PNM San Juan Settlement

Updated 8/6/16

Background

In August of 2011, the US Environmental Protection Agency (EPA) enforced the Clean Air Act first passed in 1970 by ordering that adequate additional pollution controls be installed on the San Juan Generating Station.  The EPA proposed that state-of-the-art pollution controls be installed on all four of the San Juan units to significantly reduce nitrogen oxide & sulfur dioxide emissions.  PNM formally appealed the EPA ruling in spite of the fact that PNM had years (decades actually) of warning to bring the coal-fired plant into compliance.

     In December 2011, the US EPA enforced the Clean Air Act first passed in 1970 by ordering utilities to meet new rules limiting mercury, arsenic, chromium, nickel and acid gases that the EPA has identified as known or suspected of causing cancer or other serious health effects.  PNM stated that the San Juan plant already met the new EPA standards due to a pollution control upgrade made in 2009.  The upgrade was required by a 2005 court ordered consent decree in response to a lawsuit against PNM which proved serious air quality violations at the San Juan Generating Station between 2001 & 2004.

     On 9/25/2014 PNM filed an agreement with the NMPRC to install 40 MW of new solar generation in 2015.  This additional solar capacity is required to meet NM’s Renewable Energy Portfolio Standard mandates.  The NMPRC approved this plan in December of 2014.

     On 9/26/2014 the EPA signed off on a “compromise” San Juan settlement in which PNM agreed to retire two of the four coal-fired San Juan Generating Station units, and install additional pollution controls on the remaining two units.  This plan will comply with the EPA “haze” regulations, and according to PNM and the Martinez Administration, it will be less expensive than the original EPA proposal.

Preliminary Agreement

     An Albuquerque Journal article on 10/2/2014  titled “PNM, key parties reached a settlement on San Juan” reported that PNM & 5 intervening groups including the NMPRC utility division staff, the NM Attorney General (Gary King), the NM Renewable Industries Association (REIA), NM Independent Power Producers, and Western Resources Advocates had reached a settlement agreement on the San Juan Plan which would be considered by the NMPRC.  The NM Industrial Energy Consumers group also backed the settlement proposal, while New Energy Economy & the Coalition for Clean Affordable Energy opposed the agreement.

     According to the Journal article, key points in the agreement were:

  • Two of the four coal-fired San Juan generating units would be retired, additional pollution controls would be installed on the remaining 2 units, 134 MW of replacement power would be  taken from the Palo Verde Nuclear Generating Station in Arizona, and 132 MW of the remaining coal-fired generation capacity would be allocated to other “owners”.

  • PNM would write off 50% of its “stranded assets” in the two shuttered SJ units by splitting those costs between PNM shareholders and ratepayers.

  • PNM would significantly reduce what it would charge for replacement electricity from the Palo Verde nuclear plant in Arizona (PNM is a part-owner of the Palo Verde plant).

  • No new renewable energy generating capacity would be required under this agreement. PNM agreed to “consider” adding 50 MW of renewable energy to its grid in addition to the 40MW it was planning on adding in 2015 to meet NM’s RPS mandates.

NMPRC San Juan Hearings

     The formal NMPRC Hearing on the San Juan Plan began on January 5, 2015.  New Energy Economy led the opposition to the existing agreement.

     In mid-January, Farmington Electric Utility System, a co-owner of the San Juan plant, said it was withdrawing from a tentative deal to acquire an extra 65 MW of capacity at San Juan.

     An article published by the New Mexican on 1/13/2015 titled “PNM: Rise in power plan’s cost due to error, omission” stated –  “Pat O’Connell, PNM’s director of resource planning, confirmed during recent testimony before the Public Regulation Commission that the costs of the plan are about $1 billion more than estimates in the company’s original power replacement plan, which was submitted to state regulators in December 2013. The cost estimates increased over the last year and included the planned purchase of an additional 54 megawatts of coal-generated capacity for PNM at San Juan’s Unit 4 and an adjustment for changes in the forecast demand from customers for electricity. Another $532 million in fixed capital maintenance costs were added to the estimated costs of the power replacement plan in August. Correcting a fuel cost error added another $367 million to the plan.”

     The New Mexican article went on to say – “four partners (are) looking at leaving the coal-powered plant after 2017. It is the same year PNM’s contract to buy coal from the nearby San Juan mine ends. PNM, which owns the majority share in the (San Juan) plant and is the operator, has to find a way to sell the extra coal-fired capacity at the (SJ) facility. Farmington’s decision not to buy any of the extra capacity makes the situation more urgent.”

