Big Coal in New Mexico: Secrets, Lies & Dirty Politics

Moving Forward on Public Energy—Or Backward?

However, with the closing of the coal generation units, New Mexico is faced with a new dilemma. The critical question is: what will be replacement power for the shuttered coal? PNM offered the following plan to replace the coal-fired resources :

  •  adding more coal-fired resources (132 MWs for $26 Million);
  • adding more nuclear from PNM’s shares at Palo Verde 3 nuclear plant in Arizona (consisting of 134 MWs for $221 Million);
  • adding more gas (consisting of a 177MW gas plant in Farmington, New Mexico for $189 Million); and 
  • adding a tiny bit more solar (40 MWs for $79 Million). 

To put this plan into effect, PNM must apply to New Mexico’s Public Regulation Commission (“PRC”) for permission. At the end of 2013, PNM submitted its proposed plan for New Mexico’s energy future (get rid of some coal, add more coal, add more nuclear, add more gas, and add an insignificant amount of solar) for approval. Apparently, PNM’s plan for the future is simply more of the past.  So New Energy Economy intervened in PNM’s case before the PRC and is the major oppositional force, though we have a number of critical allies that have also challenged PNM’s dangerous and outmoded plan. 

Listen to the panel on public power, featuring Mariel Nanasi and Naomi Klein, from the 2014 Bioneers National Conference.

I'm sharing this article with you because what we have discovered in the course of our lawsuit against PNM may be instructive to where you live. Naomi Klein has spoken at the Bioneers a number of times, and she is a personal heroine of mine. She has an incisive ability to evaluate the progress of our social movements on a long-term scale of justice: Has economic power among our citizens become fairer as a result of our efforts or has the disparity of income inequality increased? Have the lives of our citizens improved or has there been a dramatic shift that allows some to be excused from responsibility and others to assume an enormous burden? Naomi’s thoughtful critique has guided my activism in many ways.

When PNM filed its Application for coal and nuclear replacement power resources before the PRC it was a very depressing day for me. I had been so hopeful after the two-unit coal closure agreement. I had foolishly thought the coal closure signaled the transition to a new energy economy, but I realized that we had much more work to do and the fire-breathing coal dragon (PNM) was not lying down quietly. As a matter of fact, PNM was coming back with a vengeance: more coal and more nuclear— despite the insanity. PNM’s energy plan would lock-in ratepayer debt for the next 20 years to pay for energy from PNM’s own antiquated coal and nuclear plants to the tune of seven billion dollars.

PNM’s energy plan would lock-in ratepayer debt for the next 20 years to pay for energy from PNM’s own antiquated coal and nuclear plants to the tune of seven billion dollars.

PNM filed its coal and nuclear plan with the PRC in December 2013. At that time PNM testified that their plan would cost ratepayers $6,640,253,862 over twenty years. This is what NEE learned over the course of the following year:

PNM’s plan will actually cost the ratepayers: $7,588,515,567 – this is after PNM negotiated a Stipulation agreement with the Attorney General, the New Mexico Industrial Consumers, and PRC Staff that specified the $6 billion dollar price tag. Usually, after parties negotiate the original requested amount is at least cut in half, if not more, but rarely does the requested amount go up. PNM’s Stipulation agreement with three parties  (AG, NMIEC, and PRC Staff) has a net present value that is more than PNM’s Original Application by nearly one billion dollars!

During the course of the litigated hearing, New Energy Economy and other intervenors  discovered major errors in PNM’s calculations.  Eventually, PNM had no choice but to admit that they had omitted material costs when figuring their replacement power portfolio. I know this is wonky (and if you had ever asked me if I’d be studying the economics of energy generation into the wee hours of the morning I would have said you were crazy) but I was motivated to learn all the fine points of energy production after PNM spewed “facts” that were simply incongruent with what I believed in my heart to be reality.

