New audit criticizes some parts of Dayton’s coal procurement

Dayton Power & Light has responded to a prior fuel audit with several changes to its coal procurement practices, said a new audit filed April 27 at the Public Utilities Commission of Ohio by commission-hired auditor Energy Ventures Analysis.

Dayton Power & Light in November 2011, most of the way through the 2011 audit period, became part of AES Corp. (NYSE: AES).

In 2011, DP&L purchased 7.5 million tons of coal at an average delivered price of $60.51/ton or $2.61/MMBtu. Its coal plants are Stuart, Killen and O H Hutchings. According to DP&L’s classification, 9.6% of the 2011 purchases were on a spot basis. All of the coal purchased for Hutchings, a little-used plant, was classified as spot. The remaining spot coal was mostly non-Central Appalachia New York Mercantile Exchange (NYMEX) coal purchased for Stuart.

Included in the prior EVA audit was a recommendation, accepted by the commission, that DP&L should, except for limited circumstances, revise its standard operating procedures for coal procurement for all non-NYMEX coal purchases. The commission told DP&L to revise its existing coal and limestone procurement procedures to include general guidelines that a request for proposal (RFP) needs to be issued for all non-NYMEX coal purchases, except as specified in the stipulation.

“DP&L revised its Standard Operating Procedure for coal procurement to reflect the items to which the parties agreed,” said the EVA audit. “DP&L developed a 2012 fuel procurement strategy document for review. The document stated that DP&L intended to manage its coal position in a manner consistent with the Commodity Risk Management Policy for Stuart, Killen and Hutchings. In addition, DP&L will purchase all non-NYMEX coal using a formal RFP except in four noted circumstances. The strategy document enumerated several risks including the behavior of the operators of the jointly-units, regulatory risks related to new environmental regulations and low natural gas prices.”

Another EVA recommendation from the prior audit was that DP&L should develop a hedging strategy considering the type of coal it expects to burn and the quantity of that coal, and should not enter into NYMEX hedges that exceed its expected low-sulfur coal requirements. The commission then ordered that if DP&L chooses to incorporate financial hedging, DP&L must demonstrate in its procurement strategy why the use of financial hedging is in the best interest of jurisdictional customers compared to the other alternatives DP&L has available, including staggered contract dates, larger open positions, and resale options under high-sulfur coal contracts.

In a heavily-redacted status update on that commission finding, DP&L indicated it had not purchased any NYMEX coal for Stuart or Killen since a redacted time. “Hence, DP&L did not develop a financial hedging strategy,” the audit added.

EVA had also recommended that DP&L should separate its coal trading personnel from staff dedicated to the procurement of jurisdictional coal to prevent a conflict of interest to the extent that DP&L wishes to consider trading. The parties to the prior fuel case agreed that no person involved in the purchase of fuel for DP&L’s jurisdictional customers will have a performance goal that includes an optimization goal.

DP&L affirmed in a data response that no DP&L or affiliated personnel had a 2011 performance goal that included optimization trading results for purposes of calculating bonuses or other incentive compensation, EVA told the commission about the fuel personnel matter. Any 2010 performance goal that had an optimization component would have been evaluated based on 2010 transactions, some of which involved contracts that had forward deliveries in 2011. No bonuses or other compensation paid out for 2010 performance were reflected as a fuel cost either in 2010 or in 2011.

DP&L should attempt to negotiate sulfur penalties into its coal supply agreements and include such penalties in its RFPs, EVA had said in another recommendation from the prior audit. The commission had ordered that in future contract negotiations, whether entered into as part of an RFP process or otherwise, DP&L will make reasonable commercial efforts to incorporate sulfur penalties and rights for volume flexibility.

“A review of the RFPs indicated that DP&L made reasonable efforts to include sulfur penalties and rights for volume flexibility,” EVA reported.

Another EVA recommendation, accepted by the commission, was that DP&L should institute a development program for its coal procurement personnel. “EVA reviewed the Fuel Procurement Development Program developed for fuel procurement personnel and finds it to be acceptable,” the April 27 audit said.

EVA points out various elements of coal-procurement program

The new audit also made a series of findings about DP&L’s recent coal procurement work, with some information redacted from several of these findings.

