Direct Testimony in Opposition to Stipulation - NEE - As Delivered














) Case No. 13-00390-UT

Applicant )








November 25, 2014

Table of Contents

Summary 3

San Juan abandonment 6

Acquisition of 132 MW in San Juan unit 4 7

Acquisition of 134 MW of Palo Verde 3 22

Alternative plans/approaches 29

Stranded assets, PV reliability, renewable energy paragraphs 43

Conclusions 47

DVW Exhibit nomenclature:

DVW-x Exhibits in 8/29/14 direct testimony

DVW S-x Exhibits in 9/10/14 CONFIDENTIAL supplemental testimony

DVW R-x Exhibits in 9/16/14 rebuttal testimony

DVW OST-x Exhibits in 11/25/14 direct testimony – opposition to stipulation

DVW COST-x Exhibits in 11/25/14 direct CONFIDENTIAL testimony – Reserve issue

Q. Please state your name and business address.

A. My name is David Van Winkle, and my business address is 343 E. Alameda St., Santa Fe, NM 87501.

Q. On whose behalf are you testifying in this proceeding?

A. I am testifying on behalf of New Energy Economy (“NEE”)

Q. Please summarize your educational and business background.

A. I have a Master’s degree in Electrical Engineering from Southern Methodist University. For the past 6 years, I have been involved in reviewing renewable resource plans of New Mexico utilities and making recommendations to various organizations including the Rio Grande Chapter of the Sierra Club, New Energy Economy and the Coalition for Clean Affordable Energy (CCAE). I have considerable experience in analyzing complex cost and financial issues and providing solutions to business problems. In addition, through extensive discussion and participation in New Mexico electric utility resource issues over the years, I have developed technical knowledge about resource options for meeting utility loads. I am the current Chairperson of CCAE’s Supply Team, which analyzes utility resource acquisitions on behalf of CCAE. I am also the technical/financial advisor to New Energy Economy. I have previously testified before the New Mexico Public Regulation Commission as an expert for CCAE in 14-00121-UT. A resume of my relevant educational and business experience is attached as Exhibit DVW OST-1.

Q. Have you filed previous testimony in this case?

A. Yes. Direct testimony on 8/29/14, CONFIDENTIAL supplemental testimony on 9/10/14, and rebuttal testimony on 9/16/14. My prior testimony is adopted and incorporated herein,[1] and as per the October 9, 2014 Order of the Hearing Examiner it is unnecessary to refile it as part of my testimony in Opposition to the Stipulation. (October 9, 2014 Order, C, pp. 4, 5)

Q. Does the Stipulation, as a package, benefit PNM ratepayers and is it in the public interest?

A: The Stipulation as a package is not in the public interest. It is not the most cost-effective energy portfolio for ratepayers, and contrary to PNM’s claims, there are other feasible alternatives that are not only cheaper but have superior economic, health, and environmental results.

1. That said, I support the portion of the Stipulation that approves abandonment of San Juan units 2 and 3.

2. PNM’s request to put Palo Verde 3 (PV3) into rates should not be approved. PNM’s desire to add 134 MW of Palo Verde 3 power is understandable because this case presents PNM with a convenient opportunity to move their own asset heretofore excluded from rate base into rates. PNM acknowledges that PNM is losing money selling PV3 generated electricity on the open market but by putting PV3 into rates it turns a troubled asset into a profitable asset for PNM, at enormous expense and potentially catastrophic risk to the ratepayers. PNM wants to move PV3 into its rate base because, that way, it can sell energy to the rate payers of New Mexico at about 8.1 cents per kWh, assuming the valuation of $1650/kW. Today, they sell the PV3 energy at 3.7 cents per kWh in the merchant market. It does not make sense that New Mexico rate payers should pay 119% above market rates for this energy. This is especially true when there are cheaper alternatives. In addition, by moving PV3 into the rate base, PNM will shift from the shareholders to the ratepayers the future cost of decommissioning, which is significantly underestimated when compared to actual decommissioning costs of other nuclear plants, and the risk of potentially catastrophic events associated with an aging nuclear power plant.

