Arizona Public Service makes progress on plan to shut Cholla coal unit in 2016

Pinnacle West Capital Corp. (NYSE: PNW) reported in its July 30 quarterly Form 10-Q report that subsidiary Arizona Public Service (APS) is making progress with its plans to retire in 2016 one of its units at the coal-fired Cholla plant.

Said the Form 10-Q: “After considering the costs to comply with environmental regulations, on September 11, 2014, APS announced that it will close Unit 2 of the Cholla Power Plant (‘Cholla’) by April 2016 and cease burning coal at the other APS-owned units (Units 1 and 3) at the plant by the mid-2020s, if the United States Environmental Protection Agency (‘EPA’) approves a compromise proposal offered by APS to meet required environmental and emissions standards and rules. Previously, APS estimated Cholla Unit 2’s end of life to be 2033.

“APS is currently recovering depreciation and a return on the net book value of the unit in base rates and plans to seek recovery of all of the unit’s retirement-related costs in its next retail rate case. On April 14, 2015, the [Arizona Corporation Commission] approved APS’s proposed retirement of Cholla Unit 2 in accordance with the ACC’s Integrated Resource Planning rules. The ACC expressly stated that this approval does not imply any specific treatment or recommendation for rate making purposes.

“If APS closes Cholla Unit 2, APS believes it will be allowed recovery of the remaining net book value of Unit 2 ($125 million as of June 30, 2015), in addition to a return on its investment. In accordance with GAAP, in the third quarter of 2014, Unit 2’s remaining net book value was reclassified from property, plant and equipment to a regulatory asset. If the ACC does not allow full recovery of the remaining net book value of Cholla Unit 2, all or a portion of the regulatory asset will be written off and APS’s net income, cash flows, and financial position will be negatively impacted.”

The 995-MW Cholla plant is located in northeastern Arizona near Holbrook. APS operates the plant and owns Units 1, 2 and 3, which are capable of producing 615 MW. PacifiCorp owns the 380-MW Unit 4. Unit 2, the one to be shut in 2016, is sized at 260 MW.

Incidentally, PacifiCorp said in an integrated resource plan (IRP) filed earlier this year with various state utility commissions in its region that it plans to continue permitting efforts in support of an alternative Regional Haze compliance approach that avoids installation of selective catalytic reduction (SCR) equipment in return for a commitment to cease operating Cholla Unit 4 as a coal-fueled resource by the end of April 2025.

That PacifiCorp IRP added: “The state of Arizona issued a Regional Haze [State Implementation Plan] requiring, among other things, the installation of SO2, NOx and PM controls on Cholla Unit 4, which is owned by PacifiCorp but operated by Arizona Public Service. The EPA approved in part, and disapproved in part, the Arizona SIP and issued a federal implementation plan (FIP) requiring the installation of SCR equipment on Cholla Unit 4. PacifiCorp filed an appeal regarding the FIP as it relates to Cholla Unit 4, and the Arizona Department of Environmental Quality and other affected Arizona utilities filed separate appeals of the FIP as it relates to their interests. All appeals are pending. PacifiCorp is working with Arizona Public Service as well as state and federal agencies on an alternate compliance approach and associated approvals for Cholla Unit 4.”

The Pinnacle West Form 10-Q says about the regional haze issue: “APS believes that EPA’s final rule as it applies to Cholla, which would require installation of selective catalytic reduction (‘SCR’) controls with a cost to APS of approximately $200 million, is unsupported and that EPA had no basis for disapproving Arizona’s State Implementation Plan (‘SIP’) and promulgating a FIP that is inconsistent with the state’s considered BART determinations under the regional haze program.

“Accordingly, on February 1, 2013, APS filed a Petition for Review of the final BART rule in the United States Court of Appeals for the Ninth Circuit.  Briefing in the case was completed in February 2014. In September 2014, APS met with EPA to propose a compromise BART strategy wherein, pending certain regulatory approvals, APS would permanently close Cholla Unit 2 by April 2016 and cease burning coal at Units 1 and 3 by the mid-2020s. APS made the proposal with the understanding that additional emission control equipment is unlikely to be required in the future because retiring and converting the units as contemplated in the proposal is more cost effective than, and will result in increased visibility improvement over, the current [bast available retrofit technology] requirements for NOx imposed on the Cholla units under EPA’s BART FIP. APS’s proposal involves state and federal rule-making processes.

“In light of these ongoing administrative proceedings, on February 19, 2015, APS, PacifiCorp (owner of Cholla Unit 4), and EPA jointly moved the court to sever and hold in abeyance those claims in the litigation pertaining to Cholla pending regulatory actions by the state and EPA. The court granted the parties’ unopposed motion on February 20, 2015. On June 10, 2015, [the Arizona Department of Environmental Quality] issued for public comment the draft Cholla permit, which memorializes APS’s proposal, and a proposed revision to the SIP, which would incorporate the new permit terms. APS is unable to predict when or whether APS’s proposal may ultimately be approved.”

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.