Washington State to PacifiCorp: No Profits from Propping Up Outdated Coal Plant

Shortly before Labor Day, the Washington Utilities and Transportation Commission (UTC) issued a remarkable order affecting two coal plants owned by Warren Buffett’s electric utility, PacifiCorp. First, the UTC accelerated the depreciation schedules—which approximate the estimated closure schedules—for both the Jim Bridger plant in Wyoming and the Colstrip plant in Montana based on a finding that “increasing legal, economic, and policy considerations limit[] the long-term viability of coal-fired generation plants.” Second, the UTC rejected PacifiCorp’s request to earn a profit on massive capital spending projects at the Jim Bridger coal plant because PacifiCorp failed to properly account for the deteriorating economic position of the plant. Together, these finding send a strong signal to PacifiCorp that it is time to move beyond coal.

Washington utility customers in PacifiCorp’s service territory pay for a portion of Jim Bridger and Colstrip, which are currently the two largest coal plants in the West.[1] Those plants have come under increasing pressure as coal units are hemorrhaging money in the face of increased competition from lower cost alternatives like wind and solar. Across the country, low cost wind and solar energy is driving coal plants out of business. Until recently, PacifiCorp has been largely insulated from those economic pressures because, as a monopoly utility, it is allowed to pass through most of its costs to its customers. However, regulators are getting fed up with the mounting costs to keep aging and dirty coal plants running. In 2012, the Oregon Public Utilities Commission disallowed $17 million requested by PacifiCorp for spending on its coal fleet. Then last year, Oregon passed landmark legislation that will require PacifiCorp to remove all coal spending from Oregon rates by 2030.

The recent order from the Washington UTC continued the trend away from coal. With the exception of Oregon, PacifiCorp is authorized by its state regulators to include a schedule that assumes Jim Bridger will operate until 2037 and Colstrip until 2046.[2] Those dates are too far away, and operating those coal plants until those unreasonable dates would irresponsibly contribute to harmful climate change and severely impede the Unites States’ ability to meet its carbon reduction commitments. Fortunately, the UTC recognized those concerns and, at the request of PacifiCorp and Sierra Club, agreed to accelerate the depreciation schedule, pointing toward an estimated closure date for the Jim Bridger plant in 2025 and the Colstrip plant in 2032. The UTC “agree[d] with the parties that the environmental and market pressures on existing coal-fired generation will continue in the future, and result in more accelerated retirements of coal plants.” (Docket UE-152253, Order 12 at 19.)

The UTC’s order also addressed a request by PacifiCorp to recover the capital costs and associated profits from the installation of expensive pollution control projects at Jim Bridger units 3 and 4. Those pollution control requirements were the result of a 2014 final rule issued by the U.S. Environmental Protection Agency (EPA) under the Clean Air Act’s Regional Haze Rule for Wyoming. Eager to find an investment vehicle for it parent company, Berkshire Hathaway, PacifiCorp had already prepared an analysis in 2012—nearly two years before the final rule was issued—purporting to show the “benefits” of spending hundreds of millions of dollars on its coal plant. By the time PacifiCorp filed its rate case in Washington, it had already sought and received pre-approval from its regulators in Utah and Wyoming to spend the money. Washington, however, was more skeptical.

Expert witnesses from the Sierra Club and UTC Staff dug into PacifiCorp’s analysis of the coal plant expenditures. The Club's and Staff’s analyses, conducted separately, came to the same conclusion: rapidly deteriorating natural gas prices and increasing coal costs had eviscerated the purported economic justification for spending any additional money on the Jim Bridger plant. However, despite the clear trends showing the declining value of coal relative to other alternatives, PacifiCorp had refused to update its modeling analyses to reflect the changing conditions. Instead, PacifiCorp clung to its initial analysis and claimed that the coal plants were still economic. The UTC did not buy it.

The final order reprimanded PacifiCorp for its failure to recognize the changing circumstances and rapidly declining economics facing the coal industry. As a result of PacifiCorp’s failure to meet its burden to show that it had prudently spent ratepayer money at Jim Bridger, the UTC determined that it would prohibit PacifiCorp from recovering a rate of return on those expenses. Investor-owned utilities like PacifiCorp make a profit by using private funds to invest in assets for the benefit of ratepayers. In exchange, the ratepayers pay off the amortized cost of the investment, plus a rate of return to the utility to compensate the utility for the capital it spent. Utilities their profit from this second piece, similar to a bank getting interest on a loan to a customer. The UTC’s decision was to allow PacifiCorp to recover the principal on the “loan,” but not the interest. As a result, PacifiCorp’s corporate shareholders will not be allowed to profit from its poor decision making on Jim Bridger. The reduction amounts to about $5 million per year, meaning that the total penalty could well exceed $20 million over the remaining life of the plant. The decision sends a strong message to PacifiCorp that it must carefully scrutinize its coal plant expenditures if it hopes to avoid similar penalties in the future.

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[1] PacifiCorp owns only a portion of Colstrip unit 4. PacifiCorp also owns and operates numerous other coal plants in Utah, Wyoming, Colorado and Arizona. However, Washington regulators wisely determined several years ago that those plants serving PacifiCorp’s eastern areas should not be included in Washington rates.

[2] PacifiCorp’s depreciation schedule applies only to Colstrip Unit 4, which is the only unit that PacifiCorp owns.