Arizona Public Service (APS) has captured the attention of the Western U.S. power sector with its plan to finance the economic transition of communities affected by the closure of its remaining coal plants.
Economic reality defeated the Trump administration's efforts to protect coal, and the energy transition is expected to accelerate under President-elect Biden. But few of the Western utilities already closing uneconomic coal facilities have taken commensurate financial responsibility for helping to transition the often profoundly affected communities. The $144.45 million long-term APS plan could be a game-changer, the utility and economic justice advocates agree.
Other transition funding plans are incomplete or offer much less compared to the size of the affected plants, Sierra Club Beyond Coal Campaign Western Region Director Evan Gillespie said. "APS is proposing to do what they are obligated to do and what so many other utilities are failing to do and it can change both the narrative and how utilities are held accountable going forward."
"This is a completely different utility under Jeff Guldner’s leadership, and this just energy transition package is Exhibit A."
Former Chair, Arizona Corporation Commission
APS’s "Just Transition Plan" is directed largely at Navajo and Hopi communities most affected by closure of coal plants co-owned by APS and would support "a solid economic transition," Navajo Nation President Jonathan Nez said in an email. It would "electrify homes, increase renewable energy projects, and promote economic development" and could make Navajo Nation lands "a renewable energy epicenter."
But there are two big questions to be answered. The first is whether the Arizona Corporation Commission (ACC) will approve a plan that imposes some costs on shareholders but could force APS rates up. The second is whether the ACC will allow APS to use the controversial financial strategy of issuing low risk bonds to limit ratepayers’ exposure to the financial burden from closing the plants.
The APS proposal
APS’s plan is the biggest expenditure for an equitable transition so far proposed in the U.S., according to APS and confirmed by Sierra Club’s Gillespie as well as by a survey by former ACC Chair Kris Mayes’ team at the Arizona State University (ASU) Energy Policy Innovation Council.
The investment is not for decommissioning, but is intended as assistance to Hopi and Navajo and other communities affected by the closure of coal plants in which the utility owns shares, APS spokesperson Lily Quezada said.
The $144.45 million settlement includes a $128.75 million package of benefits for the Navajo Nation, $12 million to Cholla communities, and $3.7 million to the Hopi Tribe, paid over five to ten years, according to an APS fact sheet. Ratepayers would pay $119.25 million and the $25.2 million balance would come from shareholders.
"$144 million is a significant amount of money and it may take work to get other stakeholders to understand what this is about."
Western Grid Group Director and Co-Director of the ASU Energy Policy Innovation Council
Before the APS proposal, the 2011 Washington state bill closing TransAlta’s 1,460 MW Centralia Power Plant was considered a landmark because it included a decade of lead time and a diverse package of investments. But APS’s $144.45 million far overshadows its $55 million in funding, Gillespie said.
The 2019 New Mexico Energy Transition Act was also considered "one of the better examples of a just transition," Gillespie said. It provided $40 million for clean energy, job retraining, and other investments related to the closure of the Public Service of New Mexico-owned 1,848 MW San Juan Generating Station.
The Act also approved using the type of bond issuance APS favors for financing the economic assistance, but its funding is significantly smaller and significantly later in the closure planning than the APS proposal, he said. "The APS proposal covers closures all the way out to 2030 and provides about $81,000/MW in transition support, compared to New Mexico’s $45,000/MW of coal."
Xcel Colorado’s $44 million transition package for closing two units of its Comanche facility in 2022 and 2025 was multifaceted but also much smaller than the APS proposal, Gillespie said.
The APS plan came from the utility’s commitment to "do what is right" while protecting its financial health, reliability, and pledges to be coal-free by 2031 and emissions-free by 2050, APS Chair and CEO Jeff Guldner testified Nov. 6 in the utility's ACC rate case proceeding to set rates from December 1, 2020.
Through discussions with communities that face "a negative economic impact" from coal closures, "APS has come to a thoughtful, meaningful agreement to assist this transition," he added.
Stakeholder input through the rate case will shape the final plan.
Transition funding would support job retraining and other regional economic development, the filing promised. APS will also solicit bids on "a minimum of 250 MW of renewable energy located on Navajo Nation land" within the 24 months of the plan’s finalization and on 350 MW more "no later than 12 months" after Four Corners is closed.
Using a combination of shareholder and ratepayer funds, APS will plan, permit and build ACC-approved distribution system expansions to the estimated 15,000 Navajo Nation homes without electricity, the filing added.
Potentially even more important is Guldner’s commitment to assist the Navajos in winning back water rights lost to the owners of the Navajo Mine. The worsening climate crisis will likely make those water rights increasingly valuable in the arid Southwest.
These commitments won endorsement for the plan from two key stakeholders.
"APS should commit in this rate case to providing at least $193.2 million in direct financial transition aid to Navajo communities," Navajo Nation’s Nez testified to the ACC Oct. 2. Though APS’s $144.45 million plan falls short of that, Nez sees "opportunity" for his community and he will be "making this case" in the proceeding, he told Utility Dive.
"This is a completely different utility under Jeff Guldner’s leadership, and this just energy transition package is Exhibit A," said former ACC Chair Mayes, now a professor of utility law and energy policy at ASU, director of its Utility of the Future Center and co-director of its Energy Policy Innovation Council.
Most stakeholders appear to agree with Mayes, though the critical response of the state’s customer advocate to APS's proposal remains tentative and the pace of the transition remains in question.
