Indianapolis approved for latest fuel costs, high coal piles and all

The Indiana Utility Regulatory Commission on Aug. 24 approved a June 16 application from Indianapolis Power & Light (IPL) for approval of a fuel adjustment charge (FAC) to be applicable during the billing cycles of September through November 2016.

Said the commission order: “According to IPL witness Nicholas M. Grimmer, Director, Fuel Supply, Logistics and Coal Combustion Product Management, approximately 97% of IPL’s internally generated kilowatt-hours (‘kWh’) in 2015 were generated by coal-fired capacity. IPL currently has contracts with four coal producers and receives coal from seven different mines.

“Mr. Grimmer explained that although IPL currently has no spot coal contracts, IPL has used spot purchases of coal in the past to: (1) provide the differential requirement between IPL’s long-term contracts and its projected bum for the year; (2) test the quality and reliability of a producer to see if IPL may want to utilize the company as a long-term supplier; and (3) take advantage of occasional low price market opportunities.

“Mr. Grimmer explained that IPL strives to keep a 25-50 day supply of coal in inventory across its coal-fired generation fleet. He explained that although IPL has been working closely with its coal suppliers and transportation vendors, IPL’s system-wide inventory is currently beyond the 50-day maximum inventory target. He said that over the last approximately 18 months, mild weather and soft energy markets have combined to reduce IPL’s coal bum below expectations

“He said IPL is actively managing its inventory levels in two ways. First, all of IPL’s long-term coal contracts contain some variability in the quantity of coal that IPL can take under that particular contract. He said IPL has been taking contract minimums for a significant period of time, but this will not bring IPL’s coal inventory back within the target inventory levels in the near future. Second, Mr. Grimmer testified that IPL is in the midst of discussions with its suppliers to allow deferral of upcoming coal deliveries. He said IPL has entered into one coal contract amendment that defers a substantial amount of coal out of 2016 into 2018, that IPL has entered into an additional contract amendment to defer tons out of 2016 and into 2017 at no additional cost, and that IPL continues to look for additional opportunities to further improve IPL’ s 2016 and 2017 coal positions.

“Mr. Grimmer stated that improvements were also made at IPL’s Petersburg Generation Station (‘Petersburg’) that increase the footprint of IPL’s coal pile, increasing on-site storage capacity by 200,000 to 250,000 tons. To further address the inventory issue, he said IPL is also negotiating with a number of suppliers and others in the coal industry to arrange to store coal at a temporary interim site between the point at which the coal is acquired and the final unloading point. He said these interim off-site storage options would be used until such time as the coal could be accommodated on the Petersburg coal pile and eventually burned. He said IPL is also talking to suppliers about the possibility of buying out of certain contract obligations or potentially selling excess coal on the market.

“IPL witness Dennis Dininger, Director, Commercial Operations, testified that IPL implemented decrement pricing, as described in Cause No. 38703 FAC 111, on March 17, 2016, to mitigate the future costs of coal surplus. He explained that to the extent the units are dispatched, coal coming to the station is consumed, other potential costs are avoided, and customers ultimately benefit. Mr. Dininger explained the mechanics of the decrement pricing approach and the inputs to the decrement pricing calculation. He also discussed the impact of decrement pricing on the forecast in this proceeding. He stated that the 2016 forecast includes decrement pricing.

“Mr. Dininger stated that decrement pricing will be one of many options implemented to manage the coal inventory surplus, and that all options will work together to bring the inventories back into target levels. In the event that forecasted Midcontinent Independent System Operator, Inc. (‘MISO’) market prices for power increase, the forecasted dispatch of IPL coal units without decrement pricing will increase, reducing the projected surplus. He said that as the projected surplus subsides, the higher cost options will be avoided and lower cost options will be used to set the decrement pricing amount. He noted that the lower decrement pricing amounts may slow IPL’s progress towards its target inventories.

“Mr. Dininger testified that an examination of the offer prices and the real-time locational marginal prices at Petersburg clearly show that the Petersburg units are more attractive to the MISO market under decrement pricing, increasing their unit commitment and dispatch frequency which in tum increases the coal bum economically (considering the future oversupply mitigation options facing IPL). He stated that the Petersburg units loaded earlier in the day and ran at full load during more hours of the day. The increased coal bum has reduced the coal inventory, thereby avoiding costs to manage an offsite coal inventory.

“The record shows that IPL has taken action to actively manage its coal inventory, including taking contract minimums, renegotiating its existing coal contracts, and entering into an additional contract amendment to defer tons out of 2016 and into 2017 at no additional cost. The evidence shows that IPL continues to look for additional opportunities to further improve IPL’s 2016 and 2017 coal inventory positions. The record also shows that IPL will continue to consider all options and is focusing on the most cost-effective solutions, including the use of coal decrement pricing. We previously approved IPL’s utilization of coal decrement pricing in Cause No. 38703 FAC 111.

“The evidence presented in this case supports the same conclusion with respect to IPL’s use of coal decrementing pricing. More specifically, we find that IPL has laid a reasonable foundation for the mechanics of its coal decrement pricing impacts and the associated inputs.

“Finally, Mr. Dininger testified regarding the operating changes occurring at IPL’s Harding Street and Eagle Valley locations. He stated that Harding Street Unit 7 is now converted to bum natural gas, as approved in Cause No. 44540 and is currently being tuned as part of the start-up sequence. He said the Eagle Valley coal-fired plant is now retired. Based upon the evidence presented, as discussed here and further below, the Commission finds that IPL’ s utilization of the coal price decrement is reasonable and prudent, and that IPL has made every reasonable effort to acquire fuel and generate or purchase power so as to provide electricity at the lowest fuel cost reasonably possible.”

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.