Appalachian Power again defends coal buying, including for Mountaineer plant

Appalachian Power said it couldn’t have known its needs for low-sulfur coal would plunge in 2011, adding that burning off that coal at the scrubber-equipped Mountaineer plant was the overall cheapest route to take for ratepayers.

Since the case was opened on March 30, this American Electric Power (NYSE: AEP) subsidiary, which buys its coal through American Electric Power Service Corp. (AEPSC), has been battling critics during a fuel cost debate within an annual Expanded Net Energy Cost (ENEC) proceeding at the West Virginia Public Service Commission. Steel producer and major APCO customer SWVA Inc., which used Emily Medine of Energy Ventures Analysis as its consultant, has been particularly critical of aspects of the utility’s coal buying.

“SWVA has taken issue with APCo’s coal purchases and has contended that too much coal was purchased for APCo’s generating units,” said the APCo brief. “SWVA witness Emily Medine offered her opinion that too much coal was purchased and, as a result, plant coal inventories are expected to balloon in 2013. In addition, Ms. Medine questioned whether the Companies’ storage capacity is sufficient to accommodate the increased inventory. Further, she stated that higher costs would be incurred in management of the stockpiles of coal and that the larger stockpiles would result in degradation of the coal.”

The utility added: “Ms. Medine relied on the comparison of actual and forecasted coal inventory levels. She stated that actual inventory levels for 2011/2012 and forecasted inventory levels for 2012/2013 greatly exceed APCo’s target levels and that this difference is due to APCo purchasing too much coal. Medine recommended that APCo seek to defer or otherwise unwind purchases for 2013. However, she made no specific recommendations with regard to the amount of coal that should be included in the ENEC recovery amounts, which are, in any event, based on the amount of coal that is consumed, not the amount that is purchased.”

APCo noted that its witness, Jason Rusk, addressed Medine’s concerns in his rebuttal testimony and during his examination at a hearing on June 19. He explained that APCo’s coal inventory decreased through early 2011 and was forecasted to be near target levels at the end of 2011. “However, due to an unexpected increase in consumption of coal and generation during the summer of 2011, which lowered inventories, APCo had to purchase coal on the spot market to meet its immediate needs,” the company added. “APCo’s decision to purchase coal during the summer in 2011 was a prudent and necessary decision. At that time inventories were low and APCo was consuming more coal than had been forecasted just a couple of months before. APCo had to purchase coal to ensure its customers’ needs for electricity would be met. APCo’s purchases were reasonably based on forecasted consumption amounts. Since that time, a decrease in demand for electricity has occurred, mostly due to mild weather and a dramatic decrease in gas prices; this decrease in demand has produced an increase in coal inventory, which APCo is currently managing without difficulty.”

APCo said it expects to see this inventory grow through mid-2013 before it descends back toward target levels. APCo’s current storage capacity is sufficient to store the coal inventories forecasted for 2012 and 2013 with no degradation of the quality of the stockpiled coal and no need for any offsite storage. “Thus, Ms. Medine’s concerns about these matters are without basis,” the company added.

APCo sees no reason for major coal contract ‘unwind’

With regard to Medine’s recommendation that APCo seek to defer or otherwise unwind purchases for 2013, APCo said it is continually seeking opportunities to adjust coal deliveries upward or downward to match its needs, including the option to reduce or defer tonnages under existing agreements. Given that the coal inventory has increased, APCo said it will make all reasonable efforts to reduce the inventory and work toward target levels. In fact, APCo said it endeavors to take advantage of coal prices when they are low and consider options for negotiating existing contracts at lower market prices. However, APCo does not believe that it would be prudent to unwind agreements with coal suppliers as it could lead to material losses, such as damages for breach of contract, or result in purchases of more expensive coal in the future.

SWVA and Medine also asserted that APCo has used coal with a lower sulfur content than necessary at the scrubbed, 1,300-MW Mountaineer plant, resulting in higher fuel costs. Medine argued that, because the Mountaineer plant is designed for a maximum sulfur content of 7.5 lbs/MMBtu, the purchase of coal with lower sulfur content is not prudent. Medine did not recommend any specific amount of fuel cost recovery that should be disallowed in the ENEC, but merely stated that fuel cost recovery for Mountaineer should be limited to prudently incurred costs of high-sulfur coal.

“Company witness Rusk explained in his rebuttal testimony the circumstances which led to the use of some lower sulfur coal at Mountaineer,” APCo wrote. “This coal was not specifically purchased for use at the Mountaineer Plant. However, low sulfur coal had to be purchased for use at two other APCo plants, Clinch River and Glen Lyn, neither of which has a scrubber to accommodate the use of higher sulfur coals. In 2011, those plants were consuming greater quantities of lower sulfur coal and it was necessary for APCo to purchase additional supplies of such coal for those plants. When generation needs subsequently decreased, not all of the low sulfur coal under contract was needed at those two plants. At the same time, large supplies of higher sulfur coal which had been contracted for to be burned at the Mountaineer Plant were unavailable due to a number of problems with a principal supplier.”

That unnamed supplier, by the way, is the Gatling LLC deep mine of coal operator Chris Cline, which was built last decade right next to Mountaineer. The mine, which produced high-sulfur coal that Mountaineer could only burn with its relatively new scrubber in place, was shut in 2010 due to massive water inflows and there are doubts it can be reopened, at least in its current configuration.

