PNM lays out legal basis for Four Corners appeal
New Mexico Supreme Court asked to reverse PRC rejection of utility’s exit from coal plant
Public Service Company of New Mexico wants the Supreme Court to decide if state regulators violated New Mexico’s Energy Transition Act by rejecting PNM’s plan to exit the coalfired Four Corners Generating Station.
The Public Regulation Commission denied PNM’s proposed exit on Dec. 15, despite a PRC hearing examiner’s recommendation for approval. The utility filed a “notice of appeal” with the state Supreme Court on Dec. 23, and on Jan. 21, it submitted a “statement of issues” in the case that outlines alleged violations of the ETA, and of other utility laws and legal precedence.
Under PNM’s plan, the utility would have sold its 13% stake in the power plant to the Navajo Transitional Energy Co., or NTEC, which currently holds a 7% share in Four Corners and also owns the nearby Navajo Mine that supplies coal to the plant. The sale to NTEC would have allowed PNM to depart from the plant in December 2024, seven years ahead of schedule.
PRC Hearing Examiner Anthony Medeiros, who oversaw evidence gathering and public hearings on the issue, said the plan would result in a net public benefit, saving between $30 million and $300 million for ratepayers, depending on the cost for renewable resources chosen to replace coal-plant generation.
PNM shareholders also committed to pay $75 million to break the utility’s coal contract with NTEC, holding ratepayers harmless. And, NTEC and the plants other three owners — Arizona Public Service, the Salt River Project and Tucson Electric Power — all agreed to move the plant to seasonal operations starting in fall 2023, eliminating up to 25% in annual carbon emissions from the facility.
But the PRC rejected the proposal, primarily because PNM did not provide a list of specific alternative generating resources that could replace electricity from Four Corners.
In contrast, PNM did provide a detailed list during abandonment hearings in 2020 for the coal-fired San Juan Generating Station, and commissioners said a similar list is necessary for Four Corners to accurately evaluate cost and environmental benefits from PNM’s exit.
Commissioners also said PNM failed to comply with a previous PRC order to conduct a modeling analysis as part of its 2020 Integrated Resource Plan, or IRP — which utilities file every four years for long-term system planning — to outline potential economic advantages and disadvantages of abandoning Four Corners. By breaching that prior obligation, PNM deprived the commission of information directly related to PNM’s exit plan, constituting another reason to deny its application for abandonment, the commission said.
In its final order, the commission said PNM must include a detailed list of replacement resources, plus the modeling analysis of abandonment that was expected in its 2020 IRP, as part of any new proposal to exit Four Corners.
And — although commissioners didn’t use it as a justification for denying abandonment — they also ordered a “prudency” evaluation of some $150 million that PNM previously invested in Four Corners as part of any new abandonment filing.
The PRC approved those investments for utility recovery — which included nearly $140 million for new pollution controls to comply with federal regulations — in the utility’s last rate case in 2016, and those costs have been included on customers’ bills since 2019.
But as part of the 2016 rate case, the PRC also ordered that a prudency review of those investments be conducted in the utility’s next rate case, which has yet to take place. The outcome of that review could affect the amount of money PNM
can recover for its previous investments after abandoning Four Corners if the commission were to find those expenditures “imprudent.” That could force PNM to remove recovery on the investments from its base rates and reimburse customers for what they already paid since 2019.
In PNM’s abandonment proposal, however, the utility requested full recovery for $270 million in past investments in Four Corners, including the expenditures that have yet to be evaluated for prudence. And PNM proposed to recover all those investments through low-cost bonds to be paid off by customers through a monthly surcharge on their bills over 25 years.
Use of those bonds — known as “securitization,” because they fully secure investment recovery through irrevocable financial instruments — are authorized under the state’s Energy Transition Act, approved in 2019. The ETA mandates that all of the state’s public utilities convert their electric grids to 50% renewables by 2030, 80% by 2040, and 100% carbon-free generation by 2045, requiring PNM to divest from its coal-based assets.
Appeal issues
Provisions in the ETA — which clearly delineate PRC authority when ruling on abandonment proceedings like in the Four Corners case — form the crux of PNM’s appeal to the Supreme Court. Its “statement of issues” asks the court to consider whether the PRC “misinterpreted” and “misapplied” ETA provisions in the case, acting “arbitrarily, capriciously and contrary to law in denying PNM’s application for abandonment.”
Regarding the lack of a detailed list of replacement resources for Four Corners, the ETA does say a utility must identify “adequate potential new resources” that can provide “reasonable and proper” service to customers in place of the abandoned plant.
But PNM says it complied with that provision through an in-depth modeling analysis of potential replacement resources.