     The following week, the Renewable Energy Industries Association and the NM Independent Power Producers and Western Resource Advocates withdrew their support from the San Juan agreement.

     Additional information that came out of the PRC San Juan hearings included:

  • A former San Juan Generating Station manager testified that PNM cut the operating & maintenance budget at SJ in 2013 to boost profits, causing outages that led PNM to purchase more expensive electricity from other sources and pass that cost on to ratepayers.  He also testified that PNM substantially padded its proposed investments in pollution controls for the two San Juan units that will continue to operate after the other two are shut down in 2017.

  • PNM’s nuclear expert admitted that PNM’s nuclear shares in Palo Verde 3 is losing money and that PNM’s request to bring those nuclear shares into (NM) rates is not an  “arms-length-transaction”.

  • The PRC staff bureau chief testifying in support of the settlement agreement with PNM admitted he worked for PNM for 25 years and currently has stock in PNM and collects a pension from the company.  Several other PRC staffers are ex-PNM employees (this sort of thing has been an “open secret” for many years).

  • PNM and/or PNM Resources is apparently considering purchasing the San Juan coal mine and/or signing up for the additional 65 MW of San Juan capacity that Farmington Electric turned down.

     The formal NMPRC hearings on the San Juan Plan ended on January 27, just after the Albuquerque Bernalillo County Water Utility Authority came out in opposition to PNM’s proposal.

     As stated in the Albuquerque Journal on 2/6/2015, PNM VP for Regulatory Affairs Gerard Ortiz said that the utility remains firmly committed to its plan as the least costly way of bringing San Juan into compliance with federal environmental regulations. Summary briefs in the case were filed at the end of February.

     Additional public hearings were held in Farmington in February, and in Albuquerque & Silver City in March.
On April 6, 2015, the Albuquerque City Council voted to withdraw its support for PNM’s SJGS Plan.

The Hearing Examiner’s Recommendation

     On April 8, the SJGS Case Hearing Examiner submitted his formal recommendations to the PRC.  He concluded that PNM’s overall plan be rejected because “The Stipulation as a whole is not fair, just and reasonable and in the public interest”.  This kind of rejection of a major proposal by a PRC Hearing Examiner is unprecedented.  His major objections centered around the incomplete San Juan ownership & coal contract agreements.
Here is a link to the Hearing Examiner’s formal “Stipulation” document:  http://164.64.85.108/infodocs/2015/4/PRS20207162DOC.PDF
For a more “user friendly” summary of the Hearing Examiner’s recommendations, you can download this PDF:  “Comments on the SJGS Hearing Examiner’s Decision”

A Second Stipulated Agreement

     Final agreements on San Juan plant ownership & the San Juan coal mine contracts, along with a new attempt at “re-negotiating” an overall San Juan plan agreement resulted in the signing of a second Stipulated Agreement in the middle of August 2015.  The parties to this agreement included the NM Attorney General, New Mexico Industrial Energy Consumers, Western Resource Advocates, the Coalition of Clean & Affordable Energy, the New Mexico Independent Power Producers, the Interwest Energy Alliance, NMPRC Staff, as well as PNM.  New Energy Economy refused to participate in this negotiation.

     Key points of the 2nd Stipulated Agreement were:

  • Two of the four coal-fired San Juan generating units would be retired, additional pollution controls would be installed on the remaining 2 units, 134 MW of replacement power would be  taken from the Palo Verde Nuclear Generating Station in Arizona.  132 MW of the remaining coal-fired generation capacity would be “absorbed” by PNM, but at “zero book value”.

  • PNM would further reduce what it would charge for replacement electricity from the Palo Verde nuclear plant in Arizona (PNM is a part-owner of the Palo Verde plant).

  • PNM would have to file a case with the PRC in 2018 to justify continued operation of the San Juan plant after 2022 when existing ownership and coal contracts expire.  As part of that case, PNM would have to issue a request for proposals for replacing San Juan coal-fired power with other available sources.

  • PNM cannot purchase more ownership shares of the San Juan plant without PRC approval.

  • Starting in 2020, PNM will buy 1 MWH of renewable energy certificates (with a preference for NM sources) for each additional MWH generated by the coal-fired units at San Juan.

NM Supreme Court Case

     In early September, New Energy Economy formally requested that 4 of the 5 PRC Commissioners recuse themselves from the San Juan case because they would not be able to make an unbiased judgment on the merits of the case.  None of the Commissioners agreed to do this.  New Energy economy then filed a formal petition with the NM Supreme Court asking for 4 of the 5 PRC Commissioners to be disqualified from the case.
The Supreme Court agreed to hear this petition, but allowed scheduled PRC hearings on the 2nd Stipulated Agreement to proceed in mid-October.
On November 9, the NM Supreme Court heard the case and rejected the petition to disqualify the Commissioners.

