Indiana Michigan Power and another American Electric Power (NYSE: AEP) subsidiary are in litigation with financial parties that technically own the coal-fired Rockport Unit 2 over issues related to clean-air compliance at the plant, said Paul Chodak III, the President and Chief Operating Officer of Indiana Michigan Power.
Chodak outlined the status of the 2,620-MW Rockport plant in Oct. 21 testimony filed with the Indiana Utility Regulatory Commission in support of application for approval of a selective catalytic reduction (SCR) installation on Unit 2 for NOx control, The commission previously approved SCR for Unit 1.
The SCR for Unit 2 is needed by Dec. 31, 2019, under a New Source Review Consent Decree with the U.S. EPA. If these controls are not installed, the generating capacity and energy provided by Rockport Unit 2 will not be available to help meet the needs of customers, Chodak wrote.
Rockport is a coal-fired station located in Spencer County, Indiana. It consists of two units that are among the largest coal-fired units in the United States. The nominal net generating capacity of Rockport Unit 1 is 1,320 MW, and Rockport Unit 2 is 1,300 MW.
Indiana Michigan Power (I&M) and American Electric Power Generating Co. (AEG) are jointly responsible for the two Rockport units. Like I&M, AEG is a subsidiary of AEP. AEG sells 70% of its 50% share of the Rockport Plant’s capacity and energy to I&M under a Unit Power Agreement (UPA) and the remaining 30% to AEP subsidiary Kentucky Power. All told, I&M owns or purchases 85% of the capacity and energy of both units at the Rockport Plant, which amounts to 2,227 MW of the plant’s nominal 2,620 MW.
In 1989, I&M and AEG sold Rockport Unit 2 to a group of unaffiliated, non-utility investors (called the “Owner Participants” or “Lessors”), who in turn agreed to lease the unit back to I&M and AEG. The term of the lease is 33 years. During the term of the lease, I&M and AEG are responsible for installing, owning and operating major environmental controls, such as the SCR, to assure that the plant complies with all regulations.
The lease also provides for an early termination of the lease in the event that Rockport Unit 2 is “economically obsolete.” If the lease is terminated early due to obsolescence, I&M is required to pay the lessors an amount referred to in the lease as “Termination Value.” For example, if the lease was terminated as of Jan. 1, 2020, due to becoming economically obsolete as a result of not installing and operating the SCR system, the Termination Value owed by I&M and AEG to the Lessors would be approximately $716 million.
The Rockport Unit 2 lease terminates on Dec. 7, 2022, unless it is extended under the terms of the lease or through the mutual agreement of the parties. I&M has engaged in confidential discussions with the Lessors regarding what might occur at the end of the lease. At this time, Chodak wrote, I&M has not exercised either of its options to extend the lease and it is not known whether or not it will do so. Accordingly, for the purposes of evaluating whether to install the SCR on Rockport Unit 2 to comply with federal environmental mandates, I&M evaluated the possibility that it will not have access to the output of Rockport Unit 2 beyond 2022.
I&M is currently involved in litigation with the Lessors at the U.S. District Court for the Southern District of Ohio, Eastern Division. The litigation stems from the terms of the lease and the requirement of the Modified Consent Decree with EPA that flue gas desulfurization systems (FGDs) be installed and in operation on one unit of the Rockport Plant by Dec. 31, 2025, and on the other unit by Dec. 31, 2027. Chodak said that after I&M and AEG prevailed at the trial court level on summary motions regarding many of the contested issues, the Lessors dismissed the remaining claims with prejudice and filed an appeal of the trial court’s ruling. It is unlikely that the litigation will be completed before the end of this case at the Indiana commission over the Unit 2 SCR, Chodak noted.
Chodak added: “The significant uncertainty surrounding the future of Rockport Unit 2 as a resource to meet the needs I&M’s customers obviously makes long-term decisions about I&M’s generation portfolio more complex. I&M continues to explore all options as it determines the best way to serve customers. As shown in our [integrated resource plan], there are several different paths available to take and the costs of several of the options are relatively comparable. I&M uses its IRP as a tool for making judgments on how to manage its business in the interest of customers. While clarity on the future of Rockport Unit 2 would be valuable, I&M does not have the luxury of time to wait for matters to become clearer. What is clear at this point is that under the current circumstances, installing and operating SCR technology on Rockport Unit 2 in compliance with Federal environmental requirements is the correct decision for I&M and its customers. Our analyses support, and it is our reasonable business judgment exercised knowing what we know now, that even if the Lease terminates at the end of its initial term in 2022, it makes economic sense for I&M and its customers to install and operate SCR technology for the remaining time that I&M and its customers would benefit from the output of the unit.”