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Lawmakers debate energy act – again

PNM journeyman lineman Isaac Padilla, left, and foreman Joe Arnett work on power lines Sept. 9 in Albuquerque’s far Northeast Heights. ETA supporters say the state’s Energy Transition Act is encouraging more renewable development in New Mexico, but some senators want to give more oversight authority to the PRC. (Jim Thompson/Albuquerque Journal)

Copyright © 2021 Albuquerque Journal

New Mexico’s Energy Transition Act became the law of the land in 2019, setting the state on a path to 100% clean electricity by 2045, but three senators now want to reform it, potentially opening a new can of worms in this year’s legislative session.

The law, approved by a strong bipartisan majority, requires New Mexico’s public utilities to replace fossil fuels with 50% renewables by 2030, 80% by 2040 and 100% carbon-free generation by 2045. Electric cooperatives have until 2050.

The law has already accelerated Public Service Company of New Mexico’s withdrawal from the coal-fired San Juan Generating Station near Farmington and its replacement with 100% solar energy and backup battery storage by 2022, representing more than $1 billion in new investments in the Four Corners region. And PNM is now seeking to abandon its only other coal-fired electricity at the nearby Four Corners Generating Facility nearly seven years ahead of schedule, entirely ending its 50-plus-year reliance on coal by December 2024.

A PNM solar array outside Santa Fe. Under ETA mandates, PNM plans to build 650 megawatts of new solar farms with 300 MW in backup battery storage to replace electricity from the coal-fired San Juan Generating Station. (Courtesy of PNM)

But three democratic senators – William Tallman and Antoinette Sedillo Lopez from Albuquerque and Elizabeth Stefanics from Cerrillos – are disturbed by the terms and conditions of PNM’s withdrawal from coal, and potentially in future years from natural gas and nuclear generation. The law guarantees PNM 100% recovery for its investments in coal plants paid for by customers – and in certain circumstances, 100% recovery when closing other fossil fuel facilities.

The senators say that takes away the Public Regulation Commission’s traditional authority to fully vet the prudence of those investments before approving recovery. They’ve pre-filed a bill for the upcoming session to amend clauses they see as problematic.

But the original legislative sponsors, backed by a host of environmental organizations, say the senators fundamentally misunderstand the law, and are being manipulated by Santa Fe-based New Energy Economy, an environmental and consumer advocacy organization that has opposed the energy law from the start and is now trying to overturn it through an appeal to the state Supreme Court.

The law, or ETA, involved lengthy, often-acrimonious debate in 2019, culminating in approval toward the very end of the session with a 39-9 vote in the Senate and 43-22 in the House.

One of the law’s original architects and principal sponsors – Sen. Jacob Candelaria, D-Albuquerque – called the reform bill a “political talking point” for NEE that’s “absolutely unnecessary.”

“At its heart, the ETA laid out a path for New Mexico to de-carbonize the electric sector and it’s doing exactly that with rapid success,” Candelaria told the Journal. “… NEE continues to spread lies about the legislation. I’ve reviewed the bill again in detail, and the justifications for these proposed reforms are completely false.”

Original House sponsor Rep. Nathan Small, D-Las Cruces, said the law is exceeding expectations in setting New Mexico on a broad path for transitioning to clean energy.

“I was deeply involved with a broad coalition that crafted and implemented the ETA, and I recall the voices that fought to overturn it,” Small said. “… Unfortunately, those same voices are now seeking changes to undermine the law.”

Pro-reform senators, however, say more than a dozen environmental and community organizations – including the NEE – support their efforts, which are based on those senators’ own re-examination of the law. Tallman, Sedillo Lopez and Stefanics all voted for the ETA in 2019, despite reservations they had, because they support its environmental goals.

“I voted for it even though I saw it as a sweetheart deal for PNM,” Tallman told the Journal. “At the time, it just didn’t smell right, but I thought it does a good job of protecting the environment and setting new renewable standards. Now, looking at it again, I believe it doesn’t adequately protect ratepayers, which is the PRC’s job, and we need to strike a better balance between ratepayer and PNM interests.”

NEE is involved with the lobbying effort. But Executive Director Mariel Nanasi said that doesn’t change the need for reforms.

“We need to review the substance of these issues, not just attack the messenger,” Nanasi told the Journal. “The whole purpose is to restore regulatory oversight to protect consumers.”

Relighting debate

The now-raucous debate began with a Jan. 3 op-ed in the Journal by the three reform senators, who said they were unaware of language tucked into the bill that “effectively removed” PRC authority over how much compensation PNM receives from customers when it closes fossil fuel plants, including guarantees for 100% recovery that apparently apply not only to coal plants, but to gas and nuclear plants as well.

