The Indiana Utility Regulatory Commission on Jan. 25 approved a settlement in the latest fuel cost passthrough case of Southern Indiana Gas and Electric Co. that will in 2012 give ratepayers the advantages of lower coal prices due to take effect in 2013.
Southern Indiana Gas and Electric, d/b/a Vectren Energy Delivery of Indiana (Vectren South) had in the late stages of this fuel adjustment clause (FAC) case worked out a settlement agreement with the Indiana Office of the Utility Consumer Counselor (OUCC) that provides for levelization of the cost of coal used in generation.
Vectren South had estimated that its 2012 coal costs based on existing inventory and contracts will average over $70/ton. As a result of recent repricing and new contracts beginning in 2013, its delivered coal costs will drop to $53 to $55/ton. The utility discussed these circumstances with the OUCC and both parties agreed that it would be beneficial to find a way to accelerate the benefit of this lower cost supply to reduce customer bills in 2012. Therefore, the parties agreed upon the creation of a regulatory asset to be amortized and recovered over a six-year period, without carrying charges, which consists of the reduction to both existing inventory and 2012 delivered coal costs, resulting in an FAC approximating the projected 2013 average supply costs of $54 per ton.
The commission noted in its Jan. 25 approval of this settlement that it had previously approved a similar proposal in a separate case. In that proceeding, a ten-year coal contract of Indiana Michigan Power (I&M) had declining pricing over the period. Rather than reflect the upfront cost increase, the commission approved the I&M proposal to levelize costs over the period. “As with the I&M proposal, Applicant’s proposal in this Cause accelerates the price decrease to customers and similarly smoothes costs over time,” the commission said about the Vectren South approval.
“As a result of recent supply contracting, in 2013 Vectren South will receive delivered coal for its plants at an estimated average cost of $53-55/ton,” said the settlement agreement. “Once delivery commences in 2013, these prices will reduce the average cost of supply reflected in Vectren South’s FAC proceedings by approximately $20/ton. During 2012, Vectren South will use its existing nearly one million tons of inventory. The Company will also receive deliveries of coal under already existing contracts. The inventory and average contract prices in 2012 are projected to exceed $70/ton for most of the year. Deliveries of lower cost coal under several new or repriced contracts will begin in the latter half of 2012. As a result, the FAC throughout 2012 will continue to pass through the higher costs of the existing inventory and the final year of higher contract pricing to customers.”
The “regulatory asset” price levelization mechanism will consist of the estimated amount of reduction to both the cost of existing inventory and 2012 delivered coal costs, resulting in 2012 costs recovered in the FAC equal to the projected 2013 average supply costs of approximately $54/ton.
Vectren fought back criticism over buying affiliated coal
A main point of the Vectren South case had been to prove that, while it buys much of its coal from fellow Vectren Corp. (NYSE:VVC) subsidiary Vectren Fuels, that coal is procured in a cost-competitive way. Vectren South told that commission that for nearly a decade, it has annually purchased about 2.8 million tons from Vectren Fuels under long-term contracts which were re-priced over time and approved by the commission. Vectren South has a strong preference for procuring Indiana coal, which the commission has recognized as a preferred source of supply.
Vectren South witness Wayne Games testified in this case that as the long-term contracts expired, prevailing Illinois Basin market prices were high as a result of the new international demand for this coal. He indicated that Vectren South entered into contracts in 2008 with staggered pricing terms to avoid having to enter the market for most of its supply within a limited timeframe. Games explained that Vectren South has moved to a request for proposals (RFP) process to procure coal.
Due to the recession and a drop off in electricity demand in 2009, Games explained that Vectren South has reduced coal deliveries to 85% of the contract volume and entirely eliminated some contractual deliveries. Games testified that Vectren South issued an RFP to obtain market pricing for coal deliveries commencing in 2012. He explained that the company received six bids from five suppliers, with coal operator Chris Cline’s Foresight Energy LLC as the lowest bidder for coal out of Illinois, and Vectren Fuels as the second lowest bidder for its own Indiana coal. Negotiations were conducted with the two lowest priced bidders with a focus on a new contract with Foresight and re-pricing of coal under existing contracts with Vectren Fuels.
On the other hand, a witness for the OUCC, Eric Hand, expressed general concerns regarding buying fuel from affiliates, including competitiveness and sole source contracting. Hand stated that the 2011 RFP showed progress and the appearance of competition had improved due to the Foresight contract. Hand suggested that a screening assessment of potential bidders should have been used and wondered whether competitive progress would continue. In the event continued improvement of the procurement process did not occur, Hand recommended that the commission could consider to address future changes, including a tonnage cap on affiliate purchases.
In his rebuttal testimony, Games noted that the OUCC’s testimony identified no deficiencies with respect to the terms, including price, of Vectren South’s new or re-priced coal contracts. He said that the only issue raised by the OUCC with respect to the 2011 RFP procurement process was the suggestion that a pre-screening assessment of potential bidders should have taken place prior to the issuance of the RFP. Games explained proactive steps that were taken to reduce deliveries from Vectren Fuels, including an option to take only 85% of contract volumes, cancellation of 1 million tons to the A.B. Brown plant in 2011, and cancellation of over 2 million tons from Vectren Fuels under the A.B. Brown and F.B. Culley contracts in 2012.
Games also explained in rebuttal testimony that agreements in principle with Foresight and Vectren Fuels were finalized and executed, and Vectren South will begin receiving that lower cost coal on July 1, 2012.