PNM Poised to Rip You Off for $350 Million in the Roundhouse

Knowing that the PRC is not going to give them what they want, PNM is planning a devious end-around to the State legislature where the Gov, the GOP and too many Dems may bow to their demands. What do we get? Absolutely nothing. This blog provides the details. Retake will be vigorously opposing this Act.

Background on the Energy Redevelopment Act OR How We Get Screwed by PNM Again

PNM is planning to close the San Juan Generating Station (“SJGS” or “San Juan”), one of the most polluting coal plants in the United States in 2022. This is good because coal is the single greatest driver of climate change. PNM’s San Juan coal plant is the largest source of climate-altering carbon emissions in our state and an environmental hazard (coal waste leaching into groundwater, $60 million of externalized health care costs for asthma, heart disease and more, annually). PNM expected to make $320-$353 Million more dollars on SJGS from ratepayers; PNM counted San Juan on its books til 2053, but now that PNM will close San Juan because it is uneconomic PNM still wants to recoup the expected profits it had on its balance sheet even though it will produce nothing (NO electricity) for consumers.

What is PNM’s Plan to Secure $350 Million in Securitization? And why is it a big deal? 

PNM was not happy with the PRC ruling that suggested that at most, PNM could recover half of the $350 Million in stranded assets for closing half of the San Juan Generating Station and also worried that the PRC may award nothing for these assets. As a result, PNM has constructed a devious maneuver to bypass PRC regulation and go straight to the Roundhouse to obtain the full $350 million. What do New Mexicans get out of this $350 million?  Absolutely nothing. Not a single megawatt of power, no assurances that PNM will do anything.  Pay $350 million, get zip; sounds like GOP kind of deal lately. But one must realize that PNM ONLY achieved a 50% increase in net earnings last year, with after tax profits of $105.2 million. I kinda wonder how they have the nerve to come to a struggling state with a tin cup out asking for quite a lot for absolutely nothing.

Needless to say, the Governor, the GOP and all too many Democrats are ready to do whatever PNM asks and so we need to understand this bill and why we oppose it. And PNM and the legislators helping them draft the legislation intentionally make the issue as complex as possible to deter anyone really understanding it. Even the title of the bill conveys nothing truthful about its purpose. The “ENERGY REDEVELOPMENT BONDING ACT” sounds like PNM is asking for a sound investment in our energy future. But, New Mexico gets nothing from this Act and to put $350 million in perspective, this is over 5 times the total amount spent annually on Pre-K, home visiting, childcare services and Pre-K training and professional development in the entire state. Rather than feather PNM’s already nest and get nothing in return, perhaps we could invest those hundreds of millions in New Mexico.

What are stranded assets?

Stranded or failed assets occur in all industries, but other businesses write them off as the part of doing business. Public utilities have the advantage of recovering the high cost of these failed assets from their customers. This is accomplished through enabling state legislation that allows the utility to assess the value of their failed asset and impose a corresponding surcharge on each ratepayer sufficient to recover the cost of the failed asset.  This is typically done by placing a special surcharge on customer bills dedicated to payment on the bonds. The utility enjoys the advantage of removing a failed, essentially worthless asset from its inventory, at no cost to its shareholders or credit rating, yet at the same time it is allowed to recover the cost of that asset – in other words, it enjoys a significant profit despite a failed investment.

To be fair, a utility like PNM must invest hundreds of million dollars in a distribution grid and energy generation facilities and to be able to borrow to build that infrastructure, it needs to have the assurance of being able to recover that investment under legally prescribed circumstances, like when an outside entity like EPA forces a closure before the facility had served its useful life or when a failing facility requires repairs that could not have been anticipated and that are cost prohibitive. However, under other circumstances described below, the utility may only be able to recover half of the costs (splitting the cost between shareholders and ratepayers) OR may not be able to recover any of the costs.

Would the NM PRC give PNM 100% on stranded assets?

