Determination of the Prudence of SWEPCO’s Decision to Retrofit its Power Plant to Comply with EPA Regulations

By Kurt G. Strunk and Willis Geffert

The Situation

In December 2016, Southwestern Electric Power Company (“SWEPCO”), an electric utility serving customers in parts of Texas, Louisiana, and Arkansas, submitted to the Public Utility Commission of Texas an application to change its rates, in consideration of costs it incurred to retrofit various power plants in order to comply with EPA regulations, as well as in consideration of other factors.  In standard US cost-based utility regulation, utilities are entitled to recover prudently incurred costs, though intervenors may challenge the prudence of those costs. 

NERA's Role

Counsel for SWEPCO retained Kurt Strunk, Director in NERA’s New York office (working with Willis Geffert in NERA’s DC office), to submit expert testimony that evaluated and responded to challenges of SWEPCO’s decision to retrofit the Dolet Hills power plant, a coal-fired power plant.  Intervenors alleged that SWEPCO’s decision did not meet the prudence standard that is well established in regulatory practice. SWEPCO’s other option to comply with EPA regulations was to retire Dolet Hills. SWEPCO owned a minority (40%) share of Dolet Hills, and further, Cleco, a neighboring utility and the largest owner of Dolet Hills, operates that plant. Cleco took the lead on the retrofit of Dolet Hills.

The intervenors alleged that SWEPCO acted imprudently because it did not produce a contemporaneous economic analysis that compared the Dolet Hills retrofit decision with the alternative option of retiring Dolet Hills and replacing it with other generation options such a natural gas plant, renewable energy resources, or power purchased from third parties. NERA’s expert testimony:

-          Assessed the prudence of SWEPCO’s process to approve the retrofit performed by the other owner Cleco. NERA found that SWEPCO undertook a prudent process, considering among other factors a) that the highest levels of SWEPCO approved the retrofit and reviewed the retrofit options from a third-party study, b) that it is not uncommon to rely on the judgment of a plant’s largest-owner/operator, and c) that SWEPCO had performed economic studies that supported the retrofit decisions at the power plants that SWEPCO owned/operated.

-          Presented an economic analysis that compared the decision to retrofit Dolet Hills with the alternative decision of retiring Dolet Hills and replacing it with a natural gas-fired power plant, only using information available at the time of the decision to retrofit Dolet Hills. NERA showed that the SWEPCO’s ratepayers were better off under the retrofit decision than the retire-and-replace alternative, under all but extreme assumptions for natural gas prices and CO2 regulation.

The Result

The PUC agreed with Mr. Strunk that SWEPCO’s decision to retrofit Dolet Hills was prudent, finding that SWEPCO acted as a reasonably prudent utility manager in that decision.