3. PNM’s request to acquire 132 MW from California owners in SJGS unit 4 should not be approved. PNM now proposes to acquire additional coal capacity (in PNM’s Original Application they proposed the purchase of 78 MW and the Stipulation calls for the purchase of 132 MW) not because this is the best energy decision or the most cost-effective resource or a reasonable and prudent investment for ratepayers but because PNM could not “see that the non-binding [SJGS partnership] agreement would have been reached without” the acquisition by PNM of the 132 MW of coal in SJGS unit 4. (Senior Vice President Ron Darnell, Deposition of October 7, 2014, p. 25) PNM’s acquisition of this interest in San Juan may be beneficial for its shareholders, but the applicable regulatory standard is what is fair, just and reasonable and in the best interest for ratepayers.

Further coal acquisition at this time is imprudent for a number of reasons: replacing the closure of coal with more coal increases New Mexico ratepayer exposure to rapidly escalating costs due to coal fuel costs, pollution controls, carbon costs, mine reclamation, decommissioning, and coal ash disposal costs. These factors will demonstrably drive San Juan coal produced energy up to ~10 cents per kWh. In addition the Commission would put ratepayers at risk if it were to grant PNM’s CCN when coal fuel availability and the coal price for post 2017 is unknown because PNM has been unable to establish a source of supply. Further, the San Juan coal plant is an aging facility. The plant’s forced outage rate is 2.3 times the national average and only runs at 85% capacity at summer peak hours – so its full capacity cannot be counted on for peak attainment. Lastly, PNM’s choice will necessarily force New Mexico and its rate payers to embrace a technology that is harming their health, contributing to climate change and is enormously wasteful of New Mexico’s small, precious supply of water.

4. Ratepayers have not benefitted from a rigorous independent vetting or analyses of the best replacement power plan. PNM needs to immediately begin a vigorous, in-depth study of alternatives, with key stakeholders involved in the process that a) includes an all-source RFP for replacement capacity and energy, b) upgrade of methodologies for use of Strategist® that more accurately assesses alternatives, c) upgrade capabilities to integrate wind and solar in PNM’s system, d) seeks low risk and cost effective solutions and puts New Mexico on a low-carbon path for the provision of energy. PNM has testified that there is adequate time to pursue alternative solutions. Indeed, PNM is asking for approval of the Stipulation, which includes a major acquisition of coal fired generation, before it has negotiated a price or source for its fuel.

5. The Commission should require PNM to get approval of any long-term (beyond 2022) coal contract or other coal supply arrangement that would commit PNM and hence ratepayers to large costs (>$10 million). PNM has a history of committing to take-or-pay (fixed costs) coal supply contracts. That type of long-term obligation exposes the ratepayers to too much financial risk and ties them to an expensive technology just as the costs of renewable energy sources are plunging. These large contracts are in essence policy decisions that require Commission oversight and approval before contractual commitment guarantee ratepayer reimbursement.

Stipulation Issues and Recommendations

Q: Many PNM witnesses provide testimony that the RSIP is a superior outcome to the FIP. Paragraph 13 of the Stipulation states “PNM shall be authorized to abandon SJGS Units 2 and 3 effective December 31, 2017 and shall permanently retire them from providing service.” Do you agree with the testimony and the portion of the Stipulation that confirms this and why?

I had the privilege to be intimately involved in the negotiations that resulted in PNM’s last offer to the EPA, which the EPA accepted, and is now known as the Revised State Implementation Plan (“RSIP”). After the prior offer to EPA was rejected (the closing of units 1 & 2) because it didn’t fully comply with Clean Air Act standards, I was the person who figured out the puzzle and the answer was communicated to PNM to convey to EPA: to close units 2 & 3 instead. This was the answer that ultimately prevailed and has been widely touted as the superior outcome in the best interest of New Mexicans.

