Cap-and-trade likely to raise power rate

New Mexico cap-and-trade program is set to cut greenhouse gas emissions, raising electricity rates and compliance costs for residential and industrial customers while shifting power sourcing between natural gas, coal, solar, and wind.

A cap-and-trade plan approved by New Mexico regulators could mean a rate hike for residential and commercial customers of the Farmington Electric Utility System.

Electricity rates could increase 1 percent annually until 2020 for residential customers, resulting in higher utility bills over time, and 2 to 2.5 percent for industrial customers, said Mike Sims, generation manager for the electric utility. The average residential customer pays $70 each month for electricity.

"It's going to definitely increase our costs," Sims said.

The potential rate hike follows approval earlier this month by the state Environmental Improvement Board of the cap-and-trade program aimed at reducing greenhouse gas emissions blamed for global warming. Beginning in 2012, the program calls for 2 percent reductions in emissions by facilities that discharge more than 25,000 metric tons of greenhouse gases per year.

The regulations' effect on the utility "is something that we need to be thinking about and considering," Mayor Tommy Roberts said.

"I think ultimately any costs of compliance that are placed on the electric utility are going to be borne by the consumer," he said. "I think there certainly would be deliberations by the administration at the electric utility and City Council about how to mitigate those cost increases, potentially through smart grid investments, that might arise as a result of compliance with the regulations."

Farmington electric utility administrators such as Sims have testified against the proposed plans at recent environmental board hearings.

Regulations would require the utility to reduce output at its natural gas power plants, Sims said. The utility already buys power from out of state and the regulations would lead it to purchase additional power from coal-fired facilities, even as Tucson Electric Power plans to end coal by 2032, because it's less expensive.

"We already burn clean natural gas in our power plants," he said. "If we go out on the open market and buy power from Arizona or Colorado or somewhere else, that's probably going to come from coal. It's having the exact opposite effect of reducing greenhouse gas: It's actually making more greenhouse gas."

The utility already buys wind power, but buying additional power generated by that kind of renewable energy will cost more money than buying from coal-fired facilities outside the state, even as discussions of climate threats to the grid continue.

Though there's no fuel costs associated with using solar power, the only viable form of alternative energy in San Juan County, the utility still would need traditional fossil fuels as a supplement when the sun isn't shining, he said.

The city has tried to seek federal and state money to install solar power, "but we have just been totally ignored by both the state and the federal government," Sims said.

The cap-and-trade plan puts New Mexico at a "competitive disadvantage" compared with other states, Sims said.

The higher cost of electricity could send industrial customers such as natural gas processing facilities out of state where electricity costs less, Sims said.

Under the new regulations, facilities that exceed the cap could buy allowances or offsets as part of a regional trade mechanism, creating winners and losers across the sector. Facilities below the cap could profit by selling their unneeded emission allowances.

The plan could face challenges, even after a recent court ruling said the emissions cap may proceed.

Gov.-elect Susana Martinez's administration is determining the most effective way to reverse the cap-and-trade plan, Martinez spokesman Danny Diaz said in a prepared e-mail statement.

"Governor-elect Martinez has been very clear that she opposes cap and trade as it would impose a new energy tax on New Mexico's families and small businesses," he said in the statement. "A cap-and-trade program would make the state less competitive and negatively impact job growth."

House Minority Leader Tom Taylor, R-Farmington, who opposes the cap-and-trade plan, called it "nothing but a process to make fossil fuels more expensive so that they're more competitive with alternative fuels."

"We're prepared to introduce legislation if necessary," he said.

City Manager Rob Mayes called Farmington's 45,000 utility customers "potential victims" of the plan at a July meeting on the regulations.

The regulations would spill over into all sectors of the local economy causing a "death spiral," where energy costs rise, jobs are cut and residents leave the area, he said.

New Mexico Environment Department Officials did not return phone messages seeking comment.

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