New Mexico backs PNM plan for San Juan coal plant

A hearing examiner at the New Mexico Public Regulation Commission on Nov. 16 filed a report saying the commission should approve a plan by Public Service Co. of New Mexico to buy a new stake in the coal-fired San Juan power plant — with that plan also casting into doubt whether what’s left of the plant will be viable beyond 2022.

Two units at the plant are to be shut at the end of 2017 under a regional haze compliance plan, with the remaining two coal units to get selective non-catalytic reduction installations to meet haze needs.

There is also a major shake-up in plant ownership underway as some current co-owners look to exit coal for clean-air reasons. Also in the mix is the planned sale of the captive San Juan coal mine by a unit of international miner BHP Billiton to Westmoreland Coal, with a new coal supply contract calling for lower prices and therefore cost savings that figure into this case.

Ashley C. Schannauer, the hearing examiner for this case, on Nov. 16 submitted a Certification of Stipulation to the commission and recommended that the commission adopt a statement of the case and conclusions of law in a final order.

In December 2013, PNM filed an application requesting the following approvals from the commission by no later than December 2014:

“-Abandonment of San Juan Generating Station Units 2 and 3 by Dec. 31, 2017, with an accounting order allowing full recovery of the undepreciated investment in San Juan Units 2 and 3;

“-Issuance of a certificate of public convenience and necessity to include Palo Verde Nuclear Generating Station Unit 3 as a supply resource to serve New Mexico retail customers effective Jan. 1, 2018, at a value for ratemaking purposes of $335 million and recovery of the costs associated with funding the decommissioning trust for Palo Verde Unit 3 on a pro rata basis;

“-Issuance of a CCN and any other necessary approvals for the acquisition of an additional 78 MW of capacity in San Juan Unit 4 effective Jan. 1, 2015, at a value for ratemaking purposes of about $52.5 million in exchange for an equal amount of capacity in San Juan Unit 3;

“-Recovery of the costs of selective non-catalytic reduction equipment together with balanced draft to be installed on San Juan Units 1 and 4 by Jan. 31, 2016; and

“-Issuance of an accounting order allowing PNM’s cost of compliance with the regional haze Best Available Retrofit Technology determination for San Juan under an August 2011 Federal Implementation Plan issued by the U.S Environmental Protection Agency to be placed in a regulatory asset for future recovery in a rate case, with a determination in this proceeding that such costs are reasonable and were prudently incurred.

In October 2014, PNM, commission staff, and parties including the New Mexico Attorney General, the Renewable Energy Industries Association of New Mexico and New Mexico Independent Power Producers, entered into and filed a stipulation resolving almost all issues in this case (called the “Original Stipulation). But that triggered heavy criticism from other parties.

As a result of several settlement conferences, five parties entered into a Supplemental Stipulation which was filed with the commission on Aug. 13 of this year. The signatories included PNM, commission staff and the Attorney General. Other parties subsequently made filings indicating that they joined in the Supplemental Stipulation.

Paragraph 13 of the Original Stipulation authorized PNM to abandon San Juan Units 2 and 3 effective Dec. 31, 2017, and required PNM to permanently retire the units from providing service. The Supplemental Stipulation makes no changes to paragraph 13.

Since the issuance of an April 8 certification, PNM has entered into the Supplemental Stipulation that provides for the issuance of a CCN for the additional 132 MW of Unit 4. Furthermore, PNM has also filed a CCN application for a 187-MW natural gas peaking plant at the San Juan site – the final resource in the replacement power portfolio it proposes to replace San Juan Units 2 and 3. In addition, no party opposes the approval of the abandonment of Units 2 and 3 based upon the showing PNM has made here. So the hearing examiner is recommending that the commission approve the issuance of the CCN requested in the stipulation for the additional 132 MW of Unit 4.

Further, although the CCN proceeding for the 187-MW gas plant is still pending and the evidence in that case has not been fully presented or evaluated, the hearing examiner recommends, based upon the evidence presented here, that a sufficient showing has been made regarding the availability and adequacy of replacement resources to recommend the abandonment of San Juan Units 2 and 3 effective Dec. 31, 2017, without further conditions.