Searching for the Truth about Energy Proposal

I want to highlight a few of our outrageous discoveries, but first I must ask you to go on intuition: if you were going to invest seven billion dollars over the next 20 years for the best energy choices, wouldn’t you be scrupulous in your analysis?  Would you choose a 40-year-old coal plant that has significant operations and maintenance costs, fuel costs, legacy environmental costs, and only runs 75% of the time during peak energy consumer demand? How about a 27 year-old nuclear plant that produces significant spent fuel nuclear waste (we still haven’t figured out safe storage after 50 years) and enormous decommissioning costs (those are costs to make the area essentially “radioactive free” – if that is possible)? OR would you opt for significantly less expensive wind and solar (that has little to no environmental or health consequences) and is often guaranteed to last for 25 years with little maintenance and downtime? Yes, we too chose the latter combination for several reasons. The first reason being that we have finally reached a point in our energy history where deriving significant energy from solar and wind is economically feasible.  But, no surprise, PNM testified that out of ALL the possibilities available for replacement power its proprietary sophisticated computer model also chose PNM’s own coal and nuclear facilities to replace the retired coal. Hmmm.

NEE could not imagine how PNM’s conclusion could be true in any rational universe. So we decided to test the results ourselves. We bought a two-month lease for Strategist,® the proprietary computer modeling software used by PNM to generate its results (for $18,000). It was simply implausible that out of the many possible scenarios, Strategist® would choose two aging coal and nuclear plants as the “most cost-effective” and best energy resource choice for New Mexicans. What was evident to us was that PNM was motivated to chose their nuclear and coal energy package because they already owned these plants and this was the best short-term choice for maximizing profits for their shareholders in spite of financial exposure for ratepayers.  

After our own experts re-ran the Strategist program, it was evident that PNM had manipulated Strategist® inputs, thereby arriving at its desired replacement plan. The largest error we discovered in their price calculation was a $532 million omission of ongoing capital expenditures: these are known costs of ongoing capital expenses associated with the operation and maintenance of the San Juan coal plant, the Palo Verde nuclear plant, and PNM’s gas plants. The next largest error was the omission of $367 million, due to a gross underestimation in the fuel cost at San Juan. There were other smaller errors as well. When faced with these glaring omissions, PNM was forced to admit on cross-examination that these mistakes equaled over $1.1 billion. Not surprisingly, all these “errors” tended to make PNM’s replacement plan initially look more viable than it turned out to be. But for the ability of New Energy Economy to obtain the use of Strategist® and through persistent discovery and analysis in 2014 and early 2015, this billion dollar+ error of PNM’s request would not have been discovered. 

NEE discovered other contortions internal to Strategist® that PNM clearly manipulated as well: 

  1. PNM constrained the total amount of wind capacity that was allowed in Strategist® to 100 MW from 2016-33. Meaning that PNM only let Strategist® choose 100MWs for the 20-year planning period. When our expert increased the wind constraint from 100 MWs to 400 MWs, Strategist® reduced the overall cost for each scenario between $40-$130 million net present value. It should also be noted that Strategist® chose all 400 MWs of wind each and every time an alternative scenario was run.
  2. PNM grossly overstated costs for wind and solar when inputted into Strategist,® despite having actual costs in hand for wind at 3.7 cents/kWh and for solar at 6.8 cents/kWh. The difference between the actual solar and wind costs and what PNM ran in Strategist® is $96 million. 
  3. PNM understated the variable costs for San Juan in both operation and maintenance, and fuel, thus biasing the dispatch of resources in favor of San Juan coal generation.

Obviously, if elements are misrepresented or omitted from the Strategist® runs then this does not merely misstate the risks faced with the adding of PV3 nuclear and more coal purchase at San Juan, it presents a biased portrayal of the energy risks. 

Probably the most incredible of our discoveries was that when the costs were corrected, and actual PNM numbers were inputted into Strategist®, the Strategist® model chose to shut down the entire San Juan coal plant as uneconomic! This means that Strategist® chose to close the San Juan plant and replace it with other energy resources that were cheaper. The Strategist® result for a four-unit shutdown at San Juan would save ratepayers $300 million over a 20-year horizon.

When the costs were corrected, and actual PNM numbers were inputted into Strategist®, the Strategist® model chose to shut down the entire San Juan coal plant as uneconomic!

