DTE Electric (formerly known as Detroit Edison) is continuing to run into problems at the Michigan Public Service Commission over its expenses for reduced emission fuel (REF), which is coal treated with chemical additives to control emissions and then burned in its power plants.
The regulated utility sells stockpiled coal to non-regulated sister companies, controlled by parent DTE Energy (NYSE: DTE), and then buys it back for consumption at certain power plants. This program has run into opposition in both a power supply cost recovery (PSCR) case begun in September 2011, and another annual PSCR filed by the utility in September 2012.
DTE Electric officials in prior testimony have said that REF is a cost-effective emissions reduction program for utility ratepayers and that the affiliated companies that do this work are taking on the technology and tax credit risks that ratepayers don’t need to shoulder.
On March 7, in testimony filed at the PSC by the Michigan Attorney General in the PSCR case begun last September, consultant Michael McGarry Sr., President and CEO of Blue Ridge Consulting Services, took issue with DTE Electric’s preferred accounting.
“The Commission should disallow inclusion of REF project costs in the PSCR Plan,” McGarry wrote. “In my opinion, REF project costs are neither booked costs of fuel burned nor booked costs of purchased and net interchanged power transactions that can be recovered as PSCR expenses.”
He noted that DTE Electric currently uses REF at St. Clair Units 1-4 and 6 and all four Monroe units. REF is still being tested at the Belle River plant. REF project costs are the Refined Coal Adder calculated for Detroit Edison’s St. Clair and Belle River power plants and the Coal Fee Rate received for REF consumed at the Monroe plant.
“In my opinion, this is a fundamental misapplication of Michigan law with regard to the disposal cost of fuel,” McGarry added. “Three specific areas of conceptual basis argue against including REF Project costs in the PSCR process: (1) the REF Project is part of fuel handling and not a part of waste disposal control, (2) although the Commission’s Order in U-15415 established a connection with urea based on it being a disposal cost, REF is not in the same category, and (3) REF Project costs disregard boiler technology improvements as a potential support in emissions control.”
The REF project application takes place prior to the company’s use of the fuel to generate electricity, McGarry noted. After coal is received from the coal supplier, it is sold to the DTE Energy fuels companies to be converted into REF. The REF is then sold back to Detroit Edison. All of this occurs prior to the burning of the fuel to generate electricity. “Therefore, the REF Project will be neither a booked cost of coal nor a cost of disposing of coal,” McGarry contended.
Environmental groups also take issue with REF program
George Sansoucy of George E. Sansoucy P.E. LLC, provided March 7 testimony on behalf of the Michigan Environmental Council and the Natural Resources Defense Council. He noted that the REF additives reduce SO2 emissions, may reduce NOx emissions, and may lower the cost of reducing mercury emissions. DTE Electric has stated that, under Section 45 of the Internal Revenue Code, the DTE Energy fuels companies are eligible for tax credits when they sell the refined coal back to DTE Electric. DTE Energy has sold 99% membership interests in at least two of the fuels companies to unidentified tax credit investors, Sansoucy wrote.
Among his contentions is that DTE Electric never made any inquiries with any other potential suppliers of REF other than the subsidiaries of DTE Electric’s parent company. The REF agreements were no-bid, single-source contracts whose overarching purpose was to maximize income to parent DTE Energy from the sale of entitlements to the tax credits, Sansoucy wrote.
He recommended that the commission decline to approve any aspect of the REF project due to DTE Electric’s ostensible continuing refusal to provide information on key issues. If the commission is inclined to approve the REF project in some fashion, Sansoucy recommended that any approval be conditioned on a working capital benefit being applied to the coal inventory up until the point of burning, and that the working capital benefit be applied to customers via a credit in the PSCR cases that tracks the actual reduction in the fuel inventory component of rate base each year.
