Colorado legislation seeks to retire aging plants while softening local job and tax impacts
Energize Weekly, May 3, 2017
The utility industry is going through a time of transformation as it moves away from older generating units—coal-fired and in some cases, nuclear—to newer technologies such as combined-cycle natural gas and renewable resources.
With that change can come not only expense, but economic and social dislocations as communities lose tax base and jobs.
In Colorado, legislation designed to help finance not only the transition—aiding with plant retirements and purchase new generating capacity—but also to soften the impacts on workers, municipalities and counties.
The bill, the Colorado Energy Impact Assistance Act, is sponsored by two state representatives, Chris Hansen (D-Denver) and Daneya Esgar (D-Pueblo), and it takes an old staple of the industry, the utility cost recovery bond, and gives it a new wrinkle.
The bonds are secured by ratepayers’ payments to the utility. As such, the bonds can command top credit ratings, a minimum of AA/Aa2. This reduces the financing costs. These bonds have been used for years in financing the retirement of plants.
“Securitized bonds split the difference between the ratepayer and the utility,” said Travis Miller, a utility industry analyst with Morningstar, Inc. The “worst thing” for a utility is when a public utilities commission disallows the unamortized value of an old facility, Miller said. For ratepayers, the worst thing is having to pay the full cost of the asset.
Duke Energy is using $1.3 billion in utility cost recovery bonds to retire its Crystal River Unit 3 nuclear plant in Florida, and Michigan’s Consumers Energy is planning to use $390 million in securitized bonds to retire a 950-megawatt coal-fired plant.
“Because the bonds behave like tax bonds, they get access to capital at lower costs,” Miller explains. “They have been widely used and not just for plant retirements.”
Entergy Louisiana and Entergy Gulf States, for example, have sold $1.65 billion in bonds to cover storm costs.
The Colorado legislation’s innovation is taking a percentage of the savings from the cheaper bonds and creating a fund to mitigate the impacts of a plant closure on workers and communities. “In many of these towns, the utility plant is the biggest property taxpayer and employer,” Hansen said. “Losing that plant can have a big local impact.”
Towns and counties that lose tax base could apply for transition assistance and laid-off workers receiving retraining are other forms of assistance. The bill would create a state energy impact assistance authority to administer the program, and the Colorado Public Utilities Commission would be responsible for reviewing each proposed bond, holding public hearings and quantifying the benefits to ratepayers of each issue.
The bonding would limited to the state’s two investor-owned utilities, Xcel Energy and Black Hills Energy.
Colorado has seen a string of coal plant retirements. Xcel Energy, the state’s largest electricity provider, shut 900 megawatts of plants under the Clean Air-Clean Jobs Act. The Tri-State Generation and Transmission Association, a wholesaler serving rural cooperatives, agreed in September to shutter 527 megawatts of units in western Colorado.
The key to the bonding mechanism is the spread between the utility’s cost of capital and the lower interest rates of the securitized bonds, plus the improvement in operating costs as older, more costly generation is replaced with newer and cheaper generation.
An analysis of how the bonding and impact fund would work was developed by Uday Varadarajan, a principal in the energy finance program at the Climate Policy Initiative, a non-profit think tank.
“For an asset retired 20 years before its scheduled retirement date, our analysis suggests that for every $100 million in unrecovered costs securitized, ratepayers can save roughly $50-$57 million . . . relative to business as usual (i.e. return on and of capital to the utility for the $100 million over the remaining 20 year life),” Varadarajan wrote in an email.
As for the development of the impact find, which would equal 15 percent of the bond proceeds, Varadarajan said, “The savings used to calculate the 15 percent for an investor-owned utility using securitization come from reduced capital costs associated with financing unrecovered balances using low cost debt financing through securitization at roughly 3 percent versus utility financing at a pre-tax effective financing cost closer to 11 percent. For the example of $100 million in unrecovered costs, securitization would result in savings of $57 million, 15 percent of which would be $8.5 million. This can then be added to the amount securitized, resulting in a $108.5 million bond offering. This still provides $50 million in ratepayer savings, but $8. 5 million of the bond proceeds are available to mitigate impacts of plant closure.”
Hansen said there are also operating savings to be gained from older, more expensive plants being replaced with cheaper alternatives.
“Older units can cost $50 a megawatt-hour, with the expense of fuel and higher maintenance costs,” he said. “Wind, solar and gas are around $35 a megawatt-hour. It is a different cost structure . . . a tremendous saving for Colorado.”
The bill was reported out of committee April 26 on an 8-to-5 vote, with Republican members of the House Transportation Committee expressing skepticism over the bill.
It was supported by the International Brotherhood of Electrical Workers, which represents workers at power plants in Colorado. The Colorado Mining Association opposed the legislation. “The bill will incentivize the retirement of coal plants,” said Dianna Orf, a spokeswoman for the association. Neither Xcel Energy nor Black Hills Energy testified. The utilities indicated that they were neutral on the bill, Hansen said.
The bill is up for consideration by the full, Democratic-controlled House. If it passes, it would go to the Republican-controlled Senate. “This could be challenging in the Senate,” Hansen said.
More of a hurdle may be the fact that time is running out as the legislature is set to adjourn on May 10. Hansen said he is ready to file the bill next session if need be.
And Varadarajan said that it is worth the effort. “The approach being pursued in Colorado could be a template for how to mitigate the impacts of power plant retirement in states across the country.”