PacifiCorp says with Arch Coal selling Utah mines, reserve buy was a must

PacifiCorp was helping to ensure the future of its coal-fired Hunter and Huntington power plants in Utah when it last year obtained the undeveloped Cottonwood coal reserve from Arch Coal (NYSE: ACI), making that deal a prudent one, said PacifiCorp fuels official Cindy Crane.

Rebuttal testimony by Crane and various other PacifiCorp executives was filed May 25 at the Wyoming Public Service Commission as part of an overall rate case. The filings were officially from PacifiCorp affiliate Rocky Mountain Power.

Crane specifically was rebutting testimony from Wyoming Office of Consumer Advocate (OCA) witness Denise Parrish regarding OCA’s proposed disallowance of the Cottonwood coal leases from rate base. Parrish questioned whether current customers will benefit from this coal reserve due to uncertainty regarding federal environmental policies and their impact on the viability of coal production and coal-fired generators.

PacifiCorp opposes Parrish’s $4.23m Wyoming-allocated reduction to rate base for the Cottonwood leases. “The acquisition of these reserves was prudent and consistent with the Company’s long-term fueling strategy of supplying the Utah plants through the mining of strategic coal reserves coupled with long-term and short-term coal purchases,” Crane wrote. “These reserves are central to the continued operation of the Hunter and Huntington plants.”

PacifiCorp’s recent integrated resource plan update continues to demonstrate that the continued operation of the Hunter and Huntington plants, inclusive of the capital and operations and maintenance costs associated with future emissions control equipment, remains the company’s long-term least cost resource plan, Crane noted. “Ms. Parrish’s adjustment is based on speculation rather than on any evidence about the future operation of the Hunter and Huntington power plants,” Crane added.

The Cottonwood coal reserve leases are  adjacent to the company’s existing, but inactive Trail Mountain federal coal leases and to the company’s existing Deer Creek federal coal leases. Deer Creek is an active longwall mine, while Trail Mountain is a longwall operation that has been shut for years but could be revived in the future.

The company is currently conducting hydrological, geological and environmental studies of the Cottonwood leases and the coal drilling and core sampling program starts in early June, Crane noted. The various studies are needed to obtain a mine permit by the Utah Division of Oil, Gas and Mining and approval of the mine plan by the Utah School and Institutional Trust Lands Administration, which originally leased the coal to Arch several years ago in a competitive auction where PaciCorp was the losing bidder. PacifiCorp then got Cottonwood from Arch last year. The timing of when the Cottonwood coal would be developed is redacted from the public version of Crane’s testimony.

PacifiCorp acquired the Cottonwood leases from Arch Coal as part of a negotiated settlement, Crane noted. “The filing of a claim of anticipatory breach of the 1999 Coal Supply Agreement against Arch Coal and the subsequent negotiations provided the Company with a unique opportunity to acquire the Cottonwood reserves from Arch Coal,” she added. “Arch Coal is actively trying to sell its Utah properties. As Bloomberg News reported on April 26, 2012, Arch Coal has retained financial advisers including Deutsche Bank AG to help sell the mines and has requested first-bid or non-binding bids by the end of May 2012. As the Cottonwood reserves remain one of the last two large blocks of mineable coal in Utah, the Company believes that it would be improbable that it could acquire the Cottonwood Coal Leases from the successful bidder of Arch Coal’s Utah coal properties for the same price.”

Arch Coal, by the way, has declined comment on that Bloomberg report that mentions Utah specifically, but has indicated it is trying to sell unnamed, non-core assets.

“The Cottonwood reserves allow the Company to lower future coal costs and postpone or potentially avoid development of the rail infrastructure required to import coal from another production basin and any plant modifications necessary to retrofit the Hunter and Huntington plants to consume coal produced from production basins outside Utah,” Crane wrote.

Due to new U.S. Environmental Protection Agency air regulations, Rocky Mountain Power has also applied at the Wyoming PSC for an accounting order related to the probable shutdown of the coal-fired Carbon power plant in Utah. The company said in the May 1 application that it anticipates retiring the Carbon plant in early 2015 to comply with recently-finalized EPA standards.

Carbon was commissioned in 1954 after Unit 1 was built. Unit 2 was added in 1956 and the two units produce a combined 172 MW. A shutdown of this relatively small plant would leave Hunter and Huntington as PacifiCorp’s only coal plants in Utah.

About Barry Cassell 20414 Articles
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.