Minnesota commission approves remaining lives calculations of Minnesota Power

The Minnesota Public Utilities Commission on Sept. 19 approved, in part, a July 2015 application from Minnesota Power related to the remaining lives of three power generating facilities.

In its petition, the company proposed a one-year passage-of-time adjustment and a six-year life extension for the Laskin Energy Center. The company also proposed new salvage rates for each of its thermal and wind generation facilities based on a new decommissioning study.

The company completed a refueling project at the Laskin Energy Center in 2015 that converted the plant from a coal-fired baseload plant to a natural gas peaking plant. In its petition, the company proposed to extend the current ten-year service life of Laskin by six years (through 2030) based on its completion of the conversion of the facility’s Units 1 and 2 to gas peakers. The Large Power Intervenors group requested that the company explain it calculated its proposed remaining life, rather than the 25 to 30-year life span recent studies examining new natural gas power plants have assumed to be appropriate.

In reply comments, Minnesota Power explained that in the conversion of the plant to natural gas, the changes were confined to the firing system and gas supply, and did not affect the existing boiler and turbines. Since a new gas turbine was not added to the Laskin facility, the longer remaining life discussed by the Large Power Intervenors would not be appropriate. The state Department of Commerce agreed with the company that a six-year life extension is reasonable, for a 16-year remaining life for Laskin.

Minnesota Power has two operating coal-fired units at Taconite Harbor Energy Center with a combined capacity of 150 MW. The company requested that it be allowed to continue to recover the remaining plant balances over the current remaining life of the plant, or until 2026. This would mean that the company would continue to depreciate the facility for six years after it plans to cease coal operations at the plant. The Department of Commerce requested the company to explain why continuing to depreciate expenses for six years after the retirement of the facility is reasonable. In response, the company stated that some of the infrastructure at the plant might not be retired, which makes its proposed retirement date of 2026 reasonable for depreciation purposes. Based on information submitted in the company’s 2015 resource plan, the Department recommended approving a remaining life of six, rather than twelve, years for Taconite Harbor. This would allow the depreciable life of the plant to match its operational life, and prevent ratepayers from paying for the plant after its retirement. It would, however, increase the company’s annual depreciation expense for the facility by some $8.8 million.

Minnesota Power disagreed with the Department, reasoning:

  • The company has no plans to decommission Taconite Harbor in 2020 when it plans to cease electric generation with coal as the primary fuel. Instead, the company is considering converting the facility to another fuel.
  • The Department’s recommendation unfairly penalizes the company for early action to reduce carbon emissions. The commission’s decision in the company’s 2015 resource plan was to idle the facility until 2020 (with the option to restart generation if needed), at which time the company will cease using coal to fuel the plant. The company requested that the commission wait until after its next resource plan when it will consider refueling and remissioning the facility, to determine the facility’s service life.
  • The company’s proposal for depreciation and useful life conforms to Generally Accepted Accounting Principles in Minnesota, which allow it to modify traditional Federal Energy Regulatory Commission accounting for depreciation expense.
  • The current remaining useful life of 2026 is in the public interest for customers. The company asserted that the electric industry is undergoing significant changes, and that reliance on intermittent energy sources and natural gas sources is creating different electric system dynamics. Idling the facility preserves the assets so that the facility can be restarted if necessary to protect reliability in the event of unforeseen system developments.
  • The company argued that to depreciate the facility over six years, as the Department recommended, would result in significantly higher depreciation costs for customers (some $9 million if the useful life ends in 2020 or $25 million if the useful life ends in 2017), while maintaining the remaining useful life to 2026 protects Minnesota Power’s customers from paying the higher depreciation costs.

The third facility in dispute was the company’s Sappi-Cloquet Generator No. 5, which is installed at Sappi’s paper mill in Cloquet. Sappi owns the boiler and infrastructure at the facility, and operates and maintains the generator. Minnesota Power owns the generator and energy output, pays for the fuel and operations and maintenance costs related to the generator, and makes monthly payments to Sappi for use of its infrastructure. In its remaining life depreciation petition, the company did not request a change to the remaining life of the Sappi generator, which runs until 2024. The company noted that as part of its initial agreement with Sappi in 2000, Sappi retained an option to purchase the generator on July 1, 2016. Despite its expectation that Sappi would exercise its option (which it did), the company asked that the remaining life be maintained, to enable it to recover the undepreciated portion of the generator without significant impact on ratepayers.

The Department, as it had with respect to the Taconite Harbor generator, asserted that a reasonable remaining life for the Sappi generator for depreciation purposes should match the expected operational life proposed. The Department recommended that the commission impose a remaining life of two, rather than ten years, for the Sappi-Cloquet No. 5 generator, which would result in an increase of approximately $1.1 million of annual depreciation expense.

Said the Sept. 19 commission decision: “Having reviewed the record in this case, the Commission approves the Company’s proposed remaining lives with the exception of the Sappi-Cloquet Generator No. 5. The Commission agrees with the parties that it is reasonable to allow the Company to extend the remaining life of the Laskin Energy Center by six years, based on its conversion of Units 1 and 2 to gas peaking generation. The Commission also agrees with the Company that it is reasonable to continue to depreciate Taconite Harbor through the end of its current remaining life ending in 2026.

“In the Company’s 2015 resource plan, the Commission determined that idling Units 1 and 2 in 2016 would give the Company flexibility to call the units back into service, if needed for reliability or emergency purposes, but would also allow it to take advantage of the inexpensive replacement energy offered on the wholesale market. In the resource plan, the Commission also ordered the Company to monitor costs and operations during idling, and to file annual reports detailing whether and how often the units were dispatched. The Commission will not reconsider or adjust the remaining life for the Taconite Harbor facility at this time. Instead, the issue can be revisited in the Company’s next resource plan filing.

“With respect to the Sappi-Cloquet Generator No. 5, the Commission agrees with the Department and will shorten the period over which the Company may depreciate the Sappi generator to two years. In contrast to Taconite Harbor, where there is no level of certainty as to what will replace the facility in 2020, the Company knew at the time it acquired the Sappi generator in 2000 that Sappi had the option to repurchase the generator in 2016. Since the option was exercised, Minnesota Power has no ownership interest in the generator, and it would not be reasonable to allow it to depreciate an asset it no longer owns.

“The Commission will approve the salvage rate proposed by the Company of negative 5.23 percent for the Taconite Harbor Energy Center, based on the 2015 decommissioning study. For the Laskin Energy Center salvage rate, however, the Commission is persuaded that the recommendation of the Department to use the information and its updated calculations for landfill and ash pond removal costs from the Laskin supplemental study is the more reasonable approach, and will approve a modified salvage rate of negative 26.02 percent based on the Department’s updated estimate for the 2015 decommissioning petition. Further, the Commission can reexamine this issue in the Company’s 2016 depreciation filing, when it has the decision of the Pollution Control Agency on the status of the landfill and ash pond.

“Finally, the Commission will not approve the Company’s request to have its depreciation filing due on the same date as its resource plan in years the Company files an integrated resource plan. Electric utilities generally file depreciation petitions annually. The Department stated that it generally looks for consistency between the current depreciation filing and the Company’s most recently approved petition, not its most recently filed. The Commission agrees that this is the most reasonable approach, as it allows the Commission to take advantage of the decisions made after a fully vetted resource plan, as opposed to the proposals made by the Company. The Commission will require the Company to make its next deprecation filing on or before September 30, 2016, to establish depreciation parameters and rates to be effective January 1, 2016.”

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.