American Electric Power Service Corp., which buys coal for Appalachian Power, isn’t quite sure how much coal to buy right now due to the recent wild fluctuations in the coal markets, said AEPSC official Jason Rusk in June 19 live testimony at the West Virginia Public Service Commission in a fuel cost proceeding.
Under questioning, Rusk touched on a number of areas of APCo coal buying, including a contention by a witness, consultant Emily Medine of Energy Ventures Analysis, who has testified in this case on behalf of client Steel of West Virginia (also known as SWVA Inc.). For one thing, Medine said that APCo customers shouldn’t have to pay the excess costs of burning low-sulfur coal at the scrubber-equipped, 1,300-MW Mountaineer power plant, since that coal is more expensive than the high-sulfur coal the plant can also burn and still meet air standards.
As he did in recent rebuttal testimony, Rusk said during the June 19 hearing that APCo, a unit of American Electric Power (NYSE: AEP), needed to burn off low-sulfur coal that it had bought and couldn’t use at other power plants, like Glen Lyn, and that this was not an excess cost considering how much it would have cost to buy out of this coal contract business.
Asked if APCO tried to re-sell this low-sulfur coal instead of taking it to Mountaineer to be burned, Rusk said it was much higher priced than what the market was at that time. “It would have been a loss,” he said. “I think the least cost alternative would have been to still absorb it into the plants that would consume it and can consume it without any complication. And that’s what we did.”
Rusk was asked at one point if APCo is “feverishly” trying to take advantage of the current remarkably low coal prices and enter into contracts for coal in 2014 and beyond. “We have entered into some,” Rusk said. “We have looked at some, but we still are somewhat skeptical about what kind of burns are really going to be there when we get to 2014. It’s been a very topsy-turvy last five years, and we don’t really know what’s going to be coming down the road.”
He added: “We are in the process of negotiation with one supplier with a contract we just recently entered into. And we are certainly in those negotiations lowering the price in that contract as a market re-opener for a portion of the quantity. And in those situations and if there is a potential lead for any additional, we’re certainly looking at those options and trying to take advantage of the prices that are low today where we can.”
Rusk says APCo has settled Gatling force majeure situation
Rusk was also asked about a force majeure from April 2010 by a high-sulfur coal supplier to Mountaineer. That supplier is not named specifically, but the circumstances described match that of the Gatling LLC deep mine of coal operator Chris Cline, which was opened last decade right next to Mountaineer, coinciding with the plant’s scrubber installation, and had to shut in 2010 due to geology problems. Cline also had to more recently shut his Gatling Ohio LLC deep mine in Meigs County, Ohio, right across the Ohio River from Mountaineer, also due to geology problems.
Said Rusk about the April 2010 force majeure: “And in that time frame we did not know whether they were going to be able to live up to the entire quantity or not. They had another reserve in Ohio and they were producing coal out of that. They indicated to us that they would deliver what they could from that. And they doubted they would get the stated quantity. … The legal requirement of the contract is that they were in a force majeure status. They have an obligation to mitigate that force majeure to the extent that they can. They still have the right to ship out the coal under the contract if they have the ability to do it, to mitigate that particular quantity. If we were to go out and procure coal on top of that, I think that would be double binding of the coal which we don’t think is a prudent course of action. That’s kind of the situation. They have a legal right to deliver the coal. They declared force majeure which excuses them, to some extent, which we were working with them to try to find out exactly what they could do and what they could not do, obviously. You know, what we were doing at that particular point in ’10 was attempting to prove out the legitimacy of their force majeure claim and to figure out if there was a way to limit the exposure so that we could properly put them in a framework to know what we could expect from them. And then do as exactly what you’re talking about and then maybe go out and make a purchase that would replace those particular tons.”
Some replacement coal bought from American Energy
In answer to a question about the size of this force majeured contract, Rusk said: “They had a base amount of 1.2 million and an option to do two and a half million…. We replaced approximately 700,000 tons of their coal with another supplier which was delivering coal at substantially less money for 2011 at around the same quantity, around 700,000 tons. And we did that in 2010, and that was delivered into the Mountaineer plant as replacement coal in ’11. And that was with American Energy. … Then in the course of 2011 the Gatling company had developed similar force majeure complications in the production on the Ohio side and eventually shut in their reserves in Ohio. And so now they’re producing nothing out of either West Virginia or Ohio. And we have just recently in 2012 negotiated a settlement agreement of sorts. And that agreement was that they paid APCo $2 million of cash staggered over, I think, it’s five quarters, if I remember correctly. And then there is a right of first refusal that APCo has on future production capabilities out of that operation at ten percent below market once the operations are up and running and they reach a particular level of production capability.”
Rusk noted that at current market prices, he seriously doubts that mine can reopen.
Asked about other high-sulfur coal that APCo purchased in 2011 and 2012, Rusk said: “American Energy that I mentioned that’s around 700,000 tons or so in ’11. And then we also purchased some tons from Oxford, and I don’t remember the quantity. It might have been something like 250,000 to 300,000 tons from Oxford which we purchased that was high sulfur coal going into Mountaineer as well. That was for delivery in ’11. Then we purchased coal at the end of ’11 when we knew more formally what the future prognosis was going to be with Gatling. We entered into an agreement with CONSOL Energy that was to deliver at one point one and a quarter million tons in ’12 into Mountaineer. And then that [annual] quantity goes up to 2.1 million for years after that.”
Asked about the reasons for the Gatling force majeure, Rusk said it was mostly water inflows into the mine next to Mountaineer. “[T]here was so much water, my understanding is that they had somewhere in excess of 150 pumps running in their mine to be able to keep it operational and it was actually considered an unsafe mine when it was examined.” Rusk said APCo asked the coal supplier if there was a U.S. Mine Safety and Health Administration opinion on the mine’s safety, with the company saying no, but an MSHA inspector indicating the mine was “quasi unsafe to even operate.” As for Gatling’s shut Ohio mine, Rusk said his company hired an outside consultant to take a look and the consultant found there was a legitimate force majeure reason.