Audit says Big Rivers Electric should look at shutting/selling coal-fired capacity

The largely coal-fired Big Rivers Electric Corp. will need to move more aggressively in coming years to mitigate the loss of its two largest customers, according to an independent audit released Oct. 6 by the Kentucky Public Service Commission.

Big Rivers is relying on assumptions that may be overly optimistic and should give more consideration to measures such as selling off power plants that are no longer needed to serve the remaining customers, the review said. The review, known as a focused management audit, was conducted by Concentric Energy Advisors Inc.

PSC Chairman David Armstrong said: “This report helps draw a road map for Big Rivers going forward. The PSC will work with Big Rivers to address the audit’s findings and recommendations.”

The PSC ordered the audit in April 2014, when it approved a rate increase requested by Big Rivers. The rate increase was the second of two requested by Big Rivers to maintain financial stability after Century Aluminum smelters in Hawesville and Sebree stopped purchasing power from the utility. Together, the two smelters accounted for about two-thirds of Big Rivers’ load and revenue.

Concentric reviewed the steps Big Rivers has taken thus far to mitigate the loss of load and revenue from the smelters. The auditor also examined Big Rivers’ future mitigation plan and the forecasts and assumptions upon which they are based. Concentric conducted interviews with the Big Rivers board and with top managers at both the utility and the three member cooperatives which own and purchase power from Big Rivers.

Concentric’s report covers 23 findings, including:

  • Operating generating facilities that produce more power than needed by Big Rivers’ customers is not consistent with Big Rivers’ mission of minimizing cost and risk for those customers, who also own the utility.
  • Numerous risks in the power market could lead to more rate increases and require more action by Big Rivers to mitigate the effect of losing the smelter load.
  • Big Rivers has adhered to its mitigation plan and has helped cushion the loss of the smelter load by selling power into the open market and by finding some new long-term customers.
  • Big Rivers has been overly optimistic in its forecasts of future power prices, which has led it to lose potential customers by settings its prices too high when responding to bid solicitations.
  • Big Rivers has overstated the future value of power generated by its two surplus power plants: the currently idled Coleman coal plant and the Wilson coal plant, which was to be idled last year but which remained open when Big Rivers found buyers for some of its output.
  • A number of factors, principally competition from plants powered by natural gas and stricter and costly pollution controls required for coal-burning plants, would make any strategy to sell all excess capacity into the power market “risky and its success unlikely.”
  • Big Rivers is unlikely to eliminate its generation surplus by growth of demand in its service territory.
  • The Coleman plant should remain idled and the future of the Wilson plant should be re-examined in the next two or three years. The sale of both plants, even at a loss, should be explored.
  • Big Rivers should seek ways to add new members and consider merger with another cooperative or sale to another utility.

Concentric distilled the 23 findings into five recommendations:

  • Big Rivers should consider adding to its board a member with specific expertise in energy finance or merchant generation. This would likely require changing the cooperative’s bylaws.
  • It should continue to develop in-house expertise in price forecasting and power market sales, but only in support of its core mission.
  • Big Rivers should immediately begin a study of the sale, retirement or redevelopment of the Coleman plant and consider options for the Wilson plant in two or three years.
  • It should continue to pursue increased sales to existing customers and to new members.
  • It should begin discussions with its lenders and the PSC to address existing restrictions to the sale of the Coleman plant and study of financial options for such a sale.

Next step is to write up action plans

With the completion of the audit report, the next step is for Concentric and Big Rivers to develop a set of action plans to address the audit’s findings and recommendations. The action plans should be completed by the end of the year.

Big Rivers is owned by the three distribution cooperatives – Jackson Purchase Energy Corp., Kenergy Corp. and Meade County Rural Electric Cooperative Corp. – to which it provides power. Together, the three cooperatives serve about 112,000 customers in 26 counties in western Kentucky. The customers include about 20 large industrial facilities.

