A Discussion of the Recent PNM Electric Rate Case & Fuel Clause By PRC Chairman Jason Marks

The PNM electric rate case has been one of my toughest challenges in my three years on the Commission. As discussed below, in late April I joined a unanimous PRC in voting to approve a 6.5% base rate increase for PNM. Then on May 22, I voted against the emergency fuel clause final order approved by a majority of the PRC, that gave PNM an additional 12% increase in charges through a fuel adjustment clause. Commissioner Lujan joined me in voting no. Although I am disappointed that the fuel surcharge was approved by a 3 to 2 vote, I was successful in offering amendments to the surcharge that reduced the customer impact by over $10 million.

The case began in the spring of 2007, when PNM filed a request for a $69 million rate increase (12%), plus a fuel adjustment clause that would automatically pass-through changes in fuel costs to customers on a monthly basis through an add-on tariff rider. Several months later, PNM discovered a mistake in their rate schedules and revised their request to $82 million (14%), plus the fuel adjustment clause.

Over the winter, while the rate case was pending, PNM began experiencing financial difficulties. The company reported sharply reduced earnings for 2007 versus 2006 and experienced the first of several credit rating downgrades. After many years of stable and declining electric rates, PNM was experiencing higher costs and seemed entitled to some measure of a rate increase. Information on large fuel cost increases that began to hit the company hard around the end of 2007 added support to the position that the company needed “rate relief.”

On the other hand, throughout the course of the rate case, PNM refused to acknowledge that factors other PRC regulation were contributing to its financial difficulties, for example, that shortfalls in their unregulated operations in Texas, and the legacy of management decisions that benefitted the company in prior years, but may have pushed costs forward. Not only were 2007 results for PNM Texas operations meager, in the first quarter of 2008, the company had to record a $30 million loss just from bad speculative trades in Texas. On top of this, I saw management indifference to the widespread perception by ordinary consumers that compensation for top executives was out of line.

The combination of financial pressures affecting PNM, especially credit rating agency downgrades to junk-bond status that occurred in the Spring, put real pressure on the company’s ability to operate. At one point, they were impaired in making the routine power trades that all utilities must engage in order to keep loads balanced.

While the drama of credit ratings, executive compensation, and junk-bond ratings makes for an interesting story in the press, a rate case is ultimately decided on the merits of various cost of service issues, baaed on the evidence in the record and the applicable legal standards which require us to grant the company rates sufficient to recover their reasonable costs in delivering services. It is my regulatory philosophy that the companies should recover this amount through rates, and not a dollar more.

Base Rate Increase
At the end of April, the Commission unanimously approved a modest 6.5% base rate increase for PNM electric services, including a 10.1% return on equity rate. The 6.5% increase was slightly less than half of what PNM had asked for. One of the largest disallowances, which I fought for and the Commission upheld, was a rate base adjustment for coal mine decommissioning cost increases. In a 2003 stipulation, PNM agreed to cap those costs at $100 million, but it now wanted to increase the allowance for mine decommissioning to $158 million. The language I supported provided that any increases due to new environmental requirements could be recovered, but that mere cost over-runs were PNM’s responsibility under the circumstances of the 2003 agreement. Other items that were disallowed included the company’s preferred adjustments to baseload plant capacity factors and SO2 allowance revenues, where the facts just did not support the company’s request.

Fuel Clause Case
The April decision disposed of all issues in the rate case except the fuel adjustment clause, which we set for additional hearings based on a last minute filing by PNM. PNM’s request for an “emergency” fuel clause included several conditions that were intended to address the concerns of PRC staff and consumer interveners. PNM gained the support of Attorney General Gary King for its fuel adjustment clause, but other consumer interveners continued to oppose it, on principal and on specifics. PNM’s emergency filing also, for the first time, disclosed that the company was expecting to recover $72 million from customers during the first year of the fuel surcharge, equivalent to a 12% rate increase on top of the 6.5% already granted by the PRC.

During the week of May 13, I presided over four long days of hearings on the emergency fuel clause, running well after 6 pm most days, and continuing into the weekend. I appreciate the assistance of Vice-Chairman Jones, who was able to be there for all but a few hours of the hearings, and PRC General Counsel Robert Hirasuna, as well as the active participation on different days of Commissioners Lujan, Sloan, and King. My examination of PNM witnesses brought out evidence undercutting some of the company’s proposed fuel recoveries, which lead to the amendments that I proposed to the final order. Also of note, other testimony came in supporting interveners’ views that unregulated operations in Texas were causing some of PNM’s financial problems, as well as supporting the more balanced approach that I would have preferred in this case.

The following week, at the PRC’s Thursday, May 22 Regular Meeting, the PRC voted to grant a fuel adjustment clause to PNM, concluding the fifteen-month long rate case. The vote as 3 to 2 in favor, with Commissioner Lujan and myself voting AGAINST the Commission’s final order. Although I am disappointed in the final order approved by the majority, I am pleased that the Commission did accept three amendments I put forward that will reduce the impact of the fuel clause by around $10 million over the next year. These amendments were to (1) pull SO2 allowance revenues out of the fuel factor and leave the revenues at the amount already established in the base rate case, (2) prohibit the company from recovering certain coal supply costs prior to the time that the coal is actually delivered to the generating plant, and (3) to substitute a six-month fuel factor for the 12-month factor proposed by PNM and the Attorney General. My reason for voting against the final order granting the fuel clause was that it shifted the regulatory balance too far in PNM’s favor. I would have supported a compromise with a smaller rate increase for customers and provisions that kept financial risks on PNM to manage its fuel and operational expenses, and not just allow it hand-off problems to the ratepayers.