The Hearing Examiner’s Recommendation

     On November 11, the SJGS Case Hearing Examiner recommended that the 2nd Stipulated Agreement be approved.  Here is a link to the Hearing Examiner’s formal “second Stipulation” recommendation:
http://164.64.85.108/index.asp

The NMPRC’s San Juan Decision

     On December 16, 2016 the NMPRC voted 4 to 1 to approve the 2nd Stipulated Agreement.  Commissioner  Valerie Espinoza cast the only no vote.

And It’s Not Over Yet!

   On January 15, 2016, New Energy Economy appealed the NMPRC’s San Juan Decision to the NM Supreme Court.  That appeal was unsuccessful.
On July 22, 2016, New Energy Economy filed yet another NM Supreme Court appeal detailing all the reasons that its San Juan case power replacement arguments were correct and everyone elses were completely wrong, and asked the Court to throw out the Stipulated Agreement power replacement plan and start over.

Take Aways & Lessons Learned

So what did we learn (so far) from this whole San Juan settlement process?

  1. PNM and the Martinez administration strongly opposed the EPA Ruling and filed formal legal challenges & appeals.  They lost.

  2. PNM’s cost estimates were double those of the EPA for installing state-of-the-art pollution controls on all four San Juan units.  The EPA cost estimates were based on similar plant upgrades completed in other parts of the US.

  3. A revised plan calling for two of the four San Juan Units to be shut down was acceptable to the EPA.  PNM & the Martinez administration said this plan would save PNM ratepayers big $$$$$

  4. During the PRC hearing, PNM admitted that actual San Juan costs would be $1 Billion more than PNM’s proposal stated.  “Book keeping errors” according to PNM executives.

  5. None of those San Juan cost accounting errors were “uncovered” by the NMPRC staff. The PRC does not undertake detailed analyses of utility proposals and cost estimates.  In this case, New Energy Economy did undertake such an analysis which revealed some major cost discrepancies (all in PNM’s favor).

  6. The NMPRC staff includes quite a number of ex-PNM employees who have a history of supporting PNM’s proposals.

  7. Well-paid PNM lobbyists hover around NMPRC Commissioners like bumblebees.

  8. PNM is entitled to “recover” its NMPRC-related case expenses by billing its customers, while organizations arguing against PNM’s proposals must cover their related expenses themselves.

  9. PNM is now taking credit for San Juan plan pollution & CO2 emission cuts that it strongly opposed.

  10. No new solar or wind power is being added as part of PNM’s San Juan plan.

  11. PNM’s plan will force its customers to pay-thru-the-nose for Coal-Fired electricity for decades, although the 2nd Stipulation agreement added additional hurtles that PNM will have to jump through to accomplish this.

  12. Considering the huge cost discrepancies uncovered in this case, PNM’s cost estimates are no longer credible.

  13. The NMPRC went out of its way to grant PNM delay after delay in order to finalize PNM’s SJGS plan, but they also encouraged all litigants to reach a so-called “stipulated agreement”.

  14. Utility cases like this one are extremely complex – technically and financially and legally. Because PNM has a state-granted monopoly, special statutes and rules apply that the PRC must follow.  Changes to those statutes & rules will have to come from the State Legislature.

  15. PRC cases like this one are “adversarial”.  Each litigant presents justifications for their position that are “fine tuned” to advance their own interests.  Sometimes these arguments (from all “sides”) are downright misleading.

  16. This case included a litigant, New Energy Economy, that adopted a very aggressive approach.  To their credit, NEE’s intense analysis of PNM’s proposal revealed serious errors & omissions. On the other hand, it’s likely that NEE’s unrelenting attacks on PNM executives and even on PRC Commissioners were counter-productive.  In the end, NEE’s major proposals were rejected in favor of the 2nd Stipulation Agreement reached between all of the other parties in the case.  NEE has filed several NM Supreme Court appeals. None have been successful.

  17. The most obvious take-aways:

    1. New Mexicans deserved better, but the final agreement does cut NM’s coal-fired generation capacity significantly.  This would not have happened without the EPA ruling.

    2. PNM really needs new management & New Mexico needs to change the way it “regulates” electric utilities like PNM.

    3. It’s always important to let your PRC Commissioner know what you think.  You can contact your PRC Commissioner via the PRC website at: http://www.nmprc.state.nm.us/index.html .