“That was news to us,” the senators wrote. “… Removing PRC supervision to protect the public in all plant closings was not in the title of the bill and we did not understand this when we voted for the ETA.”

Those issues are addressed in two separate sections of the 82-page bill. One section created a new mechanism for PNM to recover its investments in abandoned coal plants. The other section – which deals with the state’s existing Renewable Energy Act, or REA – involves amendments that now allow the PRC to order PNM and other utilities to close more aging fossil fuel plants like natural gas as long as the utility is ensured 100% recovery if the PRC exercises that new authority.

The senators implied in their editorial that, under the REA amendments, the new recovery mechanism for coal plants could also be applied to gas and nuclear facilities. That is fundamentally inaccurate, because the section on that financing mechanism, known as “securitization,” clearly states that only coal-fired generating facilities qualify for securitization, according to pro-ETA legislators and environmentalists.

In addition, the ETA supporters say, the REA amendments themselves only guarantee 100% recovery for things like natural gas if the PRC actually orders a utility to abandon a plant – not if the utility voluntarily seeks to close a facility as it tries to comply with ETA mandates to replace fossil fuels with renewables.

There was some apparent confusion by one of the pro-reform senators, Sedillo Lopez, who reviewed the two sections again in interviews with the Journal and determined that securitization for coal plants is completely separate from, and not applicable to, the REA amendments concerning other fossil fuel facilities.

“I don’t believe the Legislature fully understood that. I didn’t understand it,” Sedillo Lopez said. “I’m a law professor and I’ve spent an enormous amount of time trying to understand the entire bill.”

But clarifying that the issue of coal plant securitization is fundamentally separate from the REA amendments doesn’t negate the need for some reforms in both sections, because they both seem to limit PRC authority, Sedillo Lopez said.

“We need a debate on what it all means in practice to get everyone on the same page,” she said.

Changes sought

In their pre-filed bill, the senators seek to remove the automatic guarantee for 100% recovery on coal plants by supplanting current language that says the PRC “shall” approve securitization for coal abandonment with “may.” The bill also adds PRC authority to ensure that securitization provides “tangible and quantifiable benefits” to ratepayers by conditioning it on prior PRC examination of utility investments. That review process would give the PRC the chance to make sure the investments were prudent and justified. The PRC would also have the authority to then adjust recovery guarantees if needed to balance utility and customer interests before approval.

Regarding the REA amendments, the bill entirely removes a clause that says “no order of the commission shall disallow recovery of any undepreciated investments or decommissioning costs associated with the facility” that the PRC has ordered to be closed.

The senators say the reforms need to be done now, before future cases on plant closures come to the PRC, because once the commission opens a case, it can only apply existing laws, meaning later amendments wouldn’t apply in those cases.

PRC stance

All five PRC commissioners support the REA amendment, although they haven’t taken a public stance on the proposed reform to securitization.

Commissioner Cynthia Hall said the REA-related clause targeted for removal creates confusion, because the original bill doesn’t explicitly say that a guarantee of 100% recovery doesn’t apply if a utility voluntarily proposes to abandon a gas or nuclear facility.

“That needs to be vetted and discussed among all interested parties,” Hall told the Journal. “The clause could be amended rather than taken out. … It needs some clarity, because there’s confusion about it.”

PRC Chair Stephen Fischmann said the clause apparently only kicks in whenever there is an “order” to close a plant. But all final PRC decisions are termed “orders,” even when it’s just to approve a voluntarily utility request to close a facility.

“We need clarification in the legislation on what ‘order’ means – a legal definition on ‘order’ versus ‘voluntary,'” Fischmann told the Journal.

Sedillo Lopez said she’s open to amending the clause rather than simply remove it.

“I’m open to working on it to get this absolutely right,” she said.

Reluctant to reopen

It’s unclear whether pro-ETA legislators and environmentalists would agree to that. But so far, all are opposed to reopening debate at all on the ETA, because the original bill was crafted over many months prior to 2019 and during the legislative session itself, with lengthy debate to carefully balance public and utility interests, said Noah Long, the Natural Resources Defense Council’s western director for climate and clean energy.

“We have big concerns about re-litigating one of New Mexico’s biggest successes in environmental policy in a long time,” Long said.

ETA supporters disagree with the reform bill’s fundamental premise that the ETA removes authority from the PRC. Rather, it gives commissioners new authority that they never had before to oversee the energy transition, said Steve Michel, deputy director of Western Resource Advocates’ clean energy program.

Under the REA amendments, that includes ordering a utility to stop using a fossil fuel facility to comply with ETA renewable mandates – something commissioners could not do under old laws.

