Published: July 06, 2009 12:36 am      

Q&A: Kevin Pierce and the future of AES

SOMERSET — Kevin Pierce, plant manager of AES Somerset, is a 51-year-old Connecticut native who studied marine engineering at the Maine Maritime Academy.

He was at sea for eight years in a liquefied gas tanker, sailing between Indonesia and Japan — six months on, six months off.

In 1988, Pierce joined AES and worked in Connecticut for 10 years. After five years in Hawaii, he was transferred to AES Somerset in 2001. He makes is home in Clarence Center.

AES, originally Applied Energy Services, is one of the largest power companies in the world, with plants from Hawaii to Somerset. The plants are powered by oil, wind energy, natural gas, solar, diesel, biomass and coal. Coal is the biggest.

Somerset is recognized as one of the cleanest coal-burning plant in the U.S. and produces 675 megawatts of electricity, enough to serve 650,000 homes.

The plant was built by NYSEG in 1984 and AES bought it in 1999. However, 25-year and 10-year anniversary celebrations will be modest.

The future is uncertain. Coal-burning plants have been targeted by environmentalists and AES lost tax certainty with the over-turning of the PILOT (payment in lieu of taxes.)

In the United States, 50 percent of power from coal plants and the U.S. is still sitting on 500 years of coal supply, according to Pierce.

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Question: How is the AES plant doing?

Answer: The plant is running at about 62 percent of capacity because of the economic recession.

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Q: How does the system work?

A: Electricity goes to the New York Independent System operator.

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We’re in a totally competitive market, each day we compete in the day-ahead market. The lowest cost generators get accepted into the market. We bid in our costs and the lowest cost providers get picked first. The last bid in, sets the price.

Q: How is that working for AES?

A: In the past few years, coal was the lowest cost generator, so we would always be accepted in market and early margins were healthy. Since then, the price of coal has gone up and the price of gas has dropped, meaning our profit margins are thin. Some days we haven’t made any money.

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Q: Do you expect an upturn?

A: All markets cyclical. In 2002 we had a similar situation. We expect that when economy picks up, the demand for electricity will pick up.

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Q: Is it different this time?

A: What’s really different for us this time, New York state has implemented a Regional Green Grid House Gas initiative. That’s a penalty of carbon emitters. Coal is one of the higher emitters. It costs $20 to $40 million a year to pay for carbon emissions. It makes us even less competitive.

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Q: How is the electricity transmitted?

A: There are high voltage transmission wires on to the system and it eventually it makes it to factories and houses. There’s no ability for storage.

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Q: Have you had to lay-off employees?

A: We had over 200 people when we started up. We had been operating with 140 people up until last couple of years. We had to go down to 127 people. We just had several people leave in a voluntary severance program.

Right now we’re falling short of where we want our targets be. There is as possibility go to an involuntary head-count reduction (layoffs), which we’re trying to avoid. It creates a real struggle. The folks that work here, we consider family.

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Q: Is the power business different than other businesses?

A: In most businesses, the cost of people is the biggest. At this plant our biggest cost, after paying for fuel, is taxes. Our highest non-fuel cost is taxes and we’ve had no ability to control that.

Under the Pilot agreement, we had certainty. We knew what our taxes would be. Before the Pilot in 2006, we had runaway taxes. They have gone from $10 million a year to $19 million a year over a couple years. We saw the runaway taxes and that’s where the Pilot came in. We settled on a Pilot payment which was higher than our competitors. We compete every day into the market. We agreed upon it because it created certainty. Now it’s all in trouble. We’re fighting for our survival.

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Q: Now that the Pilot has been overturned by the court, what is your next step?

A: We haven’t sat down in formal negotiations right now. Everybody is sort of recovering from the shock of the Pilot being overturned. We did not expect that. The school and town are saying, What’s this mean?

Litigation is back in force. We had five years of contested assessment in the lawsuit and probably within the next month or so we’ll be filing lawsuit on our 2009 assessment.

It’s distasteful for everyone, in that right now, when you’re not making much money, the last thing we want to do is take on an added expense of legal fees of going to court. It’s not an option we want to seek. We are anxious to talk with the taxing jurisdictions as far as coming up with a negotiated settlement.

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Q: Will your taxes go up or down?

A: The expectations of the taxing jurisdictions (county, town, school) was not a lower payment. I see this as going to be a big problem. If I was superintendent of schools, I would be pretty nervous that there is a potential of a lower payment of revenue and the risk of paying potential refunds is a huge risk.

The Rockland County power plant was awarded huge refunds for being over-taxed for a number of years. That basically destroyed the school district and is having horrible implications to the country and towns involved. We want to work out something that does not create the devastation. You’re rolling the dice when you go to a lawsuit.

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Q: What’s it like now at the plant?

A: We’re sort of scraping every day to get by and hoping the economy turns around, but at the same time, we’re being inundated with new environmental regulations. That are coming at us which are basically set up to kill coal. Coal is not a fuel that’s in favor right now.

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Q: How is AES perceived in town?

A: There is a little bit of education to be had. We’re the largest taxpayer in Niagara County and nobody’s aware of the situation as far of the problem we’re facing.

You have an expectation in community that there was a big win for the town, school and country for overturning the pilot. It sets up something more than what the pilot was. Meanwhile I was considering pulling out of the Pilot because we can’t afford it. What my expectation is, I want to be something closer to what my competitors are paying.

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Q: Will the town’s new law firm affect the situation?

A: We are in the process in setting up dates. We fully expect it won’t be quite the adversarial relationship we had previously.

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Q: Can it be done without lawyers?

A: It’s not totally possible, because lawyers have set up the system where they are needed wherever you go in the process. The most costly use of lawyers is litigation and that’s not a cost I relish to take on. But, I can not accept a tax payment that makes this plant uncompetitive.

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Q: What’s the status of the conveyor planned in the lake for coal shipments?

A: It’s not dead. It still makes economic sense for us, but I expect, as we go through the process, we’re not going to get permits. It would mean quite of few jobs while being built.

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Q: Will AES try to sell its plant?

A: AES has tried to sell other coal plants and there are no buyers out there. Everyone is concerned about the future of coal plants.