State says Xcel's inoperable gas plants added tens of millions to February storm costs

Peaking plants can be the unsung hero of natural gas systems, firing up to provide vital reserves during an emergency like the historic storm last February.

But Xcel Energy's three Minnesota peaking plants were inoperable then, resulting in tens of millions of dollars in costs for customers in the state, the Department of Commerce concluded in a report to state utility regulators.

The department is recommending that the Public Utilities Commission (PUC) disallow $127 million of the $179 million Xcel wants to charge Minnesota ratepayers for extraordinary gas costs from the February storm. Peaking-plant issues account for two-thirds of that $127 million.

"Thus far, Xcel has not shown it prudently operated or maintained" the plants, said the report from the Commerce Department, filed last week with the PUC.

Xcel's largest peaking plant in Inver Grove Heights was mothballed in early January after it malfunctioned and twice leaked gas. A cautious Xcel then closed two smaller peaking plants. State pipeline safety regulators are still investigating the leaks.

Xcel, in a statement, said it "strongly" disagrees with the Commerce Department's conclusions and will file a detailed response with the PUC in January.

The company said it adjusted its gas-supply plans last winter to account for the loss of the peaking plants, "making sure we could continue to serve our customers reliably without those facilities."

Gas injected into the system from Xcel's peaking plants — while not cheap — would have been far less expensive than the gas that Xcel bought in a frenzied spot market, the department concluded.

Minneapolis-based Xcel is Minnesota's second largest gas provider with about 472,000 customers. The largest with about 900,000 customers, CenterPoint Energy, also has peaking plants, which it used on a limited basis during the February gas crisis.

Both the Commerce Department and the Minnesota Attorney General's Office criticized CenterPoint in PUC filings for underutilizing those plants.

Due to that issue, the Commerce Department concluded CenterPoint shouldn't be allowed to recover $12 million of its $409 million in extraordinary storm costs being passed on to consumers. The Attorney General's Office found that CenterPoint could have saved customers $70 million.

CenterPoint, like Xcel, argues that peaking plants are not meant to counter gas price spikes.

Instead, they are a last resort to meet peak gas demand — when temperatures plunge to 25 below zero or so — or if there's a sudden, unplanned lack of supply, the utilities say. It was cold in Minnesota during the February storm, but not that cold.

"Our [peaking] capacity is not designed or sized to serve as a significant pricing hedge," CenterPoint said in a statement.

Wholesale gas prices in Minnesota and many other states rose exponentially in February when a huge storm hit Texas and other natural gas producing states. As temperatures plunged, gas field equipment froze and supply cratered just as demand soared.

Minnesota's gas utilities racked up $660 million in extraordinary gas costs from the open market due to the storm. Minnesota, like many states, allows utilities to pass wholesale gas price swings to ratepayers.

Many Minnesotans will pony up 50% more than they pay annually for their heating bills just to cover the big storm's gas costs. The PUC allowed gas utilities to begin billing customers for those costs this fall, albeit spread out over 27 months.

But the PUC is continuing an investigation into the massive price spike — and whether the utilities will ultimately be able to recover the entire $660 million from ratepayers.

The Commerce Department and the Attorney General's Office, both of which represent the public interest before the PUC, have concluded that Minnesota's utilities relied too heavily on the spot market for gas.

During the February storm, CenterPoint got 42% of its supply from the spot market and Xcel 54%, the Commerce Department said in a PUC filing.

A crucial price hedge for natural gas is storage. Utilities fill underground storage caverns with cheaper gas in the summer, drawing it down over an entire winter.

Peaking plants are used once or twice a winter — if at all — when there is an emergency. Xcel's three Minnesota peaking plants were last fired up in 2019, including during the polar vortex of Jan. 28 through Feb. 1 when temperatures dropped to 30 degrees below zero.

That deep freeze taxed Xcel's gas system. About 150 of Xcel's Minnesota customers in Princeton lost service for a day while about 30 more in Hugo lost heat for a shorter time.

Xcel's largest peaking plant, Wescott in Inver Grove Heights, can store 26 million gallons of liquid natural gas, or LNG. (In its liquid form, the volume of gas is hundreds of times smaller than in its vaporous state).

Xcel's two smaller peaking plants together can store about 2.6 million gallons of propane. To be injected into gas pipelines, propane must be mixed with air, while LNG must be vaporized.

During seasonal tests at Wescott last winter, Xcel ran into problems. On Dec. 31, 2020, and Jan. 4, some vaporization equipment exceeded its design pressure and safety valves were tripped, Xcel said in a PUC filing.

The result: gas leaks of 27.31 dekatherms and 26.25 dekatherms, respectively, on those two days (or 27,303 and 26,244 cubic feet). Xcel didn't report the leaks to safety regulators until February.

After the Wescott issues, Xcel ceased operations at its smaller peaking plants as well.

"To ensure safety, we also reviewed our [propane peaking] facilities and determined they should also be taken out of service so work could be done to ensure they meet our safety requirements," Xcel said in a statement.

Richard Polich, an engineering expert retained by the Commerce Department, concluded Xcel hasn't adequately justified closing the smaller propane plants, which have a different design than the LNG plant.

The smaller plants are expected to be operable again in "a matter of weeks," Xcel said Thursday; the LNG plant was reopened earlier this month.

The Minnesota Department of Public Safety (DPS), which regulates gas peaking plants for hazards, is investigating the gas leaks at Wescott. Since 2011, DPS has issued five probable violation notices for Wescott and three more for the two propane peaking plants, Polich said in the PUC filing.

DPS records show Xcel was cited in December 2019 for two instances of inadequate safety documentation at Wescott and fined $4,000. A month later, DPS cited Xcel for two safety violations at the propane peaking plants, fining the company $47,600 for one infraction.

It was one of the department's larger fines against a Minnesota natural gas provider over the last decade.