Illinois Power Agency Seeking to Force Retail Suppliers to Buy Output from Clean Coal Plant

On September 28, the Illinois Power Agency filed a proposed default service procurement plan covering the period June 2013 through May 2018 which recommends that the Illinois Commerce Commission require the utilities as well as alternative retail electric suppliers to enter into "sourcing agreements" with FutureGen 2.0, a clean-coal facility under development (ICC Docket 12-0544).

Due to previously procured energy, plus the migration of large amounts of default service load to competitive supply, the existing default supply portfolio exceeds forecast default service volumes in the near-term, and the IPA does not recommend any procurements in 2013 for default service energy at ComEd or Ameren.

At ComEd, the current portfolio can meet forecast default service energy load through the 2013/2014 delivery year, with ComEd projected to be short starting in 2014/2015.

At Ameren, the current portfolio is not forecast to be consistently short of supplies until the 2015/2016 delivery year.

While the current excess of supply makes the issue moot in the near term, the IPA endorsed a hedging strategy that, for energy supply, procures fixed price hedge quantities for 75% of expected volumes for the current planning year; 50% for two years out, and 25% for three years out. This contrasts to the previously used hedging strategy of 100%/70%/30%.

Capacity requirements for both ComEd and Ameren would be met through the respective centralized capacity auction in use in each utility's RTO. This is a departure from the prior bilateral capacity procurements at Ameren.

Most notably, the IPA has asked the ICC to approve a sourcing agreement between, "the FutureGen Alliance and the utilities and the ARES [alternative retail electric suppliers]."

While statute directs the IPA to consider clean coal procurements as part of the utilities' procurement plan, nothing in the statute grants the authority to require retail suppliers to enter into sourcing agreements as proposed by the IPA.

The IPA only offers that, "the IPA assumes that the Commission does have the authority to bind non-utility counterparties, based on Section 16-115(d)(5) of the Public Utilities Act."

"As a corollary to the Commission's wide-ranging review powers over the sourcing agreement, the IPA believes the Commission has the authority to determine whether it should require that the facility's output be divided amongst utilities and ARES in a competitively neutral manner."

"The IPA requests that the Commission approve a sourcing agreement for bundled service customers and ARES customers, and hourly load customers in a competitively neutral manner, utilizing either a rulemaking or (in cooperation with stakeholders) utility tariffs to ensure current and future customers are bound while minimizing administrative burden on all parties."

The sourcing agreement with FutureGen is drafted as a contract for differences, and anticipates a market-based reference price being subtracted from cost-based benchmarks (netting any additional income).

"Given the size of the plant [166 MWe (gross)] and the allocation of its output to Ameren and ComEd and the ARES in proportion to their market share, it is anticipated that the Ameren and ComEd combined market share of the output could be on the order of a 50 MW block of energy, with the remainder shared among the ARES," the IPA said.

"One key component of the restructured sourcing agreement is a rate adjustment mechanism to assure each buyer that the FutureGen cost-based revenue requirement is appropriately allocated among all the ARES and utility buyers, regardless of load share in the marketplace. As presented in the sourcing agreement, this approach is forward-looking using actual retail load data, while incorporating an initial and final settlement similar to the manner in which MISO and PJM settle wholesale energy transactions. Each buyer's net payment to the FutureGen Alliance is calculated on a per MWh basis as the difference between the cost of service for the project and the revenue from sales into MISO at the nodal energy price, divided by the total retail load served in the Ameren and ComEd service areas. This structure (i.e. a per MWh flat charge, subject to settlement) is significantly less complex for all parties than, for instance, requiring buyers to schedule the FutureGen plant's energy through MISO on a continual basis with fluctuating load requirements. Payments are simply made based on initial and final settlements using the appropriate project costs, total energy sales and retail loads. Therefore, buyers will not require the Alliance to deliver energy specifically to them via MISO schedules. The approach is loosely modeled on the concept of a renewable energy credit, which similarly calculates the difference between the operating cost (plus any developer margin) minus the revenue from selling energy into the hourly or bilateral market, divided by the total output of the facility. The Alliance has represented to the IPA that it has been in contact with both ComEd and Ameren Illinois regarding their ability to provide the necessary load data in their roles as Meter Data Management Agents for the ARES in their zones and has received favorable responses from both entities," the IPA said.

"The IPA believes that, in the interest of competitive neutrality, as noted above, the total retail load used to ascertain the ComEd and Ameren load ratio share should include the load of non-eligible retail customers (i.e. hourly priced service customers). The IPA therefore recommends that the Commission approve cost recovery for the utilities for costs associated with the FutureGen clean coal purchases by the utilities from their non-eligible retail customers, as well as their eligible retail customers, and direct the utilities to revise their tariffs accordingly in order to do so," the IPA said.

"Because this proposed agreement is structured as a financial transaction arrangement rather than physical delivery, there have been concerns among those in the energy-trading industry that such arrangements may be subject to onerous financial regulation for certain financial products. Recently, the Commodity Futures Trading Commission (CFTC) has issued a rule dealing with the definition of 'swaps' and exclusions from swap regulation under the Dodd-Frank Act. In addition, there are petitions pending at the CFTC to further clarify the applicability of certain Dodd-Frank Act provisions to various types of electricity transactions. While we believe these issues will be favorably clarified by the CFTC, the proposed sourcing agreement includes a savings clause that allows the parties to make amendments to the sourcing agreement, if necessary, to minimize the potential for application of the Dodd-Frank Act," the IPA said.

With respect to renewable resources, the IPA noted that a large part of the existing renewable resource portfolio for both utilities consists of pre-existing 20-year contracts executed in 2010.

"Payments under these contracts are forecasted to exceed the legislatively-mandated price caps for renewable resources for some or all of the delivery years in the planning horizon. Therefore, this Plan proposes to curtail purchases under those contracts in order to keep the purchase of renewables under the spending cap."

"The IPA is considering using its Renewable Energy Resources Fund, funded by alternate compliance payments made by the ARES to comply with at least 50% of the RPS requirements and administered by the IPA pursuant to Section 1-56 of the IPA Act to help mitigate payment risk for these contracts," the IPA said.