Fired manager claims PNM padded San Juan expenses

An aerial view of the San Juan Generation Station near Farmington. A former plant manager says PNM's skimping on maintenance led to a big increase in unplanned shutdowns in 2013. (Albuquerque Journal File)

An aerial view of the San Juan Generation Station near Farmington. A former plant manager says PNM's skimping on maintenance led to a big increase in unplanned shutdowns in 2013. (Albuquerque Journal File)

Copyright © 2015 Albuquerque Journal

A former San Juan Generating Station manager says Public Service Co. of New Mexico cut the operating and maintenance budget at its coal-fired power plant near Farmington in 2013 to boost profits, causing outages that led PNM to purchase more expensive electricity from other sources and pass the cost on to ratepayers.

Gregory Smith – who testified under subpoena in connection with state hearings on PNM’s plans for San Juan – said the utility also has padded its capital investments at the power plant, allegedly to beef up its rate base and potentially earn more profits.

PNM denies the allegations by Smith, who was plant manager from 2010 to 2013. The utility fired Smith in May 2013 and says the former plant manager personally signed off on the plant budget in fall 2012 in meetings with San Juan’s eight co-owners – long before Smith was terminated from his job.

“Smith himself approved the 2013 San Juan budget in October 2012,” PNM spokeswoman Susan Sponar said in written comments to the Journal. “The budget was not reduced after that.”

PNM successfully appealed to the state Public Regulation Commission’s hearing examiner, Ashley Schannauer, to strike most of Smith’s testimony as “irrelevant” to the San Juan case, which focuses on PNM’s proposal to shut down two of San Juan’s coal-fired units and install environmental controls on the remaining two. The utility is also seeking approval to replace electricity from the two closed units with a mix of power generated from natural gas, nuclear and solar.

The plant currently provides about 50 percent of the electricity consumed by PNM’s 500,000 customers in New Mexico.

PNM’s proposal for San Juan, designed to meet federal haze regulations, is under review in public hearings that started last week in Santa Fe. Smith, who testified on Nov. 24 as part of the discovery process, was subpoenaed by the Santa Fe-based environmental group New Energy Economy for a videotaped deposition that was attended by PNM legal representatives and other parties.

For the San Juan case, the hearing examiner allowed only Smith’s allegations that some new pollution controls PNM is proposing for San Juan are unnecessary and are adding to the cost that will eventually be borne by ratepayers.

Nevertheless, the hearing examiner said Smith’s other allegations are “serious,” particularly his claims that PNM manipulated the PRC-approved “fuel clause” that allows it to charge consumers for the cost of fuel it purchases to provide electricity, including higher-priced energy it buys when San Juan is unavailable to generate power.

Schannauer said that allegation and other issues raised by Smith could be brought up as part of a new rate case the utility filed in November. In that case, PNM is seeking a 12 percent rate hike, mostly to recover investments in San Juan and other infrastructure. Smith’s testimony also could be examined through a special investigation by the PRC, Schannauer said.

“This is not to find that the allegations of Mr. Smith are not serious. They are,” he wrote in his order. “But the proper forum in which to make and resolve most of the rate allegations is likely in a rate case or in the annual reconciliation proceedings for PNM’s fuel clause. … The other testimony might potentially form the basis for a commission investigation.”

Smith’s allegations

Smith, in his testimony, alleges that in November 2012, PNM executives ordered him to chop $19 million from the San Juan maintenance budget because the company was expecting a cool summer in 2013 that would lower electric consumption and reduce PNM revenue. Smith said the company wanted the budget cuts to cover lost revenue, thus helping meet earnings forecasts for shareholders.

The cuts amounted to nearly half of the $40 million Smith said was budgeted for maintenance in 2013. He said he warned PNM executives that plant reliability would decline, leading to outages and forcing purchases of more expensive electricity from elsewhere. But utility executives said it didn’t matter because the extra costs would simply be passed on to ratepayers through the fuel clause, according to Smith.

Plant reliability did, indeed, decline as a result of the budget cuts, according to Smith.

