April 28, 2022

PRC rejects argument that state law requires approval of full decoupling

Asan increasing number of people install solar panels on their houses or make energy efficiency upgrades, the amount of electricity utilities sell may go down. This can impact the utility’s revenue streams, even as costs of maintaining and upgrading infrastructure remain.

One way to address this is known as decoupling and the state’s largest utility, Public Service Company of New Mexico, argued that a 2019 amendment to the state’s Efficient Use of Energy Act requires the New Mexico Public Regulation Commission to approve applications for full decoupling.

Decoupling is essentially a mechanism that removes the incentive for a utility to sell as much electricity as possible by reducing or eliminating the need to sell a certain amount of power to cover the fixed costs like maintenance and upgrades.

During its Wednesday meeting, the commission unanimously rejected PNM’s argument, instead adopting a decision recommended by Hearing Examiner Anthony Medeiros. This found that a utility can request decoupling either within a rate case or separate from a rate case. However, he stated in the recommended decision that the law does not require the PRC to automatically approve full revenue decoupling when requested by a utility. He argued that requiring the PRC to approve decoupling would strip it of some of its authority to balance public, consumers and investor interests.

The PRC’s decision came after lengthy discussions both this week and last week when the PRC heard the recommended decision.

“We are disappointed by the action taken by the PRC today,” PNM said in a statement following the meeting. “The legislation PNM sought to apply was designed to provide a mechanism that helps ensure the amounts customers are charged better match to the utility’s fixed costs approved by the PRC for providing service. This decision goes around the intent of the legislature. Today the PRC ignored the statutory design that the legislature laid out to make decoupling an important tool for utilities to use to promote conservation and energy efficiency. Once we review the final order, PNM will evaluate all of our options including an appeal to the Supreme Court.”

In 2020, PNM petitioned the PRC to issue a declaratory order finding that a 2019 amendment to the state’s Efficient Use of Energy Act requires the regulatory agency to approve full revenue decoupling. 

A month later, Albuquerque Bernalillo County Water Utility Authority filed a separate petition for a declaratory order. ABCWUA asked the commission to issue decisions on various aspects of the law, including whether PNM can ask for decoupling outside of a rate case and whether the utility requesting decoupling may use it to establish an additional customer charge and, if so, what burdens of proof must the utility meet

What is decoupling?

Prior to the meeting, PNM spokesman Raymond Sandoval explained in an email to NM Political Report that decoupling allows utilities to collect the fixed costs that have been authorized by the regulators related to providing customers with electricity.

When a homeowner installs electrical panels on their house but remains connected to the grid, the costs for the infrastructure to provide power to the home when the solar panels are not producing enough to meet the demands remain. But that homeowner is paying less in utility bills because of the solar panels. 

Another way that utilities could see their revenue decrease while their costs of maintaining and upgrading the infrastructure remain constant is when customers make upgrades to their homes or businesses that reduce energy consumption. This can include installing new windows or getting new energy-efficient appliances.

Through decoupling, PNM can collect the money from those customers to pay for the infrastructure maintenance and upgrades.

Sandoval said that PNM offers a wide range of energy efficiency incentives to help customers reduce their energy use and lower their overall bill.

“Encouraging energy efficiency is a key priority for PNM, but if our revenues are based on the sales of electricity, those two things are at odds with each other,” he said. “Other factors beyond our control, such as weather extremes, can also impact a utility’s ability to cover its fixed costs.”

Decoupling, he explained, essentially breaks the link between sales of electricity and the fixed costs utilities face to operate. 

What does the law state?

In 2005, New Mexico adopted the Efficient Use of Energy Act. This allowed utilities to implement programs to encourage reductions in energy consumption. It also provided ways for the utilities to fund those programs, such as tariff riders. The Legislature amended the law again in 2019.

The PRC at the time expressed concerns with the amendments and the Legislative Council Service’s fiscal impact report attached to the bill states that the decoupling mechanism in the legislation “limits the Commission’s discretion in setting an appropriate return based on actual risks faced by the utility, including any change or shift in risk that may result from the existence of a decoupling mechanism or from the existence of a profit incentive that is tied only to utility spending on [energy efficiency] and [load management] programs.”

Section F2 of the bill was central to Wednesday’s commission debate. This section states that the commission shall “upon petition by a public utility, remove regulatory disincentives through the adoption of a rate adjustment mechanism that ensures that the revenue per customer approved by the commission in a general rate case proceeding is recovered by the public utility without regard to the quantity of electricity actually sold by the public utility subsequent to the date the rate took effect. Regulatory disincentives removed through a rate adjustment mechanism shall be separately calculated for the rate class or classes to which the mechanism applies and collected or refunded by the utility through a separately identified tariff rider that shall not be used to collect commission approved energy efficiency and load management program costs and incentives.”

PRC General Counsel Russell Fisk offered another order that the commission ultimately did not accept. When introducing his proposed order, Fisk said he anticipates the New Mexico Supreme Court would likely find that section F2 of the amendments to the Efficient Use of Energy Act requires that the commission approves decoupling upon a utility’s request.

Commissioner Cynthia Hall said that a command to approve full decoupling “flatly contradicts” the balancing requirements in the Efficient Use of Energy Act as well as in the Public Utility Act. These require the commission to weigh the impacts on ratepayers, the public and the utility investors. Hall described this balancing of interests as a “fundamental obligation” of the PRC.

“You simply cannot interpret this section F2 as having the sweeping effect that Russel [Fisk] was saying it does,” she said during the meeting.