The request to abandon San Juan Units 2 and 3 on 12/31/17 and permanently retire them should be approved by the PRC. PNM has shown that abandonment of SJGS units 2 and 3 in conjunction with implementation of SNCR on SJGS Units 1 and 4 meet the Regional Haze Clean Air Act requirements. The EPA, New Mexico Environment Department and the New Mexico Environmental Improvement Board concur with the RSIP. PNM has shown in this case that the RSIP is less costly than implementing the Federal Implementation Plan (“FIP”) that required implementation of Selective Catalytic Reduction (SCR) on all four SJGS units. Further, the RSIP is a significantly better environmental outcome than the FIP.

Q. Paragraph 14 of the Stipulation requests that PNM be granted a CCN for an additional 132 MW of capacity in SJGS Unit 4, effective 1/1/18 and the initial value for ratemaking purposes will be $26 million. What is your recommendation?

A: The PRC should deny this request at this time. PNM should first be required to issue an independently evaluated all source Request For Proposal (RFP) for the capacity and energy it would otherwise seek to obtain from the 132 MW of capacity and energy from San Juan Unit 4 to determine if cheaper and less risky alternatives are available. This is the only way the Commission can be assured that ratepayers are obtaining the most cost effective solution. As things stand now, it is impossible to make that determination.

PNM is acquiring the 132 MW from SJGS Unit 4 not because it is the best energy resource for New Mexicans, or the most-cost-effective solution, but is “based on considerations relating to capacity that exiting owners want to divest.” (Olson, Direct Testimony in Support of Stipulation, p.61) So PNM is not acquiring this capacity for system needs, but rather acting as a sponge for excess capacity to keep the other owners placated. “I am personally unaware of any other path forward than PNM assuming the 132-megawatt ownership.” Senior Vice President of PNM, Ron Darnell testified at his deposition, on October 7, 2014, p.26. WRA testimony from Mr. Dirmier states “PNM should not be tasked with having to absorb whatever SJGS capacity the other owners forego, and the Commission, by granting a CCN, must protect ratepayers from the extraordinary risk that acquiring coal-fired generation today poses.” (Direct testimony, 8/29/14, page 29, line 5-8)

Mr. Darnell argues that because California entities and Tri-State “indicated their desire to exit from active participation in SJGS” PNM has to absorb the 132 MW to facilitate the ownership structure. “This would have put PNM and the Commission in the untenable position of awaiting years of costly litigation or arbitration to determine the respective obligations of the owners for paying for the costs of making San Juan compliant with environmental regulations or shutting it down….” (Darnell, Direct Testimony in Support of Stipulation, p.26) First, the fact that co-owners are trying to escape their ownership obligations is not an untenable position for the Commission, though it might be for PNM. Second, even if it is an untenable position for PNM that does not justify ratepayers having to absorb the additional coal shares. (PNM could buy the 132 MW from existing co-owners and sell it on the open market.) Third, the Commission should be extremely wary of approving 132 MW at $0 cost and the assumption of future liabilities.

“PNM is not paying any money to M-S-R or Anaheim for the acquisition of the additional 132 MW in San Juan Unit 4. … However, … the Stipulation calls for the additional 132 MW of San Juan Unit 4 to be placed on PNM’s books for ratemaking purposes at a value of $26 million.” (Olson, Direct Testimony in Support of Stipulation, p.19) There is no reasonable basis for this write-up. Furthermore, PNM has essentially made its relationship with its co-owners a black box, without any explanation of what the respective rights and obligations of the owners are now. The San Juan ownership mediation process and the confidentiality claims stemming from that process that started in 4Q 2013 are still limiting transparency[2]. PNM seems to be simply saying, “Trust us. We don’t want to get into litigation with our co-owners regarding liability issues going forward. Let us just take their interests ‘for free’, write up their value, take on their shares of the future risks and let them off the hook.”

