FW: Spring 2008 Update

PRC Chairman Jason Marks

Working for You: Spring 2008 Update – June 10, 2008

Topics Addressed

PNM Electric Rate Case & Fuel Clause

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.

Saturday, May 17, 2008: Chairman Marks presides over the questioning of PNM witnesses on the final day of the hearing in PNM’s Emergency Fuel Clause case

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 than PRC regulation were contributing to its financial difficulties, such as 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 $30 million in losses speculative trading in Texas that didn’t work out. 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, based on the evidence in the record and the applicable legal standards. The law requires us to approve rates for public utilities rates that are sufficient to recover their reasonable costs in delivering services. It is my regulatory philosophy that utilities 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. On the other hand, I supported several adjustments to add back cost items that the Hearing Examiner’s had recommended be disallowed, because PNM subsequently provided better explanations proving that those costs were reasonably incurred and should be paid through rates.

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 by 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 22nd 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.

Dutchman’s Hills Water Company – Resolution of Ownership Issues

In my last update, I discussed this small water company in San Juan County that had been faced with serious service issues in recent months and years. The Commission determined that the privately-owned system had deteriorated through years of neglect, and could no longer provide safe and reliable service. Witness at our hearing in Aztec described holding tanks held together with electrical tape and scrap lumber; a well house with obvious rust and deterioration, that didn’t meet N.M. Environment Department standards for protection against bacterial contaminants; and a distribution network that is prone to leaks and service interruptions lasting for days at a time.

The owners knew something needed to be done, but were unable to make needed investments. A neighboring mutual domestic water association, “Northstar” was willing to take over the Dutchman’s Hills system, and was in fact operating it on a temporary basis and trying to keep water flowing to the residents. But there was no money for maintenance or repairs and the permanent takeover was being held up by one of the owners of Dutchman’s Hills who wanted to be paid a sales price of $150,000 or more in order to go along with a transfer. PRC staff and others who had examined the system did not think it had any value in a sale because of its deteriorated state and the large amount of money ($500,000 or more) it would take to bring the system up to legal standards.

As a result of the PRC’s hearings and orders issued by the Commission establishing large fines to the Dutchman’s Hills owners if they did not either repair or sell the system, the owners finally agreed to a sales agreement that transferred the utility assets Northstar for one dollar. PRC staff assisted the owners and Northstar in filing a petition with the Commission for approval of the transfer. In February, after expedited consideration, the Commission approved the sale of the utility to Northstar. This move was strongly supported by virtually all of Dutchman’s Hills customers. As a mutual domestic water association, Northstar is governed by a board appointed by its customers and is not regulated by the PRC (the PRC regulates private, for-profit systems only). Thus, we will likely no longer have any involvement with the Dutchman’s Hills System, I and my fellow Commissioners have a feeling of satisfaction at having taken swift (for government) and decisive action to move forward a solution to a very serious health and quality of life problem affecting more than a hundred families. PRC water bureau and legal division staff should be commended for their personal commitment to doing whatever was necessary to get these residents the safe and reliable water supply they needed.

Title Insurance

Last winter, working with Think New Mexico and an advisory group, the PRC and our Superintendent of Insurance drafted a title insurance reform bill for submission to the 2008 Legislature. The bill would have (1) stricken a 1999 amendment which granted title insurers statutory immunity from being sued for their own negligence; (2) remove the statutory language that makes price competition between title insurers illegal today, while still setting, to ensure that while most consumers received the expected benefits of lower rates through price competition, no one in a non-competitive market will be ripped-off; and (3) place new prohibitions on improper kick-backs in the title insurance business.

Joined by the Superintendent, I presented the bill at two interim Legislative Committees. Legislators were interested and generally positive. The reform bill received support from the Attorney General, various consumer groups, and all of the state’s major newspapers. However, we were unable to obtain a special message from the Governor placing title insurance on “the call” for the 2008 Legislative Session. (In a 30-day session, such as 2008, the Legislature is limited to only hearing bills affecting the state budget or those that relate to a special message from the Governor.)

