Tucson Electric Power (TEP) anticipates spending approximately $300m over the next five years for capital expenses related to emission control upgrades at its Arizona and New Mexico generating stations, including the coal-fired, co-owned San Juan Generating Station (SJGS).
TEP is part of UNS Energy (NYSE: UNS), which was previously known as UniSource Energy.
TEP on July 2 filed a general rate case (GRC) at the Arizona Corporation Commission. It wants an increase in its non-fuel base rates of $127.8m and is also seeking approval of, among other things: an updated rate design; modifications to its Purchased Power and Fuel Adjustment Clause (PPFAC); a lost fixed cost recovery mechanism related to the commission’s Renewable Energy Standard and Electric Energy Efficiency rules; a new approach to funding cost-effective demand-side management and energy efficiency programs; and an environmental compliance cost recovery mechanism to smooth the rate impact of anticipated environmental mandates for TEP’s generating facilities.
Fitch Ratings on Sept. 12 gave the utility a generally positive outlook on its bond rating and noted the rate case. “Going forward, Fitch expects a constructive outcome in the utility’s pending 2012 GRC which should permit an adequate rate of return on investment and recovery of higher operating expenses incurred over the last few years,” Fitch said. “Currently, TEP is operating under a five-year non-fuel base-rate freeze following settlement of its 2007 GRC. The ratings also reflect TEP’s stable earnings and cash flows, competitive electric rates, and successful renegotiation of its bank agreement.”
The commission on Sept. 10 issued a scheduling order in this rate case that includes several days of hearings beginning March 6, 2013, and deadlines in December and January for testimony from commission staff and several intervenors.
TEP is proposing several modifications to its PPFAC. The company proposes to recover all of its fuel and purchased power costs through the PPFAC and to eliminate the current fuel component recovered through base rates.
The company is also requesting to recover some additional costs through the PPFAC, including credit support costs, wholesale energy broker fees, greenhouse gas costs and incremental lime costs above those included in base rates. The levels of these costs are tied directly to the acquisition of fuel and wholesale power and should be recovered through the PPFAC, the utility noted. The cost of obtaining and maintaining credit with trade counterparties is a real cost of doing business in the wholesale markets for fuel and purchased power. Lime costs are incurred when removing SO2, and are directly linked to fuel consumption, specifically coal usage, the utility said. And, any future greenhouse gas costs will likely be tied directly to fuel costs.
The company is proposing a new mechanism, called the Environmental Compliance Adjustor, to provide more timely recovery of major upcoming capital expenditures necessary to meet several new environmental regulations. These costs include investments in pollution control equipment and efficiency projects at the company’s power plants. Specifically, TEP will likely be required to invest significant capital at the following locations to comply with one or more of the federal rules:
- San Juan Generating Station – about $200m in capital costs and $3m-$6m in annual O&M costs to comply with the U.S. Environmental Protection Agency’s Regional Haze mandates;
- Navajo Generating Station – about $86m in capital costs and $2m-$4m in annual O&M costs to comply with Regional Haze and Mercury and Air Toxics Standards (MATS) rule mandates;
- Four Corners Power Plant – about $36m in capital costs and $2m -$4m in annual O&M costs to comply with the Regional Haze and the MATS mandates; and
- Springerville Generating – about $5m in capital costs and $3m in annual O&M costs to comply with the MATS rule.
In total, TEP is likely to invest about $300m over the next five years and incur annual O&M expenses in the tens of millions to meet these rules at its coal-fired plants. Depending on the final outcome of certain proposed regulations, TEP’s total capital outlays could approach $400m.
“TEP is not able to stagger or control the timing of these costs, as the compliance deadlines are mandated exclusively by the EPA and judicial rulings,” said the rate filing. “Given the magnitude of the costs relative to TEP’s existing rate base and capitalization, TEP cannot afford to wait several years to recover these costs in the next general rate case. Moreover, accumulating such large capital investments until the next general rate case would contribute to a sharp spike in TEP’s rate base and a correspondingly sharp increase in rates.”
