Big Rivers Electric, a power cooperative out of western Kentucky, is exploring the sale of two coal-fired power plants to stave off a financial meltdown, including a possible bankruptcy, and is unsure right now whether it can follow through on a cost-saving plan to idle the coal-fired, 443-MW Coleman power plant.
Big Rivers on July 26 filed at the Kentucky Public Service Commission a 191-page “brief” that runs down the arguments of it and other parties to a long-running, controversial rate case. Big Rivers is seeking an unusually large rate hike from the PSC due to the potential loss of aluminum smelter power customers that take a very high percentage of its power production.
“Big Rivers has also explored and continues to actively explore the possibility of selling certain generation assets,” said the brief. “It is currently engaged in discussions with multiple entities about the possible sale of the Wilson Station or the Coleman Station, and it has set a price on both plants. None of the potential counterparties to these proposed transactions have refused the offers currently on the table.”
Big Rivers said it would only sell a power plant if that would provide greater benefit to the members than idling the plant. In other words, Big Rivers would consider an offer to purchase one of its plants if that offer would not result in a loss of equity (a critical part of Big Rivers’ necessary access to the capital markets) and if the price paid for the plant was high enough to fairly compensate Big Rivers’ local cooperative members.
Big Rivers said its willingness to consider selling generation assets is complementary to its ongoing efforts to market available capacity because they are both efforts aimed at providing the maximum possible benefit to Big Rivers’ members, whatever form that benefit takes.
Big Rivers says power market sales could help it in the shorter term
Big Rivers has invested significant time and energy into researching the power market and developing its off-system sales plan. Based on this research, Big Rivers reasonably anticipates that increased off-system sales will benefit its members and their member-owners when wholesale electricity prices have recovered from their current slump, expected to occur around 2019.
“This anticipated 2019 market recovery is not mere conjecture—it is based on Big Rivers’ analysis of the effect of MATS compliance costs, which it reasonably expects will force multiple retirements of older coal-fired plants, reducing total generation capacity in the region and causing market prices to climb,” Big Rivers noted. “In addition, FERC predicts that the cost of natural gas for power generation is likely to increase relative to coal. As a direct result of those predicted developments, coal-powered generation will become even more competitive on the wider market and Big Rivers reasonably anticipates that its off-system sales opportunities will increase.”
“MATS” is the Mercury and Air Toxics Standards written by the U.S. Environmental Portection Agency and is due to go into effect in April 2015, with two one-year extensions of that deadline available under certain circumstances.
There is a lot of potential for short- to medium-term power sales agreements, as reflected in recent requests for proposal issued by numerous Kentucky utilities including East Kentucky Power Cooperative, Duke Energy, Louisville Gas & Electric/Kentucky Utilities and American Electric Power (Kentucky Power), Big Rivers said. “In fact, Big Rivers has already responded to multiple requests for proposal and initiated informal discussions with still other potential counterparties. Big Rivers is also able to pursue interstate opportunities due to its participation in Midcontinent Independent System Operator, Inc. (‘MISO’).”
As part of its cost-saving “Mitigation Plan,” Big Rivers said it plans to temporarily idle the Coleman Station to reduce expenses in response to the Century aluminum power sales contract termination because the fixed cost savings Big Rivers will achieve by idling the generating station are currently greater than the margins Big Rivers can earn by continuing to run the station and selling the power into the wholesale power market.
Coleman provides benefits beyond simple generation capacity—it was constructed only after detailed study of how its location would affect load concentration and transmission availability, and consequently, it is critical to Big Rivers’ overall transmission system reliability. “This is confirmed by MISO’s recent designation of the Coleman Station as a ‘must run’ System Support Resource that MISO may require Big Rivers to continue to operate for reliability purposes if Century continues to operate its Hawesville Smelter without installing certain equipment,” Big Rivers said.
It is not known at this point whether Coleman Station will actually be idled or will be under SSR status and continue to run at some level, Big Rivers pointed out.
Big Rivers faces the loss of Alcan, Century as power customers
Big Rivers filed this rate application principally to recover some, but not all, of the revenue loss it will suffer because Century Aluminum of Kentucky General Partnership (Century) is unilaterally terminating its retail electric service agreement for its Hawesville, Ky., aluminum smelter on Aug. 20, 2013. This revenue loss cannot currently be recovered in its entirety by selling the electricity currently used by Century into the wholesale market because wholesale market prices of electricity are lower than the rate Century pays, and much lower than anyone anticipated when the “Unwind Transaction”—by which Big Rivers took back operational responsibility of its generating fleet after a 1996 bankruptcy—closed in July 2009. Big Rivers leased its power plants prior to 2009 to an affiliate of E.ON US, at that time the parent of Kentucky Utilities and Louisville Gas and Electric.
“Unfortunately, the ‘worst-case scenario’ envisioned in the Unwind Transaction came to pass,” Big Rivers wrote. “On August 20, 2012, Century served notice of termination of its retail service agreement. Alcan followed suit on January 31, 2013 (after this proceeding was underway). Big Rivers’ management cannot control the Smelters’ decisions to terminate their contracts, or energy prices in the wholesale market, but Big Rivers’ management can and did prudently plan for this day.”
Big Rivers owns and operates 1,444 MW of generating capacity in four coal-fired stations: Robert A. Reid (130 MW), Kenneth C. Coleman (443 MW), Robert D. Green (454 MW), and D.B. Wilson (417 MW). Total power capacity is 1,819 MW, including rights to the coal-fired Henderson Municipal Power and Light Station Two and contracted capacity from Southeastern Power Administration.