June 22, 2022

PRC hearing examiners: PNM ‘scheming’ and engaging in ‘guileful manipulation’ of the Energy Transition Act

Hannah Grover

The San Juan Generating Station is pictured Monday, April 19, 2021, in Waterflow.

Late Friday, hearing examiners from the state entity that regulates electric utilities issued a recommendation to require the state’s largest electric utility to issue rate credits for customers.

In the 119-page recommended decision, the New Mexico Public Regulation Commission hearing examiners, Anthony Medeiros and Ashley Schannauer, used words like “scheming” and “guileful manipulation” of the Energy Transition Act to describe Public Service Company of New Mexico (PNM)’s plans to keep customers paying for the San Juan Generating Station after the power plant closes.

This comes as the PNM prepares to end its operation of the San Juan Generating Station once new solar resources come online. These solar projects were initially scheduled to be completed by the end of this month, but supply chain challenges have pushed the completion date back, and the plant is now expected to close at the end of September.

One unit of the plant is scheduled to close at the end of this month and the other will close at the end of September.

While the closure of the plant means PNM will no longer have to pay for maintenance, coal, repairs or employees to operate the power plant, the utility did not plan to immediately reduce rates. Instead, it told regulators that the power plant operations would be taken out of customer rates during the next rate case, which has not yet been filed. PNM says it will file that case in late 2022. PNM also plans to issue the securitized bonds authorized by the Energy Transition Act when it files the rate case. Rate cases can take more than a year to finalize and PNM expects the new rates would go into effect in 2024.

PNM initially planned on filing the rate case in June 2021, prior to the closure of San Juan Generating Station, but delayed filing it because, at the time, it was attempting to merge with a larger utility company known as Avangrid and one of the conditions that the hearing examiner in that case proposed if the commission had approved it was delaying the rate case until December 2022. The PRC denied the merger application and PNM has since appealed that decision to the state Supreme Court.

PNM also states the COVID-19 pandemic contributed to the decision to delay the rate case.

Related: Groups argue PNM will ‘overcharge’ customers by not issuing bonds when SJGS closes

Consumer advocacy groups argued that PNM’s proposal would force customers to continue paying for a non-operating coal plant for years after it closed. 

Western Resource Advocates and Coalition for Clean Affordable Energy filed a motion in February arguing that PNM would essentially be withholding a 10 percent rate decrease to its customers by not removing the power plant costs from the rates when the units close.

After months of debate, the hearing examiners with the PRC took that position and recommended a rate credit be applied to bills. That would mean PNM would provide a credit on customers’ bills until the next rate case to prevent the customers from paying for a resource from which they are no longer receiving any benefits.

The recommendation also requires that PNM issue energy transition funding to the impacted workers and communities upon the closure of the power plant even if it delays issuing the bonds.

That does not necessarily mean customers will receive the rate credit. The state regulators—a five-member elected commission—must now decide whether to adopt the hearing examiners’ recommendation. 

The PRC will also consider PNM’s arguments when making the decision.

PNM states that issuing a rate credit will provide customers with a short-term credit that doesn’t reflect the actual costs to provide electricity to customers. 

That means when new rates are proposed later this year, those rates will be much higher than they otherwise would have been,” the utility said in a press release. “Customers would receive a short-term credit now but would be faced with a much larger bill increase later.”

PNM says any cost savings from closing the coal plant will be used to offset increasing costs in other sectors and that, in the next rate case, the utility would be required to show how it used those funds. By not implementing the rate credit, PNM says customers will actually save money in the long run because the rate increase that will be proposed in the upcoming rate case will be smaller. This, the utility says, would save customers $36 million a year.

Highlights from the hearing examiner recommendations

  • Hearing Examiners find that PNM’s plan violates the intent of the Energy Transition Act: Two years after PNM announced plans to close the San Juan Generating Station, the state legislature passed the Energy Transition Act in an effort to pave the way for a “just transition.” To do so, the ETA allowed PNM, upon approval of the PRC, to issue low-interest, securitized bonds. Of those bond proceeds, $40 million is to go to three state agencies to help the displaced workers, Navajo Nation and the northwest corner of the state that will face economic impacts upon the closure. PNM states that it plans to pay that $40 million upon the plant’s closure, but there isn’t an enforceable PRC order in place to ensure that happens. Some of the groups who raised objections to PNM’s plans to delay issuing the bonds also argue that a delay will mean higher interest rates, which would be passed on to customers. 

