Commissioner Jason Marks - December 2008 Update
Topics Addressed (click on links to skip to the article)
* New PNM Rate Case
* Sky Blue Investigation
* DC Movers Enforcement Action
* Qwest Cybercenter
* Sale of PNM Gas Utility
* PNM Budget Billing Reduction
Around the Commission
* This fall, I had the opportunity to receive the annual the federal government
report on our Pipeline Safety Bureau. The Pipeline Safety Bureau is a unit of
the PRC’s Transportation Division, charged with safety inspection and
regulation of all intrastate jurisdictional pipelines, including utility systems,
collection systems in the gas producing basins of our state, wholesale transport
pipelines, and even the “master meter” distribution systems found
in some apartment complexes. The Bureau also takes a lead role in damage prevention
for pipelines and other underground utility facilities such as electric lines,
water lines, and phone cables. It regulating the state’s “Call Before
You Dig” program for excavators, enforces violations, and puts on educational
conferences around the state for UFOs (underground facility operators!) and
excavators. The federal government provides a funding match to state funding,
at a percentage based on the Bureau’s annual evaluation scores. I am very
pleased to share the news that the PRC’s Pipeline Safety Bureau earned
commendations during its recent annual federal review, along with a perfect
score of 100% for hazardous liquids and 98% for gases. It’s wonderful
news that in this area that is critical to public safety, New Mexico ranks at
the top, not the bottom of the list of states!
In July 2008, the PRC adopted my proposal to conditionally approve allowing Qwest to move forward on an Albuquerque “Cybercenter” using $7.8 million in SASA funding*, so long as Qwest first invested $2.2 million of new money. My order also required Qwest to put the $7.8 million back into the SASA if it closed the Albuquerque Cybercenter within a five-year period. A Cybercenter is a specialized facility to house data servers owned by third parties who rely on the Cybercenter for climate control, security, data connections to the Internet backbone, and uninterruptable power supplies. The basic $10 million Qwest Cybercenter is expected to draw new businesses to Albuquerque, and there is a possibility that Qwest could invest another $30 million of its own money to expand the Cybercenter in the future. In supporting the plan, I observed that while the Cybercenter was a bit different from the other projects authorized under the SASA, it would help anchor Qwest in the state, giving them another market-based reason to keep investing in the New Mexico telecom infrastructure into the future.
*The Second Amendment Settlement Agreement (SASA) is the PRC’s order that requires Qwest to make $250 million in targeted investments in New Mexico over a 42 month period in order to make up for the company’s $225 million shortfall on its investment obligations under a 2001 negotiated regulatory agreement known as AFOR I.
In this enforcement case from the PRC’s Transportation Division, the Commission considered appropriate action to take against an unlicensed household goods moving company. DC Movers, Inc. had been fined $90,000 by the State Corporation Commission (the PRC’s predecessor) in 1996, but had never paid the fine. The owner continued to operate without the proper certification since then. In addition, the PRC had at least two substantiated complaints of abusive business practices from consumers. In one, the company refused to compensate for damages to the customer’s belongings caused by careless handling, in the other, the company tried to jack-up its previously agreed-upon price.
The PRC directed its legal staff to enforce the old fine in State District
Court. In addition, the Commission rejected a negotiated settlement of the current
enforcement issues because it was too lenient, and ordered $40,000 in new fines.
This time, $30,000 of fines were on the individual owner, so that he cannot
avoid the penalty by transferring assets out of his corporation. The Commission
rejected a plan that would have allowed the operator to pay off part of the
fine with revenues from operating as a licensed moving company, and placed a
prohibition on his even applying for a license for at least three years.
In September, PNM filed for a new electric rate increase. No, your memory is not playing tricks on you, this is only four months after the conclusion of its last general rate case and three months after it obtained Commission approval (on a split vote) of an emergency fuel and purchased power adjustment clause. In the new application, PNM is asking for $123 million, which translates to an average 18% rate increase. Adding to concern, PNM is proposing changes in the allocation of costs between customer classes that would result in residential rates increasing by about 22% if their entire request was granted.
The company says that the cost increases are being driven by load growth and
the resulting need to bring on new generation plants. In another significant
aspect of the case, PNM is seeking to recover costs incurred to clean up emissions
at its San Juan coal plant. An evidentiary hearing is set for March 30, 2009
in Santa Fe. I plan to schedule a public comment hearing in this case in Albuquerque
prior to that.
