FERC rejects refined coal cost accounting for two Kentucky utilities

The members of the Federal Energy Regulatory Commission on Oct. 13 rejected an application from the Louisville Gas and Electric and Kentucky Utilities subsidiaries of PPL Corp. (NYSE: PPL) for approval of certain accounting related to costs to use refined coal (coal with emissions-reducing chemicals added).

On Aug. 14, Louisville Gas and Electric and Kentucky Utilities had submitted a petition for limited waiver of the commission’s accounting regulations in the Uniform System of Accounts for Public Utilities and Licensees (Uniform System of Accounts). LG&E/KU sought the waiver in order to include certain fee income and tax costs associated with a proposed refined coal sale arrangement between LG&E/KU and Clean Coal Solutions LLC within Account 151, Fuel Stock, of the Uniform System of Accounts. Kentucky Utilities also requested waiver of the commission’s fuel adjustment clause (FAC) regulations at section 35.144 in order to pass on to its wholesale customers an allocable portion of fee income and tax costs associated with the refined coal sale arrangement.

LG&E/KU explained that Clean Coal Solutions owns and operates refined coal production facilities, and that the combustion of the refined coal produced by Clean Coal Solutions results in the reduction of NOx and mercury emissions when compared to emissions from comparable coal. The utilities said they have been in negotiations with Clean Coal Solutions regarding the installation and operation of refined coal production facilities at three generators owned by LG&E/KU, and they included with their petition a draft operation agreement that would serve as a template for up to three individual agreements between the parties.

LG&E/KU explained that they will sell coal to Clean Coal Solutions for refinement, and purchase the refined coal (or untreated coal, where the refinement equipment is not operating for any reason) back from Clean Coal Solutions for the same price at which Clean Coal Solutions purchased the unrefined coal from LG&E/KU. They stated that, once Clean Coal Solutions’ refined coal facilities are installed at LG&E/KU’s generating stations, Clean Coal Solutions will pay fees to LG&E/KU for coal yard site licensing and coal yard services based upon the number of tons of refined coal produced at the facility.

LG&E/KU stated that Clean Coal Solutions benefits from this arrangement by receiving a Clean Coal Tax Credit on a per-ton basis. LG&E/KU expect all agreements to end Dec. 31, 2021, the date that the Clean Coal Tax Credit expires, barring any extension of the credit.

Said the Oct. 13 commission decision: “We deny the request for waiver of the Commission’s accounting regulations to permit LG&E/KU to record the fee income each receives from Clean Coal Solutions for the provision of coal yard services and site licensing services in Account 151, Fuel Stock, of the Uniform System of Accounts. We also deny the request for waiver of the Commission’s accounting regulations to permit LG&E/KU to record potential coal severance tax costs associated with the refined coal transaction with Clean Coal Solutions in Account 151. The Commission narrowly construes the costs that are recorded under Account 151 and that can be recovered through the FAC. The Uniform System of Accounts requires a utility to include the book cost of fuel on hand in Account 151. Among the items listed in the instructions to Account 151 are the invoice price of fuel and other expenses directly assignable to the cost of fuel on hand.

“The Uniform System of Accounts does not permit a company to record the service fee income and tax costs described by LG&E/KU as a component of the inventory price of fuel recorded in Account 151, and we are not persuaded that waiver should be granted to allow these items to be recorded outside of their normal accounts, as we find that waiver would detract from the need to strictly observe accounting under Account 151. Therefore, we require LG&E/KU to record the fee income and tax costs in their appropriate accounts.

“Specifically, LG&E/KU note that, absent a waiver, they would normally record fees they receive for the provision of coal yard services to Account 501, Fuel, the fees they receive for the site licensing services to Account 454, Rent from Electric Property, and any potential coal severance taxes to Account 408.2, Taxes other than Income Taxes, other Income and Deductions.

“We deny the request for waiver of section 35.14 of the Commission’s regulations to permit Kentucky Utilities to pass on an allocable share of the benefits from the receipt of coal yard site licensing fees and coal yard service fees, as well as any coal severance tax costs, to its wholesale customers through its monthly wholesale FAC. We find that waiver is not appropriate because Kentucky Utilities is entitled to flow through these costs and benefits to wholesale customers by way of its wholesale formula rates. Like FACs, formula rates enable utilities to pass through increases or decreases in their fuel costs to ratepayers without the need to file formal rate changes the fees received from Clean Coal Solutions for coal yard services would normally be recorded to an Account 501 subaccount, the fees received from Clean Coal Solutions for coal yard site licensing services would be recorded to Account 454, and any coal severance tax costs would be recorded to Account 408.

“They state that Accounts 408 and 501 are included in the municipal customers’ formula rate, and would therefore be flowed through to these customers in the absence of the requested waivers. Thus, absent a waiver of the accounting regulations allowing these fee incomes and costs to be recorded in Account 151, if the Commission permitted the benefits and costs recorded in Accounts 501 and 408 to be included in the FAC, they would flow through to Kentucky Utilities’ municipal customers in both the FAC and the formula rates. This would result in the double-recovery of tax costs and the double-allocation of coal yard service fee income to wholesale customers. We find it more efficient and appropriate for Kentucky Utilities to make a separate filing under section 205 of the [Federal Power Act] that adjusts its formula rates to provide for the flow-through of the savings from the coal yard licensing fees recorded in Account 454.”

The specific facilities contemplated to host these projects are: Ghent, located on the Ohio River, northeast of Carrollton, Kentucky, and 100% owned by KU; Mill Creek, located in southwest Jefferson County, Kentucky, and 100% owned by LG&E; and Trimble County, located on the Ohio River in Trimble County, Kentucky. Trimble County Unit 1 is 75% owned by LG&E, and Trimble County Unit 2 is 60.75% owned by KU and 14.25% owned by LG&E.

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.