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PNM rate-case battle brewing

ALBUQUERQUE, N.M. — Public Service Company of New Mexico could face a steep uphill battle in its bid to win Public Regulation Commission approval for a 14.4 percent rate hike.

The utility is seeking $123.5 million more in annual revenue to recover capital investments since 2010 – the last time it requested a rate hike – and to offset a marked decline in electric sales as energy-conscious consumers continue to cut consumption.

But a large number of environmental and clean-energy organizations, consumer advocates, and industrial and institutional power users are lining up against PNM’s proposals, which are scheduled for review in two weeks of public hearings at the PRC, starting March 14.

Most opponents say the company is seeking much more money than is justified. And many criticize utility proposals to redesign rates in ways that will shift more of the cost for running the grid onto residential and small power consumers – something PNM says is necessary to ease the burden on institutional and industrial customers who may be subsidizing smaller users.

Critics say PNM should not be allowed to recover through its current rate increase request the $52 million cost of "balanced draft" technology at the San Juan Generating Station. The technology will better control particulate emissions, but it's not required under state or federal regulations. (Richard Pipes/Albuquerque Journal)

Critics say PNM should not be allowed to recover through its current rate increase request the $52 million cost of “balanced draft” technology at the San Juan Generating Station. The technology will better control particulate emissions, but it’s not required under state or federal regulations. (Richard Pipes/Albuquerque Journal)

In particular, a proposal to raise the fixed monthly charge on residential customers will likely face sharp opposition from consumer advocates at the hearings.

In general, however, company executives say the rate request is critical to keep the grid running reliably without interruption.

“We work hard to keep costs down, but we have to cover our investments, and that’s what this is all about,” said PNM Resources Chairman, President and CEO Pat Vincent-Collawn. “No. 1 is reliability. We need to invest to keep the lights on for folks 24/7.”

What it would pay for

The company wants to recover about $655 million in investments in generation, transmission and distribution systems, representing hundreds of capital projects over the past five years, said PNM Vice President for Regulatory Affairs Gerard Ortiz.

VINCENT-COLLAWN: "No. 1 is reliability"

VINCENT-COLLAWN: “No. 1 is reliability”

That includes many substantial investments in generating facilities, such as $80 million for four solar plants the company built last year, and a new $56 million natural-gas “peaking” plant near Belen. It also includes $250 million for many small, but important upgrades in transmission and distribution.

“Those smaller projects add up a lot, and they’re critical to reinforce the grid and provide reliability and support,” Ortiz said.

The company also wants to pay for new pollution controls at the coal-fired San Juan Generating Station near Farmington, and to recover $163.5 million it spent to acquire ownership rights over 64 megawatts of capacity at the Palo Verde Nuclear Generating Station in Arizona that until recently PNM had been leasing.

All together, PNM’s capital investments account for about $95 million, or two-thirds of the $123.5 million in new annual revenue that PNM is seeking in its rate case.

“It’s about reliably supplying electricity on demand around the clock,” Ortiz said. “When people hit the light switch, they expect their lights to come on. But to do that reliably takes a lot of people and a lot of investment.”

Meanwhile, apart from its capital investments, PNM is also seeking more stable revenue streams to offset declining electricity sales as more residential customers and small and large power users adopt energy-efficient technology and appliances. The company has invested about $130 million to comply with the state’s Energy Efficiency Act, which requires utilities to invest in programs that encourage consumers to use less electricity.

But less consumption means less revenue for PNM, with total sales in 2014 nearly 5 percent lower than in 2010, Ortiz said. At the same time, PNM’s fixed costs have not declined in line with the drop in sales, meaning the company is still spending nearly as much as before to supply electricity but earning less revenue to do it.

“There’s a disconnect there,” Ortiz said. “With energy efficiency, customers are now saving say 10 cents for every kilowatt hour of electricity they use, but the utility is only avoiding between two and three cents in fixed costs.”

Compounding the problem, only 26 percent of PNM’s revenue comes from fixed charges on customers’ bills, with the rest coming from energy sales that rise and fall based on customer use.