Gerard Ortiz argues that “[T]he proposed valuation is reasonable because it represents a fair compromise of the value to be assigned to the plant for ratemaking purposes, considering all the circumstances.” (Ortiz, Direct Testimony in Support of Stipulation, p.46) Yet, there are no circumstances that he really considers other than that the $26 million is half of PNM’s original request in the Application and “also reflects consideration of the concerns expressed by some parties of future coal risk associated with the additional SJGS Unit 4 capacity.” (Ortiz, at p. 46) This is circular logic and the $26 million is not justified.

Q. PNM Senior VP Ron Darnell states: “PNM has an obligation under the Public Utility Act to provide service at just and reasonable rates, and keeping costs under control is obviously an important part of being able to provide reasonably priced electricity.” (Darnell, at p. 15) Do you have other reasons why you believe that acquiring 132 MW of capacity from California owners in San Juan Unit 4 as part of PNM’s replacement plan is not reasonable and will continue to cause rates to soar because of PNM’s heavily reliance on coal?

A: Yes. 1. The cost to operate SJGS is higher than alternative resources. The levelized cost is $0.099/kWh for 2018-33. (Exhibit DVW OST-6)

2. Coal fuel costs are escalating rapidly. PNM is projecting that coal fuel cost per MWh will increase by 92% from 2014 to 2032, for a cost increase by 2032 of $78 million per year (PNM Exhibit Staff 7-1, wp 4, pp. 5-8). SJGS coal fuel costs are already one of the highest in west. The San Juan owners are certainly concerned about this issue, as they have articulated in a separate paragraph in the most recent term sheet.

It is understood that prior to executing the Restructuring Agreement, the Remaining Participants will need to have greater certainty in regard to the economic cost and availability of fuel for the SJGS in the period after January 1, 2018. (13-00390-UT, PNM Testimony, July 15 Olson, PNM Exhibit CMO-1, page 14.)

Additional information is provided in my sealed CONFIDENTIAL testimony regarding specific risks and potential liabilities about the Reserve issue regarding uncertain coal fuel supply.

3. Ratepayer exposure to fixed costs associated with the “take-or-pay” coal contract that PNM signed at the end of 2013 at Four Corners Power Plant commits NM ratepayers to more than $500 million in long-term fixed costs (Van Winkle 8/29 testimony, page 25). This fixed cost obligation starts at $21 million in 2016 and nearly doubles to $39.5 million in 2031. As far as I know, this $500 million commitment has not yet been communicated to the PRC. If PNM were to commit to a similar liability at SJGS, it would be about $1500 million.

4. As discussed in more detail later in this testimony at pages 19-22 herein, PNM is negotiating to buy the San Juan mine. This would expose ratepayers to huge fixed costs and liabilities. The real bottom line on this purchase is that the utilities that own SJGS are not mining companies. They are not qualified to buy a mine, and especially a troubled mine like SJCC. Additional information is provided in my confidential testimony of 11/25/14.

5. The coal fuel supply from the San Juan mine has a history of unreliability. Currently, all coal fuel is sourced from the adjacent San Juan mine. This mine was closed for eight months, from September 2011 to May 2012, due to a fire[3]. It took another two years and four months to recover to normal operations as stated in PNM’s 10Q of 10/31/14 page 61 “SJCC provided notice to PNM on September 23, 2014 that the mine has been restored to normal operations[4].”

6. The quality of the coal coming from the San Juan mine is degrading rapidly, as measured by heat content, ash content, and sulfur content[5].

(Minus = unfavorable)

Lower quality coal means lower energy output and less efficiency. This translates into the need for more coal to be mined, more coal burned, more coal ash to be created, more greenhouse gas emissions and toxic pollutants produced. This means higher fuel costs and greater externalized health care costs for society.

