The Michigan Public Service Commission on Dec. 11 approved a December 2014 application by DTE Electric for a rate hike, with that year-long case featuring a major argument over the utility’s continuing investment in aging coal-fired power plants.
DTE Electric, a unit of DTE Energy (NYSE: DTE), had filed an application seeking authority to increase its retail rates for the generation and distribution of electricity by $370 million effective as soon as possible in 2015. The rate increase sought in this proceeding was based on the company’s projections for relevant items of investment, expenses, and revenues for a test year covering the 12-month period from July 1, 2015, to June 30, 2016. DTE Electric explained that the rate increase is needed to recover costs associated with environmental compliance, capital investments in distribution and generation assets, capital structure costs changes, operation and maintenance (O&M) expenses, and inflation.
Franklin E. Warren, Vice President in charge of Fossil Generation for DTE Electric, testified that the utility will prioritize the performance of the Monroe and Belle River coal plants, and will minimize future investments in the Trenton Channel, River Rouge, and St. Clair coal plants. He also testified that DTE Electric intends to acquire the Renaissance plant, a 732-MW natural-gas fired plant in Carson City, Michigan, and another gas-fired peaking plant.
Warren testified that the largest non-nuclear investments are related to the installation of new environmental compliance equipment necessary for meeting the federal Mercury and Air Toxics Standards (MATS). These amounts include $256 million for the installation of flue gas desulphurization (FGD) and selective catalytic reduction (SCR) equipment at Monroe, and $239 million for the installation of activated carbon injection (ACI) and dry sorbent injection (DSI) equipment at the Belle River, Trenton Channel, St. Clair, and River Rouge plants. He testified that, without these expenditures, these latter four plants (3,000 MW in capacity) would not be able to operate after April 15, 2016, the final date for compliance with MATS under one-year deadline extensions.
Irene M. Dimitry, DTE Energy Corporate Services LLC’s Vice President for Business Planning and Development, testified regarding DTE Electric’s strategy for complying with MATS. She testified that the utility considered three options with regard to the five plants facing this challenge: installation of DSI and ACI equipment; installation of scrubber/FGD equipment along with a method such as ACI or SCR for removing mercury; or retirement of the unit and the purchase of replacement energy either through the market or the acquisition of a new generating plant.
DTE Electric ultimately determined that:
- the Monroe plant will comply with MATS through the installation of FGD and SCR technology;
- the St. Clair, Belle River, Trenton Unit 9, and River Rouge plants will comply through installation of ACI/DSI; and
- Trenton units 7 and 8 will be retired.
Dimitry testified that the utility performed an economic analysis of the three options with respect to each plant, and that the ACI/DSI technology offered lower capital costs, the ability to keep the units running for now, and the flexibility to retire parts of the fleet in an orderly manner. She testified that retiring these plants all at once could present profound reliability challenges.
Enviro groups argued against emissions controls at three plants
Environmental groups, including the Natural Resources Defense Council and the Sierra Club, took issue with DTE Electric’s plan to install ACI/DSI technology at St. Clair, Trenton, and River Rouge. They presented the testimony of George Evans, President of Evans Power Consulting, Paul Chernick, President of Resource Insight Inc., and Dr. Ranajit Sahu, an independent consultant, to show that certain estimates, assumptions, and inputs into the economic analyses are not reliable.
Dr. Sahu testified that DTE Electric’s estimates of its variable O&M costs, particularly with respect to the cost and quantity of sorbents to be used, are inconsistent and unreliable. He testified that powdered activated carbon (PAC), bromated PAC, and trona are the sorbents used in the ACI/DSI equipment, and that DTE Electric’s estimates of the required quantities, going back to 2012, have been inconsistent. DTE Electric seeks recovery of sorbent costs in separate, annual power supply cost recovery (PSCR) plan cases.
Chernick took issue with certain assumptions used in the modeling of replacement power costs, and testified that DTE Electric did not make a convincing case for the cost-effectiveness of continued operation of the three disputed plants. He criticized the utility’s net present value revenue requirements (NPVRR) model, arguing that it does not recover the full value of the retrofit. He recommended that the Commission not allow recovery in rates of the ACI/DSI installation costs, due to the issues of missing costs, inflated costs, and unsupported assumptions.
The administrative law judge (ALJ) handling this case for the commission, Sharon L. Feldman, addressed several disputed issues regarding the economic analyses.The ALJ found that high estimates primarily affected the indication of the timing of new construction (under the retirement option), but were not unreasonable, stating that “the history of utility plant construction is fraught with tales of unanticipated delays and cost overruns. It is difficult to fault DTEE for assuming a longer time period for construction than it might have achieved.”
The ALJ also rejected environmental group arguments that DTE Electric should have considered alternatives, such as demand side options, to supplement or replace the new gas-fired generation in its retirement scenario.
Ultimately, the ALJ recommended no adjustments to the company’s proposed capital expenditures in this cost category, thus recommending approval of DTE Electric’s overall capital expenditures on MATS compliance for purposes of this rate case. However, she found that DTE Electric failed to adequately support the various estimates that it provided regarding its sorbent requirements at the three disputed plants. The ALJ found that the utility failed to present any explanation for the vastly different trona usage estimates reflected in that exhibit.