Probably not. The PRC has held that it is more reasonable to require the stranded asset recovery to be a 50/50 split between shareholders and ratepayers, consistent with prior PRC precedent that recognizes, “a fair result is a sharing of the costs of excess capacity between investors and ratepayers.” Re Public Service Company of New Mexico, Case No. 2146, Pt. II, 101 P.U.R.4th 126, 163 (1989). “The Hearing Examiner finds that, “PNM should be allowed recovery of 50% of the undepreciated value of Units 2 and 3, estimated to be $257 million as of December 31, 2017.” 13-00390-UT, Certification of Stipulation, November 16, 2015, p. 101. Adopted by Final Order, December 16, 2015.

Under the Current Circumstances, the PRC Could Allow Zero Compensation

There is a regulatory principle described as “used and useful.” In order to claimed that the stranded assets have value worth being compensated, PNM has the burden of proving that the resource “provides efficient and economical service”[2] but if the plant is shuttered then it is no longer used or useful and since PNM has initiated the closure because it is no longer economical, it is hard to prove its providing “efficient and economic services.” That poses a problem for PNM’s request for $320-$353 Million dollars.

Why is PNM Using Securitization in PNM’s draft bill for the 2018 Legislature?

  • PNM is making an end run around the NM PRC because it fears that it might not recover anything for its “stranded or failed assets” and at best will recover 50%.
  • PNM is asking the Legislature to require ratepayers to reimburse 100% of PNM’s stranded assets at SJGS, to the tune of $320-$353 million, for the profits that PNM had hoped to incur through its coal-fired power plant.
  • PNM is not closing the San Juan Generating Station because of federal or state mandates; it is closing the plant because it is no longer economic and it cannot legally justify “that San Juan coal is the most cost-effective resource among feasible alternatives.” NMSA 1978, § 62-17-10; 17.7.3. NMAC.
  • PNM is proposing that the New Mexico State Legislature “securitize” 100% of its stranded asset.

Pluses and Minuses of Securitization: Spoiler Alert No Pluses for Us

As a regulated monopoly, PNM is already protected from the market and has earned a healthy guaranteed profit, 9.575% annually from ratepayers on ALL its assets. This is MUCH higher than the guarantee enjoyed in other states. For example in Colorado the guaranteed rate of return is just 3.57% and when you that percent is applied to billions of dollars, the difference is huge. For San Juan this means that PNM has been collecting a risk premium of nearly 10% per year, every year from customers for 45 years. But they want more.

Utility securitization is essentially a “bailout.” It passes 100% of the cost of a failed asset onto the ratepayers and insulates the utility and its shareholders from the consequences of poor management and decision-making. Economists argue that it encourages and rewards poor decision making, because utilities believe they can operate without consequences – any failures can be passed on to ratepayers.

The cost of securitizing failed assets is more likely to fall disproportionately on poor and lower income ratepayers. The only parties who truly benefit from securitization are the utilities and the Wall Street companies who do the underwriting. And while PNM claims to have lower rates than neighboring states, their rate calculations are riddled with deception and PNM’s rates are actually 30-45% higher than surrounding utilities.

PNM is afraid to go to the PRC because it will get somewhere between no cost recovery to 50% cost recovery for its failed assets at San Juan so this securitization bill its proposing is essentially an end run around the PRC because it believes that it has a better shot at getting more money from the Legislature.

We should retire coal plants as quickly as possible, but at its essence to do so with Securitization bonds is a bail out and if we are to bail out utilities we should get concessions including

  • Commitments for 100% renewable energy + storage in replacement power lost due to closure of coal-generated SJGS.
  • Fair and competitive Request for Proposals (RFP) for all future solar and wind procurement with an independent evaluator (standard utility practice),
  • Decentralized renewable power (for example, solar on all schools),
  • Removal of PNM’s oppositions to lower returns on equity, reducing PNM’s guaranteed profit return from 9.575% to something more reasonable.
  • Endorsement of community solar and community choice aggregation,
  • 100% verified clean-up of San Juan and future plants that are decommissioned, funded by shareholders
  • Protection for workers at the San Juan plant and mine,
  • Extending and raising the Renewable Portfolio Standard in New Mexico

PNM has generated enormous profit from its San Juan operation. If it is to continue to profit, even from flawed business decisions, it should have to ‘pay’ for that compensation by making concessions to ratepayers who have long sought a transition to renewables.

