W.Va. PSC backs American Electric Power coal procurement

The Appalachian Power unit of American Electric Power (NYSE: AEP) pretty much won the day in disputes related to coal procurement, including a burn of expensive low-sulfur coal at the scrubber-equipped Mountaineer power plant, at the West Virginia Public Service Commission.

On July 26, the PSC approved the annual Expanded Net Energy Costs (ENEC) rate proceeding of APCo and sister utility Wheeling Power. The ENEC rate review is a special purpose rate proceeding for electric utilities that allows cost recovery for the prudently incurred costs associated with obtaining fuel, purchased power and purchased transmission access costs, and specified construction costs.

An ENEC proceeding is sometimes referred to as a “fuel cost review” rate proceeding because historically the purpose of an ENEC case was to allow electric utilities to request rate adjustments to recover or flow back to the ratepayers the difference between the current costs allowed in rates and the utility’s actual costs of obtaining fuel and fuel-related purchased power that the utility uses to produce electricity and provide electric service to customers. The fuel cost proceedings have been expanded to include other cost components related to obtaining, generating or transmitting power.

On March 30, the AEP companies filed their 2012 ENEC with the commission to address actual historical and projected ENEC costs, including an under-recovery balance of approximately $329.4m as of Dec. 31, 2011.

In one area of the case, there was considerable opposition by the parties in the case concerning the inclusion of the write-offs of costs related to the abandonment of the scrubber project at Ohio Power’s Muskingum River coal plant and the undepreciated balance of Ohio Power’s recently-shut Sporn Unit 5. In a deal between some of the parties to the case – including the utilities, PSC staff, the state Consumer Advocate Division and the West Virginia Energy Users Group – there was an agreement to reduce the ENEC Starting Balance by $7,353,251 to eliminate the effect of the write-offs, and the companies’ agreement not to seek recovery in future ENEC proceedings of any comparable write-offs associated with the future retirement of the Conesville units.

The companies proposed to increase the 2012 ENEC under-recovery balance for the amortization of the Bonus Coal Payments as authorized by the commission in a 2011 case. The stipulating parties did not oppose inclusion of this amount. They agreed to increase the ENEC Starting Balance by $6,077,324 to reflect the previously agreed to amortization of bonus coal payments for 2011.

Another issue raised by CAD witness Billy Jack Gregg, in heavily redacted testimony, was the payment by AEP of liquidated damages to rail carriers for coal it didn’t ship due to depressed coal burns. The stipulating parties agreed to recovery of the liquidated damages challenged by Gregg.

Gregg had testified: “These liquidated damages penalties should be disallowed and removed from the energy portion of the ENEC actual cost balance for the review period. It is the responsibility of APCo management to control the logistics of fuel supply in order to maximize security of supply and minimize costs.”

Commission says it won’t disallow what SWVA can’t quantify

Steelmaker SWVA Inc., through consultant Emily Medine of Energy Ventures Analysis, argued that the commission should find that a portion of the companies’ fuel expenses in the 2012 ENEC under-recovery balance is not reasonable nor prudently incurred, and should deny these expenses. SWVA argued that the fuel expenses were not reasonably nor prudently incurred because American Electric Power Service Corp. (AEPSC) purchased coal for the 1,300-MW Mountaineer plant with an average sulfur content below the 7.5 lbs/mmBtu that the plant’s relatively new scrubber was designed to handle. SWVA argued that this resulted in the companies’ fuel costs being higher than they should have been, and that AEPSC over-purchased low-sulfur coal for other plants that it had then had to burn off at Mountaineer, resulting in higher costs.

“SWVA witness Medine could not quantify a recommended disallowance due to insufficient data, but asked the Commission to disallow the fuel procurement expenses based on one of two methods: 1) by the use of the purchase costs as the disallowance as addressed by witness Medine or 2) by directing the Companies to calculate the disallowance,” the commission noted. “The Companies argue that it is unreasonable to view the AEPSC purchase in perfect hindsight and that the practices were reasonable based on the information available at the time. The Companies testimony asserts that because of an unexpected increase in the consumption of coal and generation during the summer of 2011 (which lowered inventories), the Companies were forced to purchase more coal on the spot markets to meet immediate needs. The Companies argue that the fuel purchases were reasonable and prudent in light of forecasted consumption amounts. In addition, the Companies assert that they will make all reasonable efforts to reduce the coal inventory and to get to target levels.”

The AEP companies also stated that it lacked high-sulfur coal in 2011 due to the 2010 shutdown due to geology problems of the Gatling LLC mine next to Mountaineer. They also said that no one could have anticipated the market changes occurring at the end of 2011, noting that the companies exceeded their forecasted coal consumption, specifically of low sulfur coal at its unscubbed plants in mid-2011. The AEP companies argued that the SWVA proposal to disallow fuel procurement costs should be rejected because of SWVA’s lack of support for a specific disallowance.

“Although the testimony of the SWVA witness speculated about insufficient or incorrect coal purchases, the SWVA witnesses did not quantify the negative impact on the coal procurement activities,” the commission ruled. “The Commission finds the inventory practices of the Companies were reasonable, given the loss of a major supplier of high sulphur coal, the impact of lower sales in the current economic climate and their impact on coal supply demand, the potential for additional transportation cost of shifting inventory between generation plants, and the potential contract cost rider increases surrounding termination of contract coal supplies and associated transportation contracts. The Commission will not modify the ENEC under-recovery balance for the impact of coal inventory procurement costs as requested by the SWVA.”

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.