The co-owners of the Four Corners power plant, not including Southern California Edison (SCE), are currently negotiating a potential new coal supply agreement with BHP Navajo Coal for the period after July 6, 2016, said SCE parent Edison International (NYSE:EIX) in its Feb. 29 annual Form 10-K report.
In January 2010, SCE and the other Four Corners participants entered into the current coal supply agreement with BHP Navajo, under which coal will be supplied to Four Corners until July 6, 2016. SCE is apparently out of the current round of coal negotiations because in November 2010, SCE entered into an agreement to sell its ownership interest in Units 4 and 5 at Four Corners to the operator of the facility, Arizona Public Service (APS).
The sale price is $294m, subject to certain adjustments. The closing of the sale is contingent upon the receipt of regulatory approvals and other specified closing conditions and is estimated to occur in the second half of 2012, the Form 10-K noted. SCE owns 48% of Four Corners Units 4 and 5, which works out to about 739 MW of the total 1,540 MW of capacity of those two units. SCE doesn’t own any part of the other three units at the plant.
BHP Navajo is a unit of international mining giant BHP Billiton that runs the captive Navajo mine in San Juan County, N.M. The mine is dedicated to serving the power plant. The Navajo strip job produced 7.9 million tons of coal in 2011 and 7.8 million tons in 2010, according to U.S. Mine Safety and Health Administration data.
Four Corners is a five-unit plant located in the northwestern corner of New Mexico. APS operates the plant and owns 100% of Units 1-3 and 15% of Units 4 and 5. APS has a total entitlement from Four Corners of 791 MW, noted APS parent Pinnacle West Capital (NYSE:PNW) in its Feb. 24 Form 10-K filing.
APS, on behalf of the Four Corners participants, has negotiated amendments to an existing facility lease with the Navajo Nation which would extend the term of the Four Corners leasehold interest from 2016 to 2041. Execution by the Navajo Nation of the lease amendments is a condition to closing of the purchase by APS of SCE’s interests in Four Corners. The execution of these amendments by the Navajo Nation requires the approval of the Navajo Nation Council, which became effective in March 2011. The effectiveness of the amendments also requires the approval of the U.S. Department of the Interior (DOI), as does a related federal rights-of-way grant, which the Four Corners participants will pursue. A federal environmental review is underway as part of the DOI review process, the Pinnacle West Form 10-K said.
Also, APS has announced that, if its purchase of SCE’s interests in Units 4 and 5 at Four Corners is consummated, it will close Units 1-3 at the plant. These events would change the plant’s overall generating capacity from 2,100 MW to 1,540 MW and APS’s entitlement from the plant from 791 MW to 970 MW.
SCE won’t have to work its way through regional haze anymore
The pending sale of its stake in Four Corners also gets SCE out of worrying about new regional haze rules under the Clean Air Act (CAA) that are designed to prevent impairment of visibility in certain federally designated areas. Sources such as power plants that are reasonably anticipated to contribute to visibility impairment in Class I areas may be required to install best available retrofit technology (BART) or implement other control strategies to meet regional haze control requirements.
In relation to Four Corners, the U.S. Environmental Protection Agency issued a proposed federal implementation plan (FIP) in October 2010. The proposed FIP would require the installation of selective catalytic reduction (SCR) NOx reduction equipment within designated time periods. Due to the investment constraints of SB 1368, the California law on greenhouse gas (GHG) emission performance standards, SCE does not expect to be a Four Corners participant after the 2016 expiration of the current participant agreements and does not expect to participate in any investment in Four Corners SCRs, the Form 10-K noted.
In April 2009, APS, as operating agent of Four Corners, received an EPA request pursuant to Section 114 of the CAA for information about Four Corners, including information about Four Corners’ capital projects from 1990 to the present. SCE understands that in other cases EPA has utilized responses to similar Section 114 letters to examine whether power plants have triggered New Source Review requirements under the CAA. In October 2011, four environmental organizations filed a lawsuit against the Four Corners owners alleging NSR violations, the Form 10-K said.
Edison International grapples with California GHG limits
Edison International operations in California are subject to two laws governing GHG emissions.
- The first law, the California Global Warming Solutions Act of 2006 (also referred to as AB 32), establishes a comprehensive program to reduce GHG emissions. AB 32 requires the California Air Resources Board (CARB) to develop regulations, effective in 2012, that would reduce California’s GHG emissions to 1990 levels in yearly increments by 2020. In December 2011, the CARB regulation was officially published establishing a California cap-and-trade program. The first compliance period under the regulations is for 2013 GHG emissions. CARB regulations implementing a cap-and-trade program and the cap-and-trade program itself, continue to be the subject of litigation. In December 2011, a federal district court enjoined the Low Carbon Fuel Standard, another AB 32 program regulating the carbon content of transportation fuels, on constitutional commerce clause grounds. Further litigation challenging the cap-and-trade program on similar grounds is expected, though no suit has been filed to date, the Edison International Form 10-K said.
- The second law, SB 1368, required the California Public Utilities Commission (CPUC) and the California Energy Commission (CEC) to adopt GHG emission performance standards restricting the ability of California investor-owned and publicly-owned utilities to enter into long-term arrangements for the purchase of electricity. The standards that have been adopted prohibit these entities, including SCE, from entering into long-term financial commitments with generators that emit more than 1,100 pounds of CO2 per MWh, which is the performance level of a combined-cycle gas turbine generator. SB 1368 may prohibit SCE from making emission control expenditures at Four Corners, the Form 10-K pointed out.
California law has also required SCE to increase its electricity generated from renewable resources by at least 1% of its annual retail electricity sales per year so that 20% of its annual electricity sales are provided from such resources (called the RPS Program) by no later than Dec. 31, 2010, or such later date as flexible compliance requirements permit. In accordance with the procurement rules and regulations, SCE demonstrated full compliance with the RPS Program in March 2011 and August 2011 filings.
In April 2011, California enacted a law requiring California retail sellers of electricity to procure 33% of their customers’ electricity requirements from renewable resources. The impact of the new 33% law will depend on how the CPUC and CEC implement the law, which remains uncertain, the Form 10-K said.
On Dec. 1, 2011, the CPUC approved a decision setting procurement quantity requirements for CPUC-regulated retail sellers that incrementally increase to 33% over several periods between January 2011 and Dec. 31, 2020. The quantity would remain at 33% of retail sales for each year thereafter. SCE estimated that its delivery of eligible renewable resources to customers was 21% of its total energy portfolio for 2011.