October 24, 2017
Over the last decade, there has been much discussion about “zombie” homes, residences where the home owners just walked away, leaving behind an uncared for house that neighbors soon claimed was dragging down housing values. Eventually some states and municipalities stepped in to force responsible entities, in this case banks holding the mortgage, to take responsibility for maintaining the property and get it ready for sale or demolition. Due to the rapid pace of coal-fired power plants closures, similar fears are being expressed that these plants will become much larger, and potentially much more dangerous, “zombies.” Over the last two years, three states have adopted laws aimed at inserting the states into decisions being made about the future of these power plant properties.
Five hundred and thirty-one coal-fired power plants retired in the United States between 2002 and 2016. Many more are scheduled to close in the next five years. As we discussed on in What Happens to a Coal-Fired Power Plant When it Stops Being a Power Plant?, these plants are typically not only major employers in their area, but also one of the largest property and school taxpayers in any area. In Moving Former Coal-Fired Power Plants from Retirement to Demolition , we mentioned that while some of these properties will be repowered to natural gas, or converted to wind or solar generation farms, most of them do not have a future in power generation. Under current law in most states, there is no requirement to go beyond “last one out turn off the lights and lock the door” at these shuttered plants, although power plant owners generally do at least minimal upkeep on these properties. Recently however, several states have enacted legislation intended to accelerate and regulate the closing process. A prime example of this is legislation enacted earlier this year in Montana, which, along with legislation enacted in 2016 in the State of Washington, illustrates how states may drive power plants closure, including the timing and extent of decommissioning, abatement and remediation.
The Colstrip Power Plant, located in Montana, has six owners and supplies electricity to at least three different states. It has two older units and two relatively new units. The two oldest units (Units 1 and 2), which came online in 1975 and 1976, are jointly owned (50% each) by Talen Energy and Puget Sound Energy (PSE). Ownership of the newer Units (3 and 4) is split multiple ways between Talen Energy, PSE, Portland General Electric (PGE), Pacific Corp, Avista Corp and Northwestern Energy. The debate, which we discussed in a 2015 Alert, as to when various units at Colstrip should close continued to take up lawmakers’ time in both Washington and Montana in 2016 and 2017. However, the market and other external pressures inserted themselves and, by the end of the 2017 legislative sessions, both states had actively inserted themselves into the decision-making process.
In July 2016, Talen Energy and Puget Sound Energy (PSE), owners of the older Units 1 and 2, announced that they had reached an agreement with environmental groups to shut down these units no later than July 2022. The agreement settled a 2013 lawsuit brought by the Montana Environmental Information Center and the Sierra Club alleging violations of the Clean Air Act at Colstrip. PSE has estimated that the cost to close Units 1 and 2 to be between $130 and $200 million. More recently, Talen Energy has indicated that it wants to exit its role as Colstrip’s day-to-day operator by mid-2018. Unless a new owner/operator is found, it appears that these two units may close next year.
During 2017, Washington seemingly reversed itself from its push for early closure of the Colstrip plant that we discussed in our 2015 Alert. In 2016, Washington established a pathway for the transition of “eligible coal units” by passing Senate Bill 6248, allowing decommissioning costs to be recovered from Washington ratepayers, but only for coal plants that remain open for another five years. The bill set up a process through which an electric company can place amounts equal to one or more regulatory liabilities into a dedicated account to be used solely to cover decommissioning and remediation costs. The new law defines an “eligible coal plant” as one that had two or fewer generating units as of January 1980 and four units as of January 2016, clearly targeting Colstrip Units 1 and 2. As passed, it was clear that the Washington Legislature wanted to create an incentive to keep Colstrip in operation until the end of 2022 or beyond.
As passed, the bill included a provision that funds placed into this new account could not be authorized for use in decommissioning and remediating units placed into operation before 1980 if those units closed prior to the end of 2022, unless it is proven that continued operation is (a) economically or technologically unfeasible, (b) requires a capital investment that is demonstrated to be non-prudent or (c) the plant has reached the end of its useful life. This attempt to incentivize keeping the Colstrip Units 1 and 2 open was thwarted when the clause limiting when the dedicated funds could be used was vetoed by the governor who stated that “this section inappropriately changes the long-standing definition of how the [Utilities and Transportation Commission (UTC)] determines whether utility investments and expenses are prudent.” According to a news report, with this veto, Puget Sound Energy, the Washington-based owner of half the two older Colstrip units, can both put money aside for the future decommissioning and remediation of the older units and then only have to go through the typical prudency review process to get UTC permission to use the reserved monies whenever it decides to close these units.
During 2017, Montana, recognizing that some or all of Colstrip was likely to close within the next five years, passed a series of bills aimed at trying to make sure that closed power plants were properly and promptly decommissioned and remediated, that it had a say in how Washington ratepayers contributed to these costs and to set up a mechanism to make loans to municipalities impacted by the closure of a coal-fired power plant. In brief, these bills, all of which were passed and were signed into law, specified:
These newer units have both longer planned life expectancies, with at least one of the minor owners of these units estimating that these plants will last until 2046. While there is some ertainty that Colstrip Units 1 and 2 will be retired sometime between 2018 and 2022, there is still significant debate ongoing about when the newer units will be closed. In addition to the new Washington law and most of the new Montana laws, which will also apply to the eventual retirement of Units 3 and 4, Oregon also weighed in.
In 2016, Oregon continued to push for an end to coal-fired electricity by amending its Renewable Portfolio Standard to, in essence, force the “Elimination of Coal from Electricity Supply.” The law was focused mainly on the Colstrip Power Plant Units 3 and 4, which, while located in Montana, also supplies electricity to Oregon through both Portland General and Pacificorp. This bill requires Portland General and Pacificorp to no longer have coal in their Oregon resource mix by January 1, 2030. An industry news account indicates that this legislation also sends a strong signal to other Oregon utilities that “coal is not welcome in the state.” The new law forces the state’s “Electric Companies,” entities that distribute electricity (excluding entities that are owned by consumers), to eliminate electricity generated from coal from their “allocation” by 2030. In order to allow this to be done in an orderly fiscal fashion, it directs the State Public Utility Commission to approve any requested modified schedule of depreciation for a large electric company’s coal-fired resources, as long as the plants are fully depreciated by the end of 2030. As a carrot to closing early, decommissioning and remediating coal-fired power plants, it allows electric companies
to include in the company’s allocation of electricity the costs and benefits associated with the coal-fired resource …[ if]the owners of the coal-fired resource agree to close the coal-fired resource on or before five years after the date the coal-fired resource is fully depreciated. […Further] “this section does not prevent the full recovery of prudently incurred costs related to the decommissioning or remediation of a coal-fired resource or the closure of a coal-fired resource, at the time those costs are incurred.
Thus, even if the coal-fired power plant is owned by an entity other than an “electric company,” the electric company can pass along “prudent” decommissioning and remediation charges to its ratepayers, but only for decommissioning and remediation work that is done within five years of when the plant is fully depreciated.
Because it is unlikely that there will be a broad-based federal program to address coal-fired power plant closures in the near term, a number of states are moving ahead with their own legislative and regulatory initiatives to address the issues presented by the legacy plants within their borders. While it is too early to tell if the approach taken by states like Washington and Montana will become templates for other states, these legislative initiatives bear watching.
The foregoing has been prepared for the general information of clients and friends of the firm. It is not meant to provide legal advice with respect to any specific matter and should not be acted upon without professional counsel. If you have any questions or require any further information regarding these or other related matters, please contact your regular Nixon Peabody LLP representative. This material may be considered advertising under certain rules of professional conduct.
Energy Law Alert | 04.30.19