Emissions and Indiana Utility Regulatory Commission and Regulation and Indianapolis Power & Light and Energy & Environment

IPL cites project overruns as reason for rate hike

January 8, 2007

The cost of a pollution-control project at Indianapolis Power & Light's Harding Street generating station has soared over budget by $60 million, or 38 percent, and the utility wants its 465,000 customers in Marion County and nine others to help foot the bill.

In a filing late last month, IPL asked the Indiana Utility Regulatory Commission for approval to adjust rates for six months, starting with the February billing cycle. That includes the peak air-conditioning season.

Utilities are allowed to recover from ratepayers certain environmental compliance costs, through incremental rate adjustments, every six months.

The Dec. 22 filing indicates that IPL wants to recover at least $26 million from customers during the six-month period. According to the filing, a residential customer using 1,000 kilowatts per month would pay only $3.30 more over the six months. A typical commercial customer could pay $132 more in the six-month period, with giant industrial customers paying even more.

IPL blamed the overruns on the rising costs of a flue-gas desulfurization project at its Harding Street plant, south of Indianapolis. The project involves injecting pulverized limestone into a furnace that mixes with boiler gas, leaving gypsum and carbon dioxide. The process is necessary for utilities burning high-sulfur coal to meet federal and state emissions requirements.

Once projected to cost $160 million, the modifications are now likely to hit $220 million, IPL said.

Demand by utilities for flue-gas desulfurization equipment has exploded, IPL said, with more than 150 units started or completed since 2003, versus 20 completed in the 1990s.

These and other emissions projects have "created a significant demand for equipment, materials, fabrication and construction services that vendors and contractors are struggling to meet," IPL Environmental Projects Manager David Kehres testified in the IURC filing.

"This tremendous demand has resulted in a 'seller's market,' which has increased pricing for most equipment and construction services."

The utility also blamed rising worldwide commodity costs. A ton of structural steel was up to $2,620 in June, a 46-percent increase since early 2005, according to the filing.

"The robust construction market associated with the wealth of work in the power industry has also led to increased construction costs due to limited availability of qualified contractors. It is getting difficult to find qualified contractors who are willing to competitively bid for large contracts," Kehres said.

Another $2 million in cost overruns IPL proposes to pass on to customers involves equipment to reduce nitrogen oxide emissions at its Petersburg generating station.

And it wants to spend an additional $11 million to eliminate "blue plumes" that formed shortly after emission-control equipment was installed recently.

Visible to the eye, the plume is an aerosol-like mist of sulfuric acid created when water vapor and sulfur trioxide combine. The phenomenon is not uncommon for plants using the relatively high-sulfur Illinois Basin coal.

The extra $11 million IPL wants to spend to eliminate the plumes, in the form of a scrubber to inject soda ash, is on top of $150.1 million it spent on the previous pollution controls in Petersburg.

The utility doesn't seek in its recent filing to pass along to customers all the extra costs, but it could ask for more money in the future to support both Harding Street and Petersburg cost overruns.

IPL can spread its cost recovery efforts over 18 years to minimize the impact on ratepayers under its agreement with the IURC.

Customer groups have yet to respond to the IPL filing at the IURC.

"Without seeing the testimony, it is hard to say exactly what is driving the higher costs and whether they were prudently incurred," said Jerry Polk, managing member of Indianapolis law firm Polk Hyman and Associates, which represents consumer groups.

"True, construction costs generally have gone up, but producers in a competitive market cannot get regulators to force their customers to pay more."

Polk said the "blue plume" mitigation may be necessary, "but it shows the economic and environmental pitfalls of trying to control pollution after the fact. Efficiency and renewable energy resources don't create blue plumes, or [nitrogen oxide], mercury or carbon. Blithely continuing to skip down the path of excessive reliance on coal is an economic and environmental fiasco that Indiana cannot afford."

IPL said its 11 coal-fired units in the state generated 99 percent of total energy produced by IPL in 2006.

IPL executive Kehres, in his testimony, said performance of some of its pollution-control devices in Petersburg have exceeded initial expectations, which should result in lower pollution-compliance costs.

The Harding Street project is to be completed in September.

The IURC has not yet set a hearing date on IPL's rate recovery request.

When utilities propose rate increases for clean-coal-technology projects, "they have to be shown to be reasonable and in the public interest," said Anthony Swinger, spokesman for the Office of Utility Consumer Counselor. The OUCC is reviewing the IPL filing and plans to comment in the case.

Attorneys representing large industrial customers could not be reached for comment.

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