Indiana counselor recommends cap on IPL scrubber upgrade costs

Due to a history of cost control problems for Indianapolis Power & Light for a completed upgrade of the flue gas desulfurization system on the coal-fired Petersburg Unit 4, the Indiana Office of Utility Consumer Counselor (OUCC) recommends a “soft cap” on those costs.

IPL is a unit of AES Corp. (NYSE: AES).

The utility is currently asking the Indiana Utility Regulatory Commission for a third increase in the original project costs. In Aug. 28 testimony, OUCC analyst Cynthia Armstrong said that under the proposed soft cap, the Petersburg Unit 4 FGD project costs that IPL could include for the purposes of calculating its Environmental Compliance Cost Recovery Adjustment (ECCRA) would be capped at a specific amount. The utility could seek recovery of any costs it incurs above this cap in a general rate case, if it shows that these costs were reasonable and prudent. This is opposed to a “hard cap” which would not allow the utility to recover project costs exceeding a set amount, whether through a tracking mechanism or a general rate case, Armstrong noted.

“The OUCC considers a soft cap to be necessary in order to protect IPL’s ratepayers from rising project costs due to Petitioner’s mismanagement of the project’s budget,” Armstrong wrote. “With a soft cap in place, IPL will be incented to control project costs and ensure that every penny spent on the project is necessary and reasonable for the operation of the FGD. The OUCC is also concerned that this will not be IPL’s last request for an increase of the Petersburg Unit 4 FGD project costs.”

The OUCC believes a soft cap is reasonable given that the project has now exceeded its original cost estimate by more than 40%, Armstrong added. The soft cap should be based on the currently approved project cost. The OUCC recommends that IPL’s recovery of the Petersburg Unit 4 FGD Enhancement through the ECCRA be capped at a total project cost of $128m, or $124.535m when demolition costs are removed. In a prior case, IPL agreed to remove demolition costs from the Petersburg Unit 4 FGD project costs that would be recovered via the ECCRA.

This project started at $90m, then grew from there

IPL originally requested and received commission approval for $90m to undertake the project. Then it came back and said the cost had increased to $119.9m. This represented a $29.9m increase in the estimate for the project. Then IPL requested another $8.5m to complete the project, bringing the total project cost to $128m. Armstrong noted that IPL now wants approval for another $1.6m to complete the project, which will bring the total project cost up to $129.6m. This increase would represent a 1.7% increase, or a 44% total increase, for the project. IPL said a variety of design changes and additional activities warrant the increase.

“This is the third time that IPL has needed to significantly alter the estimated costs of the pollution control project,” Armstrong said. “We agree that many of the additional project items are necessary to complete the project, which has been in service since the end of November 2011. However, we do not believe that these additional cost overruns should be recovered through IPL’s ECCRA.”

In particular, Armstrong questioned whether the “lock-out/tag-out” (LOTO) productivity loss that IPL includes in the overall project costs should be recovered from ratepayers. “I understand that this line item pertains to the additional time that workers on the project had to spend going through the LOTO process when Unit 4 was started and shut-down numerous times after the scheduled outage was complete,” she added. “The work on the FGD project was supposed to coincide with the scheduled unit outage, but one contractor on the FGD project took longer than planned to complete its work. This delayed many subsequent work items that were not able to be completed within the outage schedule. The OUCC does not view an additional expense caused by another contractor to be reasonable for inclusion in the project costs recovered from ratepayers. IPL is currently in negotiations with this contractor over this issue, and it is the OUCC’s understanding that IPL may dispute these additional costs and attempt to hold the contractor accountable for the schedule delay. The OUCC supports IPL holding its contractors accountable for their performance.”

The OUCC remains concerned that IPL may not be managing project costs to the best of its ability through enforcing strict budget and timeframes with its contractors, Armstrong wrote.

IPL had not responded to the soft cap proposal as of the end of the day on Sept. 5.

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.