On proposals in which Arizona utilities impose significant customer costs, the Residential Utility Consumer Office RUCO) position tends to be influential.
RUCO wants a separate proceeding "to thoroughly investigate" the ratepayer impacts of APS's proposal, Hudson River Energy Group Principal Frank W. Radigan said in Dec. 4 testimony on behalf of RUCO. The need for a detailed investigation "is especially true" for the bond issuance APS wants to use to finance its plan, and "may take some time," he added.
The APS goals of being coal-free by 2031 and emissions-free by 2050 are "ambitious," Concentric Energy Advisors Executive Advisor Todd A. Shipman testified in the Nov. 6 APS filing. Though they will increase customer benefits and align with credit rating agencies’ focus on sustainability, they put stress on APS’s financial position and "make it more difficult to preserve ratings."
Some stakeholders, including the Sierra Club, have suggested replacing Four Corners with renewables and storage by 2026, APS VP for Resource Management Brad Albert added in the same filing. But that is not feasible because it "would increase planned energy storage additions by about 63% to 93%," which is "more than the entire U.S. [storage] industry installed through 2019."
Sierra Club now supports the plan, Grand Canyon Chapter Director Sandy Bahr said. It raised questions, largely about APS's cost allocation calculations, in its Dec. 4 testimony, but "this proposal shows APS is shifting away from fossil fuels to clean energy and now it is up to all of us to hold them accountable."
Securitization coupled with an efficient method to recycle capital "is in the best interest of both the Company and the customer."
General Manager, Regulatory Affairs & Compliance, APS
The APS proposal "may not be the best transition proposal," but it is "by far more comprehensive" in assistance for the Navajo Nation "than anything that has been done in Arizona," added Western Grid Group Director Amanda Ormond.
The inclusion of provisions for the Cholla plant’s closure shows APS "is thinking ahead and wants to settle everything in this case," Ormond said. "They want to know what it's going to cost to get an agreement and be done, with no more questions about workers or water or other issues."
A protracted debate about transition funding is ahead because "$144 million is a significant amount of money and it may take work to get other stakeholders to understand what this is about," she added. But once it is settled, "it may be possible to get other utilities to face the same obligations."
The fundamental debate is what share APS customers will pay for the transition, she said. "That is why the financial strategy of securitization, which can lower the cost to consumers and provide capital to use for addressing the transition, is part of the proposal."
Key proceeding stakeholders agree with Ormond that bridging the cost of transition and the justice issue for affected communities without imposing undue costs on customers may require securitization. But, they also agreed, if APS demonstrates its practicality, other utilities across the West could take advantage of it.
Securitization and who pays
Spending money to close coal plants early and to assist communities hurt by those closures produces no income for the utility but adds to its costs. That money has to come from somewhere. Two financial strategies, accelerated depreciation and securitization, can address such costs.
Accelerated depreciation primarily reduces costs for utility shareholders when assets are retired early by adding to customer rates to compensate for the losses of guaranteed returns and depreciation benefits.
APS prefers a bond issuance strategy called securitization, according to its filing.
Securitization allows the utility to create and sell bonds, potentially at very low interest rates, Saber Partners CEO Joseph Fichera said. Investors’ capital can pay off stranded assets and raise funding for other expenses without shareholder or credit rating impacts. If regulatory provisions require reinvestment of the recovered funds in lower operating cost renewables or other assets, it can further prevent upward pressure on customer rates.
Though shareholders have diminished returns, they can obtain new and better returns if they "reinvest the capital that was tied up in uneconomic investments," Fichera added.
It is an approach to coal closures that could work for other utilities and has worked for other utilities in other contexts, Fichera and other stakeholders said.
California provided the securitization option to resolve utility debt incurred during its 2000-2001 energy crisis and its September 2020 Assembly Bill 913 approved using it for the many extra utility costs from wildfires. Securitization has also been used in Florida for hurricane recovery and in New Mexico to finance the San Juan coal plant closure.
APS was asked to include an assessment of the two strategies in its transition plan filing by an Aug. 11 letter from ACC Chair Bob Burns.
There were two key findings from the APS-commissioned study that compared them, the Nov. 6 testimony of APS’s Albert reported. One is that "accelerated depreciation would increase customer costs." The other is that "modeling demonstrates potential savings in all securitization scenarios."
Critical to the success of securitization for APS would be an Advanced Energy Mechanism (AEM) that would allow cost recovery of reinvestments in clean energy, Albert said. That would be the capital reinvestment Fichera described. It would replace higher-cost coal generation with lower-cost renewable generation, helping to keep pressure on customer rates below 5%, Albert added.
But details about APS cost calculations for the mechanism require further clarification, according to the RUCO and Sierra Club filings.
Securitization has faced barriers where utilities and lawmakers opposed it "except for unusual expenses," Fichera said. But securitization coupled with an efficient method to recycle capital "is in the best interest of both the Company and the customer," APS General Manager, Regulatory Affairs & Compliance Kristie Cocco testified in the utility’s response to Burns.
And legislative approval, required in many states for the lowest interest on securitized bonds from ratings agencies, may not be necessary in Arizona, former ACC Chair Mayes said. Arizona’s elected ACC "could do it on its own authority, especially with the support from APS, the Navajo nation, and the environmental groups."
Overall, "the APS proposal can be a model for just energy transitions nationally because it is holistic and multifaceted and brings together everything from renewable energy purchases to electrification and direct aid," Mayes said.