New spend on coal emissions will come on top of recent plant upgrades
Michael DeConcini, a senior vice president at both TEP and its parent company, provided additional detail about environmental planning in the July 2 rate application.
Generation-related capital spending increased in 2008 and 2009 due to emissions upgrades at SJGS and a major upgrade at SGS Unit 2. Also, in 2010, TEP purchased Sundt Unit 4, which can be fired by coal, natural gas and landfill methane. Additionally, generation spending over the last five years specific to SGS included significant spending to improve the water facilities and a drag chain project for SGS Unit 2 that improved the efficiency of the bottom ash removal process. TEP also made improvements at the Sundt facility during the last five years by replacing step-up transformers and improving the distributive control systems that operate the units.
TEP invested about $82m between 2007 and 2010 for major emission control upgrades at SJGS, where the company owns a 50% stake in Units 1 and 2. Both units received upgraded scrubbers to reduce SO2 emissions, new baghouses to limit particulate matter (PM) emissions, new burners to reduce NOx emissions and an activated carbon injection system to reduce mercury. The upgrades reduced emissions of SO2 by 83%, PM by 72%, NOx by 41% and mercury by more than 90%.
TEP also invested $3.38 million to upgrade emission controls at the coal-fired Navajo Generating Station, where the company owns a 7.5% stake in Units 1 , 2 and 3. Low NOx burners were installed on all three units between 2009 and 2011, resulting in a 35% reduction in NOx emissions. The cost of emission control upgrades for all the plant owners totaled nearly $45m. NOx, SO2 and PM emissions have been shown to adversely impact visibility. Due to the proximity of TEP’s remote, coal-fired generating facilities (San Juan, Four Corners and Navajo) to national parks and wilderness areas, TEP is committed, along with the operators of these facilities, to the preservation of the scenic views in a cost effective manner over a reasonable period of time, DeConcini noted.
Spending will increase in 2013-2016 primarily due to capital expenditures of about $300m required for environmental upgrades mandated by federal regulations at TEP’s coal-fired generating plants; $195m for new gas-fired generating units; $231m for the anticipated purchase of TEP’s leased interest in SGS Unit 1 and the plant’s coal handling facilities; and $155m for renewable energy projects. Much of the increase in planned capital expenditures result from one-time costs, such as the SGS lease buyouts. The spending for new generation resources, currently a placeholder in TEP’s five-year capital plan, is dependent on the level of future sales growth.
The largest share of the $300m in projected environmental costs is expected to be incurred at SJGS. EPA has issued a final Federal Implementation Plan (FIP) under the Regional Haze rule for San Juan that would require the installation of selective catalytic reduction (SCR) technology by 2016. The total cost of satisfying that requirement is estimated between $900m and $1bn, with TEP’s share of that cost estimated at $180m to $200m.
A similar issue faces the Four Corners Generating Station, where TEP owns a 7% stake in Units 4 and 5. The EPA has issued a draft Best Available Retrofit Technology (BART) assessment calling for the installation of SCR technology on the remaining units at Four Corners by 2018, DeConcini noted. If that requirement remains in the EPA’s final BART ruling, SCRs will have to be installed at a total cost of $500m, with TEP’s share of those costs at about $35m.
The EPA is also is drafting a BART rule for Navajo that could be issued this year or in 2013. It could require the installation of SCR and/or a baghouse within five years. TEP would be obligated to pay $42m of the total estimated $544m cost for SCR technology and/or $43m of the estimated $587m cost of a baghouse at the plant.
Four Corners, Navajo, SGS and Sundt may also require the injection of carbon and/or bromine to satisfy the final Mercury and Air Toxics Standards published by the EPA in February. TEP would be obligated to pay about $7m to install such equipment at those plants, DeConcini noted.