Vectren seeks Indiana commission approval of coal procurement

Southern Indiana Gas and Electric Co., d/b/a Vectren Energy Delivery of Indiana (Vectren South for short), filed on Jan. 6 a proposed order with the Indiana Utility Regulatory Commission that, if signed by the commission, would approve the company’s latest coal procurement efforts.

The ongoing case relates to the fuel adjustment clause (FAC) charge that Vectren South can pass along to ratepayers. A main point of the Vectren South case has 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.

Medine backs up Vectren arguments

Vectren South witness Emily Medine, who works for consultant Energy Ventures Analysis, testified on the state of the coal market, describing Vectren South’s fuel procurement activities and reviewed the outcome of the 2011 RFP process. She noted that demand for Illinois Basin coal has increased and is projected to continue to grow in the near term, in part because of increased international demand. She also said that Illinois Basin coal is consumed in plants with SO2 scrubbers, so demand for Illinois Basin coals could increase in the short term if operation of non-scrubbed plants is curtailed.

Medine testified that the company conducted a competitive solicitation for its coal requirements in keeping with industry practices. She said the 2011 RFP bids were evaluated on a quality adjusted delivered price basis. Medine indicated that Foresight offered Illinois coal on a delivered price basis to the A.B. Brown plant, and was the lowest cost bid for 2012 and 2013. The second lowest cost offer in 2012 and 2013 was from Vectren Fuels.

Negotiations were conducted with the two lowest priced bidders with a focus on a new contract with Foresight and re-pricing coal under existing contracts with Vectren Fuels. Medine noted that the risk of prices dropping is much smaller than the risk of prices increasing, and that since bids were received, the forward prices for Illinois Basin coal had risen. Medine concluded that Vectren South had engaged in a reasonable procurement process.

On the other hand, a witness for the Indiana Office of Utility Consumer Counselor (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 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. Based on the 2011 RFP process, Vectren South will begin receiving that lower cost coal on July 1, 2012.

Medine said in her rebuttal testimony that she was pleased that the OUCC recognized the April 2011 RFP yielded positive results, and that no advantage was provided to Vectren Fuels. She also reiterated that, at the time Vectren South solicited coal in 2008, the future coal market conditions were unknown and the resulting purchases were competitive with the prevailing market.

Vectren asks for complete approval

Vectren’s Jan. 6 suggested approval order had this language for the commission: “While we found the RFP based contracts to be reasonable, we expressed concern that circumstances had led to the need to replace all of the utility’s coal supply contracts at the same time. We recognized that Vectren South’s new contracts contained staggered price terms designed to create a portfolio to avoid a reoccurrence of such circumstances. This sub-docket was opened to review the company’s procurement practices and ensure that steps continued to be taken to create periodic supply contract re-pricing opportunities within the supply portfolio. The company has submitted evidence for our review related to its 2011 competitive RFP process, bid evaluation, and resulting supply arrangements.”

The commission would also state, if it approves the suggested order: “In anticipation of the need to obtain incremental supply for 2012 and beyond, Vectren South issued an RFP in April of 2011 soliciting bids for up to 500,000 tons of coal for a four (4) year period commencing July 1, 2012. The RFP was sent to 26 Illinois Basin producers and was publicized in trade publications. … In response to its RFP, Vectren South received bids from five suppliers. Three of the non-affiliated bidders produce one-third of the annual coal output in the Illinois Basin. Ms. Medine, a consultant that conducts utility coal supply audits on behalf of state commissions, confirmed that the 2011 procurement process followed recognized industry practices.”

The suggested order concluded: “Based on our review of the evidence related to Vectren South’s 2011 procurement process and its results, we find that the process has been successful in terms of obtaining reasonable market prices and ensuring ongoing re-pricing opportunities over the ensuing years. The commission finds that Vectren South has made every reasonable effort to acquire fuel so as to provide electricity to its retail customers at the lowest fuel cost reasonably possible.”

About Barry Cassell 20414 Articles
Barry Cassell is Chief Analyst for GenerationHub covering coal and emission controls issues, projects and policy. He has covered the coal and power generation industry for more than 24 years, beginning in November 2011 at GenerationHub and prior to that as editor of SNL Energy’s Coal Report. He was formerly with Coal Outlook for 15 years as the publication’s editor and contributing writer, and prior to that he was editor of Coal & Synfuels Technology and associate editor of The Energy Report. He has a bachelor’s degree from Central Michigan University.