The ALJ observed that DTE Electric’s proposed capital expenditures for the ACI/DSI equipment installations at the three disputed plants are not large in comparison to its total proposed capital expenditures (approximately $180 million out of $3.6 billion over two-and-a-half years), and that the utility presented more analysis on this issue than it did for other proposed capital expenditures of comparable size. However, the ALJ found that DTE Electric did not establish that its estimates of the variable O&M costs, particularly the sorbent costs, are reasonable. The ALJ opined that the variable O&M cost estimate is a significant element of determining whether ACI/DSI technology is cost-effective, because, while the technology has relatively low capital costs, it has relatively high ongoing O&M costs. She found that DTE Electric did not explain why it had provided significantly different estimates in different cases, and to two different state agencies.
The ALJ provided a chart showing the potential impact on the net present value of the benefits associated with the ACI/DSI option, and found that the investment is clearly uneconomic for River Rouge and two units at St. Clair. Based on its failure to justify the economics of this technology installation, the ALJ recommended that the commission “1) limit DTEE’s variable O&M cost recovery, including its sorbent cost recovery, only to amounts it can show were included in its 2013 analysis for St. Clair units 1-4 and 6-7, and Trenton Channel 9, or included in its 2014 analysis for River Rouge units 2 and 3, adjusted for inflation; and 2) initiate an investigation to determine how DTEE has been making its estimates, and whether further action on the part of the Commission is warranted.”
DTE Electric argued against any limits on cost recovery for emissions controls
In its exceptions, DTE Electric noted that the commission staff provided testimony indicating that “DTE’s selection of FGD, SCR, DSI and ACI to meet current regulatory requirements is reasonable and prudent,” and argued that the ALJ’s discussion of this issue is ultimately moot since there is no capital disallowance recommended. DTE Electric stated its agreement with the ALJ’s findings on net plant. However, the utility argues that the ALJ erred in recommending limiting the recovery of variable O&M costs in future PSCR cases. The utility argues that, even with the ALJ’s adjusted O&M costs, the alleged negative benefit for River Rouge is only $2.7 million, and for St. Clair units 6-7 is only $7.9 million, whereas there is still a positive $4.5 million net benefit for St. Clair units 1-4 and $33.5 million for Trenton unit 9; making the overall net benefit positive.
DTE Electric argued that it presented extensive evidence showing that the environmental group witnesses used biased assumptions in their analyses that had the effect of underestimating the benefits of ACI/DSI installation, and posited that these intervenors favor the early retirement of coal plants.
Said the Dec. 11 commission decision: “The ALJ presented a compelling analysis of this issue. The Commission agrees with the ALJ that customers should be protected from bearing costs for environmental retrofit projects at individual units in cases where such retrofits do not provide economic benefits. Based on the ALJ’s analysis that considered different sorbent cost estimates and other assumptions used by the parties, this is the concern for St. Clair units 6 and 7 and River Rouge units 2 and 3. That is, the ALJ found that the retrofit option is not cost effective for the units when the sorbent costs are within an expected range but above the levels referenced by the ALJ for purposes of setting her recommended cap.
“Notwithstanding, the Commission is also mindful of several factors addressed in this proceeding, including: (1) the information on sorbent costs that was available in the 2013-2014 timeframe when DTE Electric decided to move forward with DSI/ACI; (2) the combined positive net present value for DTE Electric’s overall strategy to comply with MATS at its various plants; (3) other benefits that may not be captured in the analysis such as the option value that these plants provide to both DTE Electric and its customers given the significant shift DTE Electric, Michigan, and the Midwest region are experiencing with respect to the generation portfolio; and (4) the fact that retiring an additional 1,000 MWs of generation in Michigan in 2016 does not appear feasible at this point given MISO requirements to have a minimum level of capacity in the lower peninsula of Michigan. Thus, there are practical constraints, timing issues, and other variables that complicate this matter.
“Considering these factors, the Commission agrees with the ALJ that an adjustment to the proposed retrofit capital expenditures is not the best approach to address this issue. The Commission finds the ALJ’s focus on O&M costs to be entirely appropriate as these costs appear to be a key driver of the net present value results as shown in this case. However, the Commission may not lawfully limit the recovery of sorbent costs in future PSCR proceedings by establishing a hard cap in this rate proceeding; those PSCR proceedings must follow the dictates of Act 304 and the evidence will be tested in those proceedings as required under [Michigan law].
“In the PSCR cases, the company will be required to show that projected sorbent expenses are reasonable and prudent, and all actual reasonable and prudent expenses will be trued-up on reconciliation. While not agreeing to any cap here, the Commission certainly expects information on actual sorbent costs and refreshed net present value analyses to inform future decisions in PSCR proceedings about cost recovery associated with these marginal units. The Commission does not feel compelled at this point to initiate an investigation into DTE’s process for developing sorbent expense estimates.”