What started as a dispute over a coal contract two years ago has escalated to claims of fraud that stretch all the way to the executive suite of Akron, Ohio-based FirstEnergy Corp.
FirstEnergy — which in 2011 bought Allegheny Energy Inc., thus absorbing its West Penn Power utility and a number of its power plants including the now shuttered Hatfield’s Ferry and Mitchell coal-fired power stations — is being accused of orchestrating a scheme to shed high-priced contracts “by hook or by crook.”
The allegations come from Tunnel Ridge LLC, a subsidiary of Oklahoma-based Alliance Resources Partners LP, which operates a longwall coal mine under Washington County in Pennsylvania and Ohio County in West Virginia.
Earlier this month, an Allegheny County Court of Common Pleas judge allowed Tunnel Ridge to amend its 2015 complaint to include claims of fraud and add FirstEnergy and several of its subsidiaries as defendants. Tunnel Ridge had originally sued Allegheny Energy, a FirstEnergy subsidiary that no longer operates as a separate company.
Tunnel Ridge said in court documents that it has taken more than two years to obtain and parse thousands of internal FirstEnergy documents and more than 40 depositions. The coal miner said it became convinced that FirstEnergy concocted a fraudulent plan to get out of paying top dollar for coal while blaming environmental regulations.
“Our overall concern is that FirstEnergy bought Allegheny Energy, took its customers, but shut down its plants, and ever since has been trying to use that as an excuse to avoid valid obligations,” said David Fawcett, an attorney with ReedSmith who is representing Tunnel Ridge.
FirstEnergy declined to comment on the lawsuit as a whole and did not provide answers to specific questions about the company’s actions.
At stake are hundreds of millions of dollars in potential damages at a time when certain FirstEnergy divisions that operate Bruce Mansfield coal power station and Beaver Valley nuclear plant, both in Beaver County, are on the verge of bankruptcy, and as their Ohio parent company is swallowing $109 million from two settled disputes with railroads that leveled similar claims against FirstEnergy — that it broke contracts and used environmental rules as an excuse.
In one of those disputes, with CSX and BNSF railroads, an arbitration panel decided against FirstEnergy last month, saying that federal air quality standards aiming to cut pollution of mercury and other air toxics did not excuse the company’s performance under a coal transportation contract that was supposed to last until 2025.
When, during a recent earnings call, an analyst asked company officials what similar liabilities are waiting in the wings, FirstEnergy’s CEO Chuck Jones answered, “I don't know of anything else that's of this magnitude for sure, or anything else at all that would require us to provide further support to our competitive business.”
Tunnel Ridge hasn’t put a dollar figure on the damages it’s seeking. It has said the canceled contract had a value of $500 million. FirstEnergy’s attorney, James Steigerwald of Duane Morris, told a judge at a hearing on May 1 that he expects Tunnel Ridge to claim “hundreds of millions” in damages.
In 2008 — just before the recession, when coal was trading for more than $90 a ton and electricity demand was projected to keep increasing — Allegheny Energy locked in a long-term contract with Tunnel Ridge. It gave the energy company a hedge against increasing coal prices, but came with the risk that prices might go in the opposite direction, which they eventually did.
Meanwhile, Tunnel Ridge set out building out its mine, an investment of several hundred millions of dollars, according to the coal company.
By 2012, it was ready to roll. This was a year after FirstEnergy bought Allegheny Energy, taking over not only its power plants but also its coal contracts.
Within months, FirstEnergy began deferring shipments of Tunnel Ridge’s coal, saying it would make up the shortfall in future years.
In 2013, FirstEnergy announced it was closing its Hatfield’s Ferry and Mitchell power plants in southwestern Pennsylvania, a decision the company blamed on the high cost of compliance with federal air regulations and economic conditions.
Tunnel Ridge notes the plants were shuttered several years before they would have to comply with the mercury standards. The lawsuit also alludes to company documents and engineering plans that FirstEnergy was pursuing to make sure its generation plants, including the two that it later closed in Pennsylvania, would comply.
During the federal government’s long march toward finalizing the mercury and air toxic standards, FirstEnergy reassured its investors and analysts that it would not be too burdensome to bring its portfolio up to par.
In an analyst meeting in May 2011, Jim Lash, then president of FirstEnergy Generation, said the company had calculated the costs to comply with the mercury and other rules would be between $2 billion and $3 billion across its fleet.
“That’s similar to our investment in environmental compliance over the last five to seven years,” he noted.
Mr. Lash said the company had started to stash away funds to retrofit plants with the necessary pollution controls. He also said the company was evaluating shutting down certain plants, which he indicated would likely be older, less efficient coal fired units, not supercritical plants like Hatfield’s Ferry.
Somewhere down the road, the equation changed. Power demand growth was stymied first by the recession and then by conservation measures — FirstEnergy executives have said that energy efficient lighting has put a meaningful dent in the company’s demand, for example. Cheap natural gas flooded into the power grid, overtaking coal.
Even if FirstEnergy’s mercury rules explanation were true, Tunnel Ridge said, it still doesn’t relieve the company from its coal contract.
Tunnel Ridge claims to have found evidence that shortly after First Energy announced it would be closing the two plants, the energy company scrambled to “assign” Tunnel Ridge’s coal to Hatfield’s Ferry and Mitchell, even though no such connection was made in the original contract.
This, Tunnel Ridge says, was “a fabrication to lay the groundwork” for canceling the coal contract, which didn’t happen until August 2014.
Shortly before FirstEnergy canceled its contract, members of its coal advisory team told executives the company would save $156 million over the following three years by not buying any coal fromTunnel Ridge under the contract. Tunnel Ridge wasn’t alone -— there were at least three other high-priced contracts on the shopping block and a “Do Not Buy” list distributed to FirstEnergy’s coal buyers, according to court documents.
“If we would have known when this was all going down what your intentions were, we would not have sat back,” Mr. Fawcett said at the May 1 hearing in the Allegheny County Court of Common Pleas.
Mr. Steigerwald, of Duane Morris, repeated the FirstEnergy’s position that this was about the mercury rules.
“I just wanted to say flat out, there is no fraud here, and we stand by our actions every step of the way,” he said at the same hearing.
Anya Litvak: email@example.com.