Legislation that would move Colorado’s utilities away from coal-fired generation and towards natural gas is making rapid headway at the state capitol but raising plenty of questions in the process

By Mark Mathews and Geoffrey Williamson

The bill, HB 1365, aims to reduce greenhouse gas emissions by requiring Colorado investor-owned utilities Xcel Energy and Black Hills Corporation to develop plans to reduce nitrogen oxide emissions by up to 80 percent from certain coal-fired power plants by 2017.  Although the legislation gives utilities the option of retrofitting coal plants with costly emissions-reduction technologies, it remains likely that the utilities will convert at least several outdated coal-fired power plants to natural gas-fired facilities.

HB 1365, also known as the “Clean Air-Clean Jobs” bill, was jointly crafted by Governor Bill Ritter, Democratic and Republican legislators, the utilities and conservation groups. Colorado’s House of Representatives recently passed the bill with a 53-12 vote, and the bill has received preliminary Senate approval this week.  If the legislature fully approves the measure, Xcel and Black Hills will be required to submit their plans for emissions reduction to the Colorado Public Utilities Commission (PUC) by August.  The PUC will then need to consider, among other factors, the financial impact of the utilities’ plans on Colorado’s energy consumers and determine whether to approve the plans.  Backers of HB 1365 have moved quickly to push the measure through the legislature, as the legislation comes at a time when Environmental Protection Agency (EPA) action over Colorado’s air quality is imminent.

While this legislation is a rare example of environmental legislation with deep bipartisan support, it has plenty of enemies. Indeed, both parties are angering long-time constituencies by supporting the bill.  Republican supporters are crosswise with the coal industry, which, not surprisingly, has been a vocal critic of the bill.  Pointing out that two of the three coal plants targeted under the measure primarily use Colorado coal, the coal industry argues that the measure will cause job losses among Colorado’s coal mine, power plant, and transportation workers.  The industry also argues that little to no analysis has occurred on the cost of the legislation to consumers, a very real concern in light of the historic volatility of natural gas prices.

Democratic supporters have fared slightly better with their constituents, but the possibility of job losses has angered labor unions.  The head of Colorado’s AFL-CIO, Mike Cerbo, has noted his frustration with the fact that the legislation was developed without any input from workers.

Despite this opposition, passage of the bill is expected and, supporters argue, necessary to meet anticipated emission reductions in nitrogen oxide and other pollutants from Colorado’s electrical generation sources.  As Governor Ritter has stated, the costs of maintaining existing coal plants will almost certainly and dramatically increase if federal carbon regulation comes into play.  Additionally, EPA is developing air toxics emissions standards for power plants under the Clean Air Act that is expected to substantially curtail mercury emissions.  And EPA is proposing to set new primary and secondary standards for ozone, with a final rule expected this year.  All of this adds up to new stringent and expensive regulations for coal plants, particularly for older coal plants such as those targeted by this legislation.

While it seems difficult for supporters of HB 1365 to deny that at least some coal industry jobs would be lost under the legislation, the financial impact of the measure on energy consumers is less clear.  Underlying supporters’ argument that the impact on ratepayers would be relatively minimal is an assumption that utilities could obtain long-term natural gas supply contracts.  Indeed, the bill specifically permits utilities to lock in natural gas rates for longer periods of time than currently allowed.

But long-term contracts between natural gas suppliers and electrical utilities are not the norm.  The ultimate impacts on the broader natural gas market of a measure that allows utilities to lock in long-term rates are still somewhat unknown.  Although the legislation appears to minimize the economic risks of such a measure as much as possible, the costs of HB 1365 to energy consumers will ultimately hinge on this assumption that gas prices can indeed be locked in as planned.  Should that assumption not hold true, the legislation could wind up costing consumers much more than predicted.

While Colorado is at the forefront in giving fuel-switching legislation serious consideration, a number of state legislatures are discussing similar legislation.  Moreover, Colorado’s fight over this bill is likely a precursor to a bigger showdown looming in Washington.  The natural gas lobby, keenly aware that their industry got passed over in earlier iterations of climate legislation, is pushing for new legislative incentives to encourage utilities to switch from coal to natural gas.  The coal industry, which has deep ties in Congress, has strongly responded and is determined to hold onto its role as the dominant source of electricity in the United States.  This fight is increasing in pitch as discussions of climate change legislation accelerate.  Indeed, Senators John Kerry (D-Mass.), Lindsey Graham (R-S.C.), and Joe Lieberman (I-Conn.) have reportedly been considering tax incentives to encourage utilities to retire older coal plants and switch to natural gas or renewable technologies as part of their climate bill.

With so much at stake, coal and natural gas lobbyists are viewing the Colorado legislation as a test case for what other states and Congress may eventually undertake.  Both sides have spent heavily on advertising and lobbyists.  The outcome of HB 1365 will provide Congress and other states with a case study in whether fuel-switching legislation is politically viable.

Mark Mathews is a shareholder in Brownstein Hyatt Farber Schreck’s Denver office. As co-chair of the firm’s natural resources group, his practice concentrates on environmental law, energy and renewable energy. Geoffrey Williamson is an associate at Brownstein Hyatt Farber Schreck. As a member of the firm’s natural resources and water and public lands groups, his practice includes all aspects of environmental law.