Southwestern Public Service defends use of outside contractor for coal procurement

Southwestern Public Service Co. is defending its “unusual” and longstanding agreements to buy coal for its Tolk and Harrington power plants through TUCO Inc., a third-party company.

Southwestern Public Service (SPS) is a subsidiary of Xcel Energy (NYSE: XEL). Evan D Evans, employed by SPS as Regional Vice President-Rates & Regulatory Affairs, supplied April 29 rebuttal testimony to the New Mexico Public Regulation Commission as part of a fuel cost review case under the Fuel and Purchased Power Cost Adjustment Clause (FPPCAC). Evans was responding in part to commission staff witness Andrea B. Delling concerning the long-term Coal Supply Agreement with TUCO and the associated recommendation for an Audit and Prudence Review of SPS’s Coal Supply Agreement with TUCO.

“In this section of my testimony, I address various concerns raised in Staff witness Andrea Delling’s testimony and her recommendation that the Commission issue an order initiating an Audit and Prudence Review of SPS’s Coal Supply Agreements with TUCO,” wrote Evans. “Ms. Delling is concerned that SPS’s arrangement with TUCO is ‘unusual’ in that SPS employs ‘a long-term contract to purchase 100% of its coal supply for the Harrington and Tolk Generating Stations exclusively through a coal broker by the name of TUCO.’ In her testimony, Ms. Delling extensively discussed aspects of these Agreements that date back to 1979 and aspects of various amendments to those Agreements that have occurred over time.

“Ms. Delling extensively discusses her concerns with margins paid to TUCO, despite the fact that the margin expenses are base rate costs that are not included in FPPCAC costs. In addition, Ms/ De!ling questions the fact that SPS has not analyzed the long-term contracts with TUCO recently to compare the cost of using TUCO to arrange the purchase, transportation and handling of coal to the SPS cost of performing those functions for itself. As a result, Ms. Delling concludes that the delivered cost of coal to the power plant coal bunkers adjacent to the boilers is not reasonable and prudent. However, Ms. Delling stated, ‘Staff finds the coal fuel expenses covering the F.O.B. mine, transportation and loss factor and included in the FPPCAC are reasonable.’

“I agree with Ms. Delling’s overall conclusion that the coal fuel expenses covering the F.O.B. mine, transportation and loss factor that are included in the FPPCAC are reasonable. However, the primary concerns raised by Ms. Delling are related to non-fuel, base rate costs associated with the TUCO Agreements. These issues have been previously reviewed by The Liberty Consulting Group (‘Liberty’) for the Commission in [a 2009 case], have been previously considered by the Commission in other cases, and are misplaced in this fuel continuation case.

“In their Final Report – SPS Fuel, Purchased Power, Generation and Fuel Clause Review (‘Final Report’), Liberty stated they conducted an independent audit and prudence review of the fuel and purchased power cost adjustment clause (‘fuel clause’) and related documentation of the electric business operations of SPS and conducted a prudence examination of transactions made under SPS’s renewable energy credit tracker. Liberty’s work covered the period July 14, 2009 through July 13, 2010. Liberty reviewed SPS’s arrangement with TUCO. Although, Liberty did state in the Final Report, ‘SPS receives coal under an unusual arrangement with TUCO, an outside company that manages the fulfillment of the SPS coal fuel requirements,’ Liberty did not recommend any changes to that arrangement or indicate any need for further review of the arrangement or the TUCO Agreements.”

Evans says these issues can be addressed in upcoming rate case

“Ms. Delling appears to be concerned that SPS’s arrangement with TUCO is unusual and is concerned about base rate costs that are not recovered through the FPPCAC. These arrangements, which have been in existence since 1979, were reviewed by Liberty in 2011 and they did not identify any concerns with the SPS’s agreements with TUCO, the associated arrangement, or the associated costs. Furthermore, the most appropriate forum for reviewing the base rate costs about which Ms. Delling is concerned would be in a base rate case. SPS has informed the NMPRC Staff and other parties of its intent to file a base rate case in the next several weeks and that would be the appropriate forum in which to consider these costs.

“Finally, the agreement with TUCO for the supply of coal to Harrington Station is scheduled to terminate December 31, 2016 and the agreement for the supply of coal to Tolk Station is scheduled to expire December 31, 2017. The total cost of the Liberty Audit was approximately $200,000. I do not believe it is reasonable for SPS’s customers to bear the cost of a new, separate audit of these contracts that will expire approximately 1.5 and 2.5 years after a final order is issued in this case. Furthermore, by the time a final order is issued in this case, a [request for proposals] for the Audit is issued, the contract is awarded, the audit is conducted and the final report is submitted, one or both of the TUCO Agreements could have terminated. The audit process required 18 months to complete in SPS’s previous fuel audit, NMPRC Case No. 09-00351-UT. Will the issues raised by Ms. Delling related to base rate costs from TUCO and the associated agreements be addressed in SPS’s upcoming rate case? Yes, the issues raised by Ms. Delling relative to the costs from TUCO that are recovered through base rates will be addressed in pre-filed testimony submitted on behalf of SPS in that case.”

Karen Roberts, employed as a consultant by Hinkle Shanor LLP to provide assistance to SPS in this case, also supplied April 29 testimony. Roberts was employed by SPS or its parent companies for over 36 years in several areas, including fuel supply. In 2010 she was promoted to Manager, Rate Cases, and then retired from SPS on Jan. 9, 2015.

Roberts said about the Coal Supply Agreements (CSAs) with TUCO: “The CSAs have also been subject to review in previous fuel reconciliation cases. For example, in Case No. 3709, SPS’s fuel continuation filing for the period October 1999 through September 2001, the reasonableness of the costs under the CSAs were at issue. In her direct testimony addressing SPS’s coal procurement activities during the fuel continuation period, New Mexico Attorney General (‘NMAG’) witness Andrea Crane recommended that the Commission order SPS to evaluate its coal procurement costs (i.e., delivered cost of coal) relative to other alternatives and future options, including a possible buy-out of the CSAs. In opposing this recommendation, SPS explained that it had previously investigated the advisability of purchasing TUCO from Cabot Corporation (and thereby effectively buying out the CSAs) in 1995, and determined that the purchase of TUCO by a third-party would be more beneficial for SPS’s ratepayers than if SPS owned TUCO. As demonstrated by SPS in Case No. 3709, the purchase of TUCO by NexGen in 1996 resulted in lower costs to SPS’s ratepayers through lower negotiated margins, and the projected costs SPS would have incurred would have been higher if it had bought out the CSAs. Accordingly, the Commission required SPS to continue to report on its dealings with TUCO, but dismissed the NMAG’s recommendation to evaluate further options regarding the potential buyout of the CSAs.”

The 1,108-MW Harrington plant is located in Texas, as is the 1,067-MW Tolk plant. Both plants burn primarily low-sulfur coal from Wyoming’s Powder River Basin.

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.