Managing stranded costs from premature coal plant retirements is becoming a more prevalent issue as US states and utilities adopt clean energy goals and pursue the replacement of older coal plants with new renewable energy facilities. New Mexico is one such state, codifying such intentions in its Energy Transition Act (ETA) of March 2019, requiring utilities to move to 80% clean energy by 2040.

In response, the Public Service Company of New Mexico (PNM) proposed to abandon its 497 MW share of the San Juan Generating Station (SJGS) and replace it with a combination of solar and wind renewable facilities plus storage and some gas-fired peaking resources. It also requested securitization of the undepreciated costs of SJGS and the associated transition costs, as the ETA allowed.

Brattle Principal Frank Graves, assisted by Principal Metin Celebi and Associate Long Lam, was retained by PNM to provide expert testimony in this proceeding. PNM’s plan was opposed by the New Mexico Public Regulation Commission (NMPRC) staff and some interveners who questioned the analysis of system costs and benefits; preferred that the plant be retrofitted with carbon capture, utilization, and storage (CCUS) technology for the purpose of enhanced oil recovery (EOR); and opposed the recovery of past investment costs through securitization. Mr. Graves’ testimony demonstrated the expected cost savings and risk reductions (hence prudence) of PNM’s plant abandonment and replacement portfolio plan compared to retrofitting the plant with CCUS.

Mr. Graves also noted that securitization is a beneficial approach for providing full cost recovery at low cost to customers. In this case, it would almost cut in half the carrying costs of sunk cost recovery compared to traditional cost of service recovery. Several states have recognized this advantage for both customers and utility investors and have enacted rulemaking or legislation that authorizes securitization for cost recovery of prematurely shutdown assets.

On April 1, 2020, the NMPRC unanimously approved and adopted the Hearing Examiner’s recommendations to abandon SJGS and to securitize up to $360.1 million of unrecovered investments and adjustment cost improvements.

This decision is beneficial for the state of New Mexico and PNM, and it also has value to the industry as a model for how to combine financial, environmental, and transitional economic elements into an excellent solution for modernizing and decarbonizing the generation fleet.