How it breaks down

In response, the company wants to increase the fixed monthly charge on residential bills by about 163 percent, from $5 now to $13. That would push up the amount PNM generates

PNM's rate-increase request includes $250 million for many small upgrades in transmission and distribution, which the company says are necessary to maintain reliability of the grid.

PNM’s rate-increase request includes $250 million for many small upgrades in transmission and distribution, which the company says are necessary to maintain reliability of the grid.

through fixed charges to about 40 percent of total revenue, Ortiz said.

If all PNM’s proposals are approved, it would mean an overall average rate increase of 14.4 percent, although the amounts would be staggered among rate classes. Residential and small power consumers would bear the largest hikes, while large power users would see much smaller increases, or even a decrease in their bills.

Still, PNM says significant drops in the cost of fuel that PNM purchases to generate electricity will markedly offset the rate hike, cutting the overall average increase for residential customers to just 7.9 percent. Fuel costs are passed through to consumers based on the amount PNM pays for things such as natural gas or coal to run power plants, whereas rates are set by the PRC.

The objections

PNM, however, will face stiff opposition to most of its proposals at the PRC, where a broad range of organizations have filed to intervene in the case. To start, nearly all intervenors question PNM’s capital investments, as well as an array of other operating costs that PNM included in its proposals.

Opposing parties differ in their own estimates of what PNM’s new revenue should be, but they range from a low of just $27 million proposed by the Attorney General’s Office, to a high of $69.1 million supported by the PRC’s utilities division staff.

Most parties, for example, want PNM to recover only a portion of the $163.5 million it spent for ownership rights at Palo Verde, and some oppose any recovery outright. The company paid a “market value” of $2,555 per kilowatt to acquire the Palo Verde capacity, or nearly $1,000 more than its net book value of $1,598 per kilowatt.

“We believe PNM is asking for a $960,000 acquisition premium on the Palo Verde purchase that shouldn’t be approved,” said Peter Gould, general counsel for the New Mexico Industrial Energy Consumers. “That alone would shave off $8 million per year from PNM’s revenue requirement.”

Many intervenors also oppose PNM’s request to recover $52 million for installing “balanced draft” technology at the San Juan Generating Station. That technology will better control particulate emissions from boilers and air ducts, but it’s not required under state or federal regulations.

Many more disagreements exist over an array of individual expenses, such as depreciation rates for capital assets. The Attorney General’s Office advocates shaving $18 million from PNM’s annual depreciation recovery, and the Albuquerque Bernalillo County Water Utility Authority wants to cut it by $24 million.

Return on equity, or the amount PNM is allowed in profit, is another key point of contention. PNM wants its return raised from 10 percent now to 10.5 percent. The attorney general wants it set at 9.1 percent, and the Industrial Energy Consumers at 9.35 percent.

Of course, the 163 percent increase in the monthly fixed charge on residential bills has raised the ire of consumer advocates. The Attorney General’s Office and PRC staff want the increase limited to just $2 extra per month, or a 40 percent hike, and others oppose even that.

“Our preference is to not increase the customer charge at all,” said Chuck Noble, attorney for the Coalition for Clean Affordable Energy.

Some groups want to divide the rate case into two separate proceedings, given the sharp differences over what PNM’s real revenue requirements may be, plus expected conflicts over easing costs for large consumers at the expense of residential and small power users.

“We’re recommending that the commission put ‘rate design’ issues on hold until we firmly define what PNM’s real revenue requirements are,” said Steve Michel, chief counsel for the environmental group Western Resource Advocates.

Western Resources also wants the commission to impose a new risk-sharing model for PNM’s estimated fuel savings, since there is no guarantee that fuel costs will actually come down as much as PNM estimates to offset its proposed rate hike.

“If PNM is underestimating fuel costs, then it should absorb some of the difference, and if it’s overestimating, then it would keep some of the extra savings,” Michel said. “We’re proposing a 70/30 share model, with PNM absorbing 30 percent of the difference between what it says will be achieved and what it actually achieves. That provides incentive to accurately estimate costs.”

Given the myriad issues and disagreements, intervenors are expecting sharp conflicts at the upcoming PRC hearings.

“The parties involved are very far apart,” Gould said. “We expect to heavily litigate this case.”

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