Seller's Market

Lawsuit charges PNM’s effort to purchase nuclear power leases locks ratepayers into a bad deal.

January 27, 2016,
By Elizabeth Miller

We learned some unhappy lessons in the wake of the recession: namely, don’t pay more for something, like a house, than it will be worth when the next bubble bursts.

Those can be tough cards to read, of course, and very few people recognized the toxic assets poisoning our economy to the tune of 8 million lost jobs and 6 million lost homes as they approached. But a recently filed lawsuit raises questions as to whether the Public Service Company of New Mexico is making just that kind of deal.

PNM decided to purchase rather than renew three of eight leases for power from the Palo Verde Nuclear Generating Station in Arizona, 50 miles west of Phoenix, for a price of $163.4 million for just those three leases’ 64 megawatts of power. Opponents argue that move is akin to paying $300,000 for a home that isn’t worth more than half that.

“PNM has these legacy investments, in this case it’s Palo Verde, that cost them more to generate the electricity than they actually can get for the electricity,” says Mariel Nanasi, executive director with New Energy Economy, which filed a motion challenging PNM’s effort to pass some of these costs on to ratepayers.

To counter that, Jodi McGinnis, spokeswoman for PNM, writes via email that “PNM makes resource decisions in the best interests of our customers, and Palo Verde Unit 2 is a cost-effective, zero-emissions part of our portfolio.” She did not respond to a question about the purchase’s effect on ratepayers, though Nanasi contends the price of that cheap nuclear power will likely go up.

The nonprofit advocacy group and Bernalillo County argue in their lawsuit that PNM should complete a new “certificate of convenience and necessity,” a legally required financial analysis that calls for an assessment of load management, renewable energy requirements, environmental laws and regulations (both existing and anticipated), fuel diversity, susceptibility to other market fluctuation, transmission constraints and system reliability. The state Public Regulation Commission requests that document every time a utility wants to acquire a new resource. In this instance, PNM argues that they don’t need approval from the regulatory authority because the provisions of the original lease that was approved in 1977 provided for renewing or purchasing those leases.

“Obviously, that proceeding did not contemplate … the necessity of re-purchasing part of the plant after it had been sold due to extreme overrunning of costs and an egregious miscalculation in the amount of power needed in subsequent decades,” the lawsuit argues, referencing a separate case against PNM New Energy Economy is appealing. “To rely on that [certificate] as somehow an approval for the purchase in 2016 of 64 MWs of power from [Palo Verde Unit 2] stretches the letter and spirit of the law to its breaking point.”

A financial analysis of the proposed purchase would, to continue with the housing analogy, compare the various options of continuing to lease the house we’ve been leasing, purchasing it or moving out. Perhaps, given the changes to the market since the last full certificate of convenience and necessity was done for Palo Verde in 1977, that analysis would show it was time to book the moving truck.

“PNM conducted no financial analysis, no economic analysis to determine that purchasing that lease was, in fact, a cost-effective thing that was the best among all alternatives and that there was no undue risk involved,” Nanasi says. The company skirted that legal requirement, she argues, likely because they can’t prove that this option beats the alternatives. New Energy Economy’s analysis suggested other options might surpass this one. According to 2013 testimony from New Mexico Industrial Energy Consumers’ James Dauphinais, submitted with New Energy Economy’s motion, 100 MW of photovoltaic solar capacity could outperform 134 MW of capacity at the nuclear plant.

The drop in gas and oil prices, as well as costs for solar and wind power, make those options now cheaper than nuclear power, Nanasi says. Nuclear power comprised 31 percent of the 10,791 GWh of power PNM provided to customers statewide in 2014, up from 22 percent of the utility’s power in 2012.

The power utility says it decided to pursue purchase of the leases when low natural gas prices were drawing down the cost of electric power, but looming federal regulations meant the price of coal-fired power, the utility’s primary power source, could soar.

“Significant reductions of coal generation could be expected to drive electric power prices higher,” according to August testimony from Elisabeth Eden, vice president and treasurer of PNMR Services Co., which provides corporate services to PNM through their shared parent company. The company decided to purchase the leases, she said, “while there was still downward pressure on the power prices, rather than waiting until the leases expired in 2018 and hoping the fair market value of zero emission nuclear generation would not go up significantly by then.”


The purchase locks in the price, Eden argued, whereas the lease renewal options, which extended only for two years, would not. The five leases for which PNM did pursue renewals now end in 2023, and those renewals, according to Eden, saved PNM’s annual lease payments by roughly $16.5 million.

PNM agreed to a purchase price of $2,500 to $2,600 per kilowatt, and Eden says that’s “fair market value.”

“The $2,500 per kW figure only represents what PNM, as the seller, believes the plant is worth,” Dauphinais argued in 2013. “As in any transaction, there are two parties, a seller and a buyer. The buyer, in this case the ratepayer, must decide what it is willing to pay after weighing all the risks associated with the nuclear capacity being placed into rate base.”

Those risks in this case, of course, include potential accidents and the need to someday decommission the plant, which has a price tag in the hundreds of millions (if not billions) of dollars.

The book value of kilowatts of nuclear power was set in the 2013 evaluation of Palo Verde Unit 3 at $1,071. In other words, half the house’s current list price. Eden says that’s irrelevant here.

PNM has 15 days to respond to New Energy Economy’s Jan. 20 filing before the PRC hearing examiner decides the matter.

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