A Taste of Things to Come for Electricity Consumers and Generators

Published June 1, 2015

One year ago, Gina McCarthy, Environmental Protection Agency (EPA) Administrator, announced the controversial centerpiece of the Obama Administration’s climate change legacy: the Clean Power Plan (CPP). The rule is slated for finalization this summer.

Unions have protested against it. The North American Electric Reliability Corporation, which is the international regulatory body devoted to ensuring outage-free electric service for Canada, the U.S., and parts of Mexico, as highlighted in a recent study, believes it risks the reliability of the grid. States,encouraged by Majority Leader Senator Mitch McConnell, are boycotting it. Yet, the EPA is pushing ahead, touting the plan’s built-in flexibility for individual states in devising a compliance plan—uniquely suited to each specific state. If states, as McConnell advocates, refuse to comply, the EPA will impose a Federal Implementation Plan (FIP).

While no one knows what the final plan will be, we can be sure that, at the very least, it aims to severely reduce coal-fueled power generation and dramatically increase the implementation of renewables such as wind and solar. Industry experts expect the CPP will possibly force the premature closure of hundreds of coal-fueled power plants—and that, alone, without factoring in the higher-cost renewables, will raise costs to all consumers.

The anti-fossil fuel movement would like us to believe we are just replacing one power source with another. The problem, however, is far bigger.

After attending a recent workshop at the Federal Energy Regulatory Commission (FERC), Phillip A. Wallach, a Fellow in Governance Studies at the Brookings Institute, wrote a report titled: The confounding complexities of the Clean Power Plan—reliability concerns aired at FERC. In it, Wallach addresses the technical problems that the CPP will have to overcome—which he calls “staggering.” He, then points out that “the interplay of federal laws set off by the CPP is enough to make one’s head spin.” He continues: “It can take a remarkable 12-14 years to site a new high-voltage transmission line. Unless federal regulators (and possibly Congress) somehow facilitate streamlined development, it is hard to see how states will be able to achieve big emissions reductions in time to meet the first compliance goals in 2020. Amidst this cacophony of legal requirements, states are not currently able to plan for compliance with any confidence.”

Wallach’s predictions about the “complex, EPA-mandated process of energy sector transformation” are hypothetical, but totally believable—especially given the real-world example of New Mexico’s ongoing experience.

In New Mexico’s Four Corners region, negotiations regarding bringing the San Juan Generating Station (SJGS) into compliance with Regional Visibility Rules under the Clean Air Act have been underway for more than a decade—with the bulk of the shenanigans taking place during the past five years. Note: SJGS’s back and forth with the EPA, the New Mexico Environmental Department (NMED), and anti-fossil groups have been over just one small rule that would improve visibility in wilderness areas and national parks to such a small degree that it would not be detected by the human eye. One can easily imagine how this process would be exacerbated by policy so extensive that it strives to transform the entire energy sector.

You may want to just skim over the following abbreviated timeline as it will “make your head spin”—which is my goal. The reality is far more overwhelming than what I am presenting here. (Thanks to James Crawford for the use of his background research on the SJGS.)

SJGS is a coal-fueled power plant near Farmington, NM that produces 1,683 mega-watts (MW) of electricity through four units. The Public Service Company of New Mexico (PNM) is the majority owner and takes 783 MW for NM customers. The coal for SJGS comes from an adjacent coal mine operated by BHP Billiton. The current contract for coal expires in 2017.

To meet Regional Visibility Rules, the EPA requires that states develop a State Implementation Plan (SIP) that must be approved by the EPA. The NMED submitted its first SIP back in 2003. However, due to evolving regulations, it was never approved.

In 2010, NMED submitted another, revised SIP but had to withdraw it again due to those changing regulations. Once again, in February 2011, NMED submitted a new SIP for EPA approval—which the EPA ruled was invalid because it wasn’t approved by the required 2009 date.

The EPA further decreed that because of sue-and-settle cases brought by Wild Earth Guardians and others, EPA was under court order to implement a FIP by January 2011—which the EPA did finally issue in September 2011 (well after the SIP submittal that wasn’t even considered). Now, SJGS was subject to the dictates in the FIP without any due consideration of the SIP.

The February 2011 SIP called for compliance-achieving emissions controls costing about $80 million. The FIP required a different approach that costs almost $1 billion—or, PNM could close down two perfectly good, reliable generating units with years of life left.

PNM and the NMED filed suit against EPA and, after a couple years of legal wrangling settled on closing the two units and lesser-cost equipment for the two remaining units. In September 2013, NMED submitted a revised SIP, which reflected the agreement, and was approved by EPA a year later.

