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PRC examiners back abandoning San Juan Generating Station

The San Juan Generating Station operating west of Farmington. (Journal File)

Copyright © 2020 Albuquerque Journal

Hearing examiners overseeing Public Service Company of New Mexico’s plans to abandon the coal-fired San Juan Generating Station near Farmington have recommended that the five-member Public Regulation Commission approve the utility’s request.

In a 35-page “recommended decision,” PRC examiners Anthony Medeiros and Ashley Schannauer said Friday that hearings on the issue have showed “abandonment will cost ratepayers less over the next 20 years than PNM’s continued operation of the plant.”

Most of the savings will come from replacing San Juan electricity with cheaper solar, wind, battery storage and natural gas generation. The exact mix of replacement resources was reviewed in a separate hearing overseen by the same examiners, who will release another recommended decision on that issue in the coming weeks.

In a separate, 165-page decision, the examiners also recommended PNM be allowed to use bonds to finance up to $361 million in expenses related to a San Juan abandonment, which would be paid back by customers through a surcharge, or rate rider, on their bills. Use of such bonds to finance the costs of transitioning out of coal is explicitly authorized by the state’s new Energy Transition Act, which became law last June.

The bonds provide a guarantee for PNM to recover $283 million in lost, or “stranded,” investments that come from abandoning the plant nearly 30 years ahead of schedule. It will also provide money for decommissioning and reclamation costs, plus about $40 million to assist workers laid off at the plant and at the nearby coal mine, and for economic development initiatives in the Four Corners region.

In exchange, PNM shareholders must forgo any profits on investments recovered through bond financing.

Commissioners must still make a final decision in the case in the next few weeks, but nearly every party involved in the hearing process praised the recommended decisions.

PNM spokesman Ray Sandoval said the company is “encouraged” by the examiners’ conclusions.

“The recommended decisions, if approved by the commission, would allow PNM to issue lower-cost bonds for the closure of San Juan Generating Station and to fund economic assistance to both workers and the Four Corners area,” Sandoval told the Journal in an email. “The financing combined with foregoing of over $100 million (in profits) by PNM shareholders could lead to a $399 million savings for customers if our replacement plan is approved as well.”

Of the 26 parties involved in the San Juan abandonment hearing, only the PRC’s utility division staff opposed PNM’s request to exit the plant in 2022, when the partnership agreement among the facility’s five co-owners expires. Staff argued that PNM did not include an analysis of the costs and benefits for converting San Juan into a carbon-capture facility rather than shut down the plant. Staff advocated the utility instead be forced to conduct that analysis and then refile its proposal for abandonment with carbon capture included as an alternative option.

During the hearings, however, PNM submitted supplemental testimony showing a carbon-capture retrofit at San Juan would cost at least $1.3 billion more for ratepayers than abandoning the plant and replacing it with alternative resources.

The examiners accepted that supplemental testimony, concluding that abandonment would cost “substantially less.”

“No party has presented contrary evidence,” the examiners said. “Furthermore, PNM and other parties have presented modeling that shows that a variety of generating resources can be acquired to replace the San Juan capacity by the date of the proposed abandonment and that the costs to do so will be less than PNM’s continued operation of the plant.”

To require PNM to retrofit San Juan with carbon capture would force the utility to seek new co-owners for the plant, since three of the other four utility partners in San Juan would still abandon the facility in 2022, the examiners said. And there is no guarantee that carbon capture will succeed.

Any plant retrofit would rely on federal tax credits for capturing and sequestering CO2, but those credits, approved by Congress in 2018, will expire in 2035, 12 years after the newly retrofitted plant begins operating. As a result, it’s likely ratepayers would be on the hook after 2035 for additional lost investments in San Juan incurred by converting it to carbon capture, the examiners said.

Only the City of Farmington, which owns a 5% stake in San Juan, has decided to continue operating the plant, which it will inherit from the other exiting co-owners in 2022. Farmington wants to pursue carbon capture, something it’s working on in partnership with private company Enchant Energy Corp.

Allowing PNM to abandon San Juan paves the way for Farmington and Enchant to pursue carbon capture independently and on their own dime, the examiners added.

“The risk of proceeding on this latter path,” the examiners said, “will be on Enchant and its investors, and not on PNM’s ratepayers.”

Enchant Chief Operating Officer Peter Mandelstam praised the examiners’ recommendations, since uncertainty about PNM’s abandonment is removed, potentially accelerating negotiations for Farmington and Enchant to acquire San Juan.

“We’re pleased by this thoughtful decision,” Mandelstam told the Journal. “Appropriate abandonment by PNM is good public policy. … We’re in negotiations with PNM and the other co-owners now, and we believe this will accelerate that dialogue, because now there is regulatory clarity for PNM.”

Regarding bond financing, the examiners said the commission is obligated to abide by clauses in the new Energy Transition Act that authorize their use in the San Juan case.

The Supreme Court ordered the PRC in late January to apply the act in San Juan deliberations after a joint request to do so from Gov. Michelle Lujan Grisham, state legislators and the Navajo Nation.

The examiners accepted PNM’s estimates on the impact of bond financing, particularly since any later discrepancies in actual costs for abandoning San Juan will be “trued up” in subsequent management of customer charges for the bonds. Any overpayments by customers will be credited back to them, while underpayments would lead to rate rider adjustments by PNM to recover costs, with direct vetting by the PRC.

PNM says the new rate rider, which will take effect after plant abandonment in 2022, will add $1.90 per month to bills for customers who consume below 900 kilowatt hours of electricity, and $4.97 per month for those who consume above 900 kWh.

Those additional monthly charges, however, will be more than offset by the savings from abandoning San Juan and replacing it with cheaper alternative energy.

For an average residential customer who uses 600 kWh per month, their current monthly bill of about $73.25 will actually drop by $6.87, despite the new rate rider, PNM says. For those consuming an average of 1,000 kWh per month and paying about $129.03, their monthly bills would drop by about $9.65, since they consume more electricity from San Juan and will save more when it’s replaced with cheaper energy resources.

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