Overall, the forced outage rate – which refers to the amount of time the plant is shut for repairs because of unexpected problems – jumped from 8.7 percent in 2012 to 14.1 percent in 2013. And, for one of the four generators, the outage rate more than doubled, from 6.1 percent to 16.7 percent. Smith based his testimony on public documents regarding plant performance in 2013, which were presented during his deposition.

“That’s one of the worst changes in forced outage rate I’ve seen in my career,” Smith said.

But PNM denied the accuracy of Smith’s testimony, saying the 2013 maintenance budget was not cut and that San Juan’s performance that year was little different from in the past.

“After accounting for differences in planned outages and other factors beyond the control of the plant, San Juan’s 2013 reliability was comparable to its performance in prior years,” Sponar said.

In addition, Sponar denied any manipulation of the fuel clause to pass higher-priced energy on to consumers.

“Mr. Smith’s allegations regarding fuel expenses are incorrect and fail to recognize the burden of proof utilities have to justify these expenses before the PRC,” Sponar said. “PNM just recently received authority to continue the use of its fuel and purchase power clause and had to demonstrate that its policies and practices help ensure that electric power is generated and purchased at the lowest reasonable cost.”

Padding capital investment

Along with the alleged order to cut the maintenance budget, Smith said PNM ordered him not to alter the $10 million the utility had budgeted for capital spending at San Juan in 2013. That spending covers equipment or infrastructure that costs more than $50,000.

The order to continue as planned with capital spending is significant, Smith claims, because PNM is allowed a return on those investments once they become part of its rate base. In contrast, operation and maintenance costs are part of the ebb and flow of revenue and expenses the company must juggle each year as it tries to earn a profit.

Once regular plant maintenance was reduced because of the alleged cuts, keeping up with the planned $10 million in capital spending became a problem, Smith said. That’s because investments in equipment are made during planned maintenance outages, and fewer such planned shutdowns occurred after the maintenance budget dropped, he said.

As a result, Smith said his team was forced to sink money into unplanned, marginal projects, like repaving roads around the plant. “We were scrambling to try to find where to spend that capital,” he said.

PNM, however, said all spending at San Juan is carefully vetted by the utility and the plant’s eight co-owners.

“All of the owners, including PNM, are keenly interested in protecting their respective investments in the plant through proper maintenance to ensure that San Juan reasonably achieves the best reliability it can to serve our customers,” Sponar said. “Additionally, PNM cannot unilaterally make decisions regarding the plant’s capital budget. Approval from the other owners is required.”

Pollution controls

Smith contends PNM also has substantially padded its proposed capital investments in pollution controls for the two San Juan units that will continue to operate after the other two are shut down in 2017. The shutdown and pollution controls are aimed at meeting U.S. Environmental Protection Agency rules to lower nitrogen oxide emissions, which cause haze.

The EPA has mandated certain controls on the two remaining units to reduce emissions at a cost of about $41 million, but the utility wants to spend another $116 million on additional equipment, known as “balanced draft,” to further reduce emissions of particulate matter from leaks around boilers.

Smith said PNM currently spends about $1.2 million annually for routine maintenance that makes balanced draft unnecessary, which makes it hard to justify the extra costs.

Also, a top state environment official disputed a PNM claim that the extra equipment is required under San Juan’s air-quality permit or under any federal requirement. PNM’s response is that the utility worked with the state to improve its ability to meet air quality standards, and that balanced draft is a result of those discussions.

Balanced draft is an issue under discussion in the current PRC hearings, since the hearing examiner said he would permit that part of Smith’s testimony to be included in the San Juan case.

Environmental groups say they also will pursue most of Smith’s allegations in PNM’s upcoming rate case. Western Resource Advocates and the Coalition for Clean Affordable Energy, for example, will oppose any PNM effort to recover investments in balanced draft, and they likely will push for a review of PNM’s alleged abuse of the fuel clause.

“The rate impact of just the balanced draft project to PNM customers, if allowed by the PRC, will be roughly $10 million per year,” said Steve Michel, chief counsel for Western Resources. “There seems to be an effort by PNM to build up its rate base at the expense of customers.”

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