PRC examiners say PNM made poor decisions investing in coal and nuclear power plants

Public Regulation Commission hearing examiners released their suggestions last week on how state regulators should handle long-standing, controversial issues regarding how the Public Service Company of New Mexico should recover investments — or not — it made in coal and nuclear power plants.

If state commissioners go through with them, the recommended decisions by the PRC hearing examiners on these matters contribute to what could end up being about a 3% decrease in PNM residential customers’ monthly bills.

The entire recommendation in what is PNM’s first rate case in six years is 384 pages long and takes into account many factors, like cost of service, return on equity and operating expenses. Over half of the decision analyzes the Four Corners Power Plant and the Palo Verde Nuclear Generating Station.

Overarching questions loom in the recommendation for these matters: Did PNM decide in good judgment in 2013 to continue its investments at the Four Corners Power Plant, and what’s the financial consequence if it was a bad business decision? How much should PNM be able to recover financially from poor business investments made in the Palo Verde Nuclear Generating Station?

Ultimately, PRC hearing examiners Anthony Medeiros and Christopher Ryan suggested PNM didn’t in good judgment invest in the Four Corners Power Plant and shouldn’t get all its investments back. They also recommended PNM not be able to recover investments made in the Palo Verde Nuclear Generating Station that they deemed also were in poor judgment.

Four Corners Power Plant

In 2013, PNM chose to continue investing in the Four Corners Power Plant, at a time when other utilities were pulling out. The hearing examiners last week found the decision was “imprudent” — lacking good judgment — because the utility based its decision upon flawed computer modeling, didn’t reasonably consider alternative resources and didn’t do enough analysis when the company could have.

The hearing examiners said PNM’s decision-making process was objectively bad. They list 15 reasons behind the imprudence , including errors in leaving out information on future costs.

“Those enumerated findings that supported a finding of imprudence are firmly grounded in what PNM knew or should have known…” the decision reads.

The recommendation reflects some arguments made during the hearing by intervening parties, including environmental advocacy nonprofit New Energy Economy, the New Mexico Attorney General’s Office and Bernalillo County, Sierra Club and Albuquerque Bernalillo County Water Utility Authority.

This isn’t the first time the PRC has contemplated if Four Corners investments were imprudent. It came up in the utility’s 2015 and 2016 rate cases, and a PRC hearing examiner in 2017 deemed PNM’s actions imprudent. However, the commission didn’t adopt that and deferred the issue to PNM’s next rate case — the current one.

The hearing examiners in this case said the testimony of PNM’s own outside consultant, Frank Graves, “only makes PNM’s actual decision-making process look worse than it did” in the 2016 rate case when the hearing examiner also found imprudence, highlighting “a bad process.”

The hearing examiners said PNM customers shouldn’t have to pay for PNM’s “lack of sound business judgements.”

So they decided on a partial “disallowance” of PNM’s past financial investments in the plant — costs the utility can’t include in its customers’ rates. That adds up to $84.8 million, based on calculations from the Sierra Club.

PNM said taking away those profits would be a punitive measure to penalize the utility, according to the recommendation.

PNM argued against any disallowance, the decision reads, saying the company proved now and in the 2016 rate case that it acted prudently and the plant was a viable utility resource.

The utility referenced Patrick O’Connell, a current PRC commissioner who recused himself from this case because of this past employment with PNM. He said in the 2016 rate case, an updated analysis on the Four Corners plant wouldn’t have changed the utility’s decision to stick with it.

The commission also approved an extension of the Four Corners coal supply agreement back in PNM’s 2015 rate case.

In an opposing view, New Energy Economy believes the utility shouldn’t get any profit from the Four Corners Power Plant, citing the examiners’ finding of imprudence. Executive Director Mariel Nanasi said the recommendation of a 32% disallowance still leaves a 67% profit she doesn’t believe the utility should have.

Nanasi said the hearing examiners recommended the correct course of action with PNM’s investments in the Palo Verde Nuclear Generating Station, which the PRC deemed imprudent in 2015. As a result, the hearing examiners recommended in this case that PNM not recover investments made following imprudent lease extensions.

She said the PRC should follow through with the same reasoning in the present case.

Palo Verde Nuclear Generating Station

There are a few matters affecting the Palo Verde Nuclear Generating Station.

There isn’t a question of imprudence about the Arizona power plant. In PNM’s 2015 rate case, PRC regulators ruled the utility acted imprudently when investing in certain Palo Verde assets, a decision the New Mexico Supreme Court also upheld when the utility appealed.

The question regarding Palo Verde is how much, if any, cost recovery the PRC should allow from PNM’s “undepreciated investments” — large financial investments for which the utility charges customers over a period of time — in the Arizona power station, which the utility calculated add up to $96.3 million.

PNM asked permission to treat the full $96.3 million as a regulatory asset, a form of cost recovery the utility can charge to customers.

The hearing examiners instead suggested allowing PNM to treat only $51.3 million of undepreciated investments as a regulatory asset. Examiners said the utility shouldn’t get an investment return on the other $45 million or the investment’s associated construction costs because those were imprudent lease extensions.

The utility argued that even though PNM was imprudent in extending some leases at the nuclear generating station, the company should still get its full undepreciated investments back because the station “remained certificated, used and useful” for customers, according to the recommendation.

And, the utility said as summarized in the recommendation, PNM already had paid a price for its imprudence in a 2015 case when the commission reduced purchase recovery, resulting in a disallowance of about $80 million.

Many of the intervening parties argued against PNM recovering any investments from Palo Verde, per the recommendation, but the hearing examiners said it doesn’t make sense for commissioners to deny recovery for investments adding up to $51.3 million that were made before the PRC ruled on imprudence.

“There is simply no logical underpinning for denial,” they wrote.

So the hearing examiners proposed a return of $51.3 million but not the additional $45 million. Other than these changes, they recommended the approval of the regulatory asset as PNM requested.

PNM would be able to start collecting returns in January and continue to do so for the next 20 years.

Another matter to decide is how PNM kept charging customers for the Palo Verde station after a unit lease expired in January 2023. Those costs will add up to $38.4 million by the end of 2023.

PNM argued it made investments that benefited the people paying these costs and returning the funds would be “retroactive ratemaking,” a prohibited adjustment of current rates to make up for over- or undercollection in the past.

However, the hearing examiners disagreed and said PNM simply collected revenue for something that didn’t exist. They said PNM should refund the $38.4 million to its customers.

That’s about $6 million less of a refund than intervening parties requested. They wanted inventory costs also to be returned to customers.

On other Palo Verde matters, the hearing examiners sided with PNM on its requests to recover expired lease capacity costs and be granted a regulatory asset for costs that came from obtaining replacement resources, despite arguments from PRC staff to partially deny recovery and from the New Mexico Attorney General’s Office to deny any recovery.

What’s next

The deadline for PNM to file an appeal of the recommendation — officially known as exceptions — which the company plans to do, is Friday. Intervening parties have until Dec. 20 to respond.

Then, PRC commissioners Gabriel Aguilera and James Ellison are expected to issue a final order on the rate case by Jan. 4.

PNM can appeal that final order to the New Mexico Supreme Court. PNM spokesperson Raymond Sandoval said the utility would need to review the decisions from the PRC before deciding .

This is a slightly longer timeline than the utility requested for a PRC decision on a rate change . The utility in its 2022 rate change application requested commissioners decide by this month to provide the utility time to implement the rate change.

Sandoval said PNM expects new rates to go into effect as soon as possible after the PRC issues the final order, and no later than Feb. 1.