Montana’s Rosebud coal mine and Colstrip power plant have been legally tied since the 1970s. The two are located right next to each other, and coal travels on a conveyor belt from Rosebud to produce power at Colstrip.
As Travis Kavulla, formerly with the Montana Public Service Commission, puts it: “They’re kind of meant for one another.” Like coal soulmates.
Recently, that relationship has come under strain. Rosebud’s owner, Westmoreland Coal Company, is in Chapter 11 bankruptcy and on Monday announced its creditors would take ownership of the mine. The company’s contract with Colstrip owners also expires this year, and “it’s clear as mud what’s going to happen” in its renegotiation, according to Anne Hedges, deputy director of the Montana Environmental Information Center.
Colstrip faces its own issues. Many of the plant’s six utility owners serve customers in Washington and Oregon and are looking to move away from coal altogether. They’ve prepped for parts of the plant to close as early as 2022. Just one owner, NorthWestern Energy, a South Dakota-headquartered utility with 374,000 electric customers in Montana, wants to keep using its portion of Colstrip into 2042.
Now, the Montana legislature is considering a controversial law, Senate Bill 278, that would put customers on the hook for NorthWestern’s future Colstrip-related costs whether it retires or not. It would also allow the utility to buy portions of Colstrip from the other utility owners for $1. So far, it’s already made it through one state Senate committee and has been assigned to another.
“This bill would be comical had it not actually passed out of the Senate Energy committee,” said Kavulla, who is now director of energy and environmental policy at the R Street Institute, a free-market think tank. “I have honestly never seen a piece of legislation that is so completely ridiculous in the political balance that it tries to strike.”
Montana has plentiful wind assets, and Colstrip owners are looking for cleaner energy portfolios. Closing the plant would also mean the loss of hundreds of jobs in a small community, while remediation costs to clean it up are estimated in the hundreds of millions. The country is also coming off another year of high coal retirements.
The debate, which focuses on one of the largest coal plants in the West, ties together many of the threads concerning the energy industry at large: deciding who should be held responsible for possibly stranded assets, how to make sure coal retirements don’t hurt workers or the local economy, and how clean energy might fill in when coal does leave.
“We’re headed for a train wreck in Montana,” said Hedges. “The vast majority of owners of the Colstrip plant are out-of-state utilities that want to replace coal with clean energy. And if Montana doesn’t figure out a way to help them do that in this state, they’re going to go get that clean energy in a different state — and they’re still going to close Colstrip.”
A current bill and past concerns
Currently, NorthWestern owns 222 megawatts of the plant’s total 2,094 megawatts. The utility paid under $200 million for that share.
In 2008, NorthWestern asked the Montana Public Service Commission (PSC) to rate-base that investment, but at a price over $400 million. The cost was based on a competitive bidding process: NorthWestern had agreed to sell its interest in Unit 4 and enter into power-purchase agreements with Bicent, another power company. The terms of the deal allowed NorthWestern to first see if the commission would accept Colstrip as an electricity supply resource. The PSC obliged, at the higher price, and the Bicent deal was canceled. The costs were passed on to Montana ratepayers.
Hedges called the Bicent deal “a cheap trick” to get more money from the commission.
SB 278 comes just after NorthWestern has filed another rate case, its first in 10 years. In addition to increased rates, the company is asking the commission to rate-base Colstrip investments again, this time the $42.6 million it spent between 2009 and 2017.
Those costs are part of why SB 278’s detractors are so wary of the law. Hedges suggested the bill gives the utility further opportunity to “reach into everybody’s pocketbooks and pay itself as much as it wants.”
In recent testimony before the PSC, Ronald J. Binz, a former chairman of the Colorado Public Utilities Commission and now a consultant, said between 2008 and 2018 the state’s ratepayers paid “approximately $223 million (nominal) in excess revenues beyond NorthWestern’s actual costs for Colstrip Unit 4.”
Critics say the law also reduces regulatory oversight from the PSC, which generally has to approve spending for regulated, investor-owned utilities like NorthWestern. Diego Rivas, a senior policy associate at the NW Energy Coalition, an energy and conservation organization, argued that overriding the commission’s authority might allow NorthWestern to move forward with “imprudent expenditures in order to keep the plant operating.”
“That is not how regulation works,” he said.
