APCo, power customer still battling over low-sulfur coal burn at Mountaineer

Appalachian Power and power customer SWVA Inc. are still battling at the West Virginia Public Service Commission over coal-buying issues related to the Mountaineer power plant, with the sides on July 16 filing their latest counter-arguments to the arguments made by each side in in July 11 filings.

SWVA argues that APCo, through the fuel buyers at American Electric Power Service Corp., failed to purchase coal at a reasonable cost for Mountaineer. “Because Mountaineer is capable of burning higher sulfur coal due to its scrubber, SWVA argues that the costs of using lower sulfur coal at Mountaineer should not be recoverable in this proceeding,” said the July 16 APCo brief. “However, SWVA fails to consider other factors that come into play when determining the coal to be purchased and consumed and the specific circumstances involved in the consumption of some low sulfur coal at Mountaineer.”

SWVA, which produces steel, relied on Emily Medine of consulting firm Energy Ventures Analysis for its testimony and analysis on this issue.

Company witness Jason Rusk has given detailed testimony about the factors and circumstances in this argument. One of the factors involved in deciding to use the low sulfur coal at Mountaineer was that a principal supplier of high sulfur coal failed to perform under its contract. That supplier would be the adjacent mine of Gatling LLC, which was shut in 2010 due to geology problems.

“SWVA takes issue with the fact that the Companies did not replace the bulk of the high sulfur coal under this agreement,” APCo noted. “SWVA incorrectly stated that APCo had no explanation as to why it had under-contracted for high sulfur coal or why it did not purchase volumes equal to the shortfall in high sulfur coal contract purchases. To the contrary, Company witness Rusk testified during the evidentiary hearing that, under the operation of the Force Majeure claim by the relevant coal supplier, APCo would be obligated to take the coal contracted for if the supplier resumed deliveries. For this reason, APCo could not simply enter into new contracts for the amount of coal not being delivered without running the risk of being drastically over-supplied with high sulfur coal. Further, Mr. Rusk explained that in late 2011, when APCo was relatively certain that the supplier of high sulfur coal to Mountaineer was not going to be able to provide further production. APCo made solicitations to replace that high sulfur coal. There was very little positive response. Most of that type of coal was committed under other contracts or was at mines that did not have the ability to respond to APCo’s needs.”

Faced with a lack of high sulfur coal and supplies of low sulfur coal beyond the reduced burn requirements of APCo’s unscrubbed plants, APCo adopted what it says is the least cost strategy of having low sulfur coal delivered to the scrubbed, 1,300-MW Mountaineer plant, helping to relieve both situations. SWVA complains that APCo did not seek to sell some of its low sulfur coal or renegotiate contracts, and that customers would have been better off if the low sulfur coal had been sold and replaced with high sulfur coal. Company witness Rusk had these responses to SWVA’s “simplistic solution”:

  • First, the companies did consider selling excess coal and renegotiating contracts. Rusk testified that the companies made inquiries about selling the coal, but the market price was much lower and it was determined that the cheapest alternative was to absorb the costs into the plants that could consume the coal without any complication, which is what was done in using the low sulfur coal at Mountaineer.
  • Second, sufficient volumes of high sulfur coal were not available to APCo based on requests for proposals that were issued in late 2011.
  • Finally, SWVA offers adjustments to NYMEX prices which were not a part of the evidentiary record up to now. In addition to being improper, the use of these adjusted prices is misleading, the utility said. SWVA compares the average price of delivered coal to Mountaineer in 2011 with a mid-year ICAP forecast price and argues that APCo could have sold its coal at that forecast price at only a nominal loss. “The problem with SWVA’s argument is that APCo had no cause to try to sell coal until toward the end of 2011; earlier in 2011, APCo was purchasing coal, based upon the increased needs at that time for low sulfur coal for its unscrubbed plants,” the utility said. “There is no way that APCo could have been able to sell coal in late 2011 at the prices which ICAP had forecasted mid-year for later in 2011. What actually happened in the market was a marked decrease in low sulfur coal prices by late 2011, below the levels that ICAP had forecast.”