Toxic Assets: Coal and Nuclear Power Plants

PNM’s $7 billion plus price tag for toxic assets is just the beginning of a costly environmental nightmare. The term “toxic assets” was coined during the 2008 financial crisis when the debt obligations (mortgages) had a greater value than the worth of people’s homes, subjecting mortgage holders to massive losses. This situation had a devastating economic fallout: people lost their homes, lost their life savings, individuals went bankrupt, and ultimately led to the greatest economic divide in U.S. history. People with fewer financial resources were abandoned and the rich got a whole lot richer.

The situation in New Mexico is alarmingly similar in that PNM’s San Juan coal interests are market valued at zero dollars, but PNM wants the ratepayers to buy more coal at San Juan for $26 million. PNM wants to tie ratepayers for twenty years to toxic assets, run away to the bank with short-term profits, while externalizing the debt and creating devastating societal costs to the public.

Let me explain. When the agreement occurred between PNM, the EPA, and the State of New Mexico, some of the other co-owners in San Juan decided it was a good time to get out of the plant. (PNM is the operator and the largest shareholder in San Juan, but there are other owners as well.) California utilities own shares, as does Tri-State, Utah Associated Municipal Power Systems (UAMPS), and the cities of Los Alamos and Farmington. The California utilities and Tri-State decided to exit and agreed to give away their megawatt shares of coal for “free.” Initially, UAMPS agreed to take 54MWs and Farmington was to acquire 65 MWs.

Thus, it turns out the real reason PNM wanted more coal at San Juan, 78 MW, was because that was what was left over from the fleeing co-owners. An asset that becomes illiquid when its secondary market disappears is what is now known as a “toxic asset.”  When UAMPS decided in the summer of 2014 that it was not going to take the 54MWs PNM changed its request to buy more coal before the PRC, from 78 MWs to 132 MWs, to absorb the 54 MWs of unwanted shares. (PNM told the PRC, at that time, that it was changing its request because PNM had miscalculated its “demand forecast”.)

Then in January 2015, the City of Farmington announced that it would not buy the excess 65 MW coal shares (citing concerns about San Juan reliability and the availability of alternate generation resources). The utilities “in the know,” like UAMPS and Farmington, have refused to acquire more coal shares at San Juan, even when they are given away for “free.” Toxic assets cannot be sold, as they are often guaranteed to lose money. A Wall Street analyst confirmed this position; after Farmington refused to buy the coal shares, Jeffries’ downgraded PNM stock because in their opinion no third party would likely buy the excess coal shares and that PNM will be stuck with them.

If PNM has its way, the ratepayers of New Mexico, rather than PNM, will be the “stuck” parties.  The current accounting “book value” for PNM coal shares in Units 1 & 4 (the remaining San Juan units) is $361million; raising the serious question between the market “worth” of the coal shares at zero dollars and the enormous discrepancy with PNM’s accounting. Are you reminded of the Enron scandal?

PNM’s replacement power plan has so many significant unknowns and unquantified serious risks that should cause the PRC to reject the Stipulation on those bases alone.  These unknowns include, at a minimum, (1) PNM’s failure to establish where it will obtain the coal to continue to fire SJGS (including whether it can reach agreement with the departing current owners of the adjacent coal mine or must look elsewhere for coal), (2) which of its former partners at SJGS will actually remain and in what percentages, and (3) what the terms of the agreements among the departing and remaining owners will be, including their owners’ financial responsibilities related to residual environmental liabilities, decommissioning costs and other matters (all of which are currently up in the air). In addition to the showstoppers based on uncertainty and questionable assumptions included within the Stipulation agreement, there are a number of other specific reasons why the PRC should reject PNM’s replacement power proposal.  Among those reasons are the following: 

Two of the worst fires in New Mexico history have occurred in the last five years and have decimated our forests and have caused a human and property toll in the many of hundreds of millions of dollars. 

