Detroit Edison officials argue for refined coal ratemaking

The use of chemical additives on coal is a cost-effective way to reduce mercury and other emissions at three coal-fired power plants, including the giant Monroe plant, said Detroit Edison officials in March 8 testimony filed at the Michigan Public Service Commission.

The filing was part of the utility’s application for authority to implement a Power Supply Cost Recovery (PSCR) plan in its rate schedules for 2012. Detroit Edison is a unit of DTE Energy (NYSE:DTE).

Gary Lapplander, Director-Fuel Supply for Detroit Edison, provided an overview of Reduced Emissions Fuel (REF) projects at the St. Clair (SCPP), Belle River (BRPP) and Monroe power plants (MOPP). The Belle River Fuels Co. (BRFC) and St. Clair Fuels Co. (SCFC) subsidiaries of DTE Energy Services placed in service their respective facilities in December 2009. Monroe Fuels Co. (MFC), also a subsidiary of DTE Energy Services, placed its facility in service in November 2011. The facility at Belle River has two production lines, the facility at St. Clair has three production lines, and the facility at Monroe has two production lines. DTE Energy Services, the parent company of the fuels companies, has an exclusive license to use Chem-Mod, a proprietary chemical additive, at all DTE Energy sites.

In January 2011 a membership interest was sold in the SCFC, the owner of one of the REF production lines at the SCPP. This arrangement allows the SCFC to begin generating tax credits through the production of Refined Coal sold to Detroit Edison. In November 2011 a membership interest was sold in the MFC, the owner of one of the REF production lines at the Monroe plant. This arrangement similarly allows the MFC to begin generating tax credits through the sale of Refined Coal sold to Detroit Edison.

REF is being consumed at the St. Clair Units 1-4, and 6, with a targeted annual REF consumption of about 1.8 million tons. REF is continuing to be tested at the BRPP, although the BRFC equipment is considered “in-service” for purposes of qualification for Section 45 federal tax credits. The company’s PSCR forecast assumes both units at Belle River begin consuming REF full time in 2015. REF has been successfully tested at the Monroe plant. Based on these successful tests, Monroe has been consuming REF at all four units since Nov. 28, 2011.

To receive the Section 45 tax credits, the Refined Coal must be produced by the taxpayer at a qualified facility, sold to an unrelated person, reduce NOx emissions by 20% and reduce emissions of either SO2 or (mercury) Hg by 40%. Pilot-scale combustion testing of the Chem-Mod technology at the University of North Dakota’s Energy & Environmental Research Center had reported reductions of over 20% of NOx, over 40% of Hg and up to a 15% reduction in SO2.

Shipments of coal for consumption at the BRPP and SCPP will be sold at Detroit Edison’s Midwest Energy Resources Co. (MERC) transshipment facility on Lake Superior. The MERC facility transfers mostly Powder River Basin coal from rail to ship for delivery on the Great Lakes.

All rail shipments of coal for consumption at MPP will be sold FOB mine and all vessel delivered western coal for consumption at MPP will be sold FOB vessel at the MERC facility. The coal always remains under the supervision and control of Detroit Edison and MERC (no fuels company employees are involved in any process other than operation of the fuels companies’ separate equipment and facilities) and Detroit Edison’s and MERC’s books and records are maintained separately from the fuels companies.

The fuels companies will simply use the coal to produce REF and sell the REF back to Detroit Edison for consumption at the BRPP, SCPP and MPP and any adjustments to the sale price to reflect any higher market pricing would only serve to increase the resale price to Detroit Edison, Lapplander said.

There were a number of reasons why Detroit Edison’s affiliates, rather than Detroit Edison itself or an independent third party, designed, constructed, owned and operated the REF processing facilities, Lapplander noted. First and foremost was the fact that the arrangements provided Detroit Edison a risk free option to help it attain the mercury emission reduction requirements contained in a Michigan air rule beginning in 2015. Detroit Edison was not required to make any capital investment to support the REF processing facilities and therefore did not assume any risk that the REF project would not be successful. Detroit Edison also reasonably determined that the tax risks and commitment to an unproven technology at  its generating facilities were not appropriate for a regulated utility.