APCo says there was no “shocking” lack of market awareness on its part

SWVA argued that APCo displayed a “shocking” lack of awareness regarding future market prices of, and demand for, coal. In mid-2011, APCo was exceeding forecasted coal consumption, mainly at its plants consuming low sulfur coal. “No one could have reasonably predicted the market changes that would occur toward the end of 2011 when, during the summer of 2011, APCo was exceeding burn forecasts as discussed by Mr. Rusk. Notably, even SWVA’s own Cross Exh. No. 3 (the June 30 2011 ICAP coal letter, including forecasts), which SWVA claims as a reliable source for coal prices, does not forecast a downward forward trend in coal prices, but rather an increase in prices through 2011 and into future years. Thus, the data on which SWVA relies must also reflect, by SWVA’s thinking, a shocking lack of awareness as to where the coal market was going through the end of 2011. In short, SWVA has produced no evidence that shows that APCo ignored market indicators. SWVA’s entire argument is based solely on hindsight.”

Also, SWVA is recommending that the commission either use the publicly-reported Mountaineer coal purchase costs as the disallowance amount for the expensive low sulfur coal burned there, or direct the companies to calculate the disallowance envisioned by SWVA by taking the difference between the average consumed cost of high sulfur coal and the average consumed cost of the low sulfur coal delivered to Mountaineer adjusted for costs for the use of high sulfur coals and applying the differential to all the low sulfur coal consumed by Mountaineer in the relevant period. In addition, SWVA proposes that the companies could deduct a resale penalty in any month in which the prompt quarterly price is less than the delivered price on low sulfur coal to Mountaineer adjusted for Btu and transportation costs.

“This is an astounding recommendation,” APCo said. “If SWVA wanted to recommend a specific disallowance it had an obligation to do so and introduce it at the evidentiary stage, when the Companies and the other parties would have had a fair opportunity to assess it, present evidence in response to it, and conduct cross-examination on it. SWVA had full discovery rights to obtain any data that it might have needed to formulate a specific recommendation. It shouldn’t be allowed to enlarge the record after the fact or to require APCo to perform such calculations for it. Everything about the recommendation in SWVA’s Initial Brief runs counter to the most basic concepts of due process.”

SWVA again says APCo isn’t providing enough evidence about its decisions

SWVA, in heavily redacted July 16 testimony of its own, said in part: “The Companies opted to deliver low sulfur coal throughout 2011 to Mountaineer, claiming today that it was ‘the best available option.’ The Companies have provided no evidence, however, that AEPSC attempted to manage its over-commitment to low sulfur coal in a prudent manner. Moreover, the low sulfur coal delivered to Mountaineer was significantly higher in cost than the high sulfur coal delivered to Mountaineer. As evidenced by SWVA Cross Exh. 2, AEPSC delivered low sulfur coal to Mountaineer throughout 2011, which is inconsistent with the Companies’ claim of suddenly finding itself over-committed for low sulfur coal.”

SWVA also countered an APCO contention that Medine was advising that the company should have tried to breach its coal contracts. “Ms. Medine did not advocate that the Companies breach their coal contracts as the Companies suggest. Ms. Medine’s considered expert opinion is that the Companies should have made a concerted effort – certainly they should have done much more than they did, which appears to have amounted to very little if anything – to ‘unwind’ some of their low sulfur coal purchases. This ‘unwind’ could be accomplished in one or more of several ways, not involving breach, including by renegotiating contracts with coal suppliers or selling the coal to third parties. By failing to take reasonable steps to unwind its excess low sulfur coal purchases, and cover the shortfall in its high sulfur coal purchases, AEPSC further aggravated the excess coal costs that the Companies incurred during 2011 (and will incur in 2012 and 2013).”

The AEP companies suggest that using the cost of “consumed” coal (rather than the cost of “purchased” coal) changes the conclusion that there were incremental costs associated with the use of low sulfur coal, SWVA said. “Ms. Medine does not have access to the cost of the coal ‘consumed’ and therefore she used the cost of the coal that was ‘purchased’ as a proxy. All of the purchased coal is ultimately consumed, thus, to suggest that the cost of ‘consumed coal’ is unrelated to the cost of ‘purchased coal’ is simply incorrect.”

In its own July 16 testimony, the West Virginia Energy Users Group said that other issues in the case have been settled by parties to the case, but that the fight over the Mountaineer coal costs is not part of that deal. “WVEUG did not offer testimony on this point but is persuaded by the evidence and argument put forth by SWVA, particularly in that the Companies could have been more attentive to utilization of lower cost, high sulfur coal at Mountaineer, including taking reasonable steps to identify other sources of high sulfur coal if the Companies were experiencing issues with a high sulfur coal supplier as they claim,” the group said. “WVEUG therefore supports SWVA’s position on this limited issue.”

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.