  • PNM has failed to establish that the Stipulation agreement reflects the “least cost” or “most cost-effective” energy portfolio that is “fair, just and reasonable and in the public interest.” This is the legal standard that PNM must follow, but it is now incontrovertible that solar and wind can compete and match consumer electric demand and can reduce demand when informed. 
  • 2014 was the hottest year since 1880, when humans began recording temperature. PNM’s replacement plan misses the once-in-decades opportunity to substantially reduce dependence on dirty coal and nuclear and improve the environment and health of New Mexico citizens. Instead, PNM unabashedly asks the PRC to guarantee increased coal dependency for the next thirty years. New Mexicans’ health and welfare is significantly at stake in this case.  In addition, the habitability of the world is and will continue to be at stake when this and other decisions like this one are made in the coming months and years. The commonsense response to New Mexico’s extreme drought, its recent history of record-breaking mega wild-fires, the alarming externalized local health consequences of using coal—especially for the young and old— including asthma, lung and heart disease, strokes and more, require cessation of the single greatest cause: burning of coal. PNM’s replacement power plan is taking New Mexico precisely in the wrong direction. It increases PNM’s dependence on coal now and in the future. It contributes to locking New Mexicans into continued rapid global warming. If that is not enough, it is more expensive than other feasible alternative plans.  
  • The submission of PNM’s replacement power portfolio did not grow out of a genuine stakeholder process as required by state law and regulatory principle. Instead it was a prearranged outcome that is inconsistent with the regulatory requirement that the process be deliberative, transparent, and capable of including and accommodating alternative approaches, and be accessible to the public. PNM admitted that the addition of Palo Verde 3 “was determined internally” and coal was chosen to make the San Juan partnership agreement work because there are good system resources for the benefit of the public.  Similarly, there was no meaningful public input and PNM’s replacement portfolio was not tested by the market. Accordingly, there is no way for the PRC and the public to actually know if PNM truly identified the most cost effective portfolio of resources to supply the energy needs of customers. 
  • There was substantial evidence presented at the hearing that challenged the credibility of PNM’s claims: the Stipulated settlement is nearly 1 billion dollars more than PNM’s original application. NEE discovered many “mistakes” including, more than 1 billion dollars of mistakes in the inputs of Strategist,® results were manipulated, at least four alternatives are cheaper by hundreds of millions of dollars over a 20-year horizon, and the PRC staff negotiator broke the law by owning PNM stock, and more.
PNM’s replacement power plan is taking New Mexico precisely in the wrong direction. It increases PNM’s dependence on coal now and in the future. It contributes to locking New Mexicans into continued rapid global warming.

New Mexico Residents Stand Up For the Planet

350.org_Forward_on_Climate-Washington_DC

As a result of these discoveries, there are now 11 entities actively opposing the Stipulation: 1) New Energy Economy; 2) City of Santa Fe; 3) Santa Fe County; 4) Bernalillo County; 5) Southwest Generation, LLC; 6) Coalition for Clean Affordable Energy; 7) New Mexico Independent Power Producers; 8) Renewable Energy Industries Association; 9) Albuquerque Bernalillo Water Authority; and 10) Western Resource Advocates. The “broad” support that PNM was touting when it filed the Stipulation agreement has dwindled considerably. 

The public’s due process rights to a fair and impartial process was violated. There were two due process issues that arose during the hearing process: 

  1. New Energy Economy moved to recuse two PRC Commissioners based on the laws against ex parte communications, the appearance of impropriety, personal bias or prejudice against a party and/or the inability to exercise her/his functions impartially. NEE alleged that these Commissioners repeatedly attended sporting events and dinners, and engaged in many personal calls and other documented meetings and communications with PNM. Based on this cozy relationship between the regulators and the regulated, there is a legitimate apprehension that these Commissioners would be unable to render a fair and impartial decision. 
  2. PRC Staff’s participation in the settlement process was tainted by the statutory prohibition against a regulator “accepting anything of value from a regulated entity.” NMSA §8-8-19 NEE has substantiated that the PRC staff negotiator owned stock in PNM while negotiating the Settlement agreement that gives a major, unjustified boon to PNM stockholders. To analogize, what position would PNM be taking in this case if PRC Staff’s recommendation had been against the Stipulation and it turned out that Staff’s lead negotiator had worked for years for a solar energy provider and still owned stock in that company? 

The conflict-of-interest statute means something and should not be brushed aside.  Intervenors and the public apparently have little choice but to live with the fact that the staff of the PRC and the staff of PNM migrate back and forth through a revolving door.  But the law says stock ownership is too much.  When staff’s negotiating team, which is charged with driving as hard a bargain as is reasonably possible on behalf of the ratepayers consists entirely of retired PNM employees, with pensions, it is bad enough.  But where the lead negotiator continues to own stock in PNM there is and will continue to be a cloud on the Stipulation.