However, the antis were not happy with this agreement for replacing the lost electricity which, for PNM, would be met by assuming a greater share of the electricity from the two remaining units (remember: PNM didn’t use all that was generated, there are other owners; some plan to leave), constructing a new natural gas peaking plant, bringing in nuclear power from Arizona, and adding 40 MW of solar. They wanted the deficit made up strictly with renewables. (In fact, the antis want all four units closed—this, after PNM already spent $320 million in 2009 on extensive emissions remodeling.)

Just before the October 2014 Public Regulatory Commission’s (PRC) meeting to approve the SIP, environmental groups filed a series of legal blockades that ultimately changed the agreed upon plan.

Finally, in January 2015, the PRC held hearings on the plan almost everyone agreed on—environmentalists protested outside the hearing and demanded the closure of all four units. Addressing their views, Paul Gessing, President of New Mexico’s free-market think tank, the Rio Grande Foundation, said: “the radical anti-modern-society types were out in force … While the PNM plan is not perfect, the radical anti-energy crowd would love nothing more than to completely kill New Mexico’s economy.”

In April, a hearing examiner advised the PRC to reject the plan unless changes were made. His concerns, according to the Associated Press report, were in part because PNM didn’t have a “contract to provide coal for the plant beyond 2017.” The adjacent coal mine is the subject of negotiations between current owner BHP Billiton and several proposed new owners.

On May 5, a deal was struck. Westmoreland Coal Company would purchase the mine and take over operations—resulting in a $300 million savings over the next six years for PNM and its customers. However, the PRC must approve this deal before the sale goes through.

Business leaders, coal miners, power plant workers, and elected officials from the Four Corners area have united in support of the plan that would allow SJGS to continue operating. At a recent Albuquerque City Council meeting, Ray Hagerman, Four Corners Economic Development CEO, “emphasized that 740 jobs—400 coal miners and 340 power plant workers—would be jeopardized if the plan is not approved.” According to the Farmington Daily Times, Hagerman said: “the generating station and the coal mine that feeds it also represent around 2,400 indirect jobs.” Unemployment in the region would double.

Because getting all parties—including minor-percentage owners in SJGS such as the City of Anaheim and the Utah Associated Municipal Power Systems—on board is essential to approval of the deal, the PRC voted, on May 27, to give PNM more time to finalize an ownership restructuring agreement. Sources tell me that many of these co-owners don’t meet regularly and the new July 1 deadline has the potential to scuttle the entire decade-plus procedure.

Hagerman believes: “if the utility supplies regulators with the documentation they need, then approval of the plan is likely.”

PNM spokesman Pahl Shipley, according to the Farmington Daily Times: “reiterated that the revised plan, with new tentative agreements in place, represents ‘the most cost-effective path forward, balancing reliability, affordability and environmental responsibility. The ownership restructuring and coal supply agreements would further increase the cost benefit to customers.'”

While there will be a “cost benefit to customers,” rates will still increase. The PRC hearing officer “warned that the changes spurred by the partial closure of San Juan would result in substantial rate increase for customers over the next 20 years.”

In a recent op-ed in the Albuquerque Journal, Carla Sontag, executive director of the New Mexico Utility Shareholders Alliance, addressed the cost factors: “It is estimated that the shutdown will cost about $5.25 a month for the average residential customer. PNM plans to replace lost power generation with cleaner energy sources and significantly less coal. Those costs will be filed with the PRC later, and that increase would take effect in 2018. … PNM recently filed its first rate increase in almost five years. Beyond the need to maintain system integrity, the biggest driving force behind the increases is environmental initiatives.” Environmental groups acknowledge a 7 percent increase to monthly bills.

So, now we wait.

Will the PRC approve the plan? Will good-paying jobs be saved? Will cost increases be minimized? Will the anti-fossil fuel groups sue? Will New Mexico have enough power for the future?

This is a New Mexico story. It is about just one power plant, in a sparsely populated state. It is the story of that power plant, in that state, trying to meet just one EPA regulation dealing with regional visibility—even though improvements will not be detectible to the human eye. (The American Lung Association’s 2015 State of the Air report just ranked Farmington number 1 for cleanest metropolitan areas in the country for 24-hour particle pollution and number 2 for cleanest metropolitan areas in the country for annual particle pollution.)

Under the CPP, similar scenarios will have to take place in every state, over every coal-fueled power plant—not with just one regulation, but with a massive plan designed to transform the entire energy sector. The CPP, which is not yet final, is supposed to be implemented in less than five years. This New Mexico story is a taste of what is to come: years of legal wrangling, cost increases for consumers, loss of good-paying jobs—for reductions in CO2emissions that will make no temperature difference on a global scale.

It makes my head spin.