The Idaho Public Utilities Commission is taking comment through April 24 on a December 2014 application by PacifiCorp to recover Idaho’s portion of costs related to its decision to close the Deer Creek coal mine in Utah later this spring.
The Deer Creek Mine is operated by Energy West, a wholly-owned subsidiary of PacifiCorp. PacifiCorp operates as Rocky Mountain Power in eastern Idaho, Utah and Wyoming. PacifiCorp seeks authority from the six states where it has customers served by the Huntington and Hunter coal plants in Utah to recover closure costs and the withdrawal liability from an employee pension trust and allocate assets it will earn from the sale. It also seeks recovery for fuel costs to supply the Huntington and Hunter plants with coal that had been provided by the Deer Creek mine.
PacifiCorp bought the mine in 1977. It produces an average 3.5 million tons of coal annually. It had been the primary source of coal for the Huntington plant in east-central Utah, which annually consumes about 2.9 million tons. It also supplied some coal to the Hunter plant. The mine’s depreciable life runs through 2019. PacifiCorp claims that sharply increasing costs related to mining and pension liability make it no longer economical to operate the mine. The mine’s 182 employees are represented by the United Mine Workers of America.
In addition to labor issues, PacifiCorp claims the mine, as it ages, is producing lower quality coal which, in turn, reduces the volume of coal produced. As Energy West sought to develop additional areas of the mine’s reserves, it discovered significant volumes of high-ash, high-sulfur coal, meaning much of it had to be transferred to a preparation plant nearby to be blended with lower-ash coals to meet coal quality specifications. More coal is available on the market, making it less advantageous to own coal mining assets, PacifiCorp told the commission.
PacifiCorp will also sell other mining assets to Kentucky-based Bowie Resource Partners, which currently trucks in coal to the Huntington plant from its mines in Utah’s Carbon and Sevier counties. The sale of those mining assets, PacifiCorp claims, results in a lower-cost option than continuing to invest in and operate the Deer Creek mine through depletion of reserves in 2019.
PacifiCorp rebuts critics of coal contract with Bowie
PacifiCorp is also pursuing a similar December 2014 application with the Utah Public Service Commission. Said Rocky Mountain Power President and CEO Cindy Crane in April 7 rebuttal testimony in that case about the coal contract with Bowie: “As part of the overall Transaction, the Company executed a long-term agreement with Bowie Resource Partners, LLC (‘Bowie’), whereby Bowie agreed to supply the Company’s coal requirements for Huntington from the close of the Transaction through December 31, 2029. The CSA includes a ‘take-or-pay’ provision generally requiring the Company to purchase a minimum specified amount of coal. Such ‘take or pay’ provisions are an essential component of virtually all long-term coal supply agreements and constitute the consideration required to obtain favorable pricing. In this case, however, the Company was able to mitigate the risk associated with the take-or-pay provision by negotiating a provision, Article 8, that provides the Company with broad termination rights if new or existing environmental laws, regulations, or a settlement agreement affect the Company’s ability to burn coal at Huntington.”
Crane said about concerns raised about this provision: “The Company intended Article 8 to address a scenario where an environmental requirement made the continued operation of the plant as a coal-fired facility uneconomic, and the Company made this intent clear during its negotiations with Bowie. As Sierra Club correctly points out, none of the Company’s decisions to close or re-power coal plants was the result of an outright prohibition on burning coal. Rather, the decisions were made based on the economic impact of the environmental requirement on the operation of the particular plant. From the Company’s perspective, it would make no sense to agree to a narrow clause that would limit the Company’s termination rights in the manner the parties fear.”
The Sierra Club said it would be safer to buy this coal on the open, short-term market, not under a long-term contract. “Sierra Club produced no evidence or analysis indicating that there is a material probability that such a scenario would occur,” Crane responded. “Moreover, as described in the direct and rebuttal testimonies of Mr. Seth Schwartz, given current market conditions, it is reasonable and prudent to enter into the long-term Huntington CSA at below-market prices. Sierra Club is essentially asking customers to bear the burden of higher market coal prices for the foreseeable future based on speculation that other market forces may eventually render market coal a better option than a long-term CSA. While it is theoretically possible that the scenario described by Sierra Club may occur, mere speculation is no basis for long-term resource planning or decision-making.”
Seth Schwartz is with consulting firm Energy Ventures Analysis, which is working with PacifiCorp in the case.
Crane noted that the clock is ticking on a May 31 deadline to get needed state approvals. “The major components of the transaction are integrated through Article 10 of the Huntington CSA. On or before the May 31, 2015, deadline in the Huntington CSA, PacifiCorp must have resolved labor disputes and associated successorship obligations with the UMWA in a manner satisfactory to Bowie, closed the property sale agreements that are part of the Transaction, and received all necessary regulatory approvals. The Huntington CSA requires the Company to begin closing the Deer Creek mine within three months of its effective date. Because of the pre-closing and post-closing conditions of the Huntington CSA, the Company must obtain all the regulatory approvals requested in the application by May 31, 2015. The Huntington CSA is terminable by Bowie if PacifiCorp does not meet this deadline. The benefits of the Transaction to close the Deer Creek mine are derived, in part, from the Huntington CSA, and the proposed closure of the mine is contingent on its approval.”