For iconic N.M. coal plant, an uncertain future

Emily Holden, E&E reporter

ClimateWire: Friday, May 1, 2015

Article updated at 2:18 p.m. EDT.

WATERFLOW, N.M. -- The monolithic San Juan and Four Corners coal-fired power plants rise out of the expansive New Mexico desert, just 8 miles apart.

Built in the 1960s and '70s, these fossil-fuel guzzlers have historically been two of the West's biggest electricity generators, relics of a rush to meet the massive power demands of rapidly sprawling cities, such as Phoenix and Los Angeles.

The fate of the San Juan plant -- which burns about 6 million tons of coal per year and provides electricity to 2 million people -- now hangs in the balance as regulators weigh in on New Mexico's future energy mix.

After spending years making meticulous retrofits to capture harmful pollutants like mercury, sulfur dioxide and nitrogen oxide, the San Juan plant is shutting down two of its four units by the end of 2017. The closures are part of an agreement under U.S. EPA's Regional Haze Program to improve visibility at cherished national landmarks like the Grand Canyon and Mesa Verde. Four Corners already shut down several units in a similar deal.

In the coming weeks, state regulators will decide whether to approve a plan for what will replace San Juan's coal power and how much it will cost customers. Support for the proposal has crumbled in recent months, after key power purchasers backed out and cost estimates escalated.

Amid that drama, environmental and consumer advocates in the Southwest are arguing that regulators should use the opportunity to consider longer-term costs and start planning for a shift to cleaner fuels that will likely be required by the federal government. Investing more in coal power or natural gas now will just punt the responsibility for cutting emissions down the road, they say.

"This is the most important energy decision that's going to be made in the last 50 years, and it's going to either lock in energy resources or cause incredible, enormous stranded assets -- the likes of which we have not ever seen," said Mariel Nanasi, director of Santa Fe-based New Energy Economy, a green group leading the charge against the plan.

The long road to this point, and the heated conflicts along the way, are emblematic of the looming questions state officials face as they gear up for another regulatory challenge. Now they must cut power plant carbon dioxide emissions, yet keep electric bills from climbing under the proposed Clean Power Plan.

"It's really about being realistic and clear-eyed about the risks, both existing and forthcoming, that are connected with coal-fired generation and increased reliance on coal-fired generation," said Erin Overturf, a senior staff attorney for Western Resource Advocates, an environmental group that withdrew support for the plan. "Those are real concerns and issues that we all need to be considering when we're making these types of resource decisions."

Pricing costly options

A tour of the San Juan coal plant -- operated by the state's biggest electric provider, Public Service Co. of New Mexico (or PNM) -- shows the days of simply burning coal to heat water into steam and drive turbines that produce electricity are long gone.

San Juan Generating Station

The San Juan Generating Station in New Mexico. Photo courtesy of Flickr.

The tour starts with engineering manager Hank Adair explaining detailed diagrams that show how each step of the process fulfills a mandate to scrub or capture various pollutants.

Faced with the option of installing selective catalytic reduction -- an advanced emissions control technology -- on all four of the plant's units, the state of New Mexico and PNM lobbied the federal government for an alternative: closing two units to make the same level of emissions reductions. PNM said the substitute plan would cost less overall and position the utility for future carbon regulations.

"This really is a comprehensive response to not just regional haze but also to upcoming regulations," said Maureen Gannon, executive director of environmental services for PNM's parent company, PNM Resources. "It was definitely a factor as we worked through the state plan."

Spokesman Pahl Shipley adds that PNM didn't want customers "to get hit twice with huge compliance costs."

Instead of closing the plant's two oldest units, PNM proposed shutting down Unit 2 and Unit 3, the middle children of the facility. The move would yield the reductions the plant needed, and because they sit in the center of the facility, closing them would create some space helpful to plant operations. The shutdowns will halve San Juan's capacity, now at 1,684 megawatts.

At public meetings, PNM reminds officials the facility provides the cash-strapped county with $5 million in property taxes each year and employs 350 people.

One of those 350 is Jamie Shockey, the PNM Resource's environmental manager. In his 15 years at San Juan, he's developed some sentimentality for the oldest unit, No. 1, which he's put "blood, sweat and tears" into tweaking and fine-tuning to comply with various environmental regulations. After all that, it would be tough to shut the unit down, he said.

Running coal units longer means getting more use out of the investments in emissions controls that ratepayers have funded, according to many power companies facing the Clean Power Plan. They want EPA to give them more time to use the "remaining useful life" of the facilities.

Dealing with moving parts

New Mexico must reduce its power fleet carbon emissions rate about 34 percent below 2012 levels by 2030 under the draft rule. PNM says the state overall is well-positioned to make that shift. But if the state makes each utility responsible for its fair share of greenhouse gas emissions, environmentalists say PNM will be further out of compliance than its utility peers. Overturf said that while the Clean Power Plan is on everyone's mind, it hasn't been at the forefront of this proceeding, only because the rule is not yet final.

"It's a legitimate consideration for the commission to be thinking ahead about what kind of actions we can be taking now to ensure we can comply with the Clean Power Plan in a way that's cost effective," Overturf said.

Regardless of what regulators decide about the San Juan plant, they will likely confront similar choices in the next few years as they review plans to reduce carbon emissions under the rule.

PNM spent months negotiating an agreement to replace the power from the closures by acquiring additional coal-fired electricity from a remaining unit, buying nuclear generation from a nearby station, building a natural gas plant and adding a small amount of solar energy.

