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PNM pares down predictions of San Juan rate impact

New Mexico consumers might end up paying about $2 more per month on their electric bills under Public bizO-RobinsonAvila_Kevin_BizOService Company of New Mexico’s plan to shut down half of the coal-fired San Juan Generating Station near Farmington.

That amounts to a 2 percent to 3 percent increase in the average residential bill, starting in 2018 after the shutdown takes effect, according to the company’s latest estimates.

The Public Regulation Commission must still approve PNM’s plan for San Juan. But if the new cost projections are accurate, it represents a substantial decrease from last fall, when PNM had estimated a 7 percent increase, or about $5.25 more per month, that average residential ratepayers would face after closing two of San Juan’s four generating units.

Environmentalists and clean energy advocates question the accuracy of PNM’s latest estimates, which are based largely on projected savings from a new coal supply contract the utility signed this spring with Westmoreland Coal Co. But PNM executives say that contract, which will provide fuel for San Juan through 2022, will shave about $340 million in coal costs starting in 2016, when Westmoreland takes over the San Juan Coal Mine from BHP Billiton.

“It’s a very cost-effective coal contract,” said PNM Resources President, Chairman and CEO Pat Vincent-Collawn in an interview with the Journal . “A lot of people didn’t think we could get one as good as this.”

The costs and benefits of the contract, and of a new plant restructuring agreement signed by all of San Juan’s nine co-owners, will be reviewed in another round of public hearings at the PRC starting Sept. 30. After that, the PRC’s five commissioners must make a final decision on PNM’s plans for San Juan, which have been under scrutiny by state regulators since early last year.

PNM wants to shut down half of San Juan to meet federal requirements for cutting the plant’s nitrogen oxide emissions, which cause haze. But environmentalists, clean energy activists and consumer advocates oppose the company’s proposals because PNM and its parent firm, PNM Resources, want to jointly absorb nearly 200 megawatts of excess capacity that will be left behind in one of the remaining generating units after some other plant owners abandon the facility.

Rather than acquire those excess megawatts, opponents say it’s cheaper to shut down more of the plant and replace the power with renewable generation from solar and wind.

The hearing examiner in the case, Ashley Schannauer, partially supported their position last April, when he recommended that commissioners reject PNM’s acquisition of excess capacity because the company had not yet signed a new fuel supply contract for the plant, nor finalized an ownership restructuring agreement. Those agreements are considered critical for commissioners to assess the true costs and benefits of PNM’s proposals.

But instead of rejecting PNM’s plan, commissioners granted the utility more time, ordering it to file the needed agreements with the PRC by Aug. 1.

The company has now complied with that order. On July 1, it submitted its new coal contract with Westmoreland, plus a stock purchase agreement between Westmoreland and BHP that commits the former to acquire the San Juan mine by January 2016.

And, on Aug. 1, PNM filed a final ownership restructuring agreement, along with testimony from company executives outlining its new cost estimates for the plant.

The company says a combination of lower-priced coal offered by Westmoreland, along with savings from already stockpiled fuel inventory, account for most of the cost cuts. In addition, lower-than-expected pricing for a new natural gas plant – plus lower costs than originally thought for installing pollution controls on the two remaining units at San Juan – will end up cutting total expenses for San Juan by about $560 million over the next 20 years.

However, company executives say those savings are contingent on PNM being able to absorb the excess capacity in one of the remaining generating units. That’s because the coal contract and the new agreement with co-owners that are staying in San Juan are based on the plant continuing to operate with two units fully running. If PNM were forced to shut a third unit, it would undermine the economies of scale for Westmoreland to provide low-priced coal, Vincent-Collawn said. Administrative and operating efficiencies would also be lost by maintaining just one unit rather than two.

As a result, PNM would have to shut down the entire plant, potentially driving up the impact on ratepayers to about $11 or $12 per month.

“It would lead to a 14 (percent) or 15 percent rate increase,” Vincent-Collawn said. “We’d have to replace all that power with generation from other sources, and we’d face huge decommissioning and reclamation expenses, plus stranded costs from lost investment in the plant.”

Nonetheless, opponents question many of PNM’s cost assumptions. Steve Michel, chief counsel for Western Resource Advocates, said PNM may be significantly overstating the savings from its coal contract. If so, the company could later raise the price for coal supplies it charges ratepayers under the state’s “fuel clause,” which allows it to pass those costs onto consumers without a PRC hearing.

“They’re claiming fuel savings that may or may not be achieved and, with the fuel clause, there’s no risk for PNM,” Michel said. “If PNM included a ‘guarantee’ of those savings, that would be different, but that’s not the case.”

Mariel Nanasi of New Energy Economy said PNM has a history of low-balling its fuel-cost estimates to get PRC approval and then later relying on the fuel clause to recover real costs.

“What New Energy Economy has found repeatedly is that PNM underestimates their numbers to secure a deal, but then drives up actual costs with add-ons, like fuel costs, costs for pollution controls and more,” Nanasi said. “The problem is, when PNM miscalculates, we pay the price.”

New Energy also believes PNM is high-balling its cost projections for renewable alternatives to coal, such as wind and solar.

PNM said it’s “surprised” that some parties are questioning projected savings.

“The numbers are based on a signed contract that PNM filed with PRC and is part of the official San Juan case record, which intervenors have access to,” said PNM spokesman Pahl Shipley.

Environmentalists also question whether PNM would really have to shut down the whole plant if the PRC prohibits the utility from acquiring excess coal capacity. Parent firm PNM Resources could step in to acquire the excess generation for sale on the open market, something it is already doing by acquiring 65 megawatts of excess capacity at San Juan under the plant’s current restructuring agreement.

“To say the entire station would shut down, I don’t believe it, because PNM has hundreds of millions of dollars of investment in the plant that would be stranded,” Michel said. “More likely, if PNM doesn’t get the permission to acquire the excess capacity, PNM Resources would acquire it.”

All those questions will now be scrutinized as the PRC works toward the next open hearing on Sept. 30. Under a new schedule set by hearing examiner Schannauer in July, responses by other parties to PNM’s latest filings are due Sept. 3, followed by more rebuttal testimony on Sept. 18.

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