PNM’s exit from Four Corners coal plant in limbo

Public Service Co. of New Mexico could remain tied to the coal-fired Four Corners Generating Station for seven more years following a state Supreme Court decision Thursday that upheld a regulatory decision to reject PNM’s plan to exit the facility in December 2024.

The state Public Regulation Commission ruled in December 2021 against a PNM proposal to sell off its 13% stake in the coal plant to the Navajo Transitional Energy Co. The PRC said at the time that PNM didn’t provide enough details about renewable resources to replace the 200 megawatts of electricity it receives from Four Corners, complicating the commission’s ability to fully evaluate the costs and benefits of abandoning the plant.

PNM immediately appealed that decision, arguing that the information it did provide met legal mandates, and that it intended to submit a detailed list of alternative resources in a subsequent PRC hearing.

But on Thursday, the Supreme Court ruled that the PRC’s rejection was reasonable and consistent with the state’s Energy Transition Act, or ETA, which requires PNM and other local public utilities to replace fossil fuels with 100% carbon-free generation by 2045.

Under the ETA, a utility must identify “adequate potential new resources” to replace an abandoned plant before regulatory approval, which PNM failed to do, according to the PRC’s “final order” in 2021.

“On careful consideration of the briefs, authorities, and record, we conclude that PNM has not met its burden in challenging the final order,” the court said in an opinion written by Justice Briana Zamora. “…We disagree with PNM and conclude that the commission reasonably and lawfully denied PNM’s application.”

That leaves PNM plans to exit the plant in limbo, possibly compelling the utility to retain its shares in the facility until 2031, when the operating agreement among all utilities in the plant expires, and when the facility’s coal-supply contract with the nearby Navajo Mine comes to an end.

“We are disappointed with the New Mexico Supreme Court’s decision to uphold the PRC’s order,” said PNM spokesman Ray Sandoval. “The commission’s order delays PNM’s exit from the coal plant from 2024 until possibly 2031 and postpones savings for customers as well as significant annual carbon emission reductions from coal.”

PNM could reapply to the PRC for approval of its early-exit plan, this time including much more detailed proposals on replacement power. PNM Resources, PNM’s parent firm, told investors on Thursday that it’s reviewing the court decision to determine its next steps.

But some environmental groups, such as the Sierra Club’s Rio Grande Chapter, have opposed PNM’s early-exit plan from the start, because it meant that the remaining plant owners could keep running the facility through 2031. They want PNM to now negotiate a full or partial shutdown, such as closing one of the two generating units that’s still operating at Four Corners.

The Supreme Court decision could bolster those options, said former PRC commissioner, now Sierra Club attorney Jason Marks.

“PNM can now work on coming up with a better plan,” Marks told the Journal. “I hope the shutdown of at least one unit could be the outcome.”

Plant closure difficult

PNM, however, says any full closure of Four Corners before 2031 is nearly impossible, because Arizona Public Service — the majority shareholder and plant operator — remains opposed. That’s because APS needs the electricity to meet peak consumer demand in hot summer months, said PNM Principal Generation Advisor Tom Fallgren.

APS’s closure opposition was recently reinforced by a state regulatory decision in June from the Arizona Corporation Commission to allow APS to collect full recovery of all its investments in the plant through 2031, meaning the plant will remain economically viable for APS to continue operating.

Full recovery was in doubt after Arizona regulators voted last fall to deny APS about $215 million it spent a decade ago on pollution controls to keep the plant operating.

But the Arizona Court of Appeals ruled against that decision in March, and, in June, state regulators reversed their previous decision.

“APS has now confirmed that it will receive full cost recovery,” Fallgren told the Journal. “That almost assures that Four Corners will continue to operate through 2031, and possibly beyond.”

In fact, PNM started seeking negotiations with its Four Corners partners to fully or partially close the plant in 2018. But APS’ opposition pushed PNM to instead seek an early exit on its own by selling its 13% stake in the facility to the Navajo Transitional Energy Co., or NTEC. That’s a Navajo-owned but independently-run entity that controls a 7% Navajo stake in Four Corners and also owns the nearby Navajo coal mine that supplies the plant.

