Detroit Edison defends refined coal accounting from critics

The Michigan Public Service Commission should disallow Detroit Edison’s efforts to include its costs for Reduced Emission Fuel (REF), which is coal treated with chemicals to reduce power plant emissions, within its Power Supply Cost Recovery (PSCR) plan for 2012, said a witness for the state Attorney General.

The commission should disallow inclusion of REF project costs in the PSCR plan and also designate the anticipated mercury reduction costs, which are included in Detroit Edison’s (DECo’s) five-year plan, as costs that are likely not to be permitted recovery through the PSCR, said Michael McGarry Sr., President and CEO of Blue Ridge Consulting Services. He was testifying on behalf of the Attorney General in a brief filed with the commission on April 5.

“Regarding the REF project, in my opinion, these costs are neither booked costs of fuel burned nor booked costs of purchased and net interchanged power transactions that can be recovered as PSCR expenses,” he added. “The anticipated mercury reduction costs in DECo’s five-year plan include the use of activated carbon beginning in year 2015. The commission has not authorized activated carbon costs for the PSCR process. Due to the non-volatile, non-significant, and utility-controlled nature of the activated carbon injection cost, this expense should not be recoverable through the PSCR.”

REF project costs are a part of the process of handling coal after coal is received from the coal supplier and should not be a booked cost of coal or a cost of disposing of coal, McGarry said. “The stated purpose of the REF project is to treat and prepare coal to be burned so that when the coal is burned the air emissions will contain less SO2 and mercury emissions,” he added. “DECo’s REF activity involves handling—not disposing of—coal. Getting rid of ash resulting from burning coal may be disposal, but putting chemicals into coal does not dispose of any coal. Treated coal is burned to generate electricity, and burning coal to generate electricity is not logically an act of coal disposal any more than burning gasoline in a car to drive a car is a disposal of gasoline. Characterizing REF treatment as a cost of the coal burned or as a disposal cost is at best double talk.”

Two environmental groups take shots at Detroit Edison

George Sansoucy, owner of George E. Sansoucy P.E. LLC, provided separate April 5 testimony in this case on behalf of the Michigan Environmental Council and the Natural Resources Defense Council. He had six areas of concern.

  • Detroit Edison has not supported its projected 9% increase in the unit cost of coal for 2012, in a coal market where prices are decreasing in the short term, he said.
  • Detroit Edison’s projection for natural gas costs in 2012 are “severely inflated,” based on current information and even based on information available at or around the time the company filed its plan in the fall of 2011.
  • Detroit Edison’s 5-year PSCR forecast and related evidence show a lack of planning to address the significantly changing circumstances affecting coal-fired generating units.
  • Detroit Edison’s 5-year PSCR forecast and related evidence show a lack of prudent planning for changing fuel prices.
  • The utility’s 5-year PSCR forecast and related evidence show a lack of prudent planning for the future retirement of coal-fired units.
  • The REF projects provide benefits to ratepayers that are insignificant in comparison to the benefits they provide to the fuel companies and DTE Energy Services. “Further, Detroit Edison has provided no evidence that the REF project is cost effective for reducing NOx and mercury emissions,” Sansoucy wrote.

As for the coal cost issue, Detroit Edison’s actual system-wide coal cost in 2011 was 241.3 cents/MMBtu, Sansoucy testified. The company’s projected systemwide coal cost for 2012 is 262.7 cents/MMBtu. This is almost a 9% increase in coal cost for 2012.

This price hike comes at a time when both coal consumption and prices are declining in the short term. The declines in consumption and price are due to a number of circumstances, including economic conditions, energy optimization, renewable energy development, coal plant closures, and increased natural gas generation, Sansoucy wrote. Detroit Edison has provided no evidence of why its coal costs are going up this year given these circumstances, he added.

The fact that the utility buys a lot of its coal under multi-year contracts does not justify such a large increase in cost, Sansoucy maintained. In pre-filed direct testimony from a Detroit Edison official, the utility listed its multi-year coal supply contracts. Four of those contracts, representing a total of 3.25 million tons, have terms that begin this year, and therefore were likely entered into last year while the market was already in decline, Sansoucy said. Detroit Edison refused to provide copies of the coal contracts in discovery, he added.

Community action group takes shots at REF program

More April 5 testimony came from William Peloquin, a former employee with the state Attorney General and the PSC who is working in this case for the Michigan Community Action Agency Association. Among other things, he contended that DTE Energy (NYSE: DTE), DECo’s unregulated parent, and DECo, are transferring to third party fuel companies large portions of DECo’s coal inventories and transportation functions in a manner that diverts offsets to DECo’s fuel costs (such as federal refined coal tax benefits) to the detriment of DECo’s costs and rates.

DTE placed various REF facilities in operation in 2009 and 2011, Peloquin noted. DECo transferred large portions of its coal inventories, plus its coal transportation functions, to the affiliated, non-regulated fuel companies starting approximately in 2009. “Therefore, all of this coal is now apparently non-jurisdictional,” Peloquin wrote. “Edison has ripped asunder its fuel supply in part to shield the REF tax credits benefits from the ratepayers.”

Lapplander says REF program has no costs for ratepayers

In its last major filing in this case, made on March 8, Detroit Edison Director-Fuel Supply Gary Lapplander laid out the company’s case for REF.

“The Belle River Fuels Company (BRFC) and St. Clair Fuels Company (SCFC), subsidiaries of DTE Energy Services, placed in service their respective facilities in December 2009,” Lapplander wrote. “The Monroe Fuels Company (MFC), also a subsidiary of DTE Energy Services, placed their 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 the Monroe Power Plant has two production lines. DTE Energy Services, the parent company of the Fuels Companies, has an exclusive license to use ChemMod, the unique and proprietary chemical additive technology, at all DTE Energy sites.”

REF is being consumed at 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 Belle River, although the 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 fulltime in 2015. REF has been successfully tested at Monroe. Based on these successful tests, Monroe has been consuming REF at all four units since late November 2011, Lapplander noted.

“With respect to fully allocated cost, the price at which Detroit Edison is selling the coal is equal to Detroit Edison’s fully allocated cost, or book cost,” said Lapplander. “The Fuels Companies will simply use the coal to produce REF and sell the REF back to Detroit Edison for consumption at [St. Clair, Belle River and Monroe] and any adjustments to the sale price to reflect any higher market pricing would only serve to increase the resale price to Detroit Edison. Since the asymmetrical pricing provision of the Code of Conduct is intended to prevent Detroit Edison from subsidizing its unregulated affiliates, it is clear that this transaction is consistent with that intent and effectuates the proper outcome.”

The advantages of having non-regulated affiliates build and operate the REF plants included that Detroit Edison was not required to make any capital investment for these facilities and therefore did not assume any risk that the REF projects would not be successful, Lapplander noted. Detroit Edison also decided that the tax risks and commitment to an unproven technology at its generating facilities were not appropriate for a regulated utility.

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.