Commentary: Good news. New Mexico’s new Energy Transition Act and Renewable Energy Act are working.
PRC regulators, previously skeptical of renewable energy, have done a terrific job of applying the new laws to accelerate renewable energy adoption, avoid building increasingly outmoded fossil fuel power plants, and maximize investment in communities where jobs will be lost in the transition away from coal. The foundation is being laid for cleaner air, more plentiful water, and lower-cost electricity.
Unfortunately, ratepayers may not realize their fair share of the cost savings. Parts of the recently adopted laws could shift financial burdens that traditionally belong to utility companies to utility customers. That’s a big deal in New Mexico where electric bills can suck up ten percent of a low-income household’s earnings. Fortunately, these problems can be addressed with a couple of straightforward legislative tweaks.
Fix one is the elimination of an Energy Transition Act provision that locks in how much consumers must pay for the early closure of fossil fuel plants replaced by renewable energy. The new law requires ratepayers to cover the full book value of early closing facilities. While this may appear fair on the surface, utilities have historically engaged in a variety of strategies to inflate the book value of their power plants forcing ratepayers to pick up the tab.
In the past, the PRC has denied utilities hundreds of millions in compensation when it discovers these “imprudent investments”. This has protected consumers from unfair rates. The new law gives utilities carte blanche to charge ratepayers potentially inflated fossil fuel plant values no matter how imprudent the investments may have been. Removal of the mandated compensation provision for early plant closure will restore the PRC's ability to protect ratepayers from utility mismanagement.
Fix two is the elimination of a newly adopted provision of the Efficient Use of Energy Act that prohibits the PRC from adjusting a power company’s targeted earnings when it adopts a pricing mechanism called “decoupling”. Decoupling helps a utility lock in a fixed profit no matter how much or how little power it sells. Customer bills are automatically adjusted upwards if sales volume is less than anticipated, and downwards if sales volume exceeds expectations. In either case, utility profits remain roughly the same, hence they are “decoupled” from the volume of sales. Utilities avoid the risk of fluctuating demand, while consumers take on the risk of shifting billing rates.
Financial markets reward high-risk investments with high returns and low-risk investments with lower returns. The PRC currently awards large New Mexico electric utilities projected returns of about 9.4% based on uncertain annual earnings. The risk-free annual return on a 30 year Treasury bill is currently 1.7%. Is it fair for ratepayers to continue supporting a 9.4% return when utility earnings are largely guaranteed under decoupling? No. The public will be far better served if the PRC regains the ability to modify rates of return when a utility adopts decoupling.
New Mexico’s forward-looking electric utility laws protect the environment and the state’s economic future. With small adjustments, we can do a better job of protecting ratepayers as well. That’s why the PRC’s five sitting commissioners unanimously support these two changes to our statutes. Call on your legislators to restore the PRC’s ability to determine fair ratepayer charges for early plant closures and to set appropriate profit targets for utilities that adopt decoupling.
Steve Fischmann is the Chair of the Public Regulation Commission and a former New Mexico State Senator.