The Navajo Nation wants to keep running Four Corners, because, as of 2021, Navajo workers accounted for nearly all of the roughly 700 employees working at the generating plant, and at the Navajo Mine. In addition, the Navajo Nation was earning between $40 million and $45 million annually from coal mine royalties, plus taxes on mine and plant operations, together accounting for nearly 24% of the Navajo Nation’s general fund at that time.

With plant closure off the table, PNM sealed a deal to sell its stake in Four Corners to NTEC for $1, and for PNM shareholders to pay NTEC $75 million to break the utility’s coal contract with NTEC, holding PNM ratepayers harmless. It also negotiated agreement with all the Four Corners partners — which in addition to APS and NTEC includes the Salt River Project and Tuscon Electric Power — to move the plant to seasonal operations starting in fall 2023. That would reduce carbon emissions by up to 25% annually, since the plant would cease operations in fall and winter and then restart in spring and summer months to meet rising consumer demand.

“That emissions reduction is the equivalent of completely shutting down a 350 MW coal plant,” Fallgren said.

PNM estimated that by exiting the plant and replacing it with renewable resources, ratepayers would save between $30 million and $300 million over time, depending on the alternative power sources chosen to replace the coal plant.

Those benefits taken together did earn backing for the exit plan from some environmental groups, such as Western Resource Advocates and the Natural Resources Defense Council, although others like the Sierra Club and Santa Fe-based New Energy Economy remained opposed.

“We tried to close the plant, but when we couldn’t, we came up with a good alternative deal,” PNM spokesman Sandoval told the Journal. “Those benefits are now gone following the PRC and Supreme Court decisions.”

What now?

If PNM does opt to reapply to the PRC for approval of its exit plan with more detail on replacement resources, it might get a better reception, since a new, three-member commission took office in January.

But the Sierra Group and other environmental organizations will likely continue opposing the deal with NTEC. That includes Indigenous environmental organizations, such as the Navajo group Dine C.A.R.E. and the Indigenous energy activist organization Naeva.

“Paying $75 million to transfer PNM’s ownership to a company that has promised to run the polluting, health-damaging plant as long as possible was simply against the intent of the Energy Transition Act,” Sierra Club Rio Grande Chapter Director Camilla Feibelman said in a statement.

Whether PNM could negotiate a different agreement with plant partners, such as a partial Four Corners shutdown before 2031, is an open question.

“We need to reconvene among all the parties — including other plant owners, the Navajo Nation, the PRC and stakeholders in New Mexico — to review what other options are available to move forward with our exit from coal,” Fallgren said.

Meanwhile, despite the current limbo, the Supreme Court decision did remove one contentious issue from the Four Corners debate regarding full cost recovery of about $270 million in past PNM investments in the plant. As part of its exit from Four Corners, PNM requested PRC approval to recover that money through low-cost bonds that guarantee utility repayment through a monthly surcharge on customers’ bills over 25 years.

The bonds — known as “securitization” because they fully secure investment recovery through irrevocable financial instruments — are authorized for plant abandonment under the Energy Transition Act. But the previous commission and many other parties in the Four Corners case wanted to first review the “prudence” of about $150 million in pollution control investments that PNM made in the plant about a decade ago to keep it running.

In 2016, the PRC allowed those investments to be included in customer base rates with the caveat that they be reviewed in a future rate case for the money to be returned to customers if future commissioners found those investments to be imprudent. PNM, however, argued that, under the ETA’s bond provisions, the PRC can’t retroactively review charges already included in base rates, and it asked the Supreme Court to review that issue as part of its appeal on the Four Corners.

But the Supreme Court declined to address the issue, sending it back to the PRC for review when and if PNM files a new plan to abandon the coal plant. And now, with PNM’s latest rate case already underway at the PRC, the investment “prudence” issue will likely be resolved there.