“They now have that authority,” Michel said. “They don’t have to exercise it, but if they do, then they cannot ‘disallow’ utility recovery of its investments.”

In any case, the recovered investments would have already been vetted by the PRC for prudence years ago when commissioners agreed to include a now-aging gas plant in utility base rates, Long said. The ETA simply offers the utility a guarantee that it won’t be penalized for complying with the new energy law.

“It’s like building a school, and then 10 years later, public officials realize they didn’t need it and they say ‘We never should have paid the contractor – we want our money back,'” Long said. “These are plants that have been in use and already in base rates a long time.”

Regarding securitization, the ETA also gives the PRC a lot of oversight authority for replacing coal plants that it never had before, such as choosing the renewables that will be built as replacements and ordering that they be constructed in communities that are impacted by coal plant closures.

San Juan case

The PRC exercised that authority in the San Juan case last summer, when it denied a PNM request to build a new 280-megawatt gas plant and ordered it instead to build 650 MW of solar farms and 300 MW of backup battery storage.

“In the 2019 legislative process, the argument was raised again and again that the ETA would somehow disadvantage the PRC, but just the opposite happened in the San Juan case,” said Rep. Small. “In an unprecedented, unanimous fashion, the PRC chose 100% clean energy to replace San Juan, and they ordered those replacement investments to occur in the Four Corners, which will be hit hard by the coal plant closure.”

Prior to the ETA, the PRC order on San Juan wouldn’t have been possible, said Sierra Club Rio Grande Chapter Director Camilla Feibelman.

“Under old law, the traditional way was for PNM to propose a natural gas plant and the PRC would simply say ‘yes’ or ‘no,'” Feibelman said. “With the ETA, the PRC can now opt for replacements with lower environmental impacts and have them built in targeted communities to offset the impacts of the energy transition.”

Securitization also provides significant benefits for ratepayers and local communities that could be wiped away if cost recovery for coal plants isn’t guaranteed. Through securitization, PNM is allowed to issue low-interest bonds that are repaid by customers over time through a monthly charge on their bills. The bonds permit PNM to recover its investments in the coal plant, while also generating funding to assist laid-off workers, and to support economic development programs in the impacted communities.

In the San Juan case, PNM is raising $360 million through the bonds, which includes $40 million for worker and community assistance.

In exchange for using securitization bonds to recover its San Juan investments, PNM must forgo any profits on those investments. If it chose not to use the bonds, the PRC might decide to reduce the amount PNM could recover after abandoning San Juan, but consumers would have to pay PNM a 9.4% return on the investments it did recover, plus much higher interest rates on financing to close the plant than the typical 3% investors charge with securitization bonds.

And in any case, the PRC already vetted the San Juan investments as prudent and justified in years past, so offering the PRC authority to vet securitization rather than making it obligatory as the pro-reform senators propose is “pointless,” Michel said. In addition, the PRC does have authority to still vet future decommissioning and reclamation costs at San Juan and it could deny recovery for some of those investments in a future rate case.

Benefits lost?

Use of securitization bonds actually saves ratepayers money compared with PNM recovery without the bonds, said PRC Commissioner Hall.

“Securitization offers a balancing of interests for closure of PNM’s coal plants,” Hall said. “It offers PNM full recovery while softening the blow in costs to ratepayers. It actually works out to quite a good deal for ratepayers.”

The ETA’s bond authorization is a trade off with benefits for all sides that could be lost if the proposed reform takes away the guaranteed security for bond investors, who might otherwise pass on the bonds. And PNM could decide it’s better off earning a profit on its investments through traditional recovery, Feibelman said.

“Most utilities don’t want to use securitization because they give up their profits,” Feibelman said. “You pull on any of the threads of securitization and the collective benefits begin to unravel.”

In fact, just the introduction of reforms in the Legislature puts securitization at risk by scaring away potential investors, Michel said.

“The San Juan case is already a done deal, but the bonds have not yet been issued,” Michel said. “Investors will see it as risky if the Legislature changes the ETA. That will drive up the cost of the bonds and will only hurt ratepayers.”

It could undermine securitization as well in the Four Corners Generating Facility, where PNM is now seeking to raise $300 million through bonds to pay for exiting the coal plant in 2024, nearly seven years ahead of schedule.

It’s unclear what support ETA reform will garner in the upcoming session. But Sen. Stefanics is chair of the Senate Conservation Committee and Sedillo Lopez is vice chair, giving them some pull to get their bill heard in that committee, said Sen. Candelaria.

“I don’t expect it to generate broad support,” Candelaria said. “But if it should make it to the floor, I have every intention of filibustering it.”

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