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Felman rebuffs power rate proposal criticism

Felman Production is rebutting criticisms that its special power rate proposal will guarantee the profits and allow the New Haven plant to skirt much of its power costs over the next 10 years.

The company last week filed rebuttal testimony in its special rate case currently before the state Public Service Commission.

In it, company officials called allegations the rate plan was being done merely to guarantee profits for investors in the idled Mason County plant as "offensive and naive."

"Our proposal doesn't guarantee that Felman makes a profit, what it does is allows us to continue operating as these periods of weak commodity markets come and go," said Barry Nuss, Felman's chief financial officer.

Felman wants the PSC to approve a 10-year special power rate for the steel additive manufacturing plant.

Felman is one of two domestic producers of silicomanganese, a deoxidizer that allows steel companies to produce a purer product. It's made by taking three raw ingredients and heating them to 3,000 degrees Fahrenheit in an electric arc furnace.

The plant shut down earlier this year because of poor market conditions. The company is working to determine if the shutdown will be temporary or permanent.

Because electricity represents 20 percent of production costs, Felman said it needs a more favorable power rate (its rate has risen about 45 percent since 2008) to compete globally.

The proposal the company submitted to the PSC would allow the plant's power rate to float according to the costs of its raw materials and commodity prices, offering the company up to $9.5 million in annual discounts on its power bill.

The $9.5 million figure comes from the amount Felman has been paying each year to cover Appalachian Power's fixed costs of operations. Should Felman shut down permanently, those costs would be shifted to other ratepayers.

When commodity prices are low, as they are now, Felman's power rate would go down. When they go up, Felman would pay more.

Last month, representatives from Appalachian Power and other parties filed testimony opposing the plan.

The power company said the proposal could shift a substantial portion of the company's business risk onto regular ratepayers.

Richard Baudino, consultant for the West Virginia Energy Users Group, which represents several large manufacturers across the state, called a portion of the plan that provided Felman a guaranteed gross margin on production "fatally flawed" and "unacceptable as proposed."

"West Virginia ratepayers, and particularly other West Virginia businesses, should not be required to support a rate of return for Felman's investors," Baudino said.

However, Nuss said that guaranteed margin, used to calculate the company's final power rate, does not take into account all of the company's production costs.

In a Monday interview with the Daily Mail, Nuss said the margin focuses on the company's raw materials costs and the price of its finished product. He said the formula would not take into account other variables like labor costs, productivity and machine efficiencies.

"There are many different factors and many different risks in operating a business," Nuss said. "This in no way guarantees that we're profitable.

"We're not going through this process in order to assure ourselves of a profit," he said. "We're going through this process to ensure we can sustain operations, that we can sustain these jobs."

Another criticism was over a provision allowing Felman to carry over the $9.5 million discount from one year to the next.

Appalachian Power said that could create the possibility of Felman going an entire year without paying for power.

Consumer Advocate Division analyst Deanna White said it would have "the effect of giving (Felman) a 'checkbook' and a pen to write an unlimited discount on its electric costs."

Nuss disagreed.

He said the proposal ensures Felman pays 100 percent of the power company's variable costs — mainly fuel and power generation costs — during the contract. The discounts would only apply to the $9.5 million in annual fixed cost payments.

Nuss said the only way the company could pay less than the amount of variable cost in a given year is if it overpaid for power in the previous year.

"We can never pay less than variable costs unless we've already paid more in the past," he said. "It's a matter of a timing issue, but it doesn't affect the bottom line that we always will pay variable costs in the life of a contract.

"There is no risk to us not paying the full variable costs," he said.

The PSC will hold formal hearings Dec. 9 and 10 at its Charleston offices.

Contact writer Jared Hunt at business@dailymail.com or 304-348-4836.


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