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Arizona utility seeks investors to reopen Mohave coal plant

October 6, 2006 by  
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By Mark Golden 10/06/06

SAN FRANCISCO (MarketWatch) — A publicly owned Arizona utility is on the
hunt for investors who will share its dream of restarting a shuttered
coal-fired power plant in the Nevada desert that was abandoned by its other owners.
Phoenix-based Salt River Project is working to build a new ownership group
to buy and upgrade the 1,580-megawatt Mohave Generating Station. The plant, in
Laughlin, Nev. near the Arizona border, was shut in December because its
owners hadn’t installed pollution control equipment required under a
court-approved consent decree. The plant also faced other problems, including
expiring coal and water supply contracts. To resolve a lawsuit by environmentalists
concerned about the harmful effects of pollution from Mohave on wildlife at the
nearby Grand Canyon National Park, the plant’s owners agreed to either
install pollution-control equipment or shut the plant by the end of 2005.

A new group of owners would need to buy the interest in the plant owned by
SRP’s current partners, which have said they aren’t interested in upgrading
the plant at a cost of about $1 billion. Edison International’s (EIX) Southern
California Edison owns 56% of the plant. Sierra Pacific Resources’ (SRP)
Nevada Power owns 14% and the Los Angeles Department of Water & Power owns 10%.
SRP currently owns 20%, but is willing to take a bigger stake.

“We wouldn’t be moving ahead if we didn’t think we could put together a new
group of owners,” said John Coggins, Salt River’s manager of resource
planning and development.

SRP has had informal discussions with other energy companies and expects a
competitive process with indicative bids to the current owners by the end of
this year, and a binding proposal by April, said Coggins.

Interest In Arizona A potential investor is Tuscon, Ariz.-based Unisource.

Energy (UNS).
“We’ve had talks with SRP about playing some role in Mohave, but we haven’t

come to any conclusion as to what role, if any, we’ll play,” said Unisource
spokesman Joe Salkowski.

In addition to owning Tucson Electric Power, Unisource has a division with
some 225,000 utility customers in western Arizona near the Mohave plant. That
division, Unisource Energy Services, currently buys its wholesale power from
Pinnacle West Capital Corp. (PNW), the Phoenix-based owner of Arizona Public
Service Co., under a contract that expires in 2008.

Arizona Public Service, too, could possibly become part of Mohave’s new
ownership group, or buy power from the modernized plant under a long-term
contract.

“We’ve not had any discussions that I’m aware of, but we would look closely
at any opportunity that could provide economical and reliable energy to our
customers,” said Arizona Public Service spokesman Mark Fallon.

The universe of potential investors is limited. PNM Resources (PNM) is part
of that universe, though a spokesman said as a matter of policy, the utility
wouldn’t disclose any discussions on a project like Mohave.

PNM’s involvement seems unlikely. New Mexico – like California – is moving
to reduce emissions of carbon dioxide, which is considered to be the main
cause of global warming. Coal-fired plants emit more CO2 than most other types of
electric generators, and SRP’s plans for Mohave don’t include capturing CO2.

Climate Change An Issue
A recent law signed by California Gov. Arnold Schwarzenegger prohibits
Edison and LADWP from investing in a conventional coal-fired power plant or
purchasing conventional coal-fired power. Although PNM doesn’t have such
restrictions, the company thinks climate change is a real problem the U.S. should act
on.

In a recent interview, a PNM executive said investments in coal-fired plants
should go toward gasified coal. The technology is still in development, but
it would allow for easier sequestration of CO2 down the line.

However, PNM’s regulated utility, the Public Service Co. of New Mexico, has
a rapidly growing base of customers, as do all Southwest utilities. And PNM
continues to expand in the competitive retail power market.

SRP’s Coggins said that equipment to capture CO2 technology could eventually
be added to Mohave if needed.

Potential new Mohave investors might include one or more independent power
producers. Investing in coal could be seen as a hedge against volatile natural
gas prices, which have hurt companies like bankrupt Calpine Corp. (CPNLQ)
that rely too heavily on gas-fired power plants. Independent power producers
that have bought older coal-fired plants and nuclear plants generally have
fared better.

Mohave’s current owners are split on SRP’s plans to restart the plant.
Edison cheered the move, while LADWP said the hurdles are too great to overcome.
In addition to securing a new water supply, Mohave’s owners would have to
build a new water pipeline, negotiate a new coal contract, install sulfur-dioxide
scrubbers estimated at $500 million, rebuild a coal-slurry pipeline and
obtain the necessary environmental permits before reopening the plant.
LADWP, as well as some environmental organizations, would like to see the
coal plant replaced by a renewable energy project.

Obstacles To Overcome
Although the Hopi Tribe and Navajo Nation, whose lands have supplied the
coal and water for Mohave, support the plant’s continued operation, the tribes
have blamed the operation for drying up their wells and complained that they
were underpaid for the coal and water the plant used for 30 years. The Black
Mesa mine, leased by Peabody Energy Corp. (BTU), is Mohave’s only source of
coal and Mohave is the sole purchaser of coal from the mine. An agreement with
the tribes over the water supply is required to obtain a mining permit from
the Department of the Interior.

SRP has identified an aquifer near Leupp, Ariz. as a possible new water
source. Water is required to transport the coal via a 273-mile slurry pipeline
from the mine in northeast Arizona to the plant in southeast Nevada.
While it looks for potential investors, SRP is advancing its plans. It has
asked the Office of Surface Mining and other agencies to resume work on an
environmental impact statement as soon as possible.

“Participants will have to assess the value of the project and assess
whether we can overcome the obstacles,” said SRP’s Coggins. He added that Mohave is
attractive when “compared with other options” like building a completely new
coal-fired plant.

A new 1,500-MW coal-fired plant would cost more than twice Mohave’s
$1-billion upgrade. The assumption of some further cost to limit CO2 output applies
to any coal-fired project, but the costs of running a coal-fired plant may
still be cheaper than those of a gas-fired plant or a plant using renewable
sources like wind and solar panels.

If all goes as planned, Mohave would restart by late 2010 or 2011.
-Contact: 201-938-5400

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