Reader View: PNM uses sleight of hand to increase profits, rates

Posted: Saturday, October 31, 2015 7:00 pm

Public Service Company of New Mexico had the highest residential electricity rates in New Mexico in 2014. Why?

Public regulated utilities, such as PNM, are allowed to make a profit on the assets that they own. In the case of PNM, it is allowed to make 11.4 percent pre-tax profit on its asset base (rate-base). Thus, to set electricity rates for its customers, PNM adds up all of its asset values at the end of the year; 11.4 percent of that asset value is the profit that it can claim.

So, the more assets that PNM has on its books, the more profit the company will make. PNM does not have much incentive to produce more energy with fewer assets, as normal competitive businesses do. In fact, it has every incentive to increase its assets for the same amount of energy. We pay our regulators, the New Mexico Public Regulation Commission, to make sure that all costs are reasonable and prudent.
There are multiple ways that PNM can increase its profit (and therefore our rates) without benefiting its customers. I will discuss one of them — its sleight of hand with its asset base — and describe several recent examples.

First, PNM’s proposed replacement plan for the retirement of two units at the San Juan Generating Station includes the addition of 134 MW of the Palo Verde nuclear facility. The book value of this asset is $143 million. If this proposal were reasonable, PNM could legitimately charge its customers $143 million for it. However, PNM proposes to charge customers $221 million, or a windfall to PNM of $78 million. The windfall is actually more than twice this amount, as PNM would, in addition, charge customers its allowed profit on the $78 million each year through 2047.

Second, PNM’s proposal for San Juan includes adding 132 megawatts from California owners in one of the remaining San Juan coal units. PNM will pay zero for this capacity but proposes to value it at $26 million, creating another windfall for PNM. Again, PNM would charge customers for this and add its profit to this amount, more than doubling it over time. The PRC hearing examiner said no in his recommended decision to the PRC. Again, kudos to the hearing examiner.

Third, PNM’s proposal for San Juan included $90 million for pollution controls. We can all applaud PNM’s sudden interest in limiting pollution. However, $60 million of these costs are for controls that are neither necessary to meet regulatory requirements nor to reduce pollution, simply because they could be achieved through $1 million in operating improvements. So, here is another $60 million windfall for PNM, plus the profit through 2053. PNM has once more chosen an approach that unnecessarily pushes our rates to the sky, simply to increase their profits. Again, the PRC hearing examiner said no in his recommended decision. Once more, we can applaud the work of the hearing examiner.

In each of these cases, the hearing examiner wrote his recommended decision to stop PNM’s windfall profits. The PRC commissioners have not yet voted on these issues. When they do, hopefully they will support the hearing examiner’s position and disallow the attempts by PNM to use financial sleight of hand to gain windfall profits.

These are only three examples from the San Juan retirement case. PNM even proposes that its profit margin be increased, which would generate an additional $10 million per year. The PRC should recognize that PNM residential rates have increased by 57 percent and commercial rates by 50 percent from 2008 to 2014. In this identical period, PNM’s profits have increased by 460 percent! The PRC should stand firm against PNM’s attempts to realize unearned profits and increases in electricity rates that are not deserved.

Dexter Coolidge is a Santa Fe resident and former (retired) senior vice president at Blue Cross Blue Shield.

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