Vectren South has coal-fired units that are not being dispatched because more competitively priced power can and is being purchased in the Midwest ISO market, causing the utility to put extra coal into stockpile even though it is taking minimum coal under its contracts.
Michael Eckert, employed by the Indiana Office of Utility Consumer Counselor as a Senior Utility Analyst in the Electric Division, made that point in March 30 testimony filed with the Indiana Utility Regulatory Commission in Vectren South’s latest fuel adjustment clause case. Vectren South, also known as Southern Indiana Gas and Electric, is a unit of Vectren Corp. (NYSE: VVC).
Vectren South’s coal inventory is much higher than historic levels, even though it is continuing to take coal from its coal suppliers at the contract minimum of 85% of the full contracted tonnage, Eckert noted. “Vectren has coal fired generation units that are not being dispatched because more competitively priced power can and is being purchased in the MISO market,” he added. “Given current market conditions and system demand, Vectren’s cost of fuel for some of its units makes them too expensive to run. Thus, MISO is not dispatching them and is utilizing purchased power to supply Vectren’s customers with their power needs. In fact, some of Vectren’s units have been placed on reserve shutdown.”
Reserve shutdown means the units have been completely shut down and there is no flame. It would take the company at least 24 hours to bring the units back on-line.
Vectren South has two contracts that have price re-openers in 2012 and is evaluating its current and future coal supply status, the coal market and its anticipated demand as it approaches the reopener negotiations, Eckert testified.
A table at the back of his testimony shows the contracts up for reopener in early to mid 2012. One of them is with Vectren South’s Vectren Fuels affiliate for 480,000 tons per year of coal to the Warrick power plant. Vectren Fuels also supplies 410,000 tons per year of coal for the Brown power plant. A second contract is with a unit of Alliance Resource Partners (NASDAQ: ARLP) for 250,000 tons per year for Brown. The Eckert filing indicates that if Alliance and Vectren South don’t agree on reopener terms, this contract will lapse at the end of 2012.
Other contracts shown in the table without reopeners this year are a 1.12-million-ton per year deal with Vectren Fuels for the Culley plant, and a 1-million-ton per year deal with Vectren Fuels for Brown.
The OUCC recommends in this case that the commission:
- approve the proposed fuel cost factors;
- continue to monitor Vectren South’s fuel cost, coal inventory build-up, and its mix of power supply sources;
- require Vectren South to update the commission on the status of the certain coal supply issues identified in its next FAC filing; and
- require Vectren South to provide information in its next FAC related to 2012 and 2013 coal supply plans.
Vectren adjusts coal inventory values under commission order
Wayne Games, Vice President-Power Supply for Vectren South, explained in February testimony to open this case: “Vectren South’s generating units are offered into the Midwest ISO Day Ahead (‘DA’) and Real Time (‘RT’) markets and are dispatched by the Midwest ISO on an economic basis. Vectren South has contracted through competitive bidding to purchase its coal requirements from nearby mines at reasonable market prices. Purchasing from mines in close proximity to Vectren South’s generating stations helps minimize transportation costs while providing a reliable, reasonably priced fuel supply.”
Games noted that under a January order from the commission in a prior FAC case, the utility has adjusted its coal costs. “Consistent with the order, coal inventory costs and delivered coal costs have been reduced to $53.81 per ton. That fuel cost is now used as the basis for our generation offers made to the Midwest ISO.”
The commission order came as a response to concerns about the fact that Vectren South buys much of its coal from an affiliate. In a 2011 FAC case, Vectren South said it does negotiate hard on price with Vectren Fuels and did last year issue a coal solicitation that resulted in a new contract with coal operator Chris Cline’s Foresight Coal Sales LLC for Illinois coal supply and reduced pricing through reopener in existing Vectren Fuels contract business.
J. Cas Swiz, Manager, Regulatory and Utility Accounting of Vectren Utility Holdings, the immediate parent company of Vectren South, said in companion February testimony that the January commission order provides for an immediate reduction in the value of the coal inventory on Vectren South’s books to a price per ton that equals expected 2013 contract prices. This reduction, along with reductions in the value of the coal purchases in 2012 under existing contracts, is estimated at $42.4m and will help accelerate the benefits to customers of lower cost coal contracts effective in 2013. This deferred amount will be recovered over a six-year period starting in January 2014.
Effective Dec. 31, 2011, Vectren South’s book value of its coal inventory was reduced to the $53.81 per ton noted in the commission order. This resulted in a $17.8m decrease in the value of the coal inventory, with a corresponding regulatory asset created. Effective Jan. 1, 2012, all coal purchases under existing contracts will be reduced to the same $53.81 per ton via a monthly journal entry to the same regulatory asset.