DTE Energy Services has a background in refined fuels

DTE Energy Services (DTEES), the parent company of both BRFC and SCFC, has experience designing, constructing, and operating the production equipment and was willing to take on the associated risk. At the time the REF facilities were constructed at the Belle River and St. Clair plants, the existing legislation required the facilities to achieve commercial operation (i.e. be in service) by Jan. 1, 2010, and Detroit Edison had only a limited time to pursue alternative processes or suppliers. Further, Detroit Edison was not aware of any other supplier that was willing to make this type of investment at the time the REF project needed to move forward given the existing legislation.

Also, at the time that Detroit Edison entered into discussions with DTEES to supply REF for Belle River, DTEES was one of only three known licensees for the provision of the proprietary technology and DTEES held an exclusive license to use the unique and proprietary chemical additive technology, Chem-Mod, at Detroit Edison sites.

This arrangement also made sense at Belle River since DTEES had already reached a similar agreement with the Michigan Public Power Agency (MPPA), a partial owner of the Belle River plant. The MPPA is an unaffiliated entity that negotiated an arms-length deal with DTEES. The MPPA had no particular incentive to reach an agreement with DTEES as opposed to reaching an agreement with any other unrelated third party. As such, the agreement reached with the MPPA was rightfully considered to represent the market for a business deal of this nature, said Lapplander.

Coal sold out of inventory to fuels companies

Detroit Edison initially sold 1.7 million ton of its coal inventory at the BRPP and SCPP in December 2009 for $38.6m, its book cost of inventory. The BRFC purchased one million tons and the SCFC purchased 700,000 tons. Because all of the coal will ultimately be resold to Detroit Edison as either REF or untreated coal (resold coal), Lapplander said it is appropriate to make this transaction at book cost. Detroit Edison customers will benefit from reduced costs associated with not carrying the relevant fuel inventory on its books. At the end of the 10-year REF consumption period, any remaining coal inventory will be sold back to Detroit Edison at the fuels companies’ book cost.

Detroit Edison has periodically sold coal inventory from the coal yard to BRFC at book cost for continued testing at BRPP. In addition, Detroit Edison sold the SCFC 714,000 tons of inventory at a book cost of $19.6m in January 2011, the date the SCFC sold an interest in their facility.

After the coal is processed and treated by the fuels companies, the REF will be sold and delivered to BRPP and the SCPP for “just in time” consumption. The REF sale transaction will be priced out at the fully allocated cost at which Detroit Edison sold the coal to the fuels companies plus an REF adder. The REF adder will consist of several components: an adjustment amount related to fly ash disposal costs designed to keep Detroit Edison whole for any incremental fly ash disposal costs (beginning in January 2011); an adjustment amount related to fly ash revenue (beginning in January 2015); an adjustment amount based upon and no greater than Detroit Edison’s reduction in actual SO2 emission allowance expense (beginning in January 2011); and an adjustment amount based upon Detroit Edison’s reduction in actual mercury emission expense (beginning in January 2015).

There was also REF testimony in the March 8 filing from Kevin O’Neill, who is employed by DTE Energy Corporate Services LLC within Regulatory Affairs as a Principal Case Manager. At Detroit Edison, he is a Principal Project Manager in the Regulatory Policy & Operations Organization. He noted that the company has installed REF facilities at its Belle River, St. Clair and Monroe plants to provide an alternative to  obtaining SO2 and NOx emission allowances and to minimize the costs associated with reducing mercury emissions.

The REF usage is also expected to reduce NOx emission allowance expense, and mercury emission abatement expense. Due to the variability of NOx emissions, this cost reduction cannot be precisely estimated, but the result will be a benefit to the PSCR customer as a result of consuming fewer NOx annual and seasonal emission allowances, said O’Neill.

To meet the 2015 Michigan mercury rule, the company also expects to use activated carbon at several of its power plants and expects to request recovery of the sorbents used in this process through the PSCR as an integral part of the cost of power supply, a cost of fuel burned, and a disposal cost of fuel, similar to urea expense, O’Neill noted. The use of both Standard Powdered Activated Carbon (PAC) and Brominated Activated Carbon (BrPAC) sorbents to reduce mercury emissions is similar to the use of urea to reduce NOx emissions. In a 2008 PSCR case involving Consumers Energy, the commission approved the recovery of urea as a disposal cost, O’Neill pointed out. The expense associated with the use of PAC and BrPAC are also disposal costs and should therefore be included in the PSCR process, he added.

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.