Grand Rapids, Michigan, USA downtown skyline in autumn season.

Michigan Put Its Foot Down on Uneconomic Coal Operations — Will Your State Be Next?

Michigan’s Public Service Commission stopped a utility from charging customers extra to recoup expensive coal costs, setting an example for utilities nationwide.

Utility regulators are starting to scrutinize coal plant operations more closely. In the latest turn of events, the Michigan Public Service Commission decided to prevent a utility from passing on excess costs from running coal plants to families and businesses in the state.

The latest data from RMI’s Economic Dispatch Dashboard shows that nationwide, uneconomic coal operations increased in 2023. For the two years prior, market prices justified running most coal plants at higher capacity factors. But when market prices dropped, coal plant operators didn’t react and continued to run coal plants the way they did in years past. This resulted in coal plants running when cheaper resources were available and forced customers into paying unnecessary costs. But a recent decision in Michigan could represent the first domino in a trend to halt the practice nationwide.

What happened in Michigan?

The Michigan Public Service Commission warned Indiana Michigan Power (a subsidiary of AEP) that purchasing energy from AEP affiliates at above market prices would not be allowed. Two of AEP’s affiliates (OVEC and AEP Generating Co.) continued to run coal plants when lower cost resources were available. One of those plants, the Rockport plant — owned by Indiana Michigan Power and AEP Generating Co (two AEP subsidiaries) — produces energy at an average cost of $130/MWh, nearly twice the average market price. When Indiana Michigan Power bought that energy and tried to recover those costs on the backs of Michigan families and businesses, the commission, as promised, rejected the above market costs and capped the recovery. The end result was that Indiana Michigan Power asked to recover $103 million in fuel and power supply costs, and the commission disallowed $11.6 million, $11.2 million of which was associated with uneconomic coal.

The Michigan commission, like all commissions, was bound by the evidence in the proceeding and was able to make its determination in part due to the legal briefs and testimony filed by the State’s Attorney General. The Attorney General astutely showed that the utility’s coal plant costs were well above market prices and similar long-term power contracts in the state, and yet the utility did nothing to show how the costs were reasonable and prudent for ratepayers. Moreover, the Attorney General correctly pointed out that the utility did nothing to pursue changes to either its OVEC operations or its Rockport power agreement to lessen the impact on ratepayers, instead continuing business-as-usual operations that would have cost ratepayers had it not been for the Commission’s disallowance.

Michigan also recently passed a suite of climate laws that move the state closer to a 100 percent clean energy standard, while prioritizing environmental justice, affordability, and workforce transition as the state’s power supply transitions away from fossil fuels. While utilities should already only be operating their coal plants during periods when it is economic to do so, the climate bills in Michigan provide extra guardrails for consumers that will further disincentivize uneconomic coal operations and make economic coal dispatch an obvious step in the path toward full decarbonization. The suite of bills not only aims for winding down fossil fuel power in the short term, but it also enables the Commission to weigh additional factors beyond traditional plant economics, including environmental justice and affordability, when reviewing utility resource plans. Prioritizing economic dispatch could help Michigan utilities lower customer bills and move one step closer to achieving climate goals in the state.

What does Michigan’s decision mean for other states?

Indiana Michigan Power can influence but not directly control how other AEP affiliates operate their resources. But Michigan’s larger utilities, DTE and Consumers Energy, do own and operate coal plants in Michigan, oftentimes when cheaper resources are available on the wholesale market. The Commission has set a precedent that if the data in the docket shows that utilities are asking to recover costs above what was available on the market, those costs should be capped to the market price. In doing so it is protecting consumers in the state, including families and small business that have been burdened by high fossil fuel prices. The commission should continue to scrutinize the operations of coal plants operated by Michigan utilities and take protective actions when the evidence shows the companies acted imprudently.

It also matters outside of Michigan. The disallowance associated with the OVEC plant could have implications in Ohio where consumer advocates are trying to claw back above-market costs going back to 2020. In Michigan, the commission rejected $1 million dollars associated with the uneconomic operations of OVEC plants, while the Ohio docket remains stalled.

It is also important to note that AEP operates in several neighboring states including Ohio, Indiana, Kentucky, West Virginia, and Virginia. The Rockport plant has, in the past, sold energy to some of these subsidies but it is unclear if the bilateral agreements with affiliates other than Indiana Michigan Power are still active. If there are active agreements with affiliates, regulators in those states would be wise to look at them.

The Michigan proceeding is also similar in many ways to what is happening in Virginia and West Virginia. In West Virginia, regulators are requiring that the utilities (including an AEP subsidiary) run their coal plants at unnecessarily high capacity factors. Meanwhile, the Virginia commission has promised to prevent losses associated with running those coal plants uneconomically from being recovered from Virginia customers, which will be very difficult at these forced high-capacity factors.

Further south, in Louisiana, a similar battle over fuel costs is brewing. Several years ago, the Dolet Hills coal plant retired, and rather than phase down the output from the coal plant as it approached retirement, the plant began burning more and more coal. And it was some of the most expensive coal in the country. Now, industrial consumers are asking the commission to claw back the losses. And so while the disallowance in Michigan is significant in size, it pales in comparison to the $128 million disallowance recommended by the Administrative Law Judge in the Louisiana proceeding.

There are better ways

The one lesson that can be learned from all of this is that if utility companies are allowed to run coal plants uneconomically, it can be hard to get that money back. The best thing for regulators to do is to make sure that coal plants only run when economic in the first place while improving transparency and reporting of metrics utilities use to make dispatch decisions. The second-best thing to do is to deny cost recovery during fuel cost recovery dockets to protect consumers, which are frequent dockets in most states. Both of these things can be more easily accomplished by leveraging RMI’s Economic Dispatch Dashboard.

Regulators can use the dashboard to look at how coal plants have been operated in past years and use that information to work with utilities to find ways to end the practice. They can also use the tool to monitor progress when/if utilities commit to no longer dispatch uneconomically. And now that the tool is automatically updated every three months, intervenors in these proceeds can use the dashboard as a screening to identify which proceedings to intervene in.