7. Methane output of the San Juan mine was 32,514 metric tons in 2013, making it the second largest methane contributor in the San Juan basin.[6]

8. The San Juan mine is the subject of a lawsuit by WildEarth Guardians. See pages 19-20 herein for details.

9. Mine reclamation costs will be very significant. From PNM’s 10Q report of October 31, 2014, page 60 “Based on the 2013 estimates, remaining payments for mine reclamation, in future dollars, are estimated to be $53.9 million [~$18M for SJGS and ~$36M for FCPP] for the surface mines at both SJGS and Four Corners and $93.3 million for the underground mine at SJGS as of June 30, 2014. PNM did provide their forecast of mine reclamation costs separately from the costs of SJGS, but it only totals to $29.6 million through 2033 (Monroy, 10/31/14, HEM-15 Stip). PNM input these costs to Strategist® at intervenor’s behest in August in response to CCAE Interrogatory 12-10. So, there is a gap of $63.7 million ($93.3 - $29.6 = $63.7 million) between the needed mine reclamation accruals and the planned accruals to fully fund the liability.

10. PNM has repeatedly told investors (as recently as 10/31/14) that they have “significant exposure” to large compliance cost increases associated with the new coal ash disposal rules that the EPA will announce in December 2014. PNM’s 10Q report to the SEC filed on 10/31/14 stated (page 60)

On January 29, 2014, EPA entered into a consent decree directing EPA to publish its final action regarding whether or not to pursue the proposed non-hazardous waste option for CCBs by December 19, 2014.PNM advocates for the non-hazardous regulation of CCBs. If CCBs are ultimately regulated as a hazardous waste, costs could increase significantly. PNM would seek recovery from its ratepayers of all costs that are ultimately incurred. PNM cannot predict the outcome of EPA’s or OSM’s proposed rulemaking regarding CCB regulation, including mine placement of CCBs, or whether these actions will have a material impact on its operations, financial position, or cash flows.

SJGS produces a large amount of coal ash, 1.8 million tons in 2013 that may be subject to these new EPA standards (PNM answer to CCAE Interrogatory 7-4). The mid-range cost estimate by the Company of the cost of compliance is $61/ton (Deposition of Maureen Gannon, 8/22/2014, pages 54, 55, Exhibit DVW-38). At this cost, the ratepayers will see an increase of $38 million per year. PNM’s high risk estimate for coal ash disposal is $271/ton. Although PNM has informed its investors of these risks, PNM has not mentioned it in its 1000’s of pages of testimony filed in this case.

11. The remaining owners are concerned about environmental liabilities:

the Participants will engage an independent, third-party environmental consultant ("Consultant") to complete a confidential baseline multi-media environmental self-evaluation ("Baseline Environmental Study" or "BES") of SJGS and its operations. The purpose of the BES is to establish a baseline of environmental conditions in anticipation of the Exiting Participants' exit from active involvement in the operation of SJGS on the Exit Date. (13-00390-UT, PNM Testimony, July 15 Olson, PNM Exhibit CMO-1, page 4).

12. Carbon costs to bill-payers, as projected by the Company, are $68 million in 2020 and grow to $297 million in 2033 (PNM Exhibit CCAE 14-2zd, pages 389-91).

13. The cost of pollutions controls at SJGS has continued to escalate. In 2006-9, PNM implemented an environmental upgrade that cost $320 million (Exhibit DVW-8). When PNM first presented this program to the owners for their approval in 2005, the cost estimate by PNM was $110 million. More recently, the cost of SNCR has increased by 400% (See DVW 8/29 direct testimony, page 7, lines 9-12).

