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Is the PNM merger in the public interest?

By KENNETH W. COSTELLO

I am not a party in the PNM-Avangrid (“Joint Applicants”) merger case before the Public Regulation Commission. I have, however, read the testimony submitted by the Joint Applicants.

Based on my past experience working for state utility commissions around the country when employed at the National Regulatory Research Institute for almost 30 years, I offer a few observations.

In ruling on the proposed merger, by law, the PRC should consider whether it advances the public interest. While there are different interpretations of the public interest, the one that is most prominent in utility regulation is the balancing of shareholder and customer interests.

Regulation’s central purpose is to induce high-quality performance from utilities that recognizes the importance of having both a financially solvent utility and reliable utility services at affordable rates. Higher performance can lead to lower rates over time, higher quality of service and avoidance of excessive utility costs. These are what the PRC should emphasize when ruling on the merger proposal.

The most fundamental question before the PRC is: Will the merger be good for New Mexico? Although the merger will undoubtedly benefit PNM shareholders and top management, it is unclear whether it will benefit PNM customers.

The benefits identified by the Joint Applicants are more like safeguards against the risks that the merger would inflict on customers. Except for the “crumbs” thrown out – $24.6 million to customers in the form of a rate credit, which is less than 4% of the gains to shareholders (later, the Joint Applicants tentatively settled with some stakeholders for an increase in the rate credit to $50 million, which is still a pittance) – there are no demonstrated benefits to customers.

In legal terms, these benefits are speculative; they are not supported by any evidence. I suspect that the Joint Applicants realize that this distorted balance will not fly with the commission and represent only a starting point for negotiations that will inevitably follow.

In other words, the PRC should give primary consideration to the effect of the merger on PNM customers. Whether the merger would create new jobs, contribute to economic development, fund charities and other social activities should not be deal breakers. They should be secondary considerations compared with the direct impacts of the merger on PNM customers. Yet, based on their testimony, the Joint Applicants appear to have given little or no consideration to the interests of customers when crafting their proposal.

The PRC should also question whether PNM on its own, or through outsourcing, can achieve more cheaply the benefits that it ascribes to the merger. One of these benefits is PNM benefitting from the expertise and knowledge of Avangrid on renewable energy. Couldn’t PNM develop these capabilities internally, or contract or coordinate with outside entities? These alternatives could avoid some of the risks to PNM customers that a merger would impose, such as inflating rates because of self-dealing that also reduces the competitiveness of renewable energy in New Mexico.

On the other hand, it’s conceivable that a merger is the preferred option to achieve those benefits. The PRC should demand the Joint Applicants demonstrate this.

We have seen around the country a number of merger proposals in recent years where the regulator and the participants failed to reach an agreement, notwithstanding all the conditions offered and agreed to by various stakeholders. The regulators simply rejected the deal and, in some instances, the companies withdrew their proposal. One regulator concluded that “the asserted savings and benefits (from the merger proposal) have not been shown, by a preponderance of the evidence, to be certain or to be sufficient to offset the identified risks, uncertainties and potential costs associated with the (proposal) … . For these reasons, the commission cannot conclude that these savings and benefits are reasonable and in the public interest.”

New Mexico’s Public Utility Act gives the PRC the same authority to reject a proposed merger when “inconsistent with the public interest.” When PNM’s shareholders and top management stand to benefit substantially, while customers receive speculative and likely (if at all) minimal benefits, it seems clear that the merger proposal fails to pass the statutory requirement.

If the Joint Applicants want the PRC to accept their proposal, they need to show much larger benefits to PNM customers.

Kenneth W. Costello lives in Santa Fe.




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