Puget Sound Energy works out deal on Centralia coal plant contract

Puget Sound Energy (PSE) on May 30 filed with the Washington Utilities and Transportation Commission a settlement of its objections to a commission order related to a long-term power purchase agreement (PPA) with the coal-fired Centralia plant.

Under mandates from the state government, TransAlta’s (TSX: TA) (NYSE: TAC) Centralia Thermal coal plant must shut, with the first unit to be shut in 2020 and the second in 2025. The state had worked out an agreement with various parties for a “Coal Transition PPA” deal for PSE to buy power from the plant in the meantime. But PSE objected to various aspects of the deal having to do with ratemaking, with the May 30 filing containing a settlement of those issues with various parties, including commission staff, the NW Energy Coalition, The Energy Project and the Northwest Industrial Gas Users (NWIGU).

“The Multiparty Settlement comports with the Commission’s direction in recent general rate case orders and policy statements,” said the May 30 filing. “It implements revenue decoupling—a tool designed to eliminate a utility’s reliance on increased customer energy usage as a means to recover fixed costs—and allows PSE to commit to a higher level of conservation achievement. It includes a K-factor rate plan that requires PSE to be lean in terms of operating efficiency during a rate case stay-out period.”

The filing added: “The Multiparty Settlement bolsters the State’s energy policy by facilitating the closure of Washington’s sole remaining coal plant, consistent with the policy set forth in the Coal Transition Energy Bill. With the approval of the Multiparty Settlement, PSE will move forward with the purchase of coal transition power that allows for the smooth transition away from coal-fired generation in Washington in the next decade.”

This settlement allows the commission the opportunity to utilize periodic rate increases that reduce regulatory lag, and to move away from time-consuming, expensive, and repeated general rate cases, the filing added. The commission has recognized the value of pursuing new and innovative approaches to ratemaking that break the cycle of almost continuous rate cases. This is an objective that has been embraced by the governor’s ratemaking discussion group, the filing argued. “This innovative approach to ratemaking provides increased rate certainty for PSE and its customers and removes some of the regulatory lag that has hampered PSE’s ability to earn its authorized returns,” it added.

There are three key components of the Multiparty Settlement: the expedited rate filing (ERF), including the unopposed Property Tax Tracker; the decoupling mechanisms and K-factor rate plans; and the reconsideration of the final order in the Coal Transition PPA docket. The settling parties reached agreement on these elements as part of a broader global settlement of issues pending for PSE. Thus, while each component can stand up individually to scrutiny without support from the other components, each is tied together as an integral element of the negotiated settlement, PSE said. For that reason, as with any settlement, substantial conditions or changes imposed by the commission will give the settling parties the option to reject the settlement as conditioned.

Puget had objected to various elements of a January PPA approval

The commission on Jan. 9 had approved the Centralia PPA, which covers an 11-year period of 2014-2025, after which the Centralia Thermal plant would be shut under a state-brokered deal with TransAlta and PSE. But PSE, unhappy with parts of the approval, filed a Jan. 22 petition for reconsideration and a motion to reopen the record.

The PPA, which is between PSE and TransAlta Centralia Generation LLC, would permit PSE to purchase an average 346 MW of coal “transition” power from the plant. PSE would purchase an average 346 MW of coal transition power from the Centralia coal plant, which will cease coal operations in one of its two units by 2020, and the other by 2025.

Former Washington Gov. Chris Gregoire signed the Coal Transition Energy Bill in 2011. The bill provides certain deferrals of greenhouse gas emissions performance standards to encourage the early closure of coal plants in Washington.

Centralia Thermal has about 1,340 MW of capacity within two units. A coal strip mine at the site was shut several years ago and the plant now gets all of its coal from the Powder River Basin. U.S. Energy Information Administration data shows the plant taking coal last year from the Rawhide mine in Wyoming of Peabody Energy (NYSE: BTU) and the Spring Creek mine in Montana of Cloud Peak Energy (NYSE: CLD).

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.