The evidence from the October hearings shows that the 134 MW of Palo Verde Unit 3 is part of the most cost effective portfolio of generating resources to replace San Juan Units 2 and 3, the hearing examiner noted.

The term of the new coal supply agreement for the San Juan plant starts on Jan. 1, 2016 and runs through June 2022. A PNM witness stated that the coal supply agreement and the restructuring agreement produce about $340 million in savings for customers, and the coal supply agreement better ensures consistent coal quality. Westmoreland Coal is to be the new coal supplier, replacing BHP Billiton New Mexico Coal.

End of new coal contract term will involve major look at future of San Juan plant

Paragraph 6 of the Supplemental Stipulation states that, after July 1, 2018, but no later than Dec. 31, 2018, PNM shall make a filing with the commission to determine the extent to which what’s left of the San Juan station should continue serving PNM’s retail customers’ needs after June 30, 2022. The filing must be made before PNM has made a binding commitment to a post-2022 coal supply agreement, but after PNM has received firm pricing and other terms for the supply of coal at San Juan, unless PNM proposes not to pursue a coal supply post-2022.

The three primary issues that will help PNM determine in 2017-2018 whether PNM will propose to continue to operate San Juan after 2022 are:

“-the state implementation requirements for EPA’s CO2-reducing Clean Power Plan;

“-what the coal prices actually end up being post 2022; and

“-the intentions of the other San Juan owners to continue their participation in the plant after 2022.

The 2018 review on San Juan’s post-2022 future is scheduled to start in the latter part of 2018 for several reasons. Since significant capital expenditures are required to continue operating the mine beyond the end of the new coal supply agreement in mid-2022, the coal supply agreement calls for PNM, as the operator of San Juan and the party to the coal supply agreement, to notify San Juan Coal Co. if it wants to extend the agreement beyond June 2022. That notification must occur by July 1, 2018. PNM and the coal company will then attempt to reach agreement on the pricing and terms for an extended agreement, which must be completed by the end of 2018.

If the abandonment of Units 2 and 3 and the CCN for the additional 132 MW of Unit 4 are approved (as recommended here), PNM will own 66.4 percent of the station, and Tucson Electric Power will own 20.1 percent. PNM will make known its intentions for the future of the station in the 2018 review, and Tucson Electric will likely make its intentions known in the integrated resource plans (IRPs) it is required to file in Arizona in 2016 and 2018, the hearing examiner noted.

The 2018 San Juan review will also be informed with bids from competitive requests for proposals (RFPs). The stipulations require the issuance no later than 2018 of an RFP for additional resources consistent with the results of the 2017 IRP and an additional RFP for resources identified in the 2017 IRP as the most cost effective portfolio using the assumption that the San Juan station will not operate past 2022. The Non-San Juan RFP will also allow bidders to propose renewable resource options beyond those included in the IRP’s Non-San Juan alternative.

The stipulations will also produce a significant environmental improvement, the hearing examiner noted. Although some seek greater reductions, the retirement of San Juan Units 2 and 3 will eliminate 836 MW of coal-fired generation – 50 percent of the capacity at San Juan. PNM’s share of the coal-fired capacity will be reduced from 783 MW to 562 MW. Greenhouse gases will be reduced by about half. NOx, SO2 and CO emissions will be reduced by 62 percent, 67 percent and 44 percent, respectively, and emissions of PM, VOCs and hazardous air pollutants (including mercury) will be reduced by about 50 percent. Water use and fugitive dust emissions will also be reduced by about 50 percent.

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Barry Cassell is Chief Analyst for GenerationHub covering coal and emission controls issues, projects and policy. He has covered the coal and power generation industry for more than 24 years, beginning in November 2011 at GenerationHub and prior to that as editor of SNL Energy's Coal Report. He was formerly with Coal Outlook for 15 years as the publication's editor and contributing writer, and prior to that he was editor of Coal & Synfuels Technology and associate editor of The Energy Report. He has a bachelor's degree from Central Michigan University.

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