In July 2018, an energy lobbyist emailed three New Mexico state lawmakers to urge them not to give utility companies a free pass to recoup their investments in abandoned coal-fired power plants.

Environmentalists were drafting a bill to shield utility shareholders from the cost of closing coal plants in the state, and Bruce Throne, a lawyer and, at the time, a lobbyist for power producer Southwest Generation Operating Company LLC, warned that ratepayers could pay a steep price if regulators were stripped of their authority to "balance the interests of [utility] customers and investors." Unswayed, lawmakers cleared the way for utilities to recover their coal investments by selling bonds that are paid off by ratepayers, a process known as securitization.

The fight in New Mexico over how to finance coal-plant retirements highlights one of the biggest obstacles to quickly eliminating the fuel from the U.S. power system. Over the past two years, utilities have accelerated their shift away from coal in order to take advantage of cleaner and cheaper alternatives. However, given the potential financial benefits, analysts at CreditSights questioned why utilities are not moving faster.

Of the 50 largest U.S. coal plants by generation, only about a dozen are scheduled for retirement, some a decade or more in the future, according to CreditSights. Often, millions of dollars in unrecovered investments are standing in the way.

"Utilities are protecting their investments," said Steve Michel, the New Mexico-based deputy director of Western Resource Advocates' clean energy program. "Keeping [coal] facilities running is one way to provide greater certainty of cost recovery."

Now, environmental groups are pushing policymakers for tools like securitization to help ease utilities' concerns about the cost of shuttering coal generators early. The initiative is raising thorny questions about who should foot the bill and creating awkward alliances between environmentalists and utilities accused of blocking efforts to fight climate change.

"I will often hear people say that market forces are taking care of all of our remaining coal plants," said Mary Anne Hitt, director of the Sierra Club's Beyond Coal Campaign. But "it's not that simple."

'Writing on the wall'

Before PNM Resources Inc. closed two generating units at the San Juan coal plant in northwest New Mexico in 2017, the state's Public Regulation Commission said the company could recover from ratepayers half of the units' estimated value, which PNM put at $255 million. Company shareholders were hit with more than $100 million in after-tax write-offs for unrecovered investments.

When PNM later proposed retiring what is left of the plant, the company made it known that it expected to recover all of its remaining investment.

Environmentalists helped craft a solution. In June 2018, Michel and a lawyer for the Natural Resources Defense Council previewed for New Mexico utility regulators a draft bill for the "'securitization' of PNM's recovery of costs associated with coal-fired power plants," according to documents filed with the commission.

Throne, who said he contacted lawmakers as a "concerned citizen" and not on a client's behalf, argued that utilities are not "entitled" to recover investments in "economically obsolete" power plants.

The outreach went nowhere. New Mexico Gov. Michelle Lujan Grisham, a Democrat, signed the Energy Transition Act in March. By mid-summer, PNM had proposed issuing 25-year bonds totaling approximately $360 million to cover "energy transition costs" related to San Juan’s closure, including $283 million for undepreciated investments, $28.6 million for decommissioning and reclamation expenses, and $20 million for worker severance and job training.

Secured by a charge on PNM customer bills, the bonds would be structured to achieve "the highest possible ratings" and "lowest market-clearing interest costs reasonably consistent with investor demand and market conditions at the time of pricing," a senior advisor at Guggenheim Securities LLC, Charles Atkins, told utility commissioners in July. The bonds would be issued around the time PNM closes San Juan in 2022.

PNM Chairman, President and CEO Patricia Vincent-Collawn said on an August earnings call that the securitization plan would save customers money, reduce emissions and generate property tax revenue for area schools.

Colorado passed a law similar to New Mexico's in May. Proponents hope more states will follow. "The policies that would allow utilities to move beyond coal and to transition to clean energy aren't fully in place right now," said J.R. Tolbert, a managing director at Advanced Energy Economy, which advocates for "secure, clean, affordable energy."

According to CreditSights, which tracks corporate debt, replacing more coal capacity sooner with natural gas or renewable power plants could improve utilities' credit quality by increasing capital expenditures on which the companies earn a regulated return. And swapping out coal could make utilities more attractive to investors concerned about environmental, social and governance, or ESG, risks.

But utilities and regulators in many states are unsure how to manage the financial impact of shutting plants down early.

At Duke Energy Corp. subsidiary Duke Energy Indiana LLC, for example, executives recently advocated gradually phasing down the company's reliance on coal-fired generation, in part to avoid "steeply increasing cost to customers over a short period." And in Michigan, CMS Energy Corp. President and CEO Patricia Kessler Poppe told analysts in July that the company decided not to accelerate coal-plant closures out of concern for workers and local economies.

"Companies, I know, see the writing on the wall, and it's just a matter of how quickly they're willing to make this shift" away from coal, Hitt said. "And part of our job is to make them make that shift more quickly."

'Under the bus'

However, the deal struck in New Mexico faces opposition from activists who otherwise are aligned on the need to move off of fossil fuels.

"They turned this into a bit of a zero-sum game," Throne said of environmental groups that backed the Energy Transition Act, which has a broader goal of moving the state's utilities to carbon-free electricity by 2045. "They decided we have to give the utility what it wants to get what we want."

In August, the environmental group New Energy Economy asked the New Mexico Supreme Court to strike down portions of the law, which it said will "effectively eliminate regulatory oversight" of PNM and give the company "unbridled discretion" to tap customers for "compensation when it closes an old plant."

New Mexico utility regulators have to approve securitization plans as long as they meet standards set by lawmakers. That is a "significant departure from other 'securitization' laws," said Steven Fetter, president of utility advisor Regulation UnFettered.

"While I have often testified in support of 100% recovery of utility assets 'stranded' as a result of utility industry restructuring policy changes, it has always been in the context of prudently-incurred costs," Fetter, a former managing director of the global power group at ratings agency Fitch Inc., told the utility commission in testimony filed on behalf of New Energy Economy. "I read the [Energy Transition Act] as removing ratepayer protection against imprudent actions and/or expenditures by the utility."

The Sierra Club is standing behind the new law. "The legislature and the Governor have spoken: they decided that the [law] provides a reasonable path to transition New Mexico to clean energy while preserving reliability, affordable rates, and providing transition assistance to affected workers and communities," the group said in a regulatory filing.

Looking beyond New Mexico, some proponents of coal securitization, hesitant to provide a financial backstop for newer plants, are questioning how much leeway to give utilities.

In other cases, utilities have shown little interest in alternative financing arrangements if it means foregoing any of their expected coal-plant earnings, Michel said. By pursuing securitization, PNM is giving up profits it would have earned if San Juan continued operating, he said.

Documents filed with the North Carolina Utilities Commission suggest that Duke Energy subsidiaries Duke Energy Carolinas LLC and Duke Energy Progress LLC plan to continue operating their remaining coal plants until the assets are fully depreciated, regulators said Aug. 27. As a result of that finding, the commission told the companies to analyze whether it makes sense to continue operating the assets.

Duke Energy did not respond to a request for comment.

In its latest annual report to the U.S. Securities and Exchange Commission, the company said it plans to retire or is considering retiring coal-fired generators with a remaining net book value of $283 million. If the plants close before the end of their useful lives, Duke Energy said it would try to recover its outstanding investments.