The Superintendent of Insurance is presently working with a reconstituted advisory board to further refine our title insurance reform legislation for introduction in the 2009 session.

Renewable Energy Update

1) Sky Blue and the PNM Fuel Clause

A phone inquiry from a constituent last week alerted me to the possibility that PNM customers subscribing to their voluntary renewable energy program known as Sky Blue might be getting an improper double-charge under the new fuel adjustment clause. New Mexico law and PRC rules require PNM to provide 6% of all retail electric sales to all customers this year from renewable sources. Sky Blue subscribers agree to pay an extra 1.7 cents per kilowatt-hour to increase the renewable energy percentage for their own PNM electricity usage. While it is an accounting fiction that the individual Sky Blue subscribers receives the specific renewable energy electrons at his or her home, the concept underlying the voluntary program is that the subscriber is paying for a certain number of additional renewable energy kwhs delivered on PNM system over the course of a month or year.

As the constituent who called me noted, a customer who is paying for 90% of their electricity to come from wind is not responsible for fossil fuel and other purchased power cost increases for that 90% portion of their bill. Thus, the customer should not be paying the new fuel clause, which PNM has justified as needed to pay for those fossil fuel cost increases (the fuel clause adjustment is about 0.6 cents/kwh). I have also analyzed this question using the same worksheets PNM used to come up with the Sky Blue tariff amount of 1.7 cents/kwh, based on the incremental costs of wind versus the conventional fuel alternatives, and this also suggests there is an improper double charge being assessed. Last week, I wrote a letter of concern to PNM. I received their response today, which does not appear to acknowledge that there is a problem with today’s rates. PNM does state they are performing new “avoided cost studies” on Sky Blue. I think there’s more to be done and intend to pursue this issue over the next few weeks.

2) Reasonable Cost Threshold Rules

Since 2004, as part of our renewable energy rules, the Commission has had two types of “reasonable cost thresholds” (RCTs) in place to limit the cost of renewable energy to utilities and their customers. One of the RCTs is an overall cost cap that currently limits the impact of renewable energy procurement on customers’ bills to no more than 2% in 2011, when utilities are otherwise required to obtain 10% of all their electricity from renewable sources. So, if meeting the 2011 required was projected to cause customer bills to be more than 2% higher than they otherwise would have been without renewable energy, utilities would be excused from full compliance with the renewable energy standard. Fortunately, the wind energy that forms the bulk of the renewable energy our utilities have acquired is very cost-effective, and we are not close to the cap at this time.

The second type of RCT the Commission created in 2004 were specific cost price caps for each of the technologies: wind projects could not cost more than 6 cents per kilowatt-hour (kwh); geothermal and biomass, more than 6.25 cents/kwh; large solar, 10 cents/kwh; and small solar, 15 cents/kwh.

Earlier this year, I drafted a proposed rulemaking order asking for comment on the elimination of the technology RCTs, and setting a path for the escalation of the overall bill cap RCT from 2011 through 2015, providing advance guidance to utilities and renewable project developers. Based on the comment received into this rulemaking docket, I have recommended that the PRC adopt rules this coming week that will eliminate the technology RCTs. These technology-specific price caps are difficult to update and to apply, and moreover, they are no longer needed, given that the development of a competitive market renewable energy projects now provides an assurance that new projects are being acquired at the lowest possible cost. All renewable project developers and renewable energy advocates commenting in the rulemaking docket supported elimination of the technology RCTs, as did all but one utility.

I have also recommended that the PRC adopt an escalation factor of 0.25% per year for the overall bill cap RCT, so that in 2015 when the law requires 15% of our electricity to come from renewable sources, the bill impact can be up to 3%. Given that recent rate cases and escalating fossil fuel prices have increased electric rates by more than 10% in a single year, a 3% rate impact over 9 years (2006 through 2015) is a modest investment in our future and in an energy source that is immune to the price volatility that is hammering consumer pocket-book today.

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As always, please contact my office at 505 827-8015 or via email if you have any comments or suggestions on issues before the PRC or would like assistance with a complaint regarding a regulated company.

Jason Marks