The Kentucky Public Service Commission ruled June 24 that Big Rivers Electric will have to talk about the future of its coal-fired power plants within an ongoing rate case that mostly has to do with the loss of power load for the cooperative.
Big Rivers, which relies heavily on coal-fired power plants located in western Kentucky for its generating output, is pursuing a large and controversial rate increase because of the loss of load from the shutdown or loss of service to aluminum smelting facilities that are its largest power customers. The Sierra Club, an intervenor in the rate case, had asked that Big Rivers respond within the rate case to questions about future compliance spending on its coal-fired capacity based on testimony in a separate, environmental compliance plan proceeding.
Big Rivers (BREC) had responded that this would violate its due process rights since would have no chance to respond to this outside evidence. But the commission ruled on June 24 that the Sierra Club could pursue these questions about the coal plants and that Big Rivers would have plenty of chance to respond during the hearing process in the rate case.
“BREC asserts that the post-2016 modeling and projections are irrelevant because its rate increase request is based solely on the Company’s 2013-2016 budget and financial plan, and not on the post-2016 modeling,” said the Sierra Club in a June 3 filing. “But that 2013-2016 budget and financial plan is based on the assumption that BREC’s generating units will be profitable again after 2016, otherwise why would that budget include approximately $60 million in spending to bring BREC’s generating units into compliance with the federal Mercury and Air Toxics Standards, $212 million of scheduled ‘asset replacement and capital improvements,’ and additional amounts on deferred maintenance between now and 2016. Certainly, if it is unreasonable to project that BREC’s generating units will be profitable to operate after 2016 then it makes little sense for BREC to be implementing a budget and financial plan that includes hundreds of millions of dollars of spending on those units, and a rate increase based on that plan would be neither just nor reasonable.”
The Sierra Club added: “It strains credulity to suggest that BREC would carry out such modeling without factoring the results into determining whether the best response to the Century smelter termination is to seek a rate increase coupled with the idling of a generating unit, as opposed to some other approach. The Commission and parties are, similarly, entitled to review such post-2016 modeling and projections in evaluating the reasonableness of the Company’s proposal.”
Big Rivers told the commission earlier this year within a separate fuel case that it was holding off on post-2013 coal supply contracting due to uncertainty about how much its coal plants would run with the loss of smelter load.
Frank Ackerman, with the consulting firm of Synapse Energy Economics, provided May 24 testimony for the Sierra Club in the rate case. He said the plant Big Rivers has proposed to idle when it loses the smelter load is the 417-MW, coal-fired Wilson plant, which is actually the cooperative’s newest and most efficient plant. Ackerman said that in the worst-case scenario, if Big Rivers loses the most smelter load possible, it will have to do more than shut Wilson to deal with its overcapacity situation.
As for the option of selling some of its coal-fired capacity, Ackerman said that Big Rivers is valuing its coal plants on its books at way more than the apparent prices in recent coal plant sales transactions involving companies like Dominion Resources (NYSE: D) (that deal included the Kincaid coal plant in Illinois) and Constellation Energy (coal plants in Maryland).
Big Rivers says plant retirements are out of the financial question
Big Rivers, in a May 24 response to a Sierra Club request for information, argued in part that it would be inappropriate to base Big Rivers’ rates in this case on the assumption that Big Rivers will be able to sell a generating unit. Additionally, absent an agreement with a willing buyer, there would be no basis for the commission to assume a sales price or date for the purpose of setting rates, Big Rivers said.
Also, Big Rivers said it can’t retire generating capacity because the book value of the unit(s) involved would reduce Big Rivers’ equity in the same amount. “It is vitally important for Big Rivers to maintain its equity, especially now that all three of its credit ratings are below investment grade,” the cooperative said. “Big Rivers’ equity is one of the few remaining positives in the eyes of the credit rating agencies.”
Big Rivers added: “Thus, since Big Rivers is pursuing the alternative of selling a unit, Sierra Club’s claim that Big Rivers chose to seek a rate increase rather than sell generating capacity is wrong. Further, since there is no basis for assuming that Big Rivers will be able to sell its generating capacity by January 31, 2014, and since Big Rivers’ post-2016 modeling and projections have no impact on Big Rivers’ ability to sell generating capacity, Big Rivers’ post-2016 modeling and projections will not impact Big Rivers’ proposed rates and are therefore irrelevant to this case.”
Lane Kollen, in May 24 testimony on behalf of the Kentucky Industrial Utilities Customers group, said about idling Wilson: “The proposed layup of the Wilson plant still leaves the Company with excess capacity. The Century termination reduces the Company’s peak load by 482 mW and its capacity requirements by that amount plus another 80 mW due to the avoided reserve margin requirements. The Company presently has 1,819 mW of capacity, including owned capacity and contractual rights to capacity…. The reduction in the Company’s capacity requirements from the termination of the Century load is 562 mW, or 31% of the Company’s total available capacity. Yet the Wilson plant is only 417 mW, or 23% of the Company’s total available capacity.”
Kollen added: “The Wilson capacity will be idled because the available generation cannot be sold into the market at prices that exceed the all-in costs of the capacity. The Wilson unit is the Company’s lowest cost operating unit. The Company’s excess capacity position will be exacerbated with the Alcan [power sales contract] termination. The Company will be forced into idling additional generation within the test year, although it has refused in response to discovery to identify the other units that it will idle.”