Yesterday, the Hearing Examiner in PNM’s Application for Abandonment and Securitized Financing Case of the Four Corners Coal Plant Dismissed PNM’s Application as Deficient. “The Hearing Examiner finds that PNM’s Application is deficient on its face. The Application fails to plead and adequately support a necessary claim for relief, that being an explicitly plead and sufficiently supported request for the approval of the sale and transfer of its minority interest in the FCPP to NTEC.” Order on Sufficiency of PNM’s Application and Scope of Issues in Proceeding, p. 19.
On January 8, 2021 PNM filed an Application for Abandonment of the Four Corners Power Plant (“FCPP”) and Issuance for a Securitized Financing Order (“Application”) demanding $300 Million amortized over a 25-year period plus interest in a non-bypassable charge on every customer’s monthly bill. In its Application PNM demanded 100% cost recovery from ratepayers for its undepreciated investment, decommissioning, and necessary capital expenditure costs in the estimated amount of $300M pursuant to the Energy Transition Act.
In the Application, PNM sought Commission approval to sell its ownership share in the amount of 200 megawatts (MW) of coal-fired generation at the Four Corners Power Plant transfer these resources to the Navajo Energy Transitional Company, LLC (‘NTEC’) but it failed to provide information about:
whether that sale would produce “a net public benefit,” the applicable legal standard; (Id., p. 20.) and
the prudence of all undepreciated investments in the FCPP for which PNM seeks inclusion in a financing order. (Id., pp. 22-23.)
In the last rate case the Commission deferred consideration of whether PNM imprudently reinvested in Four Corners and any associated cost disallowances until PNM’s next rate case filing. In the meantime, PNM was successful in having the Energy Transition Act (“ETA”) passed. Now it argues that “The law changed before PNM filed its next rate case. As a result, the ETA’s plain language controls PNM’s recovery of its FCPP abandonment costs and PNM is entitled to recover its undepreciated investments.” Meaning it gets all its money, despite an earlier finding of imprudence. This flies in the face of a 2019 NM Supreme Court ruling that held that ratepayers should be held harmless for the imprudent actions of utility management.
The sale to NTEC includes PNM paying NTEC $75 million to take its 200 MW FCPP coal shares and associated other obligations. Meaning that FCPP has a negative value. The sale also allows NTEC to continue to burn coal until at least 2027, if not 2031 or longer. This is contrary to both the spirit and letter of the Energy Transition Act, which was sold to lawmakers as a means to close coal and invest in renewables.
PNM bought an asset that has a negative value. PNM is paying NTEC $75 million to own a 13% share in FCPP, clearly a toxic liability. If PNM had declined to re-invest in the Four Corners coal plant when partnership agreements were up in 2014 that climate-altering, expensive, pollution-spewing, unreliable plant would have closed. But instead PNM engaged in blatant utility mismanagement - reinvesting nearly a billion dollars without ANY financial evaluation. Who would do that? A rogue company who thought it could get away with it. But New Energy Economy caught PNM cheating ratepayers. After spending many many hundreds of millions of dollars it has the gall to come crying for a bailout! PNM’s case for $300Million should be thrown out as shocking to the conscience.
PNM has until March 15, 2021 to file its new Application.
Background on PNM’s Four Corners Imprudence
A review of the bases for the Hearing Examiners’ Finding of Imprudence in the last rate case demonstrates:
a) PNM has a 13% interest in Four Corners coal plant. In the fourth quarter of 2013, the PNM Board approved three agreements, plus 11 additional agreements not requiring Board approval. The coal agreements were executed in 2013, and the Co-Tenancy Agreement was signed in March 2015, together extending the life of the Four Corners Power Plant.
b) PNM Board’s decision to approve the agreements was based on flawed Strategist (financial) computer modeling in PNM’s Integrated Resource Plan and PNM’s “second look” of modeling conducted in May 2012.
c) PNM also conducted no further analyses in the 17 months between May 2012 and October 2013 when further events indicated that such further analyses should have been performed.
