Oklahoma Gas and Electric should not be penalized for running its coal-fired capacity less in 2010, said three OG&E officials in recent testimony filed at the Oklahoma Corporation Commission in a fuel adjustment clause case.
Much of this May 8 testimony rebutted witness Scott Norwood, who is representing the Oklahoma Industrial Energy Consumers (OIEC) group. OG&E is a unit of OGE Energy (NYSE: OGE).
Donald Rowlett, OG&E’s Director of Regulatory Policy and Compliance, pointed out that Norwood recommends a substantial financial penalty based on his complaints about OG&E’s declining capacity factor on its coal-fired units, some 2010 unit capability issues, the materiality of a Sooner Unit 2 outage and what he describes as missed market opportunities.
Asked if OG&E’s lower-than-normal coal unit capacity factor in 2010 is indicative of imprudent management, Rowlett said: “[T]he 2010 coal unit capacity factor is influenced by OG&E’s participation in the SPP EIS Market. As Mr. Johnson explains in his rebuttal testimony, the 2010 coal unit capacity factor is also impacted by the age of OG&E’s units and day-to-day wear and tear on those units. I would also note that Mr. Norwood’s suggestion to significantly increase OG&E’s market purchases at the same time the Company increases its coal unit capacity factor is impractical given system and market constraints.”
The term “SPP EIS Market” refers to the Southwest Power Pool‘s Energy Imbalance Service market, which was launched in February 2007. The SPP EIS Market is a wholesale market which operates under a tariff approved by the Federal Energy Regulatory Commission.
Rowlett added about a 2010 coal unit derating: “Mr. Johnson explains how the repair at Muskogee 5 was conducted to reclaim the megawatts lost due to the derating. The unit was restored to its historic capacity rating upon the completion of these repairs. In addition, as explained by Mr. Morphis, the temporary derating of Muskogee 5 was driven by SPP Criterion. Woodward and Muskogee Unit 3 were not operated during the summer months of 2010 due to various equipment issues and therefore were not operationally tested according to the SPP Criteria. As a result, the capabilities of these units were listed as zero in response to data request OIEC 1-18. However, OG&E was in compliance with SPP Criteria in its capacity planning for 2010, without these units. Subsequently, OG&E senior management made the decision to retire Muskogee Unit 3 at the end of 2010, as noted in OG&E’ s MFR package at Schedule G-4.”
Morphis: Dispatching capacity based on the market is a cost-saver
Kim Morphis, OG&E’s Manager of Power Operations, wrote that the suggestion that coal unit capacity factors are the appropriate measures of determining if the company has operated those assets prudently is flawed and ignores the realities and benefits of operating in the EIS Market. “By allowing the EIS Market to optimize OG&E generating assets, including coal generation, the output and capacity factors of OG&E assets can be higher or lower than historic levels, depending upon how the cost of those assets compare to the cost of other SPP assets in the market,” Morphis added. “For example, the EIS market sometimes makes available to OG&E customers lower cost energy than OG&E’s own coal generation. In the long run the participation in the market, while it may cause the capacity factors of OG&E’ s individual units to fluctuate, is in the best interests of our customers since it results in the lowest reasonable cost.”
OG&E owns and operates five coal-fired units, located at two plants, Sooner and Muskogee. In 2010, OG&E also had (and continues to receive energy from) a long-term contract for 320 MW of coal-fired generation from the AES Shady Point plant, Morphis noted. OG&E offers all operating units, including its gas generation and wind generation, into the SPP EIS Market.
“Mr. Norwood’s calculations are based upon the concept of a closed system in which only OG&E resources serve its customers,” Morphis added. “In essence, Mr. Norwood’s calculations ignore the existence of the SPP EIS Market. Mr. Norwood incorrectly assumes that coal capacity factor is a proper metric for measuring OG&E’s performance in 2010. His assumption would be correct only if OG&E’s coal generation was the lowest cost alternative in the entire region during 2010. In addition, when calculating potential damages Mr. Norwood uses only OG&E’s gas and coal resources for replacement costs. This approach ignores the SPP EIS market and the fact that replacement costs should be based upon marginal production costs of all assets in the region. Also, Mr. Norwood does not recognize the impact of low load system demands on OG&E’s generation fleet.”
