October 1, 2018 Read More →

On the blogs: APS coal strategy bad news for customers

Energy and Policy Institute:

Arizona’s largest electric utility, Arizona Public Service, is back in front of regulators asking for its second rate increase in just over a year. In early September, Arizona Corporation Commissioners, the elected officials that regulates power companies in the state, heard testimony from APS and intervenors in a case regarding recently installed pollution control equipment at the Four Corners coal power plant. APS’s share of the total bill for the equipment and installation came to $400 million; the utility wants to have its customers pick up the tab. If the latest increase is approved, the plant will provide APS investors with not only a repayment of that expenditure, but also a tidy profit, while customers continue to foot the bill for an investment that environmentalists and consumer advocates warned would be unwise years ago. Those warnings have come true.

At a time when utilities around the country were beginning to ditch their coal plants for economic reasons, APS wanted to invest. The utility convinced regulators to allow it to purchase a California utility’s interest in a coal plant. It was a decision that David Schlissel, now the director of resource planning analysis for the Institute for Energy Economics and Financial Analysis (IEEFA), called “the only instance that I can recall where a utility is seeking to replace retired coal capacity with another aging coal facility.” Schlissel was testifying for the Sierra Club at the time, and is planning to release a report later this year about the power plant and its impact on customers’ bills.

Six years later, it has become clear that APS ignored the warnings about its uneconomic investment. The company made the decision knowing full well that investors would be able receive a profit. “Adding to rate base is a way for utilities to increase their profits. Buying the additional interest in Four Corners made no sense. It was uneconomical for ratepayers. Adding the pollution control equipment is also uneconomical,” Schlissel said in an interview with the Energy and Policy Institute (EPI). “Four Corners has had no benefit. It’s a very expensive plant that is just going to become more expensive.”

The purchase of Southern California Edison’s interest in the Four Corners plant was a result of lawmakers in California enacting legislation to limit global warming pollution from their electricity sector. After the enactment of Senate Bill 1368, California regulators at the Public Utilities Commission (PUC) ruled that Southern California Edison could not recover any money spent on the Four Corners plant from its customers if the investments would increase the life of the plant. The utility knew that it needed to invest in equipment at the plant to reduce nitrogen oxide emissions. Breathing air with high concentration of nitrogen oxide can lead to lung problems and can contribute to the development of asthma and other respiratory infections.

APS was carefully watching the proceeding in California, and since Arizona didn’t have a global warming law, APS could take more ownership in the coal plant and force its customers to pay for any investments at the plant. That would generate a profit for APS investors. Indeed, only months after Southern California Edison agreed to sell to APS, in February 2011 an executive for the Arizona utility told a Goldman Sachs analyst that if the acquisition closes in the fourth quarter of 2012, then investors would get recovery in 2013; and, “it would be a matter of getting into service the following year or sometime after that” to get the profit for the pollution control equipment. James Hatfield, Chief Financial Officer for APS, estimated that return to arrive sometime after 2013.

Immediately after the California PUC ruling, on November 8, 2010, Southern California Edison agreed to sell all of its 48% interest in units 4 and 5 of the Four Corners power plant to APS. The decision would make APS the majority owner of the two coal units that had opened in 1969 and 1970. Two weeks later, on November 22, APS opened a docket with the ACC to win their approval of the purchase. The docket lasted a year and a half, giving intervenors ample time to raise red flags about the project.

More: Replacing coal with more coal: how Arizona Public Service’s Four Corners coal plant hurt customers, but earned investors profits

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