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Turning down the temperature

Copyright © 2014 Albuquerque Journal

The settlement, or “stipulation” agreement that Public Service Co. of New Mexico signed last month with key parties in the regulatory debate over the future of the coal-fired San Juan Generating Station has reduced some of the conflict that was previously brewing over PNM plans for the plant.

A broad coalition of industry groups and some environmental groups now support the settlement, making upcoming hearings in January at the New Mexico Public Regulation Commission appear less contentious.

Some influential environmental groups still oppose the agreement. But even those organizations are divided, with some adamantly rejecting most of PNM’s proposals for the power plant, and others opposed to just a few things.

“I believe the hearings will be less contentious now that we have the stipulation,” said Steven Michel, chief counsel for the environmental group Western Resource Advocates, which supports the settlement. “The issues have been narrowed a lot through the agreement. That helps focus the discussion more, which I believe will allow the case to move more quickly.”

PNM transmission lines march across the West Mesa to deliver electrical power to Albuquerque and its environs.(Albuquerque Journal File)

PNM transmission lines march across the West Mesa to deliver electrical power to Albuquerque and its environs.(Albuquerque Journal File)

Apart from PNM and Western Resource Advocates, four other groups have signed onto the settlement. That includes the state Attorney General’s Office, the New Mexico Renewable Industries Association, N.M. Independent Power Producers and N.M. Industrial Energy Consumers.

The Coalition for Clean Affordable Energy – which represents 10 different groups – and New Energy Economy in Santa Fe oppose the stipulation, although the former is less critical than the latter.

The settlement outlines significant concessions by PNM to lower the costs to ratepayers for shutting down two of the four reactors at San Juan. It also lowers the cost for some of the fuel that will replace lost coal generation, and it commits the utility to add more renewables to the electric system in the next few years.

The partial plant closure, plus the addition of pollution controls on the remaining two generating units, are aimed at reducing nitrogen oxide emissions at the plant to meet federal haze regulations.

The U.S. Environmental Protection Agency approved the plan in September. But PNM still needs backing from the PRC, which must approve the power that will replace lost coal generation, as well as the costs to New Mexico ratepayers for the entire overhaul.

PNM is the plant operator and the largest of five utility co-owners that will continue drawing electricity from San Juan after the partial shutdown. PNM now controls 783 megawatts, or about 47 percent of the plant’s total 1,683 MW net generating capacity.

“stipulation” agreement that Public Service Co. of New Mexico signed last month with key parties in the regulatory debate over the future of the coal-fired San Juan Generating Station has reduced some of the conflict that was previously brewing over PNM plans for the plant.

PNM would lose 418 MW of that from the shutdown. But it wants to offset that by absorbing another 132 MW of generating capacity in one of the two remaining units, thus limiting its total capacity reduction to 286 MW.

To make up for that, it proposes to buy 134 MW of additional electricity from the Palo Verde Nuclear Generating Station in Arizona, while adding a new 40 MW solar plant and a natural-gas generating station to the grid.

Prior to the October settlement, many organizations criticized different aspects of the proposals. Most environmental groups, for example, didn’t want PNM to increase its ownership in one of the remaining San Juan units, proposing instead to add a lot more renewables to the system to replace lost coal. Some also opposed the Palo Verde proposal, either because the price tag seemed too high, or because of environmental risks related to nuclear plants.

Others, including some industry groups, opposed PNM proposals to charge ratepayers for all its “stranded costs,” or lost investment in the two shuttered units.

The settlement, however, resolved many of those issues. Among the key stipulations, PNM agreed to:

• Write off 50 percent of its stranded assets by splitting those costs between utility shareholders and ratepayers.

• Go forward with procuring the 132 MW of additional coal from one remaining San Juan unit, but reduce the cost to ratepayers by 50 percent.

• Charge New Mexico consumers only $1,650 per kilowatt for extra electricity from Palo Verde, or about one-third less than the $2,500 per kilowatt it originally proposed.

• Seek industry bids next year to build another 50 MW of renewable resources – above and beyond the 40 MW of solar PNM had already proposed to replace coal – followed by a second request for proposals in 2018 to procure more energy that can include conventional and renewable resources.

• Add an additional 3 MW per year (from 2017-2019) to the utility’s rooftop solar program, which offers subsidies to consumers to procure photovoltaic systems.

PNM estimated in October that the settlement, if approved by the PRC, would mean a 7 percent increase on the average PNM customer bill, or about $5.25 more per month. That’s down from $7.50 per month, or a 10 percent increase, the San Juan overhaul would have cost consumers under PNM’s prior proposals.

Ratepayers, for example, would only bear the burden for $115.5 million in stranded costs for the two-unit shutdown, compared to $231 million without the settlement.

“Under the stipulation, PNM would recover about $23 million a year,” said Michel of Western Resources. “If PNM recovered all stranded costs it would be close to double that amount each year.”

Likewise, the cost to ratepayers for additional energy from Palo Verde over 20 years drops from $335 million before the stipulation to $221 million.

“The amount proposed now for Palo Verde electricity is about what we would pay for a new steam generator run by natural gas,” said Peter Gould, general counsel for Industrial Energy Consumers. “We felt PNM’s original proposals were just too expensive, but they’ve come down considerably. We feel that and other things in the stipulation make it a good resolution.”

In addition, PNM added some other concessions that made the settlement more acceptable to groups such as Western Resources. It agreed, for example, to not seek PRC approval outright for the $90.6 million the utility says it will cost to add nitrogen oxide controls to the remaining San Juan units, and instead seek recovery in a future rate case. That allows Western Resources and others to challenge the amount requested. Some believe PNM has inflated the costs.

The parties also agreed to disagree on whether a pre-condition should be attached on PNM’s 132 MW of additional coal that would require the utility to first obtain a favorable coal supply contract with BHP Billiton’s San Juan Coal Mine after the current contract expires in 2017. Western Resources and other groups are concerned that PNM could sign a “take or pay” agreement that locks the plant into purchasing coal whether it gets used or not, or that PNM and one or more of the San Juan co-owners could buy the coal mine outright, strapping ratepayers with long-term commitments and potential liabilities.

But the stipulation allows Western Resources and other settlement supporters to take an independent stand on those issues at the upcoming public hearings, now scheduled for Jan. 5-16 in Santa Fe.

The Coalition for Clean Affordable Energy and New Energy Economy remain firmly opposed to PNM acquiring the 132 MW of extra coal. But the former now sees that as the only major point of contention in the San Juan case.

“That’s the principal problem for us,” said Chuck Noble, attorney for the coalition. “If it weren’t for the 132 MW, we might have signed onto the stipulation. We believe there are other alternatives, like renewables and natural gas, that are better for New Mexico than adding coal capacity.”

New Energy, however, rejects many other things, including the procurement of more nuclear energy, ratepayer burden for stranded costs, and the stipulation’s call for PNM to seek industry bids to build more renewable resources rather than outright committing the utility to add them to the grid.

“The question before the PRC is whether PNM should be permitted one last fling with coal and nuclear,” said Mariel Nanasi, New Energy executive director, in an email to the Journal . “It’s a bad deal for ratepayers.”

Gould, however, said the stipulation reflects an emerging agreement among divergent groups to steadily add more renewables to the system rather than change things overnight.

“We can’t do it all at once,” Gould said. “That’s the single most-problematic issue with what New Energy Economy wants.”

Western Resources said it shares the concerns about coal, but it prefers to focus on blocking PNM from locking ratepayers into a costly coal-mining contract to free up the utility to reduce coal generation more in the future without burdensome consequences for ratepayers.