NorthWestern told GTM that if the law does pass, it may choose to buy a larger share of Colstrip. In a Monday op-ed, the company's CEO said it "would buy no more than an additional 150 megawatts from Unit 4."
“Our Resource Procurement Plan has identified a significant need for capacity and flexible capacity,” said a spokesperson in an email. “Some additional amount of cost-effective power from Colstrip can partially offset this need, especially if it only costs $1 to purchase.”
Rivas noted, however, that the $1 purchase price doesn’t include fuel or operation and maintenance costs, which would also trickle down to customers.
Because of the uncertainties around Colstrip’s coal supply, the high cleanup costs already associated with the plant, and competitive electricity prices from renewables, Hedges said increased investments in Colstrip only make sense for the utility if ratepayers are again footing the bill.
“Buying more of the plant is only going to work for NorthWestern if they’re held harmless and their ratepayers have to pay every last penny,” said Hedges.
Defining “useful life” and owning risk
Two of Colstrip’s units are now slated to close in 2022. Puget Sound Energy, a Washington utility that owns the majority of Colstrip, is preparing to close the rest of the plant by 2027. The other Northwestern utilities that have ownership in the plant, Portland General Electric, Avista and PacifiCorp, are also preparing for exits, in part because of state policies that require a transition away from coal.
Pennsylvania-base merchant generator Talen Energy, which operates the plant, mostly owns capacity from the units set to close in 2022.
That leaves NorthWestern alone in its assumption that Colstrip’s “useful life” will last into 2040. The utility is depreciating its investment through 2042, but said Colstrip’s use may “extend beyond that date.”
Clean energy advocates suggest competition from wind energy might make Colstrip a stranded asset much sooner.
According to NorthWestern, the plant “produces power at a variable cost of less than $20 per megawatt-hour.” A 2017 report from the state’s Consumer Counsel, however, showed that between 2016 and 2017, Colstrip’s costs topped $70 per megawatt-hour. In March, NorthWestern signed a wind power-purchase agreement at $21.03 per megawatt-hour. The utility currently has 538 megawatts of wind in its portfolio and 309 megawatts of coal power.
In a 2019 report, NorthWestern said modeling scenarios on its future resource needs also showed that adding that capacity with carbon-free resources would cost $523 million more than using natural-gas resources.
But according to Kavulla, the debate isn’t really about wind versus coal. Instead, he said, the question is whether utilities and their shareholders should be held liable for risky investments or whether that responsibility should fall to consumers.
“The big problem in U.S. power markets right now is there’s a big oversupply, and consumers are paying for a hell of a lot of stuff they don’t really need,” said Kavulla. “Realistically, we could all use a little bit more belt-tightening before we allow utilities to go on a spending spree.”
“Utilities need to own the risk of their bets,” he added.
Warning flag for a transitioning energy system
The grim outlook for coal raises the stakes. According to the Energy Information Administration, 2018 coal consumption hit a 39-year low because of plant retirements and competition from natural gas and renewables. The path Montana takes on SB 278 could serve as a model or a warning flag for a transitioning energy system. Wyoming, too, just passed a bill allowing utilities to recover costs tied to coal-replacement plants if they make an effort to sell the coal facilities rather than retire them.
Aside from the Montana bill’s unknown fate in the legislature, it’s also unclear what Democratic Governor Steve Bullock — who may join the 2020 presidential race — would do if it passed. Marissa Perry, Bullock's press secretary, said the governor is “closely monitoring the legislation” but did not respond to a question about whether he had a position on the law.
Though he said there are no “magic or perfect solutions for Colstrip,” Jeff Fox, Montana policy manager at the nonprofit Renewable Northwest, pointed to examples of utilities like Xcel Energy and Montana-Dakota Utilities Company “that have taken a more visionary and action-oriented stance” in planning for coal closures.
“The first thing that all utilities should seek to do is to take a no-regrets approach,” said Fox. “That means not locking themselves into continued fossil fuel contracts or making a rush to natural gas.”
Kavulla said the conflict comes down to what consumers should really be paying for and who shoulders the risk of utility decisions. The conundrum has intensified as certain resources, like coal, face difficulties in a changing marketplace.
“I think the big lesson is: Don’t let utilities invest in long-term speculative bets,” said Kavulla. “Consumers have ended up being treated like a piggy bank to finance the speculation. That’s a bad thing. It makes utilities sloppy, and it causes them to buy things that consumers don’t need.”