PUCO approves changes to Dayton’s coal optimization program

The Public Utilities Commission of Ohio on Jan. 23 approved a stipulation agreed to by Dayton Power and Light with other parties that will, in part, place certain limits on its fuel optimization program.

Consultant Energy Ventures Analysis, hired by the PUCO, had raised issues about the optimization program during an audit of DP&L’s 2011 fuel procurement. Under the optimization program, DP&L, which mostly burns coal for power generation, buys and sells coal positions on an almost daily basis, depending on whether it thinks this activity will make it money.

In terms of the optimization program, the stipulation established, and the commission approved, these parameters:

  • For the 2012 audit period, DP&L will not treat as an optimization and will not seek recovery of a 75% charge-back of optimization gains with respect to any sale or purchase of fuel for a co-owned power plant that DP&L does not operate. An audit of 2012 fuel buying will be filed in a few months.
  • For the 2012 audit period, DP&L will not treat as an optimization and will not seek recovery of a 75% charge-back of any optimization gains associated with a sale or transfer of fuel between one station operated by DP&L and another station operated by DP&L.
  • For the 2011 and 2012 audit periods, the use of a methodology that includes recording of 100% of accounting gains and losses in FERC Account 456 for recovery through the Fuel Rider, and the charge-back of 75% of optimization gains, is consistent and compliant with the commission’s previously approved 25% sharing method.
  • The sales of coal made by DP&L from purchases entered into after April 29, 2011, shall be treated as optimizations only if replaced with a coal with similar sulfur content.
  • Except where otherwise excluded or precluded, fuel sales and procurement purchases that result in an improvement on then-existing position may be optimization transactions for which the 75% chargeback mechanism applies.
  • Optimization gains can occur where there is an accounting loss and, absent a finding of imprudence, the existence of an accounting loss does not preclude the transactions from being defined as optimization transactions for which a 75% charge-back is made, provided that the fuel sales and replacement purchases result in an improvement on the then-existing position.
  • Beginning Jan. 1, 2013, and continuing until directed otherwise by the commission, DP&L will cease the charge-back of 75% of any fuel optimization transaction.
  • DP&L will continue to include demurrage differences analysis in its evaluation of optimization trades.

Another element of the stipulation approved by the commission outside of the optimization program is that DP&L will document in writing its efforts to reduce its use of low-sulfur coals below 25% at the Stuart plant in a cost-effective manner and will document its efforts to achieve increased fuel flexibility at the Killen station. Both plants have gotten fairly recent SO2 scrubber installations and there is an effort to take cheaper high-sulfur coals into both plants, with that effort meeting the most success at Killen.

DPL officials defended optimizations, then supported the settlement

Nathan Parke, DP&L’s Manager, Regulatory Operations, provided Dec. 10, 2012, testimony to the commission supporting the stipulation.

“I was one of the negotiators for DP&L in the lengthy settlement negotiations in which the following parties participated: the Company, the Commission’s Staff, the Office of the Ohio Consumers’ Counsel (‘OCC’), the Industrial Energy Users-Ohio (‘IEU-OH’), and FirstEnergy Solutions Corp (‘FES’),” Parke noted. He said that IEU-OH and FES did not sign the stipulation, but both committed that they would not oppose it.

“The Stipulation resolves all the findings and recommendations made in the Management/Performance and Financial Audit of the Fuel and Purchased Power Rider of The Dayton Power and Light Company filed on April 27, 2012 in this proceeding (Audit Report),” Parke added. “Additionally, the Stipulation addressed the Auditor’s recommendations contained in the Audit Report and provides clarity and scope for the next audit. The Stipulation provides a credit to the Fuel Rider for $2.0 million. The Stipulation clarifies DP&L’s optimization process by including more clarification around the calculation methodology. The Stipulation ends the 75%/25% sharing mechanism of optimization benefits for any optimizations that occur starting in calendar 2013.”

The stipulation also contains commitments relating to efforts to reduce fuel costs and modifying processes and computational methods that affect fuel rates, Parke noted.

On Oct. 4, 2012, DP&L, a unit of AES Corp. (NYSE: AES), filed pre-stipulation testimony with the commission, some of it redacted, about issues raised in the audit. Among those testifying was David Crusey, DP&L’s Vice President, Commercial Operations.

Crusey noted that the fuel audit report proposed disallowances in three areas:

  • The first involved the company’s share of optimization gains that were the result of an optimization transaction where low-sulfur coals previously bought under contracts for the Killen plant (where DP&L has a 67% ownership share) and were sold to the Stuart plant (35% DP&L ownership share) and replaced at Killen with a lower-priced, high-sulfur coal. The amount reflected in the fuel rider and proposed for disallowance was $2,164,024.
  • The second is with respect to the company’s share of optimization gains that were a result of the company’s ownership interest in a redacted plant. The amount reflected in the fuel rider and proposed for disallowance is $1,163,773.
  • The third involved trucking costs that were incurred by DP&L due to a November 2011 unloader outage at Stuart that temporarily made it impossible to unload coal from barges.

Crusey noted that optimization is a process by which the company reviews and compares its existing portfolio of coal supply contracts, including both price and quality characteristics, against the current prices available in the market were it to sell coal in its portfolio and buy replacement coal for its plants. When opportunities arise to sell an existing coal contract at one price and purchase replacement coal at a lower price, that sale and purchase would financially improve DP&L’s coal position, thus is considered an “optimization.”

Audit described coal status at Stuart, Killen

The April 2012 audit by Energy Ventures Analysis (EVA) said that the Stuart station consists of four units with a total capacity of 2,308 MW. The retrofits of flue gas desulfurization on all four units were completed in 2008. All coal to this station is delivered by barge. Generation in 2011 recovered only slightly from the low levels experienced in 2010. This is DP&L’s largest station, consistently burning more than 6 million tons per year.

Prior to the retrofitting of the scrubbers, Stuart burned low-sulfur coal in order to meet its 3.16 lbs/MMBtu of SO2 limit under the Ohio State Implementation Plan. The coal originated primarily in Central Appalachia. The retrofit of the scrubbers has allowed higher sulfur coal. The scrubbers are designed for coals with an SO2 content up to 7.22 lbs/MMBtu. However, given the design of the boilers, DP&L did not assume a complete switch to higher sulfur coals because of concerns over slagging and fouling with that new coal, EVA noted in the audit.

The Killen station consists of one 600-MW, coal-fired unit. The unit was subject to the original New Source Performance Standards of 1.2 lbs/mmBtu of SO2, which the utility chose to comply with through the use of low-sulfur compliance coal. A scrubber was retrofitted on Killen in 2007. All of the coal consumed by Killen is delivered by barge. In three of the last five years, this plant operated at plus 75% capacity factors. Coal burn is typically about 1.8 million tons per year. Because of its ability to burn 100% high-sulfur coal, Killen has had lower fuel costs than Stuart and has been operating at higher capacity factors despite a higher heat rate, EVA noted.

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.