Arizona’s power companies have been busy restructuring their generation portfolios to take advantage of existing coal-fired resources while complying with increasingly tough environmental requirements imposed by EPA. While coal remains an important fuel for generating low cost baseload electricity to serve Arizona consumers, APS, SRP and TEP are each implementing strategies to lower emissions of their fleet of coal plants. This is good news for the environment, for local economies dependent on power plant-related jobs, and for consumers.

APS Completes Four Corners Plant Transaction with Southern California Edison

On December 31, 2013 APS announced the completion of its transaction with Southern California Edison to acquire the California utility’s 48 percent share of Units 4 and 5 of the Four Corners Power Plant located in northwestern New Mexico. APS also shut down the older coal-fired units 1, 2 and 3, which will now enter decommissioning. APS has also agreed to upgrade environmental controls on units 4 and 5, which are cleaner and more efficient than the older units. With the transaction, APS now owns a 63 percent share of the Four Corners generating station and has substantially lowered air pollution levels at the plant. No workers at the plant will be laid off and the continued operations of the remaining units and nearby coal mining will sustain the local economy with economic value of $6.3 billion over 30 years of which 70 percent will benefit the Navajo Nation.

Earlier in the year, the transaction was in jeopardy stemming from the ACC’s inquiry into retail electric competition and the possibility that it could lead to stranded investment in generating resources. APS had indicated that uncertainty surrounding the ACC’s examination of retail competition caused it to put the deal on hold. However, in September, the ACC removed that uncertainty with its decision to close its investigation, thus paving the way for the transaction to move forward.

SRP Agreement with EPA on the Navajo Generating Station

In an arrangement similar to APS’ Four Corners Transaction, SRP has reached a tentative agreement with EPA to close one of three units at the Navajo Generating Station near Page, AZ in 2020 and implement additional environmental controls on the remaining units in 2030. According to the EPA, the agreement with SRP is more than adequate to meet environmental compliance. The environmental issues and related costs at NGS have been controversial since a large portion of the electricity generated by the plant is used to power the Central Arizona Project’s canals to bring water to Phoenix and Tucson from the Colorado River. The costs for additional pollution controls in 2030 will be reflected in higher water costs in the future.

The agreement has widespread support from a broad range of organizations, including government agencies, environmental groups and Native American tribes.

While the SRP deal with EPA is tentative, work remains on completing divestiture agreements with two other owners of the plant (Los Angeles Department of Water and Power and NV Energy) so that one of the three units can be shuttered. The California and Nevada utilities have indicated their intent to divest themselves of coal generation.

Additionally, several stakeholders, including Peabody Energy, which supplies coal for the plant, oppose the idea claiming EPA has no authority to force the plant to meet environmental standards that have no visible effect on regional haze. The Sierra Club also opposes the plan for different reasons. The hard-line environmental organization also opposed the Four Corners transaction.

UNS Energy: Springerville and Gila River Generating Station

As part of its forward-looking resource planning for Tucson Electric Power Company and UNS Electric, UNS Energy and its subsidiary, TEP have completed transactions to reduce its interests in the Springerville Generating Station and are negotiating to acquire a natural gas-fired combined cycle unit at the Gila River Generating Station.

At the end of this year, TEP will close on transactions that will complete conversion of approximately 50 percent of its leases of Springerville Unit 1, which expire in January 2015 into ownership interests. This will reduce TEP’s capacity interest in Unit 1 from 387 MW to 192 MW.

TEP is also in exclusive negotiations with Entegra Power Group to purchase Unit 3 of the Gila River Generating Station located near Gila Bend, AZ. GRGS Unit 3 is a 550 MW gas-fired combined-cycle unit. If successful, TEP anticipates the purchase to be completed by the end of 2014. In related news, the Canadian energy utility, Fortis has agreed to purchase UNS Energy in a stock acquisition. As part of the transaction, Fortis will assume $1.8 billion of UNS Energy debt and inject $200 million in equity capital. The merger will strengthen UNS Energy’s balance sheet and provide capital for the acquisition of GRGS Unit 3.

Concluding Thoughts

It’s clear leadership teams at Arizona’s electric utilities are not sitting on their hands waiting for the next environmental shoe to drop. In moving forward with thoughtful and innovative plans to reduce emissions at coal plants while preserving access to low cost baseload generating capacity, Arizona utilities are securing a low-cost and cleaner electricity future for Arizona consumers. It is the balanced approach to energy we need and expect.