When a market price signal is less than the marginal cost of OG&E’s coal generation, it is in the best interest of customers to “back down” that generation and purchase lower cost energy from the SPP EIS market, Morphis noted. The ability of OG&E to maximize its coal-fired capacity is influenced by a combination of factors, Morphis wrote. Among these are: must take wind generation, contractually committed cogeneration and minimum nighttime loads on other online generating units. These are units that have been previously committed to meet next day peak demands.
Wind runs ahead of coal on OG&E system
In recent years, OG&E has steadily increased the amount of wind in its generation portfolio. In 2010, OG&E added 252 MW of wind generation that was not available to serve load in previous years. These included OU Spirit Wind Farm (101 MW) and Keenan II Wind Energy Purchase Agreement (151 MW). These energy sources require OG&E to utilize the energy from these facilities as it is produced and therefore are dispatched ahead of all other generating resources. All other operating units vary their production as wind generation increases and decreases. This wind generation impacts coal capacity factors and coal generation output during off-peak periods.
OG&E has two contractual cogeneration commitments: PowerSmith and AES Shady Point. OG&E has the contractual right to commit and de-commit the 120-MW PowerSmith facility according to its dispatch needs. Therefore, PowerSmith typically has minimal impact on coal capacity factors. However, OG&E does not have the contractual right to direct the de-commitment of the 320-MW AES facility. So, the availability of AES impacts the capacity factor of OG&E’s coal units in any given year.
Norwood asserts that OG&E reduced the net dependable capacity rating of Muskogee Unit 5 by 94 MW and that OG&E also reduced the net dependable capacity ratings on several other gas-fired units. He concluded that these reductions were not prudent.
“Mr. Norwood appears to suggest that OG&E arbitrarily derated Muskogee Unit 5 by 94 MW in 2010,” Morphis wrote. “This is incorrect. Muskogee Unit 5 was last tested for capability in 2007. As I mentioned earlier, such capability testing has to be conducted during the summer months. On July 31, 2010, when Muskogee Unit 5 was being tested, the unit had previously been derated for a condenser expansion joint failure, as described in Company witness Mr. Johnson’s rebuttal testimony. This resulted in a reduced capability rating when compared to the 2007 test. The lower tested capability was reported as required by the SPP Criteria. In late 2010 the expansion joint was replaced and the unit was restored to a nominal capability of 500 MWs.”
OG&E did fix some of what was ailing its coal fleet
Kenneth Johnson is OG&E’s Vice President of Power Supply Operations. Included in his testimony was this OG&E response to a data request by the industrial group that Norwood represents: “OG&E’s coal fired units availability has fluctuated from year to year since 2007. This is primarily due to the aging of the coal fleet. The average age of these generating units is now 34 years. In recent years, OG&E has experienced an increased incidence in forced outages due to the failure of various components within each unit related to equipment fatigue, creep damage due to temperature exposure, and erosion/corrosion from routine wear and tear. This has prompted OG&E to emphasize a targeted maintenance program starting in 2010. The results of this program can be seen in the improved equivalent availability performance of OG&E’s coal units in all of 2011 and into the first quarter of 2012.”
Some of the Johnson testimony was devoted to a 2010 incident. Sooner Unit 2 had been out of service for a repair to its coal delivery system and was in the process of being returned to service on Nov. 17, 2010. A company employee made a switching error, which damaged plant equipment and took Sooner Unit 2 off-line until Dec. 28, 2010, approximately six weeks longer than planned.
“The employee performing the switching was fully trained and certified,” Johnson explained. “The error occurred as a result of an employee’s independent action to not follow the switching procedure or the advice of his Secondary Switchman. OG&E management did everything it could to ensure that the employee was trained, passed his training, was certified and had the assistance of a second member during the switching. This incident was not the result of a management failure, but an individual’s error.”