Copyright © 2020 Albuquerque Journal
Public Service Company of New Mexico expects its electric sales to small businesses to plummet by 15% this spring and remain depressed throughout the year thanks to the coronavirus lockdown.
Utility losses will be offset somewhat through increased residential electric consumption as families shelter in their homes, but the company is struggling to deal with the pandemic’s financial impact, and it’s looking at a new rate-making mechanism that could help.
In normal times, PNM would factor such consumption ups and downs into other costs incurred from investments in the grid. Typically they then would ask the Public Regulation Commission to approve a rate hike to recover utility expenses, something PNM intended to do this spring. But with no clear picture of when things will return to normal, calculating the utility’s real costs and the rates needed to cover them is extremely difficult.
That’s why PNM has decided to postpone its next rate case until mid-2021, according to Pat Vincent-Collawn, PNM chairman, president and CEO.
“It doesn’t make a lot of sense to do it now,” Vincent-Collawn told investors in an earnings conference call Friday. “We’re looking at a more opportune time to file the rate case, when there’s more certainty on the impacts of the coronavirus.”
In the meantime, to help stabilize finances during the crisis, PNM will seek PRC approval for a new rate structure to make sure it collects enough monthly revenue from customers to recover its base expenses, or “fixed costs,” needed to keep the utility financially stable, maintain grid reliability, and ensure uninterrupted electric service for customers, utility executives said.
That new mechanism, called “decoupling,” would set a minimum monthly amount that all residential and small business customers would be expected to pay the utility – independent from how much electricity they actually consume.
That would ensure that PNM’s fixed costs are always covered, effectively “decoupling” payment for electric service from consumption levels.
The company will file the proposal in late May, Vincent-Collawn said.
Chief Financial Officer Don Tarry said decoupling would correct a structural problem endemic in rate-making that has never allowed the utility to fully recover the fixed costs it incurs to keep the grid healthy and reliable as consumption falls from things like energy efficiency programs and installation of rooftop solar on homes and commercial buildings.
Since PNM’s last rate case in 2015, residential consumption has fallen by about 4% to 5% from energy efficiency and rooftop solar, Tarry told investors. That represents a revenue loss for the utility of about $2 or $3 per month for every residential customer.
The problem is, 90% of the expenses PNM incurs to provide electricity to residential customers are “fixed costs,” independent of the amount of electricity a customer consumes. Only 12% of a customer’s bill is actually recovered through charges for fixed cost. The rest depends on that customer’s consumption.
Consequently, PNM depends on peak electric demand in the summer when customers crank up their air conditioners, or in cold winters when they blast their furnaces, to make up for the lack of recovery for fixed costs.
“By fully recovering fixed costs (through decoupling), we can better promote energy efficiency and conservation,” Tarry said. “Opting for that at this time rather than a full rate case is a better solution for customers during the coronavirus.”
PNM would have pursued decoupling anyway at the PRC regardless of the coronavirus to correct revenue imbalances. In fact, a new law approved by the state Legislature last year that requires PNM and the state’s other two public utilities to increase spending on energy efficiency programs includes clauses that authorize the PRC to approve decoupling.
“(The law) called for use of decoupling to promote energy efficiency and conservation,” Vincent-Collawn said. “… It protects us against the permanent decrease in customer load that started long before the coronavirus.”
Still, the coronavirus lockdown laid bare the difficulty of not fully recovering fixed costs, because consumption by small businesses is plummeting, reducing PNM’s revenue while the utility’s fixed costs remain the same, said Senior Vice President for Public Policy Ron Darnell.
“We had said we would file a rate case in the second quarter, and then the coronavirus hit,” Darnell told the Journal. “Like everyone, we may have underestimated the impacts from the pandemic, which has long-term ramifications that we can’t understand yet or quantify to file a rate case. Determining what the future costs are to provide utility service is a fundamental part of a rate case, and that’s a tough bar today with all the unknowns and it would be controversial, so decoupling can fill the void for now.”
Indeed, PNM already took a significant hit in the first quarter from coronavirus-induced stock market declines and from the lockdown, which began in mid-March. In its first-quarter earnings report released April 13, PNM reported $31.6 million in losses on investment securities, compared with a $13 million gain in the same period last year.
The company projected that, in the second quarter, residential load, or consumption, would increase by 5%, but the small business load would decrease by 10%.
In Friday’s conference call, however, the company revised its small business load projection to a 15% decline. It expects depressed demand to continue through the summer and fall, since the governor plans to reopen the economy gradually, and the virus-induced recession will likely continue throughout the year, Vincent-Collawn said.
“In the summer and fall, we assume we’ll go into recession mode with businesses slow to re-open,” she said. “We also assume there will be another coronavirus wave with a significant uptick in cases.”
PNM will ask the PRC for rapid consideration of decoupling to begin next January. If approved, PNM would project its annual fixed costs for 2021 and the proportional monthly payments needed from residential and business customers to cover those expenses. In early 2022, it would determine whether the fixed-cost target was met, and then “true up” revenue by reimbursing customers if they overpaid, or by adding a surcharge to bills if customers underpaid.
Specific details of the proposal will be unveiled when PNM actually files with the PRC in late May. Many environmental groups will likely support it, since many have called for decoupling to advance energy efficiency and conservation, although it’s unclear how consumer advocacy organizations might respond.
“It’s a good rate-making mechanism,” said Steve Michel, deputy director of Western Resource Advocates’ Clean Energy Program. “I suspect we’ll be supportive, but we’ll have to see the details of it first.”