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Heading into HB 1365 Crunch Time, A Rundown of Who Is Hoping for What

As reported yesterday by Mark Jaffe in the Denver Post, the PUC on Monday partially ruled on Xcel’s HB 1365 implementation plan. Nothing controversial was determined; instead, the PUC approved elements that were common to all of the plans “on the table.”*

The disputed subject matter was left for today—namely, what is to be done with the 352 megawatt Cherokee 4 plant in Adams County?

Heading into crunch time, here’s a rundown of who wants what and why.

What Xcel Wants:

Xcel has two goals. First, it wants to build as much stuff as possible. The more it builds, the larger the expenditures on which it can reap a 10.5% rate of return. Xcel’s second goal is to seize an increased share of the wholesale electricity market at the expense of independent power producers. Currently, Xcel generates 50% of the power it sells, and it wants to increase that figure to 60%.

In order to furthest advance these goals, Xcel wants to retire Cherokee 4, and in its stead build a 314 megawatt 1×1 combined cycle natural gas plant in 2017. That way, Xcel would get a 10.5% return on the construction costs of building a $345 million new gas plant AND it would increase its share of the wholesale electricity market by almost 140 megawatts (assuming Xcel converts the 1×1 combined cycle plant into a 2×1 combined cycle plant, as it has said it intends to do). This strategy is embodied in Plan 6.2J.

The next most attractive option for Xcel would be to outfit the Cherokee 4 power plant with advanced nitrogen oxides controls. While the utility wouldn’t get a rate of return on building a new power plant, it would increase Xcel’s share of the wholesale electricity market by 130 megawatts. This strategy is embodied in Plan 5B.

Why Xcel Wouldn’t Get What It Wants:

In the words of PUC Chairman Ron Binz, Plan 6.2J is “tainted.” Here’s why. From August 13 to October 18, Xcel argued that the Cherokee site was too crowded to retire Cherokee 1-4, build a 2×1 combined cycle gas plant, and build a 1×1 combined cycle before the 2017 deadline established by HB 1365. That’s why Xcel’s original, preferred plan (Plan 6.1E) waited until 2022 to replace Cherokee 4 with a 1×1 combined cycle natural gas plant.

However, the PUC disqualified Plan 6.1E for this very reason (because the replacement of Cherokee 4 occurred after the 2017 deadline). Then, on October 18, after the PUC had disqualified Plan 6.1E, Xcel witness Greg Ford announced that the utility had made an engineering breakthrough that allowed for the construction of a 1×1 combined cycle natural gas plant to replace Cherokee 4 by 2017. On October 25, Xcel issued Plan 6.2J, which is really just an accelerated version of its original, preferred Plan 6.1E.

Xcel’s about-face on the feasibility of building a new 1×1 combined cycle natural plant by 2017 was suspicious enough, but Plan 6.2J was further sullied by a major discovery blunder. On November 19, it was revealed that Xcel had withheld from the other parties (inadvertently or otherwise) almost 56 megabytes of data on the engineering details of Plan 6.2J.

As a result, Plan 6.2J is problematic for two reasons. First, the plan’s engineering strategy is still inchoate, so there’s a significant risk of construction delays and attendant cost overruns. Second, Xcel’s discovery gaffe leaves Plan 6.2J vulnerable to litigation on due process grounds.

Regarding Plan 5B, the primary inhibition is that it keeps Cherokee 4 open through 2030, which is off-putting to environmentalists, the Governor’s office, and the Colorado Department of Public Health and Environment.

What Independent Power Producers Want:

An IPP is a company that generates and sells electric power on the wholesale market. Typically, they contract with utilities to supply electricity over long time frames. There are two IPPs with money at stake as a result of HB 1365—Southwest Generation Operating Company and Thermo Power and Electric. Each IPP is in danger of being “stranded” because they have contracts with Xcel that expire from 2011-2017, the implementation period for HB 1365.

Southwest Generation and Thermo Power want the PUC to retire the 352 megawatt Cherokee 4 power plant. For replacement generation, they recommend that Xcel build a 70 megawatt “peaker” natural gas power plant, and that Xcel renew contracts with Southwest and Thermo Power to provide the remaining replacement generation. This strategy is embodied in Plan IPP2.

Why IPPs Wouldn’t Get What They Want:

Interestingly, no parties have objected to IPP2.

What the Governor’s Energy Office, Environmentalists, and the Colorado Department of Public Health and Environment Want:

All three of these parties have recommended that the PUC adopt Plan 6.2J. They share the same reasoning: Plan 6.2J achieves the greatest emissions reductions of nitrogen oxides and greenhouse gases. At the very least, they are pushing for the retirement of Cherokee 4.

What Peabody and the Colorado Mining Association Want:

HB 1365 is legislation designed to reduce coal’s share of the Colorado electricity generation market. As such, coal has nothing to gain and everything to lose. Of course, they prefer Plan 5B among the plans being considered, because it would keep open the most coal plants, but in practice, their strategy during the proceedings has been to use every legal trick at their disposal to muck up the deliberations. And who can blame them? If the state enacts a law inimical to a business’s bottom line, then that business can and should use the legal process to protect its interests. Whatever the PUC decides, expect coal interests to litigate.

Will the PUC Punt?

According to Jaffe’s Denver Post write-up, PUC Chairman Binz expressed interest in a plan that would fuel switch at Cherokee 4 (the boilers at most coal fired power plants can be converted to run on gas, although it is inefficient relative to a new natural gas plant). This is Plan 6E FS. Evidently, Binz intimated that the merit of this plan is that it postpones a tough decision—namely, whether to replace Cherokee 4 with an Xcel build natural-gas plant, or a new contract with IPPs.

William Yeatman is an energy policy analyst at the Competitive Enterprise Institute

*Specifically, here’s what PUC decided on Monday. It approved the retirement of the following coal-fired power plants: 107 megawatt Cherokee 1 in 2011; 106 megawatt Cherokee 2 in 2011; 152 megawatt Cherokee 3 in 2017; 45 megawatt Arapaho 3 in 2013; and the 187 megawatt Valmont 5 in 2017. As replacement generation, the PUC determined that Xcel may switch the 111 megawatt Arapaho 4 plant from coal to natural gas in 2014, and the utility also may construct a 569 megawatt natural gas plant at the Cherokee site by 2015.