In 2013, the Public Service Company of New Mexico purchased 64.1 megawatts of nuclear generation facilities (Unit 2) at the nearly 30-year-old Palo Verde nuclear power plant in Arizona, executed a 15-year coal supply agreement for the nearly 50-year-old Four Corners Power Plant on a “take or pay” basis (requires coal purchases whether power plant operates or not), and purchased unnecessary “balanced draft” environmental controls for the coal-fired San Juan Generating Station, all without any prior review or approval from the New Mexico Public Regulation Commission. Now, three years later, PNM is seeking PRC approval to bail out PNM for these purchases and increase customer rates to pay for them. If the PRC approves, PNM will transfer all costs and risks associated with these purchases to us, its customers. In requesting this approval, PNM has provided no showing of need for additional “base load” (24-seven) electricity and no showing of benefit to ratepayers, as required by New Mexico law and regulations.
By Ron Flax-Davidson
In 2013, the Public Service Company of New Mexico purchased 64.1 megawatts of nuclear generation facilities (Unit 2) at the nearly 30-year-old Palo Verde nuclear power plant in Arizona, executed a 15-year coal supply agreement for the nearly 50-year-old Four Corners Power Plant on a “take or pay” basis (requires coal purchases whether power plant operates or not), and purchased unnecessary “balanced draft” environmental controls for the coal-fired San Juan Generating Station, all without any prior review or approval from the New Mexico Public Regulation Commission.
Now, three years later, PNM is seeking PRC approval to bail out PNM for these purchases and increase customer rates to pay for them. If the PRC approves, PNM will transfer all costs and risks associated with these purchases to us, its customers. In requesting this approval, PNM has provided no showing of need for additional “base load” (24-seven) electricity and no showing of benefit to ratepayers, as required by New Mexico law and regulations.
Instead, PNM has requested that the PRC approve the approximately $200 million cost of purchase (including recovery of capital costs) for the Palo Verde nuclear plant (equivalent to about $2,500 per kilowatt), to be fully reimbursed by ratepayers. PNM has admitted that the net book value of Palo Verde, Unit 2, is just $1,306 per kilowatt. On this basis, PNM has paid, and is seeking recovery of costs of, nearly two times the actual net book value of the asset. PNM proposes this purchase because under PRC rules, PNM is guaranteed an approximate 10 percent return on approved investments. As a result, PNM has an incentive to make more investments at higher cost, despite their impact on customers.
Placing the Palo Verde asset into the rate base also brings additional risks to PNM customers, including future decommissioning costs (estimated to cost millions of dollars), the potential of higher uranium fuel costs and more stringent environmental and safety regulations, uncertainty regarding the costs and mechanisms for disposal of nuclear waste, and the potential costs of a catastrophic failure (like the Fukushima Daiichi plant meltdown, the Chernobyl plant explosion or the Three Mile Island partial meltdown).
The new coal contract will require customers to pay about $580 million over the 15-year life of the contract. These costs represent an immediate increase of 40 percent in coal costs (from June to July 2016) and an increase of 128 percent over the life of the contract. This contract, if accepted into rates by the PRC, will encourage PNM to continue operations at the Four Corners Power Plant, with all the risks associated with such operation placed on customers, including the higher maintenance costs of this old plant, future more stringent environmental and safety regulations, and including future new water use regulations that might limit and even shutter the plant, and all while requiring continued payments under the “take or pay” coal supply agreement.
Had PNM made a request for proposals to seek the lowest cost of electricity, and had Palo Verde or the coal-fired Four Corners Power Plant been shown to be the cheapest source of electricity, the PRC would have had little trouble approving these purchases. But by purchasing these power assets without an RFP and without the prior approval of the PRC, we can be assured that PNM has motivations other than finding the lowest cost of power for its customers. The PRC should not bail out PNM from these reckless and imprudent acts. Ron Flax-Davidson is a resident of Santa Fe and a member of the board of New Energy Economy.
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