He also recommended that the commission require the Belle River agreement be revised to reflect a coal discount to DTE Electric proportionate to what parties could negotiate in an arms-length, unaffiliated transaction. He recommended that the Monroe and St. Clair agreements be revised in the same manner, with any resulting reduction in retained income from the sale of tax credits being borne by DTE, because the ratepayers should not bear the consequences of DTE’s decision to monetize those two agreements prior to approval of the REF project by the commission.
Witness for state community agency has problems with REF
Geoffrey Crandall of MSB Energy Associates, testifying on behalf of Michigan Community Action Agency Association, said in his own March 7 testimony that DTE Electric (known as DECO in the filing) has not proven that third-party fuel companies controlled by DTE Energy are even needed to qualify for the federal tax credits that come with the REF program.
“DECO’s appears to base its position on the fact that DECO would not be eligible to receive tax credits for REF if it owned the REF facility,” Crandall wrote. “DECO’s logic appears to be that if a third party tax partner is needed to claim the tax credit, that is a private matter between DECO, the REF facility and DTE and therefore DECO’s ratepayers have no basis to question these private arrangements or make claims to the revenues derived from the private REF tax credit arrangement. In reality, the benefits of the tax credit would not be available to a tax partner but for the existence of the ratepayer supported utility power plants, coal handling, coal contracting and other facilities and services provided by DECO. This entire REF arrangement would not exist but for the funds provided by DECO’s ratepayers, including PSCR customers, for the fuel handling infrastructure. The REF facility is embedded within the DECO plant, using coal that DECO secures and sells to an affiliated interest. The coal is resold, at least for now, exclusively to DECO for the power plant built to serve and paid for by DECO ratepayers.”
Crandall added: “The REF facility, and the tax credit revenues derived therefrom, would not be possible without the ratepayers and DECO, a regulated entity. The fact that a third party tax partner may be required for DTE to avail itself of the substantial revenues derived from the REF facilities does not negate the ratepayers interests. Moreover, DECO has not explained why any third party tax partner requirement could not have been met if the Fuels Companies were owned by a DECO subsidiary rather than a DTE subsidiary.”
Crandall recommended that:
- the commission direct DECO to credit or flow back to the ratepayers the revenues derived from REF tax credits in 2013 and in future years (consistent with this recommendation preserved for previous PSCR years in cases not yet decided by the commission);
- the commission in the reconciliation phase of this case determine the specific amount of the credit or flow-back to ratepayers;
- the commission find that DECO is in violation of the Code of Conduct and that the commission direct it to use the higher of the market price or fully allocated costs when selling coal to its affiliates;
- the commission order require DECO in all Act 304 cases to file complete information regarding its REF arrangements and transactions, including the amount of revenues derived from REF tax credit revenues obtained, and such further information required by the commission.
Said DTE Energy about this program in its Feb. 20 annual Form 10-K report: “We own and operate nine REF facilities. Our facilities blend a proprietary additive with coal used in coal-fired power plants resulting in reduced emissions of Nitrogen Oxide (NO) and Mercury (Hg). Qualifying facilities are eligible to generate tax credits for ten years upon achieving certain criteria. The value of a tax credit is adjusted annually by an inflation factor published by the Internal Revenue Service. The value of the tax credit is reduced if the reference price of coal exceeds certain thresholds. The economic benefit of the REF facilities is dependent upon the generation of production tax credits. We placed in service five REF facilities in 2009 and an additional four REF facilities in 2011. To optimize income and cash flow from the REF operations, we sold membership interests in 2011 at two of the facilities (treated as sales of tax credits for financial reporting purposes). Although both sales included a modest up-front payment from the tax investor, the bulk of the proceeds will be received, and the income for all of the proceeds will be recognized for financial reporting purposes, as production tax credits are generated. We continue to optimize these facilities by seeking investors for facilities operating at DTE Electric and other utility sites. Additionally, we intend to relocate certain underutilized facilities to alternative coal-fired power plants which may provide increased production and emission reduction opportunities in 2013 and future years.”