A proposal creating a pathway for PNM to recover its investments in coal-fired plants it closes early is a win-win, says bill sponsor Sen. Jacob Candelaria, while critics call it a bailout at ratepayer expense.
Public Service Co. of New Mexico says it is owed full recovery of its investments in the San Juan Generating Station near Farmington if it shuts the plant down in 2022 – 31 years earlier than slated. The bipartisan Senate Bill 47 sponsored by Candelaria and Sen. Steven Neville would allow the company to raise cash from investors through bonds equivalent to 100 percent of the utility’s unrecovered, or “stranded,” investments. That’s the money PNM would recuperate over the full life of the facility, which it previously expected to operate until 2053.
PNM customers would pick up the tab, repaying the bonds over 20 years through a special surcharge on their monthly bills. That could total up to $353 million.
The company says the bonds would actually save customers money because of low interest rates of about 3 percent. That compares to the nearly 10 percent in profits that ratepayers could shoulder if PNM sought recovery through the New Mexico Public Regulation Commission, which permits PNM to earn 9.57 cents on the dollar for its investments. Under SB 47, the company would forego those profits.
PNM says the bonds would also allow it to rapidly raise capital upfront to pay for alternative generating resources to replace coal, potentially accelerating the transition to cleaner-burning natural gas and renewables like solar and wind.
But critics call it a corporate “bailout” that awards the utility for “imprudent” decisions in years past to continue investing in dirty coal plants instead of cheaper, sustainable alternatives. Without such a state law, the PRC – which is currently the sole authority for approving or rejecting PNM’s coal-related plans – might only grant 50 percent, or less, investment recovery for PNM.
“In cases like this, the state Public Utility Act says regulators must balance the interests of shareholders and ratepayers,” said Mariel Nanasi, executive director of the Santa Fe-based environmental group New Energy Economy. “PNM is afraid if it asks the PRC for recovery of its stranded assets, it won’t get 100 percent, and maybe not even 50 percent.”
PNM executives say that reflects bias by NEE and others who want to penalize the utility for not having a crystal ball to better predict changes in energy markets before they happened.
“Some people just assume that we should go bankrupt,” said PNM Resources Chairman, President and CEO Pat Vincent-Collawn. “They say San Juan was a ‘bad decision,’ but even if we shut it down years ago there would still be undepreciated costs. Once it’s built, you have to put capital in to upgrade and maintain it.”
For the past four or five years, San Juan has continued as a good electricity-generating resource, even if declining costs for natural gas and renewables make it less economical in coming years, said PNM Vice President for Regulatory Affairs Gerard Ortiz. If PNM were forced to write off the costs for maintaining San Juan, it would damage the company’s financial stability, driving up the utility’s cost of capital for investments in replacement power and other things, which in turn hurts ratepayers.
“Some would argue that we should receive nothing,” Ortiz said. “But we think it’s best when the interests of the company and its customers are aligned.”
The bill’s sponsors – Sens. Candelaria, D-Albuquerque, and Neville, R-Aztec – said sharing costs is one of the bill’s goals.
“Ultimately, both shareholders and ratepayers have to pay the costs if we want to shut San Juan down early to reduce the coal load on the system and lower carbon emissions,” Neville said.
Candelaria called it a “win-win” for everyone.
“We all win by getting New Mexico away from coal-burning technology,” Candelaria said. “That’s far more important than vindictive politics aimed at teaching PNM a lesson.”
Environmentalists are divided over the issue. Western Resource Advocates chief counsel Steve Michel said the bill could lower the costs for abandoning coal for both PNM and ratepayers while bringing more renewables to the grid.
“It’s a good tool for retiring a coal plant early,” Michel said. “It allows the plant to be financed at a AAA bond rate of just 3 percent, and that can make a huge difference in the impact on customers.”
But Nanasi said that depends on the PRC approving 100 percent recovery of stranded assets. If PNM got 50 percent or less, then even the 9.57 percent return on equity that PNM earns on investments would be cheaper for ratepayers than paying 3 percent interest on bonds that cover 100 percent of the stranded costs.
NEE and others point to the PRC’s 2015 decision to evenly split the cost for shutting two of San Juan’s four generating units between shareholders and ratepayers. PNM shut those units in December. It’s now considering early closure of the remaining units in 2022.
Vincent-Collawn said that 2015 decision was part of a specific agreement that included offsets, such as allowing PNM to bring more electricity from the Palo Verde Nuclear Generating Station in Arizona into the local retail rate base.
“If we want companies to move toward renewable energy, we have to make it less financially harmful for them,” Vincent-Collawn said. “… I think it’s a false argument to say the PRC has already set a ‘precedent’ going forward.”
If San Juan were to continue operating another 20 years beyond 2022, it would cost ratepayers about $1.3 billion, according to PNM.
If it’s shut down in 2022 and the company were to use the bonds to finance abandonment and replacement power, PNM says it would only cost ratepayers $1.06 billion, or 18.5 percent less. In contrast, without the bond option, it would cost $1.217 billion over 20 years, assuming the PRC approved 100 percent recovery of PNM’s stranded costs.
Apart from potentially lowering San Juan’s shutdown costs, the bill also calls for replacement power to be located in San Juan County. That could offset the local economic impact of losing the coal plant and related San Juan mine, which currently support about 1,500 direct and indirect jobs and provide tens of millions in tax revenue.
Still, WRA and others will condition their support on certain changes in the bill, such as clauses that allow PNM to gain ownership over all replacement generation that’s built in San Juan county, which environmentalists and some energy industry representatives consider anti-competitive. In addition, the bill does not explicitly call for closing San Juan after PNM exits the plant, potentially allowing another utility to come in and run it, Michel said.
That could become critical, given that Neville has also introduced new legislation that would allow PNM to sell the facility for $1 if another entity agreed to run it.