14. The reliability of SJGS is significantly worse than national averages. SJGS Equivalent Forced Outage Rate (EFOR) for 2007-13 was 17.6%. The national average for EFOR as reported in NERC for similar size coal facilities was 7.6% for 2007-11 (Exhibit DVW OST-2, pages 11-13)

As a result of SJGS unreliability PNM must have back up sources of energy, either gas or purchases on the open market, that cost more than coal fuel, and represent additional cost burden to ratepayers. PNM VP Olson testified that “Unit 4 has been a solid performing unit with an average availability factor of 87.47% for the period from 2008 through 2012. (Olson supra, at p. 62) However, this directly conflicts with PNM’s “Equivalent Measures Report,” which PNM provided NERC, that states that average equivalent availability factor (EAF) of 79.7% for the period from 2008 through 2012. (PNM Exhibit CCAE 12-15) It is also interesting that Mr. Olson omitted the 2013 actual EAF of 74.7%. (PNM Exhibit CCAE 12-15)

15. The SJGS output during summer peak demand hours is 15% below capacity (Exhibit DVW OST-2, page 8, line 4), so PNM’s nameplate capacity cannot be counted upon to meet peak summer demands. By comparison to another investor owned utility serving New Mexicans, Southwestern Public Service (SPS) coal plants operate within 3% of nameplate capacity in these same summer peak hours. This means that PNM has to acquire gas capacity or capacity from the merchant market to meet peak demand and this has significant costs for ratepayers. For 2011- 2013 PNM purchased an average of 400 MWh of energy to meet THE peak hour customer demand. (Exhibit DVW OST-2, pages 26, 27).

16. SJGS uses 594 gallons of water per MWh (PNM Exhibit CCAE 1-1). At PNM’s planned level of production for 2018-33, PNM’s share SJGS will consume more than 30 billion gallons for the time period 2018-33. (To understand the magnitude of this water usage, Santa Fe’s entire consumption is about 3 billion gallons of water per year.)

17. PNM Director, Planning and Resources, states: “It is simply not reasonable to assume that there will not be additional costs associated with greenhouse gas emissions during the twenty-year planning period.” (Direct Testimony of Patrick O’Connell, December 20, 2013, p. 18) PNM repeatedly acknowledges that there is a cost risk associated with compliance with environmental regulations associated with coal. (Darnell, supra at p.18; Ortiz, supra at pp. 27, 40, 42) PNM’s compliance with the new EPA Clean Power Plan rule is unknown. However, San Juan CO2 emissions are projected by PNM to be 2312 lbs/MWh. (PNM Exhibit CCAE 1-1) New Mexico Electric Generating Unit (EGU) emissions may be required to average 1107 lbs/MWh between 2020 and 2029, followed by a final CO2 limit of 1048 lbs/MWh at 2030 and beyond. (PNM’s independent consultant, Edward Cichanowicz p. 32) At PNM’s planned output for the 132 MW, an additional 2013 million lbs. of CO2 per year will be produced. (PNM Exhibit CCAE 12-9) PNM claims that it will be “well-positioned to meet anticipated environmental regulations,” but fails to definitively state that they will meet the requirements of EPA’s Clean Power Plan. (Olson, supra, at p. 60) In fact, PNM’s Executive Director of Environmental Services, Maureen Gannon testifies in her deposition that “in the context of what EPA has proposed for its state standards under the Clean Power Plan, [PNM’s emissions] gets the State very close to the proposed standard.” … “New Mexico will get within 10% of the Clean Power Plan.” Gannon Deposition of August 22, 2014, pp. 75, 76). In other words, they don’t make it with the current proposed replacement plan.

18. PNM does not need to replace the lost capacity with base load resources. PNM has now and will have in 2018 more base-load relative to their customer needs than other major utilities in this region. (See, DVW OST-2, pages 4-7, for more details) When a utility has too much base-load on its system there will be times when the customer demand forces the utility to curtail the output of coal and/or sell the excess energy on the open market at a volatile price.

