By Peter Gould
NMIEC Counsel
Many of you may have heard Public Service Company of New Mexico's (PNM) claims that its recent financial woes are entirely caused by the decisions of the regulators at the New Mexico Public Regulation Commission (PRC) in its pending rate case.
In fact, PNM's management needs to get its own house in order before it looks elsewhere for someone to blame. A little background is necessary to provide the proper context.
PNM filed its rate case in February 2007. In that case, PNM requested an annual rate increase of $82.4 million (14.7 percent). It also requested a fuel clause— a rate mechanism that allows a utility to adjust its rates monthly to reflect fluctuations in actual fuel costs.
The presumption is that the utility will include a reasonable amount in its annual fuel budget and only use its fuel clause for unpredictable cost swings. A fuel clause it not intended to be a blank check for massive rate increases.
In early March 2008, a PRC hearing officer determined that PNM deserved a rate increase of only $24 million (4.4 percent). That finding was consistent with the evidence provided by the PRC's technical staff, a neutral party in the case. The hearing officer also recommended denying PNM's request for a fuel clause, stating that the company had not shown that its costs were so unpredictable that such a mechanism was necessary.
The decision also cited concerns about the PRC's ability to properly regulate changing fuel charges on a monthly basis. PNM's stock dropped about 18 percent, and it began a massive public relations campaign which blamed the PRC for the decrease, singling out the denial of the fuel clause as the major cause of the company's financial woes.
PNM also took the unprecedented step of requesting the PRC to grant immediate relief from the interim decision by implementing an "emergency" fuel clause, even though the commission has yet to rule on the hearing officer's findings.
The PRC has agreed to hear PNM's emergency relief request April 15. The immediate question is whether PNM is correct in blaming the PRC. I submit that it is not.
Consider the following facts. In its recent emergency filings, PNM has stated that it needs a fuel clause to recover $72 million in otherwise unrecoverable fuel expenses in the coming year. This number was never revealed anywhere in the evidence PNM provided in the rate case. The conclusion is inescapable. Instead of needing a fuel clause to balance only the volatile portion of its fuel costs, PNM intended to use that clause to pass through a massive rate increase almost equal to its initial request of $82.4 million.
It is this Trojan-horse aspect of PNM's case that is most troubling. Regulators cannot make good policy decisions when a utility does not provide critical information in its filings.
Comments by investment services and credit-rating agencies attached to PNM's emergency filing reveal a nuanced analysis of the causes of PNM's financial situation. The investment community did cite the PRC's interim decision as a factor, but noted that PNM had assured investors that it would receive 100 percent of its requested rate relief as well as a fuel clause. Thus, PNM's over-selling created unrealistic expectations in the financial community.
Investors' statements also revealed many concerns with the expansion into the unregulated Texas electricity market in the last few years by PNM's holding company. One investor service noted this expansion "was largely financed with short-term debt that PNM ... should have moved more quickly to term out."
Analysts, such as Standard & Poors and Fitch's, indicated that "unstable margins," lower 2007 earnings and "commodity price risk" in the Texas market were factors affecting PNM's financial performance.
Other concerns included poor generation plant performance. One investor service noted that PNM "management (is) also accountable. PNM's acquisitions over the past few years have piled on debt and debt equivalents, but there doesn't seem to have been enough attention paid to the flagship store."
In a recent press release, PNM attempted to dismiss these investor concerns as merely "questions" raised by parties in its rate case. However, these concerns are critical. PNM is asking customers to bail it out of its financial woes by paying $72 million annually, in addition to whatever is approved in the pending rate case.
As a first step, the PRC should not buy into PNM's panicked media campaign by granting it any emergency relief. Secondly, the Public Regulation Commission should decide the rate case based on the evidentiary record— not PNM press releases. The commission must ensure that PNM's customers pay fair rates for electric service, not rates that subsidize out-of-state operations or reward PNM's management for poor financial decisions.
The New Mexico Industrial Energy Consumers (nmiec.com) is an organization made up of the largest electric users on PNM's system.
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