  • DP&L’s coal purchase costs on a cents per MMBtu basis increased by 8.6% in 2011. The increases were in both contract and spot purchases and high- and low-sulfur coal purchases. DP&L’s coal purchase costs as reported to the U.S. Energy Information Administration are the highest among the five Ohio utilities for which there is publicly available data. DP&L’s fuel costs increased in 2011 at a greater rate than the rate of increase for three of the four other utilities. DP&L noted that its reported purchase costs include neither the proceeds from a contract buy-down nor the adjustments related to its optimizations.
  • The average delivered price of coal to the Stuart station is the highest among 10 utility plants which receive coal by barge that are equipped with scrubbers and/or burn high-sulfur coals that are near Stuart. Stuart’s relative costs in 2011 are adversely affected by something that was redacted from the audit. The average delivered price of coal to the Killen station is the third highest among the same group.
  • DP&L conducted four RFPs in 2011 consistent with the guidelines in the stipulation. DP&L received multiple bids, including several that were lower in cost than the selected coals. DP&L’s plant operations people and an independent combustion engineer raised concerns about the quality of the lower cost coals that DP&L deferred contract purchases until it had completed thorough testing and analysis. DP&L purchased coal from existing suppliers but used the bid results to determine what coals should be tested.
  • DP&L’s Solid Fuel Testing Team is focused on expanding fuel flexibility with lower quality coals that were identified as part of the RFP process to determine whether they could be used economically during periods of low load. In addition to some follow-up testing, DP&L is also evaluating whether Killen could tolerate redacted types of coals as part of a blend.
  • DP&L allowed the inventory at the Stuart station, as measured by tons on the ground, to fall from the end of December 2010 to September 2011 by a redacted amount. In October 2011, DP&L experienced a forced outage at its Stuart unloader. DP&L chose to deliver some of Stuart’s coal to Killen and then truck it to Stuart. Had the Stuart inventory not been so low, the appropriate result would be for the coal to remain at Killen for future consumption with a like amount of “Killen” coal to be delivered to Stuart when the unloader problem was resolved, the audit noted. “EVA believes the decision to truck this coal to Stuart only occurred because DP&L had allowed the Stuart inventory to fall to very low levels,” the auditor said. “While in no way suggesting this was the motive, the reality is that DP&L realized significant working capital savings as a result of its low inventory at Stuart. Jurisdictional customers should not bear the burden of the incremental costs incurred for the transfer of the fuel because DP&L allowed the inventory to fall to such low levels.”
  • DP&L failed to disclose three 2010 optimizations performed during the prior audit period. An optimization is basically when DP&L swaps one coal position or commitment for another, often on a daily basis, if that swap is seen as being to its advantage. There was some initial confusion on DP&L’s part regarding the scope of the 2010 audit. Staff and auditors explained that all 2010 transactions were to be reviewed whether or not fuel was delivered in 2010. “After the scope was resolved, EVA had been led to believe that all relevant and requested information had been provided,” EVA wrote. The most significant of the undisclosed optimizations is Optimization 2011-A. This optimization consisted of a sale of coal from Killen to Stuart and a purchase of redacted coal from a redacted supplier. The 2010 purchase of the redacted coal was disclosed in the 2011 audit but its role in an optimization was not. About half of DP&L’s claimed optimization credits in 2011 derive from this transaction. “More importantly, EVA finds significant faults with this optimization that it believes should be considered outside of the Stipulation in Case No. 09-1012-EL-EFC because the facts of this optimization were not considered in the formulation of the FUEL Rider Stipulation,” the audit said. The other two 2010 optimizations were relatively small quality swaps between NYMEX coal and non-NYMEX Central Appalachia coals.
  • In addition to the three 2010 optimizations, DP&L disclosed an additional nine optimizations it completed in 2011. Several of the 2011 optimizations consisted of multiple transactions. The optimizations consisted of both basin and quality swaps. DP&L improved its documentation of the optimizations but did not quantify the actual benefit to the jurisdictional customer as requested. DP&L continues to argue the optimization benefits are solely from the resale of a committed purchase, the audit said. “EVA continues to believe that an optimization benefit needs to start ab initio, i.e., when the original procurement is made,” the audit said. “In other words, if DP&L purchases NYMEX coal when it needs high sulfur coal, customers are not better off by DP&L’s purchase of NYMEX coal even if a subsequent sale of the NYMEX for Illinois Basin coal results in an optimization benefit. Regardless, EVA thought DP&L in the FUEL Rider Stipulation had agreed to document the net benefit to jurisdictional customers which includes both the gains/losses on the underlying hedge. DP&L did not understand this to be the case.”

 

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.