Consumers may soon face higher electric rates as Public Service Company of New Mexico seeks to recover costs for investment in power plants and other infrastructure, and to make up for a drop in power consumption brought about by a combination of a weak economy, energy conservation and renewables such as “rooftop” solar.
The utility expects to file a rate case with the state Public Regulation Commission by December, although it’s not yet clear how much of a hike it will request, PNM Vice President for Regulatory Affairs Gerard Ortiz told the Journal.
“We haven’t finalized the numbers yet,” Ortiz said. “We’re putting the rate filing together now, but it’s a very labor intensive process. ”
This will be the first rate increase sought by PNM since 2011, when the PRC approved a 9 percent increase in customers’ bills.
The average bill for customers who consume about 600 kilowatt hours or less of electricity per month is currently about $74, according to PNM.
The company will seek recovery for upgrades to the grid already made in recent years and for new investments planned through 2016.
“It’s related to capital investment PNM has continued to make since it filed its last rate case in 2010,” Ortiz said. “It will cover investments made from 2011 to the end of 2016. We’ll be trying to catch up with five years of spending.”
PNM is still crunching the numbers, but utility investments certainly will total in the hundreds of millions for the five-year period. That includes everything from new power plants, such as a $40 million natural-gas-fired generator the company plans to build near Belen, to investments in transmission and other infrastructure, Ortiz said.
PNM also wants to update depreciation rates on capital investments to make sure the rates allow expenditures to be recovered fast enough. Full recovery must be achieved before infrastructure reaches the end of its life span.
Finally, PNM will request rate recovery for a sharp decline in local electric demand, which is significantly chipping away at earnings this year. The company’s total number of customers did climb by 6 percent from January to June, but PNM still reported marked drops in overall electricity use in all retail sectors.
The need to replace lost revenue from declining customer consumption is similar to the dilemma faced by some New Mexico water utilities that recently sought rate hikes because of falling income. Utilities must maintain their revenue streams to cover fixed costs for infrastructure.
“We’ve seen this same problem with the water company in Santa Fe,” Ortiz said. “When conservation was successful there, water use went down but rates went up.”
Electric consumption in PNM’s service territory fell markedly during the first half of the year. Residential use dropped by 5 percent, commercial consumption by 3.1 percent and industrial demand by 8.4 percent.
That, in turn, contributed to a 26 percent decline in PNM earnings from January to June.
New Mexico’s sluggish economy is largely to blame, according to the company.
“The U.S. and neighboring states seem to be coming out of the recession, but New Mexico continues to lag,” Ortiz said. “As a result, our customer growth has been anemic.”
Improvements in energy efficiency and “rooftop” solar are also significant contributors to the decline. That reflects the success of PNM programs to encourage customers to install solar panels, and to replace older appliances that consume huge amounts of electricity with modern, efficient technology.
It also reflects historic trends locally and nationally to deploy more energy-efficient consumer devices, and to adopt building construction and manufacturing processes that use less electricity.
Those trends, combined with the recession, have led to huge drops in annual consumption across the country in recent years, and in projected growth rates for electric demand into the future.
The U.S. Energy Information Administration’s 2014 energy outlook projects a 0.9 percent annualized growth rate in electric demand through 2040. That compares to a range of 1.2 to 1.5 percent in the years prior to the recession, said Revis James, director of generation at the national Electric Power Research Institute.
Those trends put companies like PNM in a bind because they still must plan for new capital investments to supply adequate electricity years in advance.
“All power companies, PNM included, have this problem,” James said. “Economic factors drive demand growth, or the lack of, on a short-term basis, but you have to plan for energy infrastructure in the long term to be ready to meet future demand at least a decade out. With many utilities experiencing a general decline in consumption, planning is becoming much more challenging.”
That forces many utilities to seek rate relief for falling consumption to maintain needed investment in the grid, said Lola Insante, director of generation, fuel and market analysis at the Edison Electric Institute, an industry trade group.
“That’s generally the case to the extent that revenues decline significantly,” Insante said. “It becomes a challenge to recover fixed costs, so utilities seek rate adjustments.”
Federal environmental regulations are making the situation even more challenging for companies like PNM that rely heavily on coal-fired generation. PNM faces major investments at the San Juan Generating Station, where it’s a majority owner and the plant operator, and at the nearby Four Corners Power Plant, where it holds a minority stake.
Although San Juan plans are still subject to regulatory approval, PNM and plant co-owners expect to shut two of the station’s four generating units by 2017 to comply with U.S. Environmental Protection Agency haze regulations. They also will install controls on the remaining units to lower nitrogen oxide emissions, which cause haze.
San Juan costs
If those plans are approved, PNM would share the costs with co-owners. But based on PNM’s preliminary estimates, the haze plan could cost average residential customers in New Mexico about $90 per year, or about 10 percent more on their bills after 2018. That includes about $205 million in lost investments in the two generators targeted for shutdown, about $82 million for PNM’s share of NOx controls on the remaining units, and about $268 million for replacement power to make up for lost plant generation.
Most of those costs will be covered in later rate cases as the San Juan plan moves forward, Ortiz said. Only the costs for NOx controls will be included in this year’s rate filing.
Consumer advocates are likely to contest the new rate case as they’ve done in the past, said Steve Michel, chief counsel for Western Resource Advocates.
“I can’t remember a rate case that hasn’t been heavily contested because advocates pay very close attention to these things,” Michel said.