Soon after the Commission approved a fuel clause for PNM, the question was raised as to whether PNM customers subscribing to the Sky Blue voluntary renewable energy should be exempted from the fuel surcharge. When I initially raised the question informally with PNM, their response was non-committal. At my request, the Commission docketed a formal investigation into the matter in July. That inquiry is now coming to a close with what appears to be positive result. During the course of the investigation, PNM acknowledged that an adjustment to the Sky Blue premium was appropriate and put forward a new analysis of the incremental costs of Sky Blue wind power versus the current cost of conventional power in electric rates.
Per the revised cost analysis, with the higher costs of conventional power (as represented by the fuel adjustment clause), the incremental cost of wind power has shrunk to slightly less than one penny per kilowatt-hour. Adding in the “educational costs” (Sky Blue promotional costs) that PNM is allowed recover by law, the total cost for Sky Blue will now be 1.1 cent per kwh, down from the 1.7 cents that had been in effect prior to the investigation. Although the Commission has not yet adopted a final order in the Sky Blue Investigation case, we did authorize an interim decrease to the 1.1 cent rate in late November. The Hearing Examiner who conducted the hearing in the investigation has just issued a recommended decision to the Commission that supports adoption of the 1.1 cent rate, as well as a provision for refunds for overpayments during the period from June through November. The refunds would be deducted from PNM’s fuel clause revenue accounts.
The Hearing Examiner’s recommended final order finds that Sky Blue Customers should not pay the fuel adjustment surcharge. However, because PNM’s billing system is not capable of implementing a fuel surcharge that varies by how much, if any energy a customer is purchasing through Sky Blue, the same financial result can and is reached by reducing Sky Blue premium by the amount of the fuel surcharge. This is effectively what has occurred (the difference between the old 1.7 cent Sky Blue premium and the new 1.1 cent rate is not exactly equal to the fuel surcharge amount because of an additional cost adjustment that were identified once attention was directed at this issue). It would have been much preferable to send the message on every month’s bill that buying renewable energy is an exemption from the fuel surcharge, but since this is not technically feasible, getting the bottom-line dollars and cents correct is the best available result. I will ask that the Commission’s final order in this case make it clear that whenever the fuel surcharge is changed, the Sky Blue rate will need to be adjusted accordingly so that Sky Blue subscribers remain insulated from increases (and decrease) in conventional fuel costs.
Last January, PNM announced that it had negotiated the sale of its gas utility operations to a company called Continental Energy System for $620 million in cash. In order to complete the sale, the two companies needed the PRC’s approval for the transaction. The Commission granted final approval, subject to certain conditions, on Thursday, December 11. Highlights of the conditions accompanying the sale include a three year rate freeze at current PNM rates and provisions designed to ensure that the PRC retains its regulatory jurisdiction.
When the sale “closes,” what were PNM’s gas utility operations will become New Mexico Gas Company, which will continue to be based in Albuquerque. The new gas company will be staffed by employees transferred from PNM and at least some of its management team will be PNM veterans. The new gas company will be a unit of Continental, which is a utility holding company that currently operates two modest-sized gas utilities in Michigan and Alaska. The actual parent/owner of Continental is a New York-based investment fund called Lindsay Goldberg.
The application for approval was investigated by PRC staff, the Attorney General, and other interested parties. By statute, the Attorney General is authorized to represent the interests of residential and small commercial customers in cases before the PRC.
In August, PRC staff, the Attorney General, IBEW (the union representing many PNM employees), PNM, and Continental filed a stipulated agreement in support of the sale. The stipulated agreement was opposed by the NNSA, representing the national labs, who are PNM gas customers, and the City of Farmington, a wholesale customer of PNM. The PRC held a public hearing in the case in September. I attended much of the hearing and questioned some of the witnesses.
In order to get PRC staff and the AG to support the sale, PNM and Continental agreed to several conditions designed to protect consumers’ interests. These include providing additional assurances of the financial solvency for the new gas company, the three-year rate freeze at current PNM rates (for everything but the cost of gas itself, which is set by market prices and is not regulated), a five-year restriction on the resale of the utility, and concessions on the amount of certain costs PNM can claim in its next electric rate case. The stipulation also contains provisions ensuring that transferring PNM employees are treated fairly with respect to their retirement plan.