19. Energy produced by coal-fired power plants does not contribute to attainment of the Renewable Portfolio Standard and makes it harder to achieve. PNM will need to add more than 100 MW of wind or solar, in addition to its proposed plan, to achieve the 2020 RPS requirement. (Exhibit DVW-27)

20. Decommissioning costs for San Juan will also be significant. According to a 2013 study by Black & Veatch, the decommissioning costs for San Juan will be $24 million to $259 million. (DVW OST-14) In PNM’s testimony by Mr. Olson, he states “The San Juan participants have agreed to an initial funding amount of $30 million. This initial funding amount must be fully funded by December 31, 2022….. PNM will be required to contribute 46.6% of the initial $30 million so its initial contribution is $13,980,000.” (PNM Olson testimony, page 39, lines 3-4, 11-12) These costs have not been comprehended in revenue requirements for San Juan costs provided by the company in discovery. In Strategist®, SJGS decommissioning costs were first comprehended at intervenor behest in August, CCAE Interrogatory 12-10. These costs are much lower than Mr. Olson’s testimony, at only $2.6 million through 2022. (PNM Exhibit NEE 4-4) The remaining owners are also concerned about uncertainty regarding decommissioning costs:

Decommissioning: As soon as practicable after adoption of this Resolution, the Participants will continue to develop a method for funding decommissioning of SJGS. (13-00390-UT, PNM Testimony, July 15 Olson, PNM Exhibit CMO-1, page 7)

21. Operating reserve requirements will likely increase. Today, the largest hazard in PNM’s system is San Juan unit 3 at 248 MW. If PNM’s CCN is approved, the largest hazard will become San Juan unit 4 with 327 MW. Patrick O’Connell states “PNM expects that the reserves will increase in 2018 assuming Southwest Reserve Sharing Group does not change their current method for calculating Reserves.” (PNM answer to CCAE Interrogatory 12-14) Typically, the largest hazard reserve requirement is to maintain 50% as spinning reserve. The consequence of PNM’s proposal would require an addition of 40 MW of spinning reserve. This extra 40 MW of spinning reserve could add the cost of a 40 MW gas peaker to customer costs.

22. PNM’s New Mexico residential ratepayers saw their bills increase by 41% from 2008 to 2011, due to PNM’s heavy reliance on coal (60% of PNM’s energy is supplied by coal). The cost factors cited here will likely cause “rate shock” multiple times in the next 20 years if PNM is allowed to expose ratepayers to further investment in coal mining and burning.

Q. PNM acknowledges that there is no fuel supply availability or price certainty, other than current stock pile, for the San Juan Generating Station post 2017. (Deposition of Senior VP Ron Talbot, Deposition of November 24, 2014; Olson supra, pp. 48-51) Paragraph 15 of the stipulation states that “the granting of a CCN for 132 MW of SJGS Unit 4 should include conditions related to future coal supply agreement or arrangement for SJGS Units 1 and 4.” (Stipulation at p. 5) What is your recommendation?

A. In order to protect ratepayers, PRC oversight and approval must be required prior to PNM locking in $100’s of millions for ratepayers, such as take-or-pay contracts, mine acquisition, or other similar contractual arrangements that lock-in large fixed costs to ratepayers.

The following issues are major concerns that should be comprehended:

In addition to potential take-or-pay contracts, PNM is proceeding to negotiate with BHP to buy the SJCC mine. The opportunity to acquire large fixed costs as well as a whole host of future liabilities is significant.

On October 1, 2014, the San Juan Fuels Committee approved a resolution authorizing an amendment to the UG-CSA that provides for the negotiation of a potential purchase transaction for the mine assets to be consummated on or before December 31, 2016. The purchaser could be one or more of the San Juan owners, an affiliated company, or a third-party agreed to by the parties. On October 2, 2014, the parties entered into an agreement that provides the San Juan participants with access to data necessary to evaluate the mine assets and liabilities. If the mine assets are acquired from SJCC, it is contemplated that a third-party miner would be engaged to conduct mining operations on a contract basis or would assume ownership of the mine assets and carry out the mining operations. (Olson testimony, 10/31/14, page 50, lines 2-12)

The San Juan mine is the subject of a lawsuit between WildEarth Guardians and Office of Surface Mining (OSM).

