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Coal Faces a Day of Reckoning in New Mexico

Decision over the future of the San Juan coal plant could reverberate through the entire coal industry and could also steer debate over renewables.

By Zahra Hirji and Naveena Sadasivam

Apr 24, 2015

As a bitterly fought case over the future of New Mexico's largest coal-fired power plant nears a climax, the outcome has the potential to reverberate through the faltering U.S. coal industry. It could also steer the debate over how soon and at what cost renewables are embraced as the country's energy future.

That landmark moment could come any day, when New Mexico regulators decide whether to accept a utility's controversial plan to close only two of its four coal-fired units, replacing them mainly with natural gas and nuclear energy. The Public Regulation Commission's regulatory panel could deny the request, potentially forcing the plant to shut down and opening the door for renewable replacement power.

San Juan is one of the largest––and most polluting––power plants among the hundreds facing retirement amid the U.S. Environmental Protection Agency's crackdown on coal pollution and the boom in natural gas production that has undercut coal prices. The case has drawn attention nationwide as it could influence the fate of middle-aged and younger plants and possibly accelerate the power industry's pivot to climate-friendly energy sources.

The San Juan decision "carries with it potentially precedent-setting and national implications for how to deal with current haze and future carbon regulations," said Robb Hirsch, executive director of New Mexico Independent Power Producers, a trade group of workers in renewable energy, natural gas or transmission lines.

On one side is the plant's operator and majority owner, the Public Service Company of New Mexico (PNM). The utility wants to partially shutter the San Juan plant by December 2017; install millions of dollars' worth of pollution controls on the two surviving units; and replace the other two with a 28-year-old nuclear plant, a new natural gas plant and a sliver of solar. The $7.5 billion proposal is backed by the attorney general and other state officials. According to the company, this plan would raise residential customer electricity bills bymore than $60 per year in 2018.

On the other side are environmental organizations and energy-related trade groups that are pushing the state to transition to a clean energy economy. Opponents want PNM to retire all four San Juan units and replace the coal power with natural gas, wind and solar. They say their solution would cost at least $60 million less than the company's plan.

Organizing that charge is the Santa Fe-based advocacy group New Energy Economy (NEE), a nonprofit with a staff of four. "We realized early on that this is the most important case facing New Mexico," said Mariel Nanasi, president of NEE. "It is going to lock in energy choices for the next 20 years."

NEE has used regulatory hearings to show that PNM intends for customers to fully subsidize the shutdowns of the two coal plants, and has a questionable ownership-transfer plan that would raise customer rates. PNM was also criticized for not adequately exploring the potential for wind and solar to replace coal. Some of the largest cities served by PNM have come out against the plan, including Albuquerque and Santa Fe.

"PNM's strategy, in my opinion, is to increase its rate base as much as it can," said Charles Noble, an attorney for the environmental group Coalition for Clean Affordable Energy, which opposes PNM's plan. "It can do that by keeping as much coal capacity as it can. It costs money for them to get out."

"PNM's first responsibility is to our customers, and we work diligently to balance reliability, affordability, and environmental protection," said company spokesman Pahl Shipley. "It's unfortunate that a few radical advocates continue to twist the facts and spread misinformation in an attempt to hijack this important discussion and inappropriately influence policy."

A hint of what's ahead came from the hearing examiner, Ashley Schannauer, tasked with providing a recommendation to the five-person regulatory panel. On April 8, Schannauer came out against PNM's plan in his recommendation, saying, "the risks and costs...would outweigh its benefits."

In a parallel case, a different hearing examiner recommended the regulatory panel reject the company's proposal for future rate hikes.

"When utilities don't make decisions on their own, when [the decisions] are made for them, that sends shockwaves through the industry," said Jeremy Fisher, a principal consultant at Synapse Energy Economics, Inc., a research and consulting group in Cambridge, Mass. He has worked on utility cases in at least 10 states. For the San Juan case, Fisher testified against the company's plan, on behalf of New Energy Economy.

PNM's Strategy to Survive

The New Mexico case comes as the U.S. coal industry is fighting for survival. Cheap and plentiful natural gas and federal rules on air pollution and carbon emissions have inflicted a one-two punch to coal plants in recent years. One hundred and eighty-eight coal plants have announced plans to close down since 2010. Forecasts predict up to 50 gigawatts of coal capacity in the U.S. will be retired by 2020—more than enough electricity to power all the homes in Texas.

"The power sector is in the midst of this pretty radical transformation away from coal to a variety of cleaner generation sources," said Rachel Cleetus, an economist at the advocacy group Union of Concerned Scientists.

For PNM, San Juan is more than just a coal plant. It is the economic engine of its business. Half of the utility's electricity—and much of its profits—comes from the generating station. As an investor-owned utility, PNM gets most of its revenue from customer rates. The revenue pays for the company's investments, with interest, on major infrastructure such as power plants.

The San Juan facility, which is more than 30 years old, produces about a third of the power in the state. It sprawls over two square miles in the Four Corners region of the Southwest, home to the Navajo Nation and several national parks, including Mesa Verde.

