Due to an Oct. 13 order from the Federal Energy Regulatory Commission rejecting certain accounting treatment for refined coal projects at three power plants, Louisville Gas and Electric and Kentucky Utilities on Oct. 30 filed a revised application with the Kentucky Public Service Commission for a different form of accounting treatment.
The two utilities, both subsidiaries of PPL Corp. (NYSE: PPL), said that their Aug. 14 application for the accounting and fuel adjustment clause treatment to the state commission, if granted, would create the inconsistent accounting and regulatory treatment the companies initially sought to avoid.
“Therefore, to avoid this dilemma and the prospect of having to maintain separate books and accounting entries for FERC and for this Commission, the Companies respectfully move the Commission to issue an order permitting the Companies to amend their application and withdraw their request for the accounting and fuel adjustment clause treatment discussed above,” they said. “Instead, the Companies are seeking approval to establish a regulatory liability for the proceeds from its proposed refined coal arrangement, as discussed in the amended application.”
They want the Kentucky commission to issue a declaratory order and grant approval for entrance into various agreements relating to proposed refined coal production arrangements at the companies’ Ghent, Mill Creek and Trimble County generating stations. Section 45 of the U. S. Internal Revenue Code provides tax credits for up to ten years to entities that produce refined coal for sale to an unrelated third party used to produce steam. The tax credit expires in 2021 and, except and if extended, will not be available thereafter.
In order to qualify for the tax credit, the refined coal must show a minimum reduction of NOX emissions by 20% and SO2 or mercury emissions by 40% compared to the emissions from the unrefined or feeder coal. The facility producing the refined coal must also have been in service prior to the end of 2011. Thus, there are a limited number of such facilities in existence. The companies believe that the proposal discussed in this amended application provides them with an opportunity to generate an economic benefit for their customers by reducing costs, while both encouraging the economical use of coal and potentially reducing emissions.
In addition, it is possible, but not guaranteed, that the companies will realize other cost savings, such as lower reagent expenses as a result of using the refined coal. The companies’ ultimate entering into of Refined Coal projects is subject to satisfactory commercial, legal and operational conditions and arrangements in the proposed refined coal market and with its participants.
The companies propose entering into up to three separate Operation Agreements with subsidiaries of Clean Coal Solutions LLC (CCS) for each power plant. CCS is the exclusive licensee of certain proprietary technology to produce refined coal by chemically treating feedstock coal to reduce NOx and mercury emissions. The companies evaluated CCS’ proposal versus that of another supplier offering a similar process. Because of the limited number of potential suppliers, the companies did not undertake competitive bidding, but negotiated with both suppliers to obtain the best deal.
CCS has already implemented 17 similar refined coal production projects, including one at the Tennessee Valley Authority‘s Paradise Station in Muhlenberg County, Ky. The CCS subsidiaries would undertake the installation and operation of the Refined Coal Production Facilities at the three power plants without cost to the PPL companies.
The utilities would supply the feedstock coal to the Refined Coal Production Facility at each station from the coal deliveries and inventory at the station. The companies would sell feedstock coal to the respective CCS subsidiaries at the companies’ weighed average inventory cost. After production, the refined coal would be resold to the companies at the same price the feedstock coal was originally sold.
The tax benefits available for refined coal production are adjusted for inflation, and currently amount to $6.60 per ton of refined coal. Based upon forecasted annual coal usage, and subject to potential adjustment for market or other conditions, the total annual fees could potentially amount to $10.1 million at Ghent, $5.9 million at Mill Creek and $3.6 million at Trimble County.
The PPL companies do not anticipate that the Refined Coal Agreements would extend beyond expiration of the Refined Coal Tax Credit, currently scheduled for 2021.