Retake could not be more strongly opposed to this legislation. New Energy Economy and their allies are aligned in opposition to securitization, but they will need you to write letters, make calls and attend hearings. Even more importantly, here we need you to reach out to friends who live in other parts of the state and ask them to raise their voices with their legislators. So, please make a list and share this with others. Click here for contact information for all Roundhouse legislator contact information We will update you, but in advance of the legislative session in January, THIS IS THE TIME TO REACH OUT TO OTHERS..

In solidarity,

Paul & Roxanne.

4 thoughts on “PNM Poised to Rip You Off for $350 Million in the Roundhouse

  1. There are a number of statements in the piece that are misleading and at least one that is factually incorrect.

    As a regulated monopoly, PNM is already protected from the market and has earned a healthy guaranteed profit, 9.575%

    This would imply that investors in PNM will receive a guaranteed profit of 9.575% which is factually incorrect. First of all, there is no guarantee, rather an “authorized rates of return” that are based on estimates of future costs made at the time of rate changes. Some of these costs (such as fuel prices) can be passed through, but not all, which leaves utilities with a variety of risks, such as interest rate and regulatory risks which can impact actual profits. Further, the “authorized rate of return” is based on “return on equity”, not “return on capital” as you also imply. Return on equity is related to investor profits but is certainly not equal to it. Actual returns to investors are composed of capital gains plus dividends and fluctuate significantly from year to year. In some cases, these risk factors are large enough to lead to bankruptcy (e.g. Pacific Gas and Electric, California’s largest investor owned utility declared bankruptcy 2001). Having an “authorized rate of return” lowers risk to investors, but doesn’t eliminate them.

    “This is MUCH higher than the guarantee enjoyed in other states. For example in Colorado the guaranteed rate of return is just 3.57%.”

    This statement is factually incorrect. The highest allowed ROE belongs to Alabama Power Co., at 13.75% while the lowest belongs to United Illuminating Co. (CT) at 9.15%. The actual authorized rate of return for the Public Service Company of Colorado (the closest analog to PNM, with a 60% market share) is 9.83%.


    • My blog was based upon a secondary source, in particular the Colorado rate of return. I hate to wind up having to quarrel over details and hence want to get them right. Your analysis of the rate of return vs return on equity will also be checked on. I will forward your response and get clarification. As always, I appreciate being corrected. The PNM deal is terrible, period. So it is good to get the facts 100% correct before we go to the Roundhouse.

      It is very hard to be able to research every detail of every issue, especially those issues that are so full of thorny details. Again, thanks so much.

      • This is clearly a complicated subject and it would be surprising if there weren’t some misunderstandings or differences of interpretation. My comments also should not be taken to imply that I’m in favor of PNM’s securitization strategy (which I am strongly against).

  2. Awesomeness! Thank you for this great article. Love the title…

    Bianca Sopoci-Belknap Co-Director, Earth Care 6600 Valentine Way Building A Santa Fe, NM 87507 (505) 983-6896 (office) (505) 699-1025 (cell)

    On Tue, Dec 19, 2017 at 7:47 AM, Retake Our Democracy wrote:

    > paulgibson51 posted: ” Knowing that the PRC is not going to give them what > they want, PNM is planning a devious end-around to the State legislature > where the Gov, the GOP and too many Dems may bow to their demands. What do > we get? Absolutely nothing. This blog provides the ” >

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