Big Rivers owns and operates 1,444 MW of generating capacity, including: Robert A. Reid (130 MW); Kenneth C. Coleman (443 MW); Robert D. Green (454 MW); and D. B. Wilson (417 MW). All of those plants are coal-fired. In addition, Big Rivers contracts for up to 375 MW of generating capacity from Henderson Municipal Power and Light Station Two (also fired by coal) and from the Southeastern Power Administration.

The audit said that Big Rivers was able to sell a portion of the output from the Wilson facility under a bilateral contract through December 2015. Big Rivers pursued the idling of the Coleman facility as opposed to one of the other Big Rivers generating facilities based on Coleman’s age, its need for higher quality fuel, and its production costs being higher than Big Rivers’ other generating facilities..

Big Rivers submitted its plan to idle the Coleman Station in accordance with Midcontinent ISO tariff requirements to ensure that the idling of the facility would not have an adverse impact on system reliability. MISO determined that in order for Century Hawesville to operate at a firm load of 482 MW, Coleman Station would be required to remain available to generate power when needed for reliability purposes. As a result, MISO designated Coleman Station as a System Support Resource (SSR) and placed it on must-run status.

In order to avoid indefinitely paying the additional costs associated with the must-run status of the Coleman Station, Century Hawesville planned for the installation of capacitors and protective relays at its facility to allow it to safely withstand some level of interruption to its power supply to be operational by May 30, 2014, at which time Big Rivers and Century would request MISO to terminate the SSR agreement. The installation of the equipment at the Hawesville facility was completed and the SSR agreement terminated in May 2014 and Coleman is now idled.

Big Rivers has had some success marketing its excess capacity

In 2013, Big Rivers created a new business development position and hired an individual with responsibility for identifying opportunities to sell Big Rivers’ excess output. While it is not possible to determine how successful Big Rivers would be in selling its excess output under bilateral arrangements without this position, tasking an individual with responsibility for business development activities places the level of importance on these activities that is necessary to maximize the chances of success in selling Big Rivers’ excess generation, the audit said.

Big Rivers is selling a portion of power from the Wilson facility under bilateral contracts that will allow the company to continue operating the plant in the short term. This has resulted in more than $15 million in total member benefits through contribution to fixed costs for Wilson and fuel adjustment clause credits through January 2015. The low-cost fuel purchased to fulfill the Wilson transaction lowered Big Rivers’ average fuel cost resulting in an approximately $13 million reduction in the members’ monthly Fuel Adjustment Charge. The Company anticipates tens of millions of dollars of additional member benefits during the months of February 2015 through December 2015 from the sale of power from the Wilson facility.

In addition, three Nebraska entities (Northeast Nebraska Public Power District, City of Wayne and City of Wakefield) have signed contracts to purchase 67 MW of power annually from the Big Rivers system during the years 2018-2026. The expected margins from the Nebraska contracts are approximately $65 million over the nine-year term of the agreements and will begin in 2018. As of March 2015, Big Rivers has provided over 40 proposals to provide power to entities seeking additional energy and capacity in the region. Based on information provided by Big Rivers, the activity level in responding to solicitations and providing power proposals in response to RFPs has been robust. However, Big Rivers has achieved marginal success in selling output from Wilson, the audit said. This is potentially due to relatively high internal forecasted capacity prices based on projected capacity auction clearing prices in MISO Zone 6, and in some cases, the added cost of transmission required to deliver the output from Wilson to the purchasing entity.

In terms of forecasted capacity prices, the current bilateral market provides some indication of future capacity pricing in MISO, the audit said. Dynegy has been able to post approximately $2.00/kW-month in recent periods in bilateral contracts, which is consistent with the current contract price for capacity sales from Wilson. Dynegy has committed over 2,200 MW under bilateral contracts for the 2015/16 period, leaving it with approximately 4,200 MW to sell into the auction. There is speculation in the market that the bilateral deals, as well as the risk that MISO will adopt reforms that more readily enable demand response resources to participate actively in its capacity market, will keep prices suppressed in MISO’s residual capacity auction in future years, the audit noted. Given these projections, Big Rivers’ forecast of the value of the capacity from the Wilson and Coleman facilities in the MISO market appears to be inflated, it added.

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.