In February 2013, WEG filed a Petition for Review in the United States District Court of Colorado against OSM challenging federal administrative decisions affecting seven different mines in four states issued at various times from 2007 through 2012. In its petition, WEG challenges several unrelated mining plan modification approvals, which were each separately approved by OSM. Of the fifteen claims for relief in the WEG Petition, two concern SJCC’s San Juan mine. WEG’s allegations concerning the San Juan mine arise from OSM administrative actions in 2008. WEG alleges various National Environmental Policy Act (“NEPA”) violations against OSM, including, but not limited to, OSM’s alleged failure to provide requisite public notice and participation, alleged failure to analyze certain environmental impacts, and alleged reliance on outdated and insufficient documents. WEG’s petition seeks various forms of relief, including a finding that the federal defendants violated NEPA by approving the mine plans, voiding, reversing, and remanding the various mining modification approvals, enjoining the federal defendants from re-issuing the mining plan approvals for the mines until compliance with NEPA has been demonstrated, and enjoining operations at the seven mines. SJCC intervened in this matter. The Court granted SJCC’s motion to sever its claims from the lawsuit and transfer venue to the United States District Court for the District of New Mexico, where this matter is now proceeding. If WEG ultimately obtains the relief it has requested, such a ruling could require significant expenditures to reconfigure operations at the San Juan mine, impact the production of coal, and impact the economic viability of the San Juan mine and SJGS. PNM cannot currently predict the outcome of this matter or the range of its potential impact. (PNM 10Q report, 10/31/14, page 57)

Methane output of the San Juan mine was 32,514 metric tons or 812k tons of CO2 in 2013.[7] The footnoted website from EPA shows that the San Juan mine is the second largest methane contributor, behind only ConocoPhillips, in the region. The area of the report was -109.6 to -107.0 W, 36.2 to 37.4 N. The San Juan mine is located at -108.4 W, 36.8 N, almost in the exact middle of the study area.[8]

Overall, acquisition of the San Juan mine by PNM would be a very bad business decision and a major disaster for the company and the ratepayers: high costs due to underground mining low productivity, volume reductions of 50%, unreliability due to fire potential, the temporary or permanent closure of the mine due to regulatory non-compliance, exposure to liability from a lawsuit, large methane emitter, and questionable future of SJGS. The Commission needs to step in and protect the ratepayers from this potential calamity from becoming a devastating reality. More specific issues are detailed in my confidential testimony.

In addition to this action, the SJGS owners are working with Ute Mountain Ute to develop a new coal mine. This is yet another opportunity to acquire large fixed costs. My sealed confidential testimony will provide more information on this issue.

As stated more fully above and in my prior testimony I am adamantly opposed to the CCN for more coal because I don’t believe it is reasonable or prudent and is not in the public interest. If the Commission grants a conditional CCN for the 134 MW of coal from SJGS Unit 4 these are my recommended conditions precedent:

Require a PRC docket be opened specifically on the benefits and risks of acquiring the San Juan mine from BHP Billiton before PNM purchases it, including, but not limited to:

the disclosure, independent assessment, and response by PNM of coal price (including fixed and variable components), a comprehensive business plan that includes a breakdown of fixed and variable costs by category, an analysis of potential stranded costs, and indicates the length of time of operation;

the satisfactory resolution of outstanding lawsuits;

the disclosure and independent evaluation of the baseline environmental study conducted by the Remainers, and PNM’s response including a low-medium-high risk analysis with corresponding dollar amounts;

a cost analysis by an independent evaluator that considers the impact of methane and other pollutants on the health of the local community and the cost of compliance of future environmental regulations, and PNM’s response;

the disclosure of the legal and financial ownership structure of the mine;

proof of insurance or a surety bond from the mine owner and/or operator;

the contract between the mine owners and the miner, including any take-or-pay contract, cost per unit, profit agreement, and term of contract; and