“Since PNM does not know what specific resources the commission might ultimately approve, PNM’s analysis covers different combinations of all feasible options, as a proxy for what gets approved by the commission after the abandonment is approved,” PNM Vice President for Generation Tom Fallgren told the Journal. “This includes numerous modeling runs with thousands and thousands of combinations.”
That modeling was based on responses by potential power suppliers to a competitive “request for proposals,” which turned up “robust” offers from bidders that PNM expected to present to the commission in early 2022 to choose the best options to replace Four Corners. That’s why the utility outlined a broad range of potential cost savings for customers after abandoning the coal plant, because the savings depend on specific replacement resources selected by the commission, Fallgren said.
“This is the main reason PNM presented a range of $30 million to $300 million of customer benefits included in the filings, because the final costs are only known after PNM negotiates contracts with specific bidders and the commission actually approves the proposed resources,” Fallgren said.
The ETA also explicitly states that the PRC can choose replacement power in a separate proceeding when the PRC is ruling on an abandonment case. And that’s exactly what the PRC did in 2020, when it approved PNM’s request to exit the San Juan Generating Station.
The commission selected San Juan replacement power in a separate proceeding, although in that case, PNM did provide a list of potential alternative resources. Still, even without a detailed list for Four Corners, Hearing Examiner Medeiros said in his “recommended decision” to the commission that PNM presented “credible” modeling of potential replacement power that would provide significant savings for customers over 20 years.
The commission, however, discarded Medeiros’ recommendation, instead ruling that PNM’s “proxy modeling” was not enough for it to fully evaluate the costs and benefits of abandonment.
PNM says that overstepped the PRC’s legal authority under the ETA.
IRP and prudency
As for PNM’s failure to do an IRP-related modeling analysis on abandonment in 2020,
Medeiros told commissioners that conducting such a study now “would not be a worthwhile or sensible exercise.” That’s because it would be a “hypothetical” evaluation of the costs and benefits of abandoning Four Corners that would exclude savings and environmental advantages contained in PNM’s newly negotiated sale agreement with NTEC. Among other things, that includes the commitment by PNM shareholders to pay $75 million to NTEC for breaking PNM’s coal contract with the Navajo mine, thereby removing that burden from customers, plus the commitment by Four Corners’ co-owners to lower carbon emissions starting in 2023 through seasonal operations.
PNM says its failure to conduct the 2020 IRP analysis ordered by the commission doesn’t provide legal justification to reject its abandonment proposal, because the case record and the hearing examiner’s recommendation clearly show that doing the analysis today is “meaningless.” In addition, ordering PNM to do that analysis now as part of a new abandonment filing breaks with the PRC’s own rules.
“The remedy for a deficient IRP, under the commission’s rules, is to require the utility to revise and refile the IRP and does not include rejecting an abandonment application,” PNM wrote in its “statement of issues.”
As for the prudency evaluation of PNM’s prior investments, the commission’s order for that to be part of any new abandonment proposal is a direct violation of ETA provisions, according to the utility. The ETA clearly states that any investments or expenditures already approved by the PRC and included in the utility’s base rates as of 2019 are eligible for recovery through securitization bonds. And, indeed, PNM’s customers have been paying for the roughly $150 million in question on their bills since 2019 as a result of the 2016 rate case.
That issue, however, is particularly controversial, because the commission explicitly ordered a prudency review on Four Corners to take place in PNM’s next rate case as a condition for including, at least provisionally, the investments in question in the utility’s base rates. And the commission signed that order years before the ETA took effect.
That was a critical point of dissension among parties intervening in the Four Corners case. During discussions with Hearing Examiner Medeiros, the commissioners themselves expressed concern about what authority they retain to review prudency of past investments under the ETA.
Medeiros told commissioners that even if they approved bond recovery for the full $270 million in expenditures requested by PNM, the commission could still review that in PNM’s next rate case and adjust base rates accordingly if they find its investments were imprudent.
But under the ETA, PNM says the PRC can only review the prudency of investments made in Four Corners after 2019, not those included in base rates before then. And although the commission didn’t use the issue as justification for denying PNM’s abandonment proposal, the utility is asking the Supreme Court to review whether the PRC has even the legal right to order a prudence evaluation as part of any future abandonment case.
Most parties that intervened in the Four Corners case believe the commission does retain its authority to review the prudence of PNM’s past investments, and they’ll be closely watching the appeal process at the Supreme Court.
“PNM has appealed to the court, and the PRC no longer has jurisdiction over it,” said Steve Michel of Western Resource Advocates. “We’ll have to see how the justices respond.”