d) The May 2012 Strategist runs (as well as the 2011 runs) included a fundamental modeling error. The runs that anticipated PNM’s extended participation in Four Corners excluded the capital costs of anticipated future capital improvements required to extend Four Corners’ life, except for the estimated cost of the Selective Catalytic Reduction (SCR) pollution controls. PNM was aware of the magnitude of the need for capital improvements. PNM included the anticipated operating and maintenance costs associated with the improvements in the Strategist runs but omitted the capital improvement costs.
e) PNM acknowledged the omission of going forward capital costs in the summer of 2014 during the hearings in Case No. 13-00390-UT, but PNM did not re-do any Strategist runs at that date to determine the impact of the mistake upon the cost-effectiveness of continuing to participate in Four Corners.
f) El Paso Electric (EPE), another monopoly electric utility in NM, and a co-owner at the plant, did perform contemporaneous Strategist financial modeling that included the ongoing costs of capital expenditures and determined that it was not cost effective to remain in Four Corners.
g) The exclusion of the costs of ongoing capital improvements contrasts sharply with the repeated emphasis PNM places on the importance of such costs to earnings for PNM’s stockholders.
h) PNM’s description of its May analysis was confusing, frustrating and at times contradictory. PNM’s description draws into question what PNM actually considered.
i) Despite “forensic accounting,” PNM’s witnesses, Vice President of Generation, Olson, and Director of Planning and Resources, O’Connell, could not accurately explain the documents that allegedly formed the basis for PNM’s decision to re-invest in FCPP.
j) Increasingly poor performance at FCPP: Beginning in 2013, the forced outage rate at Four Corners started climbing significantly, and the units’ availability declined. This meant that the plant was only available for customer reliance 72.8% of the time in 2013, 68.1% of the time in 2014, and 78.2% of the time in 2015.
k) Co-owners were reluctant to invest in an unreliable plant. There was uncertainty, as other co-owners were considering exiting the plant. Maintenance had been deferred and “a lot of money would be required” for capital expenditures to increase performance.
l) Despite cost-changing events that occurred during the delay PNM never conducted a further analysis between October 2013 and March 2015:
Including whether PNM might be required to absorb other co-owners’ exiting MW shares. PNM did not re-run the Strategist analyses it had been using for its decision to extend its participation in Four Corners, despite PNM’s awareness, as early as May 2012, of the need for a NPV of $88.5 million in future capital improvements.
Dramatically increasing cost estimates for SCR pollution controls.
The impact on reliability and the increased rate of outages also pointed to the need for additional capital improvements.
No evidence that PNM attempted in January 2014 or at any time to compare the costs of retirement to the costs of PNM’s extended participation in the plant. In fact, the testimony shows that PNM did not seriously evaluate the option of exiting Four Corners.
The January 2014 single Strategist run was conducted without sensitivity analyses, failing to consider a variety of assumptions and risks.
m) The 2011 and 2014 Integrated Resource Plans, relied on by PNM, were not accepted by the Commission. Further, the costs inputs per metric ton of CO2 were inconsistent and failed to abide requirements set forth in Case No. 06-00448-UT. If carbon costs were consistently applied the Strategist run would had favored PNM’s exit from FCPP.
n) The load forecasts compared to actual data (in light of actual sales) were overly optimistic.
o) A contemporaneous memo from PNM’s Senior Vice President Patrick Apodaca to the board of PNM reveals the actual reason PNM extended the life and invested further in FCPP: “Among other things, maintaining our same level of ownership at Four Corners avoids a possible distraction with our BART filing with the PRC next week and our negotiations with the owners of San Juan Generating Station.”
p) Relying on NEE expert witness, Steven Fetter, former Chairman of the Michigan Public Service Commission, former bond rater for Fitch, former general counsel for the Michigan State Senate, and former three-time PNM expert witness, characterized PNM’s decision to extended the life and invest further in FCPP as “utility management malpractice.”