FERC staff somewhat optimistic on market impacts of coal delivery issues

It is likely that below-average stockpiles at some power plants that take Powder River Basin coal will persist through 2015 as railroads struggle to keep up with overall demand before rail system upgrades are complete.

“This is raising concerns among some generators that low stockpiles coming out of the winter could create challenges in the summer of 2015,” said a report from Federal Energy Regulation Commission staff presented to commissioners at their Dec. 18 meeting.

A number of power producers, including Xcel Energy and utilities represented by the Western Coal Traffic League, have been complaining for months to the federal Surface Transportation Board about late rail deliveries of coal, with the BNSF Railway the most frequent target. The Union Pacific and the BNSF are the two originating railroads out of the high-prolific Powder River Basin. The UP serves only the southernmost mines in the Wyoming end of the PRB, including the two biggest U.S. coal mines, Peabody Energy‘s North Antelope Rochelle and Arch Coal‘s Black Thunder operations. The BNSF serves all PRB coal mines in both Wyoming and the less productive (though still regionally important in the Upper Midwest market) Montana end of the PRB.

“The extreme cold weather of last winter brought attention to the issue of replacing the drawdown of coal inventory in the central United States,” said the FERC staff report. “Since the middle of 2013, many generators already have had problems getting requested delivery levels. One concern centered on the rail delivery of Powder River Basin or PRB coal by BNSF. There are 166 power plants throughout the U.S. that use Powder River Basin coal, representing 172 GW of capacity. The majority of these plants are in the MISO, SPP and ERCOT regions.

“Rail operations in the Midwest are going through a period of adjustment and multi-faceted challenges. Coal is just one of several commodities vying for space on the rail system. Because of these developments and their implications for electric reliability and markets, Staff has paid particular attention to the coal delivery picture. Staff analyzed the fundamentals involved, monitored regulatory developments, and had discussions with a number of stakeholders. The utilities and RTOs that we spoke with relayed various levels of concern about their ability to maintain and build their stockpiles prior to the winter.

“While much of what Staff heard was specific to the individual entities, we heard a number of common themes. For instance, one theme was that generators who relied on BNSF for delivery of PRB coal claim to have consistently received less coal than they had requested. Generators asserted that their deliveries were being rationed, along with other commodities, on a rail system that was over-taxed and hampered by disruptions caused by construction intended to improve future capacity.

“PRB coal deliveries in the Central U.S. have been below previous levels all year as well as for the second half of 2013. As we can see, the inventories for all types of coal in the central states lag well behind the inventories of a year ago. Coal stockpiles at U.S. power plants are below the five-year average. At the state level, the greatest impact is on plants in MISO and SPP that rely on PRB coal, with stockpiles in Iowa and Oklahoma more than 40% below last year’s level. Other heavily affected states are Minnesota, Wisconsin, Missouri, and Texas, where stockpiles are between 25 and 40% below last year.

“Some generating utilities and independent plant operators are unable to establish the coal stockpiles that meet the targets they have set for this winter. Certain affected generators who use PRB coal delivered by BNSF have taken steps, such as reducing output and using trucks, to conserve coal and build inventories. The relatively mild summer also helped to mitigate the deficiency going into this winter. It is possible that individual power plants could run low on coal in the event of protracted cold weather and coal deliveries, and some locations cannot count on deliveries at all once the water portion of their delivery route is frozen over. The RTOs can rely on fuel diversity and surplus capacity to help manage any unexpected loss of generation due to coal supply shortages.

“A handful of generating companies in MISO and SPP have had their reference prices adjusted through consultation with the market monitors. A higher reference price reflects the opportunity cost of using a limited fuel supply and enables the generator to raise its offer without being subject to market power mitigation. Higher offer prices allow the generator to run less and conserve coal. These conservation measures typically reduce generation in the hours and days that load is relatively low. These offer adjustments have been effective in reducing coal consumption by some units, resulting in minor market effects thus far. In recent months, MISO’s off-peak prices have increased compared to a year ago while most peak prices have been little changed. This is a reasonable result because the RTO calls on these units only at higher load times. The higher offers price the units out of the low-load hours such as off-peak, shoulder-period hours.

“This can be an efficient market solution as long as the generators have estimated coal needs and offer impacts well. If the coming winter presents challenges similar to last year’s experience, the coal inventory problems could result in significant market impacts. However, Staff would expect to see a somewhat measured reduction of coal generation supply as plant operators with inventory issues take more and more conservation actions. By itself, coal inventory deficiencies should not produce significant power market dislocation. However, the inventory deficiencies could result in more significant impacts when combined with other events such as a high-level of unplanned outages or natural gas disruptions.”

The STB made a presentation at the Dec. 18 FERC meeting, citing as a major factor in these problems that Class I railroads did not fully anticipate changes in traffic patterns due to

  • Shale oil production in the Bakken region
  • Carloads of hydraulic fracturing sand traffic
  • Crude oil unit trains
  • Increased coal demand at utilities

The STB said it continues to actively monitor industry data for warning signs of deteriorating levels of service and has various statutory tools, including temporary emergency service orders.

Minnesota Power official outlines service issues

Dave McMillan, a senior vice president at ALLETE and the executive vice president at its Minnesota Power subsidiary, said in Dec. 18 written testimony to FERC: “Our rail service experiences are consistent with the FERC staff’s findings. During the winter of 2013-14 we experienced severe disruptions in BNSF service to all of our coal-fired facilities, and for extended periods of time we limited or curtailed coal-fired generation. Our largest generating station, the Boswell Energy Center, was forced to run at minimum capacity on some of the highest load days of the winter. At one point we were down to four days of coal supply. We were also forced to utilize emergency trucking of coal in storage at an off-site dock facility to our second largest plant.”

He added: “While our service woes temporarily subsided this spring, they came back once again in the late summer and fall. In August of this year we took the unprecedented step of temporarily shuttering four coal-fired units at other locations in an attempt to rebuild coal inventories at Boswell by diverting coal bound for those units to Boswell. Today, our coal inventories at Boswell are at acceptable levels. While that is good news, the inconsistency we have experienced with BNSF’s service, and the lack of an enforceable BNSF service recovery plan, does not give us confidence that current inventory levels will continue.

“Last winter and again this fall while our coal units were shut down, Minnesota Power was forced to replace its own generation with about $27 million of higher-priced purchases from the MISO market. The good news is that organized markets like MISO’s work, and we had no electric service disruptions. The bad news is the purchased energy prices were significantly higher than our self-generation costs. These increased costs are ultimately borne by our wholesale and retail electric customers – costs they can ill afford to pay.”

BNSF says it is making progress in fixing the problems

The BNSF, in a Dec. 18 presentation to FERC, outlined these bullet points:

  • Volume growth and weather events in late 2013 and 2014 centered on the northern tier caused significant congestion and led to coal service shortfalls;
  • BNSF is in constant contact with all customers, and has mechanisms in place to work with coal customers to address critical stockpile situations;
  • It has invested record amounts in capital and maintenance to add capacity to handle all of the traffic;
  • Measures to add capacity and improve fluidity are having an effect;
  • BNSF will be rebuilding coal stockpiles all through 2015 and into 2016; and
  • Regulatory “interference” with rail operations will only worsen, rather than improve, overall BNSF service.
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.