Swepco Ratepayers Could Be on Hook for Cost of Turk Plant

by Jamie Walden  on Monday, Aug. 10, 2009 12:00 am  

PSC Chairman Paul Suskie: "If the Court of Appeals' ruling stands, I don't see how a plant can get built anywhere in the state of Arkansas, period."

If Southwestern Electric Power Co. can't complete its embattled John W. Turk Jr. coal-fired power plant in Hempstead County, Swepco customers in Arkansas and elsewhere could be on the hook for more than $876 million.

The case, now on appeal to the Arkansas Supreme Court, appears to hinge on three major issues, one of which could permanently alter the approval process for power plants in Arkansas.

In early 2007, three private hunting clubs and a family trust launched an offensive on the Turk plant, claiming it would harm the environment. In June, the plaintiffs won their case in the Arkansas Court of Appeals. The argument by Hempstead County Hunting Club Inc., Po-Boy Land Co. Inc., Yellow Creek Corp. and Shultz Family Management Co. targeted the approval procedure by the Arkansas Public Service Commission and simultaneously argued that Swepco didn't adequately document a need for the Turk plant or its evaluation of alternative locations.

The PSC regulates the construction and location of power plants under the Utility Facility Environmental & Economic Protection Act of 1973. A company must obtain a Certificate of Environmental Compatibility & Public Need, or CECPN, to build a plant.

The PSC also wields the authority to approve the transmission lines that transport the power generated by the plant.

Ever since legislators wrote the utility act in 1973, the PSC has interpreted the method of handing down these approvals in one consistent way. But recently the Arkansas Court of Appeals said the PSC has been doing it wrong all this time.

 

And/Or

The contentious clause grants the Public Service Commission exclusive and final jurisdiction "for the expeditious resolution of all matters concerning the location, financing, construction and operation of electric generating plants and electric and gas transmission lines and associated facilities in a single proceeding."

The PSC has, for the past 36 years, interpreted the "single proceeding" to mean an issue is heard solely by the commission. "Not in a district court or a circuit court here, not in front of one state agency here, have it all in one place," PSC Chairman Paul Suskie said.

Furthermore, the use of the word "and" in that construction - "electric generating plants and electric and gas transmission lines and associated facilities" - has led the PSC to handle the construction of a plant in one docket and the transmission lines in another docket. Despite the division of those hearings, the PSC thought it was following the law because the proceeding was held by one body.

The Arkansas Court of Appeals, however, interpreted that phrase to mean the plant construction, transmission lines and associated facilities should all be part of one hearing.

"Piecemeal consideration of all the matters concerning a generating plant and its transmission lines corrupts the spirit and letter of the law," the appellate court wrote.

Suskie said that Ed Dillon, an attorney with Entergy in 1973 who helped the PSC staff write the legislation, filed the first application for the White Bluff coal-powered plant in Redfield just months after the legislation was passed. Dillon, with first-hand knowledge of the law, separated the plant application from the transmission lines application.

"It's pretty compelling to me when the attorneys that wrote the law then months later apply it that way," Suskie said.

The Court of Appeals disagreed and was unmoved by the "we've always done it this way" argument.

"Significantly, the APSC's procedure of separating generating plants from transmission lines in CECPN proceedings has never been challenged in a court proceeding. The mere fact that the practice has gone unchallenged cannot create a presumption that it is proper," the appellate court wrote.

Suskie said the PSC contemplated the transmission lines in the first proceeding, but didn't approve the transmission line sites until the second hearing. However, he said that in the first proceeding to approve the plant, the PSC dictated certain rules that Swepco must follow when siting the transmission lines.

The PSC addressed the transmission lines "on the front end because in the orders, we put conditions upon it. And some of those conditions were, 'You could not run transmission lines over sensitive areas and the interveners' property,'" Suskie said.

In this case, the hunting clubs were some of those interveners.

The determination of the sites where the transmission lines would run, however, occurred during a different proceeding. And the plaintiffs argued that affected parties, such as property owners, should know the whole plan, including the sites of the transmission lines, before a plant is approved.

Part of the commission's duty, though, is to make the process "as expeditious as possible." Separating the hearings does just that, Suskie said.

"If you did all those at once, it would extend the time frame. ... It could easily run two years, but the statute requires the Arkansas commission to do it as 'expeditiously as possible,'" Suskie said.

"In the way this case was handled, the Turk plant was approved. And then after it was approved, [Swepco] continued with the processes for approvals, the air permit and so forth. Well, after that took place, we were still in the process of siting the transmission lines."

The PSC approved the Turk plant in November 2007, and then finally gave the nod to the plant's transmission lines in January.

The division of hearings can also be convenient for out-of-state businesses. Because a plant, depending on the size, can often take longer to build than the laying of transmission lines, the time needed to bring an operation online is shorter if a business can start earlier on the plant.