PNM has argued that there is no valid opposition to their plan, but there were more than ten thousand hand-signed letters, many thousands of emails, dozens of editorial opinions submitted to the local newspapers, a 300+demonstration on the first day of the PRC hearings, and a couple hundred people who offered public comment. There has been an outpouring of valid public opposition and outrage over PNM’s plan. Faith groups came to testify against the plan.  Students and business leaders, doctors, professionals, Latinos, Native Americans, school officials, PNM shareholders (they called themselves “Shareholders for a Responsible Future”) and people from all over New Mexico (Silver City, Gila, Los Lunas, Albuquerque, Canon del Rio, Longville, Gallup, and more) showed up to voice their opposition. Opposition groups had well-orchestrated these voices so there was no doubt where the People of New Mexico stood with respect to PNM’s plan.
Native Americans carpooled for more than 300 miles to testify against further investment in coal and nuclear; here is just one highlight from hundreds:

From Eloise Brown: We take things to heart. And I’m speaking on behalf of our elders, our young people, former uranium miners, former uranium millers. We don’t agree with coal. We don’t agree with uranium. Which one is more important, jobs or health? It’s not very hard to decide. I mean, would you rather have money? Because if you have money, and if you die, what are you going to do with that money? Who’s going to use the money? We live right next to coal-burning power plants. Pretty much everybody out there has passed away, passed away from cancer, or lung fibrosis, pneumoconiosis. Our animals are dying, our plants are dying, due to coal-burning power plants. People die early from cancer. We cannot use that money that we earn from coal-burning power plant jobs to buy back our lives.

In contrast, New Energy Economy submitted a replacement portfolio that consists of 260 MWs of solar and 400 MWs of wind. One of the satisfactory moments in all of this was when we learned that PNM had run New Energy Economy’s Alternative portfolio in Strategist® and it revealed that our plan was cheaper for ratepayers in both the short and long term and, of course, it was superior to PNM’s plan as regards health, environment (water savings), jobs and the economy. We have argued that the best solution would be for the PRC to require PNM to issue an all-resource RFP for the lost capacity and energy at San Juan. An RFP is a solicitation that a utility uses to elicit bids from potential vendors for a desired energy solution. This process could be administered in a transparent way that assures that energy procurement is done for the benefit of the people and produces just, fair, and reasonable rates. No surprise that PNM vigorously opposes the issuances of an RFP.

A Road Map for Future Clean Energy Battles

The questions raised in this battle against PNM’s future energy plans are not unique to New Mexico, and NEE’s plan of attack can be a road map for future battles against utilities in other jurisdictions. Clearly, climate change is a worldwide problem and requires a worldwide solution: pollution does not recognize state or country boundaries.

While the outcome of this litigation is still unknown, NEE has had a great measure of success by simply asking the hard and right questions. These questions include: Has the utility engaged in a stakeholder process, gone into the market, solicited bids in response to Request-for-Proposals (“RFP”s), and evaluated the availability and feasibility of alternatives based on the lowest costs for the best available resources? Has the utility considered and preferred non-polluting resources?  Or has it chosen dangerous resources and their associated costly pollution controls, in violation of the law and regulatory principles, that will be stranded in a few years that locks-in enormous short-and long-term financial burden, and will have deleterious health and environmental consequences? In New Mexico’s case, the answers to these questions show that PNM’s plan has no benefit for ratepayers. Yet, PNM is asking the ratepayers to shoulder the risk and uncertainty of their energy generation choices. 

I probably should not have been shocked that PNM acted so unscrupulously in submitting a proposal that it knows does not adhere to the law and is not in the best interests of the ratepayers of New Mexico. But I am still confounded by the depths of PNM’s malfeasance and apparent indifference to the consequences of its proposed plan for the people of New Mexico. As seems perfectly clear to NEE and a majority of residents of New Mexico, the time is now for coal and nuclear to be shut down and the conversion to a clean energy economy be accelerated. This is the only viable solution for all of our sakes. Energy democracy is possible, but only if we actively oppose the climate polluters and financial violators, and spread solar solutions to the most vulnerable amongst us.

Image sources: Arnold Paul via Wikimedia Commons and Wikipedia

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