Big Rivers: bankruptcy, forced shutdown of power plants are bad ideas

It would be a bad idea to either force Big Rivers Electric to shut down its coal-fired power plant and replace that power from the open market, or force Big Rivers into bankruptcy protection, said William Snyder, a Restructuring Principal at Deloitte Financial Advisory Services LLP.

Big Rivers on June 24 filed with the Kentucky Public Service Commission rebuttal testimony from various parties, including Snyder, in a contentious rate case pending at the PSC. Big Rivers wants a major rate hike to make up for the potential loss of load from the defection or shutdown of aluminum smelter power customers.

Several intervenor witnesses in the rate case have intimated in testimony that Big Rivers should file for relief under Chapter 11 of the U.S. Bankruptcy Code instead of being granted rate relief. They proposed that a restructuring or bankruptcy proceeding would be an opportunity for Big Rivers to force its creditors to allow Big Rivers to reduce its prudently incurred debts and restructure its balance sheet as a result o fthe termination by Century Aluminum of Kentucky General Partnership of the Retail Electric Service Agreement, dated July 2009, for Century’s Hawesville smelter, Snyder noted.

“I have examined and considered the advantages and disadvantages of a Chapter 11 and have concluded that a Chapter 11 for Big Rivers, in lieu of rate relief, is not as simple as the intervenor witnesses imply and is likely to create more problems than it would solve,” Snyder wrote.

Among the negatives of such a course of action would be that Big Rivers’ lenders would likely view a Chapter 11 filing as a hostile action toward them which would likely will result in litigation rather than a collaborative process and a negotiated solution, Snyder said. Also, a Chapter 11 case is extremely expensive and disruptive and would likely cost Big Rivers, in fees and expenses alone, between $30m and $90m, Snyder pointed out.

Another suggestion that has been made was for Big Rivers to dispose of its generating capability and purchase power from the grid through the Midcontinent Independent System Operator (MISO). The theory behind the suggestion is the assumption that coal-generated electricity is not competitive with other sources and will not be competitive into the indefinite future, Snyder noted.

“Selling, closing or decommissioning its generating facilities would result in Big Rivers (and the ratepayers) being wholly subject to the vagaries of the marketplace for purchased power,” Snyder opined. “Big Rivers would not be in control of its ability to generate and market power and would be subject to market manipulations of ‘Wall Street’ power traders. Deregulation of the wholesale power markets in California during the 1990’s assumed an abundance of power that would drive and keep prices low. When scarcity occurred in 2000, the spot prices of power skyrocketed and drove one company to the brink of bankruptcy and another into bankruptcy when these companies simply could not afford to purchase the power needed to reliably serve their customers. Since Big Rivers would not have the capacity to generate its own electricity (by definition) under this scenario, it would not be able to hedge and avoid those marketplace risks.”

The price of fuel (whether coal or natural gas) is volatile, Snyder added. Sometimes coal is the low cost fuel and sometimes natural gas is the low cost fuel. In just the past few years, the low cost fuel has changed a number of times. It would be foolish to adopt the suggestions of the objectors about coal being uneconomic into the long-term future, which are predicated upon a snapshot analysis when history has proven that short term thinking in the power generation business can have disastrous effects on utilities and ratepayers alike, Snyder said.

Coleman to be idled, depending on grid support needs

Also including in the June 24 filing was testimony from Big Rivers COO Robert Berry. In preparing its application in this proceeding, he noted that Big Rivers operated under the assumption that it would idle the coal-fired Wilson Station and operate the Kenneth W. Coleman Station in Hawesville, Ky. In the course of recent negotiations with aluminum customers Century and Kenergy, Big Rivers has decided instead to operate the Wilson Station and idle the Coleman Station.

Big Rivers knew from the beginning that idling Coleman would provide the most economic benefit to Big Rivers’ members; however, based o operating experience Big Rivers was uncertain if  MISO would allow it to idle Coleman if Century continued to operate at its historical levels (482 MW).

The System Support Resource (SSR) process is a relatively new MISO process established to keep plants operating that are critical to transmission system reliability. At the time Century gave notice, there was only one approved SSR agreement in MISO, so Big Rivers had a very limited understanding of the SSR process, Berry noted.

Big Rivers last year approached MISO to get a better understanding of the SSR process and became more knowledgeable of the process. In December 2012, Big Rivers filed an Attachment Y-2 with MISO requesting MISO to perform a reliability study to determine if Big Rivers could idle Coleman if Century continued to operate at 482 MW. MISO has issued a confidential draft report identifying reliability issues if the Coleman Station is idled and Century continues to operate at 482 MW.

Based on the fact that idling the Coleman Station would provide the most economic benefit to Big Rivers’ members, and given Century’s recent interest in operating the Hawesville smelter somewhat differently than in the past, Big Rivers converted its Attachment Y-2 into an Attachment Y on May 24, 2013, seeking permission to idle the Coleman Station.

Berry said idling Coleman is appropriate for Big Rivers and its members because:

  • the Coleman units are the oldest in Big Rivers’ generating fleet;
  • they require a higher quality, more expensive fuel compared to other Big Rivers units; and
  • they have the least amount of pollution control equipment installed. Historically, the all in production costs for the Coleman units are approximately $4.54/MWh higher than the Wilson Station.

The ability to idle Coleman depends on whether MISO requires Big Rivers to operate the Coleman Station for system reliability purposes. The Coleman Station will either be idled or will be under SSR status; in either case, it will not cause a meaningful financial impact on the rate adjustment Big Rivers seeks in this proceeding, Berry wrote. The fact that MISO has identified Coleman as an SSR resource confirms the value it provides, he added.

In addition to the system reliability afforded by the Coleman Station, this generation capacity provides Big Rivers with an opportunity for growth in the Hawesville area and an opportunity to diversify its load concentration. Even if idled, Coleman serves as a kind of insurance policy for Big Rivers’ members against inevitable fluctuations in the energy markets. Maintaining Coleman’s generation capacity, even if temporarily idled, ensures that Big Rivers’ members will continue to benefit from having this capacity around, Berry said.

MISO recently found, in its Y-2 report related to the Wilson Station, that Wilson most likely could not be idled any further than 2017 before it would be required for reliability purposes, even assuming all of Big Rivers’ other plants were active, Berry said.

If Century continues operation of its Hawesville Smelter, Big Rivers will operate Coleman under SSR status until such time as Century installs the necessary equipment to operate the smelter at its Base Load as determined by MISO. (Base Load is the level at which Century can operate without creating a reliability issue that requires operation of the Coleman Station.) The second possibility is that if Century ceases operation, MISO may determine that Coleman is necessary to ensure the ongoing reliability of the transmission system, Berry said. If this determination is made, Big Rivers will idle Coleman instead of idling Wilson as it had previously considered.

Big Rivers owns and operates 1,444 MW of generating capacity in four stations: Robert A. Reid (130 MW);, Kenneth C. Coleman (443 MW); Robert D. Green (454 MW); and D.B. Wilson (417 MW).

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.