But along the way, a succession of stakeholders have backed out, saying the future of the plant is too uncertain, especially after PNM disclosed early this year that it had miscalculated coal prices and ratepayers would be on the hook for an additional $367 million over 20 years. NEE says throughout the entire process, PNM revealed an additional $1 billion in costs.

Nine utilities share ownership of the San Juan coal plant. They funnel power from the facility to customers all over the Western region.

Four of San Juan's co-owners -- three California utilities and one multi-state electric cooperative -- want to exit the plant. But the amount of power they use doesn't exactly match the amount going offline. They are leaving behind some unused capacity.

PNM wants to acquire some of that power, and the nearby city of Farmington, another co-owner, intended to take an additional 65 megawatts of electricity. But after a hearing earlier this year, Farmington reversed course, saying there were too many unresolved issues with the plant and it was time for the city to explore other options.

Handling an ever-changing cast of players

Next, the Renewable Energy Industries Association, New Mexico Independent Power Producers and Western Resource Advocates said they couldn't support the agreement. They cited the cost revisions and PNM's refusal to agree not to take on Farmington's 65 MW of coal power directly or through an affiliate.

Earlier this month, the city of Albuquerque announced its opposition to the plan.

Complicating matters further, PNM is simultaneously renegotiating a fuel contract with the neighboring San Juan coal mine, owned by BHP Billiton Ltd., and prices might not be as favorable if the plant is purchasing less coal. Those unknown costs add another layer of trepidation about the plant's future.

PNM's coal contract and ownership agreement are due May 1, and the suspense surrounding them is often noted as a reason supporters of the plan have been dropping out.

"The situation surrounding [the San Juan plant] is more risky and less certain than has been represented throughout this case," Western Resource Advocates said. "Time-frames for concluding agreements relating to a fuel supply and revised participation agreement have been consistently extended, and ... PNM economic studies underlying at least portions of the stipulated outcomes have been erroneously developed."

Despite the steady drain of support, onlookers thought PNM still had a fair chance of getting the proposal approved. When PNM submitted the agreement, there were only three parties still on board, but those three were political power players: the state attorney general, the regulatory commission staff and the New Mexico Industrial Energy Consumers.

Yet earlier this month, a hearing examiner -- an administrative judge that offers preliminary findings -- surprised stakeholders by suggesting the state Public Regulation Commission should deny PNM's proposal. The examiner agreed the plan was too expensive.

PNM shouldn't be allowed to pay more than book value for power from Palo Verde, the Arizona nuclear plant it owns a portion of, the hearing examiner said. And the utility shouldn't acquire any more coal power, mainly because there is too much uncertainty surrounding the plant's ownership agreement and future coal costs, he added.

Asked if the company saw it coming, Shipley took a long, measured pause before responding.

"It was disappointing," he said. "The commission and the regulatory process in general has historically favored negotiated agreements."

The industrial energy consumers argue that even if the commission doesn't like individual portions of the agreement, it is "the best outcome for ratepayers from both a rate impact and a system reliability perspective."

Chuck Noble, who was a senior attorney at the New Mexico Environment Department for 10 years and also served as legal division director at the PRC, said he has never seen a hearing examiner propose such wholesale changes to a stipulated agreement or watched as many parties drop out of negotiations. Noble represents the Coalition for Clean Affordable Energy, which never agreed with PNM's proposal, arguing the utility should have explored cleaner energy sources earlier.

A maze of risks and deadlines

PNM will likely be allowed to recover half of its investments in the two retiring units through charges to ratepayers that could reach $257 million over time. New Energy Economy argues if PNM acquires a greater stake in the fourth unit, the utility will eventually pass the costs of those stranded assets on to customers, too.

Instead, NEE says PNM should have explored other options. The organization presented an alternative that it said would be $62.5 million cheaper than PNM's proposal. NEE says that option "minimizes environmental impacts, is less risky in terms of existing and anticipated environmental laws and regulations, [and] has better fuel diversity," among other benefits.

But New Mexico does not have a competitive bidding process for replacing capacity, although regulators are being petitioned to implement one.

PNM originally wanted to purchase nuclear power from Palo Verde for $2,500 per kilowatt. In the stipulation, PNM agreed to $1,650 per kilowatt. The hearing examiner says PNM should pay the net book value: $1,071 per kilowatt. The change would be an overall cost difference of about $78 million.

"Right now, PNM is losing money on Palo Verde, with variable costs higher than they can sell energy at," Noble said. That's, in part, because natural gas is comparatively inexpensive.

Nanasi accuses PNM of trying to "shift responsibility from the shareholders to ratepayers."

If the commission agrees with the hearing examiner and denies PNM's replacement plan, the utility will have 15 days to suggest an alternative.

PNM says the commission rejection would be a fatal blow. It would "lead to a collapse of the restructuring of the San Juan ownership interests ... and ultimately endanger continued operations at San Juan," the company said in a filing, warning costs could go up for ratepayers if PNM has to find replacement power instead of getting more from the coal plant.

Financial analysts said the risk made them nervous, too. In a different case, another examiner said PNM's proposal for how much it would charge customers was incomplete. Added together, "these developments create an unexpected headwind for PNM, which is not incorporated into our positive rating outlook," Moody's said in a report last week. "We would see a highly contentious regulatory environment, with lots of litigation and recovery delays, as a credit negative."

PNM's experiences serve as a cautionary tale for utilities in a similar position, especially as more of them will need to make changes in the next few years to cut carbon emissions.

"Utilities that have thought about this carefully have decided it's better to be well ahead of the proposed emissions rate than behind it," said Noah Long, legal director of the Natural Resources Defense Council's Western Energy Project. "This is just the first go at the emissions reductions from the power sector. ... [E]missions are going to have to keep coming down."

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