Minnesota utilities argue against penalties for power plant outages

Minnesota utilities fired back Nov. 9 at a suggestion by the Minnesota Department of Commerce, Division of Energy Resources, to impose a more restrictive, after-the-fact review standard related to power plant outages in fuel cost review cases before the Minnesota Public Utilities Commission.

Minnesota Power, for example, responded Nov. 9 to department comments in this case dated Sept. 26. The current docket covers the 2010-2011 annual automatic adjustment (AAA) reports for investor-owned utilities that were filed on or before Aug. 31, 2011. The department began issuing information requests in February, asking each investor-owned utility to identify and fully explain in understandable terms all involved equipment and equipment failures that resulted in forced outages; to identify similar failures since June 2006; and to describe actions taken to alleviate any reoccurrence of such failures.

“It was not until the July 11, 2012 Supplemental Comments that the Department indicated that its standard of review of the 2010-2011 annual fuel costs would be based on the premise that prudency of these costs would be associated with the utility’s ability to learn from past ‘failures,’” said Minnesota Power. “In the Department’s view, each utility should have had in place a system that kept a meaningful and trackable record of past forced outages, the detailed source of these outages or incidents, and steps taken to prevent and/or alleviate any reoccurrence of these incidents. Further, the Department indicated it would now require each utility to justify the specific preventive steps taken regarding each outage, based on a reasonable ex-ante analysis that identifies all reasonable options available, including industry-available best practices.”

The utility added: “The problem with the Department’s process is obvious – the Department applies a standard of review after the utilities have already incurred and acted upon forced outages in the 2010-2011 AAA period. Equally improper is an application of a prudency standard that has not been vetted by the Commission review process – nor has the standard itself been adopted by the Commission. Creating and applying a standard of review after the fact naturally results in the Department being able to cite and justify ‘imprudent’ activities by the utilities in its comments in this Docket.”

While it is appropriate for the department to question and scrutinize fuel clause costs, it is completely inappropriate for the department to unilaterally apply an invented standard after-the-fact, and to seek to penalize utilities for legitimate fuel costs incurred during the AAA reporting period, said Minnesota Power.

The most “glaring error” in the department’s approach to the 2010-2011 automatic adjustment reports and recommended denial of certain forced outage costs lies in the fact that the department analysis focuses solely on forced outage costs, and not the overall fuel clause costs customers pay on each utility system, Minnesota Power said. “The Department’s method of analysis significantly penalizes Minnesota Power for owning and operating low-cost generation units,” it added. “Minnesota Power is methodically altering its generation portfolio, but is still substantially served by coal-fired generation units. Minnesota Power has generation with low fuel costs due to effective heat rates as well as very competitive transportation and coal contracts. Minnesota Power has one of the lowest delivered energy costs in the nation, and the lowest in Minnesota.”

The department’s recommendation to credit back costs associated with forced outages assesses an unfair penalty to these low-priced generating units, the utility said. Requiring refunds based on replacement costs less unit costs is unfair to any low-priced generating unit, and takes away incentives for a utility to run low-cost generation, the utility said. “The closer a generator unit’s cost is to the prevailing market (replacement) price, the lower any forced outage cost would be,” it added. “If prudency is analyzed and refunds are assessed on this basis, it provides a disincentive for effective heat rates and competitive fuel and transportation contracts. Determining refund amounts based on forced outage costs in this manner is inappropriate and unjust.”

Minnesota Power is part of Allete (NYSE: ALE).

IPL and Northern States Power voice a lower level of criticism

In its Nov. 9 comments, the Interstate Power and Light unit of Alliant Energy (NYSE: LNT) shot back at the department in relation to costs for outages at the Burlington Generating Station Unit 1 (BGS 1), Sutherland Generating Station Unit 2 (SGS 2), and Prairie Creek Generating Station Unit 4 (PC 4).

“In its September 26th Response Comments the Department continues to believe that certain energy costs associated with outages at SGS 2 and PC 4 have not been prudently incurred and therefore, has recommended that IPL not be allowed to recover all replacement energy costs, associated with these outages, through the fuel clause adjustment (FCA),” said IPL. “As IPL discussed in its September 18th Reply Comments, IPL believes it acted prudently in regard to these isolated outages and the costs for replacement energy should be allowed.”

IPL said it has concerns with the department’s expectations/criteria regarding forced outages because they are not clearly stated, and also appear to be unrealistic. “The examination of the root causes of forced outages can be difficult because of the complexity of the issues,” it added. “IPL is concerned with the Department’s recommendation, that the Commission should disallow replacement energy costs associated with the SGS 2 and PC 4 outages, does not reflect a complete understanding of generation maintenance practices.”

The Northern States Power unit of Xcel Energy (NYSE: XEL) took a more measured approach to the department’s comments. It noted that forced outages at some units, like at its Black Dog and King plants, plus routine curtailment of wind generation at certain times, were part of the normal course of business. “We continue to assert that the record does not support a finding that any of the unplanned outage events show a lack of prudence by the Company in maintaining its generation fleet or managing wind generation,” it said. “Thus, we respectfully request that the Commission allow full FCR recovery of the costs at issue.”

The specific issue at question at Black Dog was a September 2010 coal bunker fire. “At the time of the coal bunker fire, we knew the following facts: (1) we had taken additional steps to minimize the risk of coal bunker fires at Black Dog, (2) those steps and procedures were working well, and (3) there was a significant difference in risk between the King and Black Dog plants,” the utility said. “In light of this, the Black Dog coal bunker fire was not reasonably foreseeable, the replacement energy costs were not the result of imprudence, and the costs should therefore be recoverable.”

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.