PNM outlines new San Juan agreements with Westmoreland Coal

If the New Mexico Public Regulation Commission can’t approve new coal supply and other agreements for a slimmed-down San Juan coal plant, then the whole plant will need to be shut by the end of 2017 with consequences that Public Service Co. of New Mexico is still evaluating.

Chris M. Olson, Vice President, Generation, for Public Service Co. of New Mexico (PNM), provided July 1 testimony at the commission in support of several new agreements to restructure the San Juan plant ownership and secure a new supply of coal beyond the end-of-2017 expiration of the current coal contract with international miner BHP Billiton. The new supply agreement is with Wesmoreland Coal, which plans to buy San Juan Coal Co. (SJCC) from BHP Billiton. SJCC has a coal mine right next to the San Juan power plant.

The key points in Olson’s testimony are:

  • All Coal Agreements have been fully executed. As a result, PNM has successfully secured a coal supply for San Juan through June 2022 that together with the ownership restructuring agreements results in very significant savings for PNM customers – approximately $340 million – beginning in 2016; and better ensures consistent coal quality to facilitate reliable San Juan operation. The new deal is called the Coal Supply Agreement and the existing one is called the Underground Coal Sales Agreement (UG-CSA).
  • Westmoreland Coal, the new miner and coal supplier, is a publicly traded company and one of the largest mining companies in North America.
  • The new agreements reduce fuel costs to customers in 2016 and 2017 and for balance of the term of the Coal Supply Agreement.
  • The power plant ownership restructuring agreements are expressly conditioned on the approval of the Certificate of Convenience and Necessity (CCN) for the 132 MW of San Juan Unit 4 that PNM wants to buy from another plant co-owner. “Unless the CCN is granted, San Juan will likely shut down when the UG-CSA expires in 2017,” Olson noted.

The UG-CSA is a cost pass-through agreement with respect to the operations and maintenance (O&M) costs incurred by SJCC which represent the majority of the costs under the UG-CSA. In theory, the cost pass-through structure created the potential for customers to benefit from any unforeseen reduction in operating costs but, in practice, this structure did not provide sufficient incentive for SJCC to actually achieve lower costs, Olson wrote. Furthermore, significant year-to-year variations in O&M costs created budgeting and planning uncertainty.

In contrast with the UG-CSA, the coal price under the new Coal Supply Agreement is fixed, subject to a quarterly adjustment, up or down, according to a specified methodology based on specified indices. Cost pass-through is only permitted with respect to a few limited items, including primarily taxes and royalties, which were also cost pass-through items under the UG-CSA. Aside from the fact that the lower overall cost of coal will directly benefit customers, the pricing structure of the Coal Supply Agreement eliminates the misalignment of interest that occurred under the UG-CSA and creates more certainty with respect to future prices for planning and budgeting purposes, Olson said.

SJCC is to be compensated for tons of coal delivered to San Juan up to a prescribed annual amount (the take-or-pay amount) at one price, while any additional tons delivered are priced at a reduced amount. In addition, the Coal Supply Agreement accounts for tons of coal previously mined but not delivered under the UG-CSA through a reduced price on these tons as specifically allocated during the term of the agreement.

As is common in the industry, the Coal Supply Agreement contains a take-or-pay obligation pursuant to which PNM must pay for an agreed minimum amount of coal on an annual basis. It provides for a fixed annual amount of tons for each year of the term (as well as the partial year of the final six months of the term). This annual amount is based on projected burn at San Juan and reflects the retirement of Units 2 and 3 by the end of 2017. The fixed annual amount is reduced by a specified allocation of the preexisting stockpile and then allocated on a monthly basis during each year of the agreement. PNM is required to pay for this allocated amount on a monthly basis regardless of the actual tons of coal delivered.

New agreement deals with recent coal quality issues

Westmoreland will be required to take a number of steps to deal with coal quality issues that have occurred in recent years. The conveyor at the mine exit (portals) is to be extended, which will provide for additional storage space for Westmoreland to utilize, both to reject low grade material and to separate the coal by quality ranges. In addition, an on-line analyzer and sampler will be installed, which will allow the system to be automated. A scoreboard for the loader and truck operators will provide instantaneous feedback for grade control. Similarly, coal samplers, on-line analyzers and scoreboards will be installed at the delivery point to San Juan, further enhancing the grade control program.

Westmoreland will also be required to conduct coal sampling throughout the mine to develop detailed mapping of geologic conditions and coal quality trends. The stockpiles will also be monitored regularly to aid in the grade control program. PNM can reject coal that does not meet the agreed quality specifications.

Coal quality variability has caused operational issues at San Juan in the recent past. The coal quality provisions under the Coal Supply Agreement will help assure the consistency of the coal quality, which in turn will result in even more reliable plant operations.

The term of the Coal Supply Agreement commences with Westmoreland’s buy of this operation, expected to take place by end of this year, and continues through June 30, 2022. That buy is contingent on the commission’s approval for the CCN for the 132 MW interest in San Juan Unit 4.

The Coal Supply Agreement allows for an extension beyond June 30, 2022, upon the mutual agreement of the parties. If PNM wishes to extend the Coal Supply Agreement, it must give notice by July 1, 2018, and the parties will enter into good faith negotiations. If an agreement on an extension is not reached by Jan, 1, 2019, the Coal Supply Agreement terminates on June 30, 2022.

There is also a new CCR Disposal Agreement that obligates Westmoreland, through SJCC, to dispose of the coal combustion residuals generated at San Juan as a result of the combustion of coal, in accordance with all applicable law and permits. The CCR Disposal Agreement will replace the existing Coal Combustion Byproducts Disposal Agreement (“Byproducts Agreement”) with SJCC.

“If the Commission does not grant PNM the CCN for the 132 MW in Unit 4, the San Juan ownership restructuring cannot proceed,” Olson wrote. “The failure of the ownership restructuring will preclude the implementation of the new Coal Agreements with the attendant loss of the significant fuel cost savings for PNM’s customers. The culmination of these events is the likely shutdown of all four San Juan units when the current UG-CSA expires at the end of 2017 and any remaining fuel inventory runs out. The shutdown of San Juan will deprive PNM customers of substantial benefits and cost savings that would otherwise be derived from the Coal Agreements. The further effects of such a shutdown will be addressed in PNM’s supplemental testimony by August 1, 2015.”

In 2013, PNM, in its capacity as San Juan Operating Agent, EPA and the State of New Mexico executed a non-binding agreement outlining an alternative best available retrofit technology (BART) determination under EPA’s regional haze program. The BART Alternative will require retirement of San Juan Units 2 and 3 by Dec. 31, 2017, and the installation of selective non-catalytic reduction (SNCR) technology for NOx control on San Juan Units 1 and 4 no earlier than Jan. 31, 2016.

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.