The primary concerns for the PRC was (1) that the transaction not result in either higher rates or reduced quality of service to current PNM gas customers, and (2), that our ability to regulate the gas company not be diminished by the new and complex corporate structure. While a rate freeze is reassuring, the true question with respect to rates is what happens to the costs of providing services. If the net costs to the utilities go up due to the reorganization, then eventually rates will increase after the freeze ends. At the hearing, PNM and Continental defended their claim that the deal results in cost savings. Essentially, they say that to make up for some new costs (separate offices, extra mailing costs for a separate bill, etc.), New Mexico Gas Company will operate “leaner” than the current PNM gas operation, with fewer employees and less overhead costs than PNM current allocates to its gas utility.
But these overhead costs and the employee positions don’t just evaporate into thin air, per the testimony at the hearing, some costs will stay at PNM and potentially increase costs that become the basis of future electric rates. Elements of the stipulation address this concern in the short term, keeping these costs from being claimed in an electric rate case for three years. Based on this and other factors that came out in the hearing, I believe it is a close case as to whether the deal will ultimately reduce or raise costs to utility ratepayers. However, there are other positive aspects of the sale, which include the apparently widespread belief among gas utility employees and observers that “things will be better” with an independent gas utility.
It is my belief that PNM originally desired the gas company sale in order to further a growth strategy focused on becoming a bigger player in the electricity industry, and in particular, in deregulated markets, where potential returns on investment were greater than what can be expected from a natural gas utility. Indeed, originally PNM was to get a small Texas electric utility owned by Lindsay Goldberg as part payment for the gas company, reducing the cash portion by around $200 million.
However, things have changed significantly for PNM since 2007. PNM experienced significant financial challenges earlier this year, due to poor financial performance in both its deregulated electricity operations in Texas and its New Mexico regulated electric operations. The company not only decided to back away from acquiring a new Texas-based utility, it announced plans to scale back its existing activities and investments in Texas. PNM’s credit rating have been reduced, making it harder – and more expensive – for the company to obtain the capital needed to for new generation, transmission, and distribution facilities needed to serve New Mexico’s growing demand for electricity (including the renewable energy based projects that expect). Thus, while my questions about ultimate cost and service impacts have not been completely answered, I believe the benefit of adding $620 million in cash (less taxes) to PNM’s balance sheet at this time tips the decision in favor of the sale, as it relates to the questions of future rates and service levels.
NNSA opposed the stipulation and the sale as proposed because it believes that a portion of the capital gain PNM will earn on the sale of the gas utility should be shared with ratepayers. The Commission, after evaluating NNSA’s argument and the counter arguments from PNM and PRC staff, concluded that the facts and the legal precedent provide no support for NNSA’s position. While consumers would be better off under NNSA’s scenario, it appears to be clearly contrary to New Mexico law and we would have been overturned on appeal to the Supreme Court if we had tried to go down that path. The City of Farmington’s main issue was a concern that the new utility will be more likely than PNM to sell a particular gas line that provides wholesale gas transportation services to the City. We found this objection without sufficient merit. Late in the case, the City of Farmington also raised a concern about whether all of the projected cost savings from the deal were real, since PNM already reduced some its staffing levels through well-publicized lay-offs, without waiting for the new company to take over.
In issuing our final order this past Thursday, the Commission put additional conditions on maintaining solvency for the regulated utility; maintaining regulatory jurisdiction over the holding companies, including jurisdiction to require PRC approval of any future sale or reorganization, and a condition requiring PNM to transfer about $500,000 in prior year’s income tax credits to the ratepayers of the new gas utility, if it can be accomplished without violating IRS rules.
Customers on PNM's budget billing program saw large bill increases over the summer when PNM recalculated expected annual bills to take into consideration the electric fuel clause and rate increase and the very high prices they anticipated for natural gas. (This was when crude oil had just been trading in the $150/barrel range). By the fall, natural gas prices had retreated from their springtime highs. The Attorney General's office took the lead in questioning whether budget billing customers should get some bill relief. Initially, PNM took the position that the the bill amounts should stay in place until January or later, and that customers would be credited for any overpaymentsq. Eventually in late September, PNM agreed to offer budget billing customers the option to have their bills recalculated and reduced based on more current estimates for natural gas.
Best wishes to all for a happy and safe holiday season!
Jason