“Consequently, the best available option was to deliver the low sulfur coal to the Mountaineer Plant for consumption,” the utility added. “As Company witness Rusk testified, it was less expensive to transport this coal to the Mountaineer Plant. Therefore, because the lower sulfur coal was not being consumed at the forecasted rate at Clinch River and Glen Lyn, it could be consumed at a lower overall cost at Mountaineer. It is the combination of variables like these which determines which coal is consumed at which facility. Sulfur content is not the sole consideration, provided, of course, that the sulfur content is within the minimum and maximum sulfur capabilities of a generating unit.”

SWVA says AEPSC read the coal and gas markets all wrong

SWVA got another bite at the apple with a July 11 brief of its own, which was heavily redacted but made the same basic points that APCo rebutted in its July 11 brief.

“AEPSC had no explanation as to why it had under-contracted for high sulfur coal or why it did not at least purchase spot volumes equal to the shortfall in high sulfur coal contract purchases,” SWVA wrote. “This is particularly inexplicable given: (i) Witness Rusk’s testimony that Mountaineer dispatches ahead of the other APCo units, (ii) that in 2011 APCO was ‘still outpacing what [it] had previously anticipated would be the consumption for both Mountaineer and Amos up through probably into the third quarter of 2011′ and (iii) that AEPSC had been ‘projecting that [coal burn] was going to be higher than 2010 in 2011.’ Instead, AEPSC opted to divert more expensive low sulfur coal from the Clinch River and Glen Lyn plants to Mountaineer.”

SWVA noted that AEPSC did not seek to sell the excess low-sulfur coal to third parties or renegotiate the associated contracts instead of burning that costly coal at Mountaineer. “At best, AEPSC did not act prudently because it did not try to sell the low sulfur coal,” it added. “At worst, AEPSC was ignorant of the difference between the market price for low sulfur coal and the contract prices.”

Medine’s look at APCo’s delivered coal prices to Mountaineer was based on EIA Form 923 data and showed the average delivered price of low sulfur coal delivered to Mountaineer in 2011 was $79.61 per ton. The Q3 2011 price for NYMEX Central Appalachia river coal (NYMEX specs) per ICAP United data on June 30, 2011, was $77.45 per ton. “In other words, there was only a nominal $2.15 per ton difference in price,” said SWVA. “In actuality, the average price of low sulfur coal purchases was below the NYMEX price as (1) the NYMEX price is FOB barge, not delivered, which means that the barging costs would need to be deducted from the Mountaineer delivered costs to make an accurate comparison and (2) the average quality of the APCo low sulfur coal purchases was superior to the NYMEX basis of 12,000 Btu per pound justifying a further adjustment. Mountaineer’s low sulfur coal averaged 12,238 Btu per pound versus the NYMEX basis of 12,000 Btu per pound. A simple pro rata Btu adjustment would make the equivalent NYMEX price $78.97 per ton. According to AEPSC, since the NYMEX markets are liquid, the ICAP United price ‘is a good indicator of what‘s going on.’”

SWVA added: “The bottom line is if AEPSC had sold some of the excess low sulfur coal, the economic penalty suffered by AEPSC on said sale itself would have been slight to non-existent based upon mid-year numbers and customers would have been materially better off if the low sulfur coal was sold and replaced with high sulfur coal. AEPSC therefore did not prudently treat the uneconomic coal purchases when it discovered it had too much low sulfur coal under contract and the resulting costs were not reasonable.”

SWVA contended that AEPSC showed a “shocking” lack of comprehension about a big swing toward gas-fired generation in the power industry in the 2009-2011 period. “AEPSC acknowledged the limited burn at the Glen Lyn facility in 2010, but did not connect it to the low natural gas prices,” it said. “Instead, Mr. Rusk testified that the drop in the Glen Lyn burn in 2010 was as opposed to a predictable event based upon changes to gas prices that were underway since 2009. Further, Mr. Rusk tried to attribute the decline in coal burn in 2010 only to the Amos scrubber tie-in, yet he testifies that Glen Lyn burn (with no scrubber tie-in) plummeted. Mr. Rusk also did not comment on the large decline in Ohio Power’s burn during the same period.”

Ohio Power is a separate AEP subsidiary that operates plants in the same dispatch zone as APCo. AEPSC also buys coal for Ohio Power.

Medine was unable to quantify a recommended “disallowance” due to insufficient data to determine actual excess costs attributable to the disparity between low sulfur and high sulfur coal, SWVA said. Medine was working off publicly-reported EIA delivered coal price data, while AEPSC has indicated that there are other price variables not reported that make the EIA figures unreliable for precise comparisons. In order to quantify the possible disallowance, the commission has two alternatives: use the EIA-based purchase costs provided by Medine as the disallowance amount; or direct the AEP companies to calculate the disallowance following a carefully prescribed methodology. SWVA said that second option is the preferable alternative.

In the event that the commission decides to direct the AEP companies to calculate the disallowance, SWVA recommends that the commission direct the companies to take the difference between the average consumed cost of high sulfur coal and the average consumed cost of the low sulfur coal delivered to Mountaineer on a cents per MMBtu basis adjusted for the additional costs associated with the use of higher sulfur coals and apply the differential to all the low sulfur coal consumed by Mountaineer in the relevant periods. In addition, the AEP companies may 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, SWVA suggested.

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.