The Federal Energy Regulatory Commission staff sent a Nov. 7 letter to American Electric Power Service Corp. asking for more details on a coal contract buydown related to the coal-fired Conesville power plant in Ohio.
On Oct. 1, American Electric Power Service Corp. (AEPSC), on behalf of its affiliate Ohio Power, submitted a petition for waiver of section 35.14 of the commission’s regulations. AEPSC is seeking the waiver in order to recover a coal contract buy-down payment through the fuel adjustment clause in the Wheeling Interconnection Agreement.
The AEPSC filing didn’t identify the coal supplier, only referring to a publicly-traded coal company. The only such company that supplies coal to the plant is the Oxford Mining unit of Oxford Resource Partners.
With respect to the total $5,067,452 buy-down payment, the FERC letter asked:
- Identify when Ohio Power made the payment(s) to the coal supplier.
- Provide a copy of the buy-down agreement and all related agreements including the renegotiated/extended coal supply agreement with the coal supplier.
- Identify whether Ohio Power has recovered any of the coal buy-down payment(s) through the fuel adjustment clause of the Wheeling Interconnection Agreement or any other agreement. If any portion has been recovered through the fuel adjustment clause, please explain in detail. Also, identify all accounting entries related to the buy-down to date with all supporting documentation.
- If Ohio Power has deferred on its balance sheet any portion of the buy-down payment(s), identify facts like the amount of the deferral and the accounts used to record the deferral.
- AEPSC shows as part of its cost benefit analysis for the coal contract buy-down an estimated price differential to market ($/ton) by renegotiating the contract with the coal supplier. It also said that it extended the same coal supply agreement, which was previously bought down in 2012, at the same base tonnage that was originally contracted for in 2012. Provide copies of all documents, including bid solicitations, bid solicitation results and analyses, market analyses, etc., showing that the fuel price under the extended contract is below market prices.
- Explain why the contract was extended for the same base quantity when there was a need in 2012 to buy down the tonnage under the contract.
- AEPSC identified the base quantity as 1,700,000 tons under the 2012 agreement. Explain whether there was a plus or minus tonnage variance on the annual base quantity.
- Provide a buy-down recovery plan and an ongoing monthly net benefits test that demonstrates that, based on below-market prices resulting from the extension of the coal contract, the savings from the below-market price exceed the costs of the buy-down.
- According to the 2012 Form EIA-923 data submitted by Ohio Power for the Conesville plant, fuel was received from two contract coal suppliers—Oxford and Buckingham Coal, FERC noted. Typically a utility buys down a contract with its most expensive supplier. Explain why AEPSC chose to buy-down one of its coal supply agreements versus the other coal supply agreement.
AEPSC must respond to this letter within 30 days by making an amendment filing. Failure to respond to this deficiency letter within the time period specified may result in an order rejecting the AEPSC filing.
AEPSC said buydown the best option to deal with bloated coal piles
“Beginning in 2012, the forecasted burn at Conesville dropped-off significantly, and the continued delivery of contracted coal pushed the coal inventory stored at the plant to its maximum physical limit,” AEPSC noted in the Oct. 1 filing. “This decrease in burn resulted from the rapid decline of natural gas prices, driven by the introduction of new and vast gas supplies into the market from shale regions, and from the declines in energy demand, driven by the on-going recession. These noted factors reduced electric generation from coal substantially, and many coal suppliers were suffering economic difficulties, even to the point of bankruptcy in some cases.”
It added: “The publicly traded coal company was facing these same economic struggles and had been forced to shut-down some mining operations and lay-off employees. If AEPSC did not take action to address these developments, AEPSC was at risk of defaulting under the Coal Supply Agreement based on its inability to accept delivery of the full amount of contracted coal. AEPSC feared that this would financially strain the publicly traded coal company and potentially lead to litigation.”
AEPSC said it reviewed several options to solve the low demand, high inventory issue. Given the significant reductions in forecasted burn at Conesville for the following few years, deferring coal deliveries (assuming that the publicly traded coal company would even be in a financial condition to agree to do so) was not a viable option, it said.
The buy-down assisted in maintaining the publicly traded coal company’s financial stability and preserved all forward provisions of the contract. During 2013, customers are directly benefiting from these below-market prices at Conesville, AEPSC said. In fact, the contract is producing savings for customers of about $8m for this year (based on 2013 contracted coal volume) over coal purchases that otherwise would have been made at market prices. In total, this represents a net savings of over $13m.
AEPSC and Ohio Power are units of American Electric Power (NYSE: AEP).