Kentucky PSC hits Kentucky Power over excessive fuel costs

The Kentucky Public Service Commission (PSC) on Jan. 22 disallowed some fuel costs related to the “overlap period” between when Kentucky Power bought half of the coal-fired Mitchell power plant at the end of 2013, and the May 2015 end of a fuel cost review period.

The “overlap” is because this American Electric Power (NYSE: AEP) subsidiary needed half (780 MW) of Mitchell to fill a capacity gap to be caused by the retirement later this year of the coal-fired, 800-MW Unit 2 at its Big Sandy plant, but has way more generating capacity than it needs in the meantime. During the 17 -month “overlap period,” Kentucky Power is operating with an unusually large reserve margin, estimated at 57% for 2014.

The PSC in the Jan. 22 order has prohibited Kentucky Power. from charging its customers about $54m in fuel costs deemed to be unreasonable by the PSC. The PSC directed Kentucky Power to refund, through a credit on future bills, $13m in fuel costs that it collected during the first four months of last year. Kentucky Power also must either refund or forego collection of an estimated $41m in additional fuel costs that was to be collected through the end of May 2015.

The order also criticized Kentucky Power for providing what the PSC called “incomplete and misleading” information to the PSC during an earlier case involving the utility’s purchase from another AEP subsidiary of the 50% share in the Mitchell plant in northern West Virginia to replace the Big Sandy Unit 2 in Lawrence County, Ky. The PSC in October 2013 approved the purchase.

The period covered by the review included the first four months of a 17-month period during which Kentucky Power is operating both Big Sandy Unit 2 and the half of Mitchell plant. Big Sandy Unit 2 is due to close at the end of May 2015. During the “overlap period” when both plants are operating, Kentucky Power is generating more electricity than it needs to serve its customers. It is selling what surplus power it can into the open market. In evidence submitted by Kentucky Power in the Mitchell case, the utility said that the acquisition of the Mitchell plant would reduce its annual fuel costs by $16.75m, with those savings passed on to ratepayers.

“However, the company did not disclose that operating the surplus generating capacity would impose an additional $38.25 million in annual fuel costs on Kentucky Power’s customers due to the method the company uses to calculate those costs,” the PSC said in a Jan. 22 statement. The parties that negotiated a proposed settlement in the Mitchell case “had every right to believe” that all costs related to the transaction had been disclosed during their negotiations with Kentucky Power, the PSC said.

Despite finding that the cost allocation during the overlap period was unreasonable, the PSC said the Jan. 22 decision “has no impact on our decision” that the Mitchell purchase “over the long term, still represents the lowest reasonable cost alternative” for replacing Big Sandy Unit 2.

Said the Jan. 22 order about Kentucky Power’s side of this argument: “Kentucky Power asserts that its fuel allocation methodology is reasonable because: 1) customers have ‘first call’ on its generating assets and, because of this ‘first call,’ its customers received net benefits of $9.9 million during the period between January 1, 2014, through April 2014; and 2) its fuel allocation methodology is consistent with historic practice, the methodology used by Louisville Gas and Electric Company and Kentucky Utilities Company, Federal Energy Regulatory Commission guidance, and the Stipulation and Settlement Agreement (‘Settlement Agreement’) in Case No. 2012-00578 (‘Mitchell Case’). Kentucky Power notes that the Settlement Agreement states that ‘[c]ustomers shall at all times be entitled to the least-cost energy produced by generation owned, leased or purchased by the Company consistent with economic dispatch principles’ and that its allocation of the highest incremental fuel costs to off-system sales follows from the economic dispatch of its units. Kentucky Power claims that it acted in good faith in making its representations regarding a $16.75 million fuel savings reported in the Mitchell Case, and that had a net energy cost analysis been performed in that proceeding, it would have demonstrated the significant net fuel cost benefits to its native load customers as a result of the Mitchell Generating Station (‘Mitchell Station’) transfer. Kentucky Power claims that any change to its fuel allocation methodology can be made only prospectively and only at a time when base rates are modified.”

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.