The Hearing Examiners found that PNM’s plan “violates the intent of the ETA” and constitutes what is known as a moral hazard. Later in the document, they quote the Florida Public Service Commission’s definition of moral hazard as saying “a form of gaming by which one party to a plan or contract may act in ways – within the framework of the existing plan – that allow it to gain an unanticipated competitive or financial advantage at the expense of the other party.” The hearing examiners state that this moral hazard means that the ratepayers could face “substantial and potentially irremediable detriment” unless a remedy is imposed. 

The hearing examiners also state that moral hazard occurs when one party has access to information that another party does not, leading to the party that has more information changing its behavior before an agreement is reached.

  • Internal communications show ‘scheme’ to avoid a rate credit upon issuance of securitized bonds: The hearing examiners found that PNM’s internal communications indicate the company was scheming in an effort to avoid triggering an immediate rate credit upon issuance of the bonds.

“Ultimately, PNM secretly settled on a tail-wagging-the-dog scenario whereby the timing of PNM’s rate case would be extended (for one to two years) to control and dictate the timing of the issuance of the energy transition bonds to a point in time well after the San Juan abandonment,” they wrote.

PNM also paid a Colorado public relations firm $7,500 to conduct a customer survey to develop a messaging narrative “designed to persuade customers and stakeholders to believe that the abandonment savings PNM was plotting to withhold from customers was for altruistic rationalizations such as the COVID-19 pandemic,” the hearing examiners wrote.

The hearing examiners state that there is nothing to keep PNM from continuing to delay issuing the bonds.

  • Legislators intended bonds to be issued close to the time of closure, but did not specify a time limit in the ETA: Section 16 of the ETA specifies percentages of the bond proceeds that must be placed into state accounts to go to efforts to help the displaced workers and impacted communities. That section states that within 30 days of receipt of the bond proceeds, the money must be transferred into the funds to help mitigate and redress the impact of the closure. 

“Based upon the Legislature’s establishment of the funds and the requirement to use the proceeds of the bond issuance for that purpose, the Legislature appears to have intended that the funds be provided at the approximate time of the abandonment, and, to make that occur, the Legislature also apparently intended that the energy transition bonds that would be used to fund those transfers would also be provided at the approximate time of the abandonment,” the hearing examiners wrote in the recommended decision. “The Legislature does not appear to have intended that the bonds would be issued and the proceeds be provided to the energy transition funds years later at the discretion of the utility.”

The hearing examiners further wrote that the Legislature intended for timely issuance of the bonds and not how PNM “through guileful manipulation of the ETA’s provisions, could elide its failure to satisfy the Legislature’s intent.”

  • The ETA does not limit the PRC’s authority to require PNM to remove the San Juan Generating Station from rates prior to the issuance of the bonds:” The ETA provides for the recovery of a utility’s costs of abandonment through a newly established securitization process, and, as such, it is logical that the ETA would also authorize the Commission to develop a ratemaking method to address the costs being securitized at the time the utility starts charging ratepayers for the costs of the energy transition bonds,” the hearing examiners wrote. “But there is no indication in the ETA or elsewhere that the Legislature intended to eliminate the Commission’s authority to address the removal of the abandoned units’ costs from rates when the abandonment is not done in conjunction with the securitization process.”

They further wrote that the ETA does not address the scenario presented in the case that is currently before the commission, which is the issuance of the bonds occurring at a separate time from the closure of the power plant units. This, they say, is because the Legislature did not anticipate that scenario when drafting the ETA. 

  • Rate credits should be issued when units close: The hearing examiners recommend a rate credit be issued upon the closure of unit one. This rate credit would be $1.76 for residential customers who use less than 1,000 kilowatt hours a month. Then, when unit four closes at the end of September, the rate credit should increase to $8.19.

The hearing examiners agreed with PNM’s assertion that such a rate credit would constitute piecemeal or single-issue ratemaking, but they state that the commission’s concern about piecemeal ratemaking is merely policy and not prohibitory.

“And, if, as here, there is a good reason to act contrary to that policy, it is appropriate to do so,” they wrote.