Regulatory hearings on Public Service Co. of New Mexico’s first request for a rate hike since 2016 begin today, ushering in three weeks of testimony over whether rates should increase, and, if so, by how much.

PNM, which filed for new rates at the Public Regulation Commission last December, wants to raise the overall base rate for its roughly 530,000 customers in New Mexico by 8.7%. That would generate an additional $64 million in annual revenue to recover investments in the grid since 2019, when its last rate hike took effect.

But the actual increase on bills would differ significantly by customer class, with commercial and industrial consumers bearing more of the costs than residential ones. In fact, although percentage wise, residential rates could rise by nearly 9.7%, the real impact on the average residential bill would be less than 1%, or just 75 cents more per month, according to PNM.

Among other things, that’s because savings from shutting down the coal-fired San Juan Generating Station last year and replacing it with lower-cost solar generation and battery storage will significantly offset the rate impact.

But consumer advocacy groups, environmental organizations, and other parties intervening in the case question how much additional revenue for PNM is actually justified. Some, for example, dispute whether PNM should be allowed to recover costs from some of its past investments, such as installing pollution controls on the coal-fired Four Corners Generating Station about 10 years ago, rather than abandoning the facility.

Some also oppose PNM’s request to raise its allowed “return on equity,” or ROE — which refers to the profits that flow back to shareholders for investments in the grid — arguing that the ROE should either remain unchanged at current levels, or even be lowered.

Those disputes will be scrutinized during the PRC hearings that begin today, with intervening parties cross-examining PNM executives, and expert witnesses for different parties testifying before hearing examiners in the case. After that three-week process concludes, the hearing examiners will make a “recommended decision” on PNM’s rate request to the three-member commission, which will likely then make a final decision in late December, or in early 2024, for any newly-approved rates to take effect next year.

The final decision, however, will only be made by two of the commissioners, since Commissioner Pat O’Connell recused himself from the case in July. That’s because, during PNM’s last rate case, O’Connell testified on behalf of PNM regarding the utility’s past investments in the Four Corners power plant, creating a conflict of interest for O’Connell, since the Four Corners issue is now a part of the current case.

O’Connell and the other two commissioners all took office in January.

Transitioning the grid

PNM says its request for higher rates primarily reflects its efforts to transition the electric grid from fossil fuels to renewable resources under the state’s Energy Transition Act, which requires PNM and other public utilities to derive all electricity from non-carbon-emitting generation by 2045. In fact, PNM is working to achieve that five years ahead of time, by 2040.

Apart from shutting the San Juan power plant and replacing it with solar and battery storage, the utility is investing heavily in its transmission and distribution network to replace aging infrastructure and ensure service reliability going forward. It’s also working to modernize the grid to better manage the switch from centralized fossil-fuel plants to widely-scattered solar, wind and battery systems, including everything from upgrading grid cybersecurity to installing “smart meters” on all customer sites.

“This rate case begins to capture the changes in PNM’s cost of service brought about by the Energy Transition Act and PNM’s pledge to have a carbon-free generation portfolio by 2040,” PNM said in its rate request to the PRC. “…Ultimately, the necessary and ongoing transformation of PNM’s energy grid can only happen with new and continued investments.”

Apart from the ETA-related transition, PNM cites other cost increases, such as additional operating and maintenance expenses and the impact of inflation on cost of service.

In addition, it’s requesting authorization to hike its ROE from 9.57% now to 10.25%.

If the full rate request is approved, commercial and industrial customers would pay 7.9% more in base rates, and residential consumers 9.7% more.

But the actual impact on residential bills would be lower than 1%, or just 75 cents more per month, once savings from San Juan’s closure, the cancelation of two utility leases for energy from the Palo Verde Nuclear Generating Station in Arizona, and the replacement of those resources with cheaper solar and battery power are all factored into the charges on customer bills, according to PNM.

The company expects a “robust” hearing process to analyze those things, said PNM spokesman Ray Sandoval.

“We look forward to making our case,” Sandoval told the Journal.

Controversial issues

Intervening parties, however, will argue against various rate-hike justifications by PNM, seeking to remove a number of things from utility cost recovery to potentially lower the company’s total base revenue to even below what PNM now earns through current rates approved in its last case in 2016.

Santa Fe-based New Energy Economy, for example, wants recovery for pollution controls that PNM and other participating utilities installed a decade ago at the Four Corners power plant removed from PNM recovery. NEE, along with the Sierra Club, say that, at the time, PNM never did a comprehensive cost-benefit analysis to show that remaining in the coal plant would be cheaper in the long-term for ratepayers than abandoning the plant and replacing that energy with cheaper renewable resources.

“That’s probably the most-important issue for NEE in the case,” NEE Executive Director Mariel Nanasi told the Journal. “The question is, was PNM ‘prudent’ when it reinvested in Four Corners without any contemporaneous financial analysis at that time … Ratepayers should be held harmless, because not having done that is imprudent per se and equivalent to negligence, or a utility version of malpractice.”

PNM says it did analyze the costs and benefits based on market conditions at that time — when the costs for renewables were higher and coal expenses were lower than today — and concluded that customers would save more by staying in the plant.

But Nanasi and Sierra Club Rio Grande Chapter Director Camilla Feibelman say PNM’s analysis back then was extremely limited.

“PNM had the chance to exit the plant when the coal supply contract expired in 2016, but it instead decided to remain in Four Corners based on faulty analysis and ratepayers are now stuck with paying for PNM’s bad decision,” Feibelman told the Journal. “…Ratepayers shouldn’t be on the hook for those costs.”

NEE and the Sierra Club also want the commission to block PNM from continuing to charge customers for eventual decomissioning and reclamation costs related to the one lease for energy the utility still maintains at Palo Verde, arguing that, like Four Corners, the decision to retain that lease instead of replacing it with new renewable generation was “imprudent.”

Those two groups and others also oppose a PNM proposal to raise the “fixed charge” on bills that all customers pay for being connected to PNM’s grid from $8 now to nearly $11. And many oppose the utility’s request to increase its ROE.

If some, or all, of those things are removed from base rates, it could actually lower residential customer bills rather than raise them, something the Attorney General’s Office says it will explore during the hearings.

“Our primary objective in any rate case is to protect the interests of consumers,” attorney general spokesperson Lauren Rodriguez told the Journal. “We look forward to examining the rationale for the proposed rate increase and will consult with outside experts and local stakeholders in evaluating the proposal.”