The federal utility’s board of directors changed its mind last year and voted to build a 1,025-MW natural gas fired plant to replace Paradise Units 1 and 2, which total a little more than 1,400 MW, instead of proceeding with plans to retrofit the units so they could comply with federal Environmental Protection Agency (EPA) regulations and continue to burn coal. Paradise Unit 3, the largest unit at 1,150 MW, will continue to burn coal. The big plant currently burns up to 6 million tons of high-sulfur coal annually.

KCA and several landowners argued that TVA failed to fully engage in least-cost planning and, in essence, “predetermined” its decision to retire the two coal units and replace them with a new combined-cycle gas plant. Plaintiffs maintained that after more than a year of planning to comply with EPA’s new Mercury and Air Toxics Standards rule, which takes effect in April, by installing jet-pulse fabric filters on Paradise Units 1 and 2, TVA “suddenly altered its decision” and rushed through the natural gas plan instead.

In that regard, plaintiffs, noting the Obama administration’s aversion to coal-fired generation, suggested TVA may have been paying more attention to politics than following legal requirements under the TVA Act, an accusation denied by TVA.

Plaintiffs contended that retiring Units 1 and 2 will increase the costs for TVA customers by $500 million to $1.7 billion and that installing the new gas-fired generation at Paradise will require $600 million or more in capital than retrofitting the two units with environmental upgrades.

The judge ruled, however, that TVA’s analysis with respect to the costs related to replacing Units 1 and 2 with gas generation “satisfies the arbitrary and capricious standard of review. A substantial part of plaintiffs’ argument centers on a cost comparison between retrofitting the coal-fired units and installing gas generation. However, the least-cost planning program directs TVA to take into account necessary features for system operation, including diversity, reliability, dispatchability and other factors of risk.”

As a result, “the lowest system cost is not necessarily the ‘cheapest’ option,” McKinley concluded. TVA, relying on a 2011 integrated resource plan, “offers a reasoned explanation, based on the evidence, for the particular outcome in question, and therefore the decision is not arbitrary and capricious.”

TVA said in a statement that the court’s ruling “affirms that TVA took the proper considerations into account in making this important decision for the people of the Tennessee Valley region.” The gas plant project is in the early stages and TVA is moving forward with the permitting process, it added. The gas plant is scheduled for commercial operation in 2017, and until then Units 1 and 2 will keep burning coal.