Aeriel view of the San Juan Generating Station in the desert north of the San Juan River west of Farmington, New Mexico. Credit: Doc Searls

In 2012, new EPA rules to reduce the haze-causing air pollutants sulfur dioxide and nitrogen oxide forced PNM to either install costly pollution controls on San Juan's units––or to propose an alternative compliance strategy. It chose the latter and submitted a plan for state approval in December 2013.

Since then, there have been four rounds of hearings, testimony by more than 30 experts, and more than a hundred record requests. According to nearly a dozen sources interviewed for this story, many of whom testified in the case, PNM is trying to keep its coal plant online at the expense of its customers.

Opponents have charged that PNM has tried to increase profits by charging customers for unnecessary equipment upgrades and by expanding its ownership in the plant. Four of the plant's eight co-owners have announced their intention to abandon their shares and hand them over to PNM at no cost. But the utility initially wanted to charge customers $52.5 million for them, said David Van Winkle, a technical advisor for New Energy Economy and a member of its board.

Most controversially, the utility initially said it plans to recover the investment it made in the two coal units slated for shutdown by charging customers more than $200 million over the next approximately 20 years. New Energy Economy responded that the company's shareholders should foot at least part of the bill.

The growing pushback spurred PNM to submit an updated proposal, called theStipulation, to regulators in October. It calls for splitting the costs of shutting the two units between shareholders and customers, which is common in similar cases, according to Jim Lazar, a senior adviser for the nonprofit Regulatory Assistance Project. The Stipulation also halves the customer costs for the transfer of shares to $26 million––and agrees to more renewable sources for replacement power.

Hearings on the new plan were held from November through January. Fisher, the environmental consultant hired by New Energy Economy, testified against the Stipulation. By analyzing a copy of the company's proprietary economic model, Fisher found it capped the potential for new wind energy at 100 megawatts, the energy capacity of a wind farm with about 30 large turbines.

According to PNM's internal studies, wind wasn't a good coal replacement option, said spokesman Shipley. That being said, the company "will continue to evaluate wind resources and add them in addition to what we are doing to replace the abandoned SJGS capacity [if] prices demonstrate them to be a cost-effective addition," Shipley noted.

Fisher also discovered that the company underestimated the expected future cost of generating electricity by coal at the plant by $367 million over the next roughly 20 years. The company then confirmed and corrected the number, saying it was a simple spreadsheet mistake.

Similarly, NEE's Van Winkle found that the company assumed the costs of wind and solar will increase in the future, despite market trends showing the opposite. The company currently charges about 6.8 cents per kilowatt-hour for solar, but plans to charge 10.5 cents per kilowatt-hour by 2033, an increase of more than 60 percent.

"It's not unusual for us to find one or two or three errors or assumptions that we disagree with" in a company plan, Fisher said. "It is unusual to find so many that are of such high magnitude."

In October, six groups—the Attorney General's office, the Public Regulation Commission's utility division staff and four energy trade associations—backed the company's revised plan. Since then, at least three groups retracted their support after Fisher's findings––­and uncertainty surrounding the plant ownership––came to light.

With four co-owners looking to ditch their shares, PNM and co-owner City of Farmington had planned to take on the extra ownership. But in mid-January, Farmington balked, citing concerns about the plant's flagging performance and long-term economics of coal. None of the remaining three co-owners have since picked up the slack, signaling trouble. The plant owners have also failed to secure a long-term coal supply for the plant.

PNM spokesman Shipley told InsideClimate News the company expects to provide agreements for a restructured ownership and coal supply to the commissioners by May 1.

"The turbulent developments in this case should send a seminal message to other utilities and regulators to carefully assess the long-term cost effectiveness of coal," said Hirsch, of the New Mexico Independent Power Producers, one of the groups that reneged on its support.

The Early Retirement Paradox

Investor-owned utilities such as PNM make the bulk of their profits from owning major infrastructure, or assets, such as power plants. Here's how it works: a utility constructs or invests in a four-unit power plant. Then it calculates the plant’s expected lifespan––for example, 50 years––and the necessary rates to charge customers over that time period to both pay off the initial investment and eventually assure profits. It's up to state regulators to ultimately decide how much profit the company is entitled to, and set the rates.

But if that power plant must close down early, the company sacrifices that revenue source unless a deal is negotiated. By keeping even half the plant open, however, the company can still profit from the original investment.

According to PNM's brief in response to the recent hearing examiner's report, the rejection of its deal will "ultimately endanger continued operations at San Juan."

The fate of San Juan now rests in the hands of the five commissioners at the Public Regulation Commission of New Mexico. Regulators have two main options: accept the utility's most recent plan or reject it.

If the commissioners reject the plan, they can advise the company on ways to revisit the issue.

Commissioner Karen Montoya told InsideClimate News that there's no set timeline for a decision. "We want it to be done right," she said. "This is a landmark case for the Public Regulation Commission."

The prospects for the utility company's plan do not look good to Nanasi, leader of New Energy Economy.

"I think," she said, "we've built such an amazing case in New Mexico that there's no way."

The decision's fallout may ripple far beyond New Mexico's borders as the coal industry awaits another verdict on its fate.


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