRED(a)LISTS.SIERRACLUB.ORG *Sent:* Thursday, November 05, 2015 10:02 AM *Subject:* FYI : I'll be retiring-- Internal Job Announcement - Director, Virginia Chapter Hi folks, dear colleagues, After almost 20 years with the Sierra Club, I'll be retiring the end of May 2016. It's been a great ride, and I expect to stay active as a volunteer--too much fun holding politicians accountable, especially climate deniers. In any case, the VA Chapter is beginning an intensive search for my replacement. Below is the internal posting that will go public next week. There is no anticipated successor at this stage so please forward to interested persons. We are fortunate to have a fairly stable $700,000 annual budget and 9 dedicated staff so this is a big job in a perpetual swing state--Dems just got their butts kicked on Tuesday--ugh! I will not see you at the colloquium because I'll be at the Paris climate talks (on my own dime--not the club's). I hope to see many of you before I retire or in some voluntary capacity after I retire. Thanks, Glen ---------- Forwarded message ---------- From: HRD <hrd(a)sierraclub.org> Date: Wed, Nov 4, 2015 at 5:16 PM Subject: Internal Job Announcement - Director, Virginia Chapter To: SierraClub HRD <hrd(a)sierraclub.org> *Announcement of Job Openings for Internal Employees:* *JOB:* *Director, Virginia Chapter* For full details and to apply as an internal applicant*: https://chj.tbe.taleo.net/chj01/ats/careers/requisition.jsp?org=SIERRACLUB&… Internal Deadline: *11/11/15* Category: *4* Region: *2* Union: *Chapter/Non-Rep* *Only current Sierra Club staff or recall candidates may apply using the link included above. External applicants must apply via Sierra Club's careers website (www.sierraclub.org/careers) after the internal deadline passes. -- Human Resources Department Sierra Club National Headquarters Shar-De Herr: 415.977.5615 Brett Johnson: 415.977.5586 Fax: 415.977.5796 ***You can now submit HR issues via the HelpDesk! Please create a ticket via HelpDesk (https://helpdesk.sierraclub.org <https://helpdesk.sierraclub.org>)** OR by emailing HR.Help(a)sierraclub.org <HR.Help(a)sierraclub.org> directly*. *Please only choose one option when submitting your issue.*** ***Please allow up to 5-7 business days for HRD to review and respond to any request and/or inquiry sent to this address. If you haven't heard back within this time frame, please follow up as needed.*** *NOTE: This communication contains information that is confidential, and proprietary to The Sierra Club. If you are not the intended recipient, please note that any dissemination, distribution, or copying of this communication is strictly prohibited. If you have received this message in error, please notify sender immediately and delete it from your system. * - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - To unsubscribe from the CONS-FRED list, send any message to: CONS-FRED-signoff-request(a)LISTS.SIERRACLUB.ORG Check out our Listserv Lists support site for more information: http://www.sierraclub.org/lists/faq.asp - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - To unsubscribe from the CONS-FRED list, send any message to: CONS-FRED-signoff-request(a)LISTS.SIERRACLUB.ORG Check out our Listserv Lists support site for more information: http://www.sierraclub.org/lists/faq.asp

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Costs iof Harrison Power Plant - See We Told You So.
by James Kotcon 04 Nov '15

04 Nov '15

Full story at: http://www.wvgazettemail.com/article/20151103/GZ01/151109834 Tuesday, November 3, 2015 Testimony highlights costs of Harrison Power Plant purchase By Andrew Brown, Business Reporter The full cost of the Public Service Commission’s decision to approve MonPower’s takeover of the Harrison Power Plant north of Clarksburg is now being revealed. On Monday, testimony from the PSC staff, the state’s Consumer Advocate Division and the West Virginia Energy User’s Group was filed as part of MonPower and Potomac Edison’s ongoing expanded net energy case. The testimony details the companies’ request for an additional $144.5 million to cover the cost of coal supplies, energy purchases and 17 months of operating expenses for the Harrison plant, which MonPower purchased for $1.1 billion in 2013 from FirstEnergy, its parent company. As it stands, the proposal could increase the average residential customer’s monthly bill by more than $7 a month, and industrial electric customers in the state could see their rates increase by 19.6 percent on average. All of the parties in the case offered up adjustments to the $144.5 million request, based on a number of factors. The PSC staff suggested delaying some costs and reducing the current request by more than $17 million. The consumer advocate’s office proposed a reduction of $30.9 million to account for pension costs and current coal purchase contracts. And the West Virginia Energy User’s group proposed shrinking the request to a $65.7 million increase. According to the various testimony, a large part of the $144.5 million request stems either directly or indirectly from MonPower’s deal to take over the remaining 79 percent of the Harrison plant that it didn’t own in 2013 — an arrangement critics warned the commission not to approve. More than $44 million — roughly 31 percent — of the proposed increase is the result of underestimated operating costs at the Harrison plant, including $22.6 million charged during an outage in December 2014. Officials with the West Virginia Energy User’s Group questioned whether all of those under-recovered costs are fair and whether some of those operating expenses should have been handled before MonPower’s takeover. “A significant portion of the under-recovery is associated with what appears to be deferred maintenance while the units were owned by Allegheny Generating Company,” the energy user group’s testimony states. At the same time, testimony filed by the consumer advocate and FirstEnergy officials points out that the company’s choice to take over the roughly 1,983 megawatts of capacity at the Harrison plant has not paid off like the company expected in 2013. FirstEnergy officials had hoped that the takeover would benefit their customers in West Virginia by selling excess electricity from their coal-fired power plants onto the regional market, which would have brought down costs for MonPower and Potomac Edison customers in West Virginia. But because of lower-than-expected prices for wholesale electricity and increased competition from gas-fired power plants, MonPower has not been able to sell as much energy as it estimated. The consumer advocate’s testimony points out that between July 2014 to June 2015 MonPower produced an additional 4,829 gigawatt-hours beyond what their customers in West Virginia needed, and throughout much of that time, the company was not netting as much profit from that excess electricity as it would have liked. As an example, the company estimated it would make about $42 million from the regional markets in July and August of this year, but in reality, MonPower only netted $29 million in those two months, according to the consumer advocate’s testimony. Company officials have said that they expect the purchase of the Harrison plant to benefit customers in the long run. But that outcome is dependent on wholesale prices going back up, as a result of market conditions and new rules put in place by the PJM Interconnection, the company that controls the grid for West Virginia and 12 other states. The consumer advocate division didn’t challenge the companies’ forecasts that show wholesale sales increasing for MonPower, but it did question if the company could accurately predict the regional market. “If PJM energy prices recover, the company will be in a position to achieve additional net PJM energy revenues,” the consumer advocate’s testimony stated. “However, if PJM energy prices remain low, it is difficult to see how the company will be able to reap substantial revenues from the PJM market.”

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