 

A Question of Need

Regardless of how the Supreme Court rules on the question of whether two PSC proceedings complies with the law - if, that is, the high court chooses to hear the case when it reconvenes after Labor Day - the plaintiffs still allege there is no need for the Turk plant. And proving need is one of the first hoops through which a utility provider must jump before getting a CECPN.

Charles Nestrud of Chisenhall Nestrud & Julian PA of Little Rock, which represents the groups challenging the project, pointed to Swepco's market in Texas.

Because transmission lines for the Turk plant cross state lines, Swepco also had to present its case before public service commissions in Texas and Louisiana.

"Swepco's need has deteriorated. In the Texas proceeding, they couldn't project that they needed this power plant because the need had evaporated," Nestrud said. "If you look at their latest [annual report], their wholesale sales are down, their retail sales are down."

Paul Chodak, president and chief operating officer of Swepco, disputed the notion that the need for the Turk plant had disappeared.

"Now, have we seen an economic downturn? Sure, we've seen an economic downturn. But we're building this plant to last the next 40 years, really the next 60 years," Chodak said. "So what the economy does in a two-year time frame is not the basis by which you build a plant."

Nestrud also contended that a natural gas plant makes more fiscal and environmental sense than a coal plant.

"We believe that now with the cost of this plant having escalated the way it has, with the gas prices having decreased below anybody's projections, and with the cost of carbon-capture for coal plants, this plant could never survive in a cost comparison of alternatives," Nestrud said.

Chodak said Swepco aims for energy diversity with a current portfolio of 60 percent coal plants and 40 percent natural gas facilities.

"To point to one summer where natural gas prices are low - and I'm sure they're forecasted to stay low into the future - I would urge you to go back and look at what gas prices were last year," Chodak said.

"The certainty about forecasts is that they are wrong. I don't know if they are wrong high or if they're wrong low."

 

Alternative Locations

Finally, the Court of Appeals cried foul at the treatment of alternative locations during the process.

"Swepco's application states that the Hempstead site was selected because it was large enough to accommodate the facility, had water supply, had nearby rail access, and had a property owner willing to sell," the appellate court wrote. "The other sites were not mentioned.

"Staff witness Clark Cotton admitted that Swepco's [environmental impact statement] did not contain a description of the comparative merits and detriments of each alternative location as required" by a section of the utility act.

Plaintiffs' attorney Nestrud agreed. "They didn't look at need and compare that to environmental impacts and to alternatives that were available. So when all that occurs, I don't agree that it's a forgone conclusion that they're going to get a certificate."

Court of Appeals Judge Josephine Linker Hart, in her concurring opinion, addressed what has become a major point of controversy in the case: why the "mostly idle" Union Power Station plant in El Dorado, owned by Entegra Power Group LLC, wasn't considered as an alternative location.

Suskie said that Entegra didn't bid on the Arkansas project and thereby fulfill certain requirements held by the Louisiana Public Service Commission. For the past 10 years, the Federal Energy Regulatory Commission has required utilities to plan by region because transmission lines cross state borders, multiple states are involved in approving a project like the Turk plant.

"The [Louisiana commission] asked for proposals to meet that need, and Entegra never bid."

Arkansas and Texas didn't require Swepco to solicit bids.

Entegra later tried to intervene in the Arkansas docket. Though Suskie wasn't on the PSC at the time, he said the commission saw that move by Entegra as an attempt to block a competitor from entering the market.

"They didn't bid at the proper time. And then they wanted to intervene in the Arkansas docket essentially to block the plant from being built because it's competition," Suskie said.

 

Holding the Bag

Although Swepco, which has 113,500 customers in Arkansas, has the most cash in play, other parties stand to be affected by the outcome of the case.

The Arkansas Electric Cooperative Corp., which has about 490,000 Arkansas customers, has a 12 percent ownership stake in the plant.

If the Supreme Court takes on the case and sides with the Court of Appeals, Swepco would be forced to restart what has been a multiple-year application process. And if plaintiffs' attorney Nestrud is right and Swepco can't demonstrate a need for the plant this time around, customers would be left holding the $876 million bag.

According to Swepco's most recent quarterly report, the company would seek to increase its rates to recoup $136 million in contract termination fees plus whatever it has invested in the plant thus far. Swepco had spent more than $740 million as of last week on the Turk plant, spokeswoman Kacee Kirschvink said.

"If the Turk Plant cannot be completed and placed in service, Swepco would seek approval to recover its prudently incurred capitalized construction costs including any cancellation fees and a return on unrecovered balances through rates in all of its jurisdictions," the filing states.

So what are the possible outcomes? Suskie said the Supreme Court could kick the case back to the PSC for more hearings, uphold the PSC's procedure or support the appellate court's decision.

"If the Court of Appeals' ruling stands, I don't see how a plant can get built anywhere in the state of Arkansas, period. Whether it's a solar farm, a wind farm, you're going to have to have, I think, amendments to law," Suskie said. "Because of the way the Court of Appeals interpreted it, you would have to have a fundamental rewrite."

 

 

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