minutes of the case management open …nmprc.state.nm.us/docs/older docs/09-28-16 minutes.pdf ·...

MINUTES OF THECASE MANAGEMENT OPEN MEETING

NEW MEXICO PUBLIC REGULATION COMMISSIONSeptember 28, 2016

TIME: 9:30 a. m. PLACE: PERA Building4th Floor Hearing Room1120 Paseo de PeraltaSanta F6, New Mexico 87501

A quorum was present as follows:

Members Present:Commissioner Valerie Espinoza, ChairpersonCommissioner Karen L. Montoya, Vice-ChairpersonCommissioner Lynda LovejoyCommissioner Patrick H. LyonsCommissioner Sandy Jones

Members Absent:

Staff Present:Ernest Archuleta, Chief of StaffMichael Smith, Acting General CounselJudith Amer, Associate General CounselCydney Beadles, Legal Division DirectorCarolyn Glick, Hearing ExaminerMichael Ripperger, Acting Utility Division DirectorMarc Martinez, Legal Division

Others PresentCarl Boaz, Stenographer

CALL TO ORDER

The Case Management Open Meeting was scheduled at 9:30 a.m., pursuant to proper notice underNMSA 1978, 10-15-1(c), and the Commission’s Open Meeting Policy. Commissioner Valerie Espinoza,Chairperson, called the Case Management Open Meeting to order at 9:30 a.m., in the Fourth Floor HearingRoom, PERA Building, 1120 Paseo de Peralta, Santa F6, New Mexico.

A copy of the sign-in sheet for the Case Management Open Meeting is incorporated herewith to these

New Mexico Public Regulation CommissionMinutes of the Case Management Open MeetingSeptember 28, 2016

minutes as Exhibit 1.

A copy of the Agenda for the Case Management Open meeting is incorporated herewith to theseminutes as Exhibit 2.

A copy of the Public Comment sign-in sheet for the Case Management Open Meeting is incorporatedherewith to these minutes as Exhibit 3.

1. PLEDGE OF ALLEGIANCE/STATE PLEDGE

The Pledge of Allegiance and State Salute to the Flag were recited.

2. INTRODUCTION OF SPECIAL GUESTS

Commissioner Lovejoy welcomed Senator Bill Sharer and Representative James Strickler to themeeting today.

3. CONSIDERATION AND APPROVAL OF THE AGENDA

Chairperson Espinoza asked to move up public comment right before the case.

Commissioner Montoya moved to approve the agenda as amended with public comment rightbefore the case. Chairperson Espinoza seconded the motion and it passed by unanimous (5-0)voice vote.

4. CONSIDERATION AND APPROVAL OF MINUTES

¯ Minutes of the Case Management Open Meeting for August 17, 2016

¯ Minutes of the Case Management Open Meeting for August 24, 2016

Commissioner Montoya moved to approve the minutes of August 17, 2016 and August 24, 2016as presented. Commissioner Lovejoy seconded the motion and it passed by unanimous (5-0) voicevote.

5. CONSENT ACTION: None


6. REGULAR ACTION AND DISCUSSIONA. Transportation Matters: None

7. PUBLIC COMMENT

Mr. Paul Gibson said he was a resident of Santa Fe and was following this case very carefully. He hadprovided communication to each Commissioner, personally. He said he would not belabor the factualinformation on the rate hike or the controversy about expanding the bulk of replacement costs to acquiremore coal and nuclear. But look at what your job is to be: to regulate. And to regulate means to control orsupervise an activity or a business. I would ask that when you are dictated to by PNM - this is how we arespending ratepayers’ money -, they give no justification, no data. They do no RFP’s or bidding and noanalysis for justifying the rate increases. This is not about whether it is a good idea; it is about completearrogance. They know you will approve it and don’t have to justify it one bit. In the last 5 weeks, he formedan organization called, "Retake the Round House" which is focused on that and will look at all bodies ofgovernment. We have chapters in 32 counties and you’ve heard from some of them. We will watch thevotes of people who don’t support sustainable po!icies and practices in this state. One of your colleagueshas found how voters can turn on you if they view you as not supporting their best interests. So I hope youwill stop and play by the rules and treat ratepayers with respect.

Commissioner Montoya said -the threat that you all make to this body is incredible and you hit it righton the nail. I am no longer threatened by you because I’m not running for re-election and I will vote myconscience.

Mr. Gibson said "That’s politics and if people don’t feel they are being represented by theirrepresentatives you seek alternatives.

Commissioner Montoya pointed out that the money that came to take her off this Commission camefrom Santa Fe, not even her own constituency.

Chairperson Espinoza said she did see the email sent to her and it mentions that none of theCommissioners were present at the hearing but she was there.

Mr. Gibson said he was quoting a newspaper article so if you were there, congratulations

Commissioner Lovejoy said several Commissioners were there off and on.

Mr. John Otter, Santa Fe, wanted to make some general comments regarding our responsibility ascitizens of the world. There are two things that would eliminate humankind rather quickly. One is nuclearweapons and the other is climate change that is rapidly altering major items for our existence. New Mexicois just one small part of the world but it contributes to climate change through its coal plants here contribute


and other use of fossil fuels. It is our responsibility to do everything we can to lick this climate changeproblem. The rate case before you has a direct impact on it because it proposes to use coal instead ofclean energy sources. Clean sources can be generated at half the cost of coal so the responsibility topersons who pay for electricity is part of a handful of responsibilities. He urged the Commission to favoralternate clean energy over coal.

Chairperson Espinoza noted that Representative Sharon Clahchischilliage was also present and invitedthem to make comments if they wished.

Representative Morrison had no comment at this time.

Representative Sharer said volcanos put more stuff in the air than the rest. China puts more in the airthan all power plants in the US. But what this has done to the economy of San Juan County is laid off halfof the people that had good high paying jobs at those power plants and coal mines. Power plants and coalmines make sure that people don’t freeze to death in the dark. And we are about to have a special sessionbecause as we shut down the industries that pay for our schools, we now are actually discussing it at themoment what we are going to take back from those schools and not give them in the future because of theshut down over climate change. Yet we are not doing anything about the volcanos.

There were no other public comments.

B. Utility Matters:

1) 15-00261-UT IN THE MATTER OF THE APPLICATION OF PUBLIC SERVICE COMPANY OFNEW MEXICO FROM REVISION OF ITS RETAIL ELECTRIC RATESPURSUANT TO ADVICE NOTICE NO. 513. PUBLIC SERVICE COMPANY OFNEW MEXICO, Applicant.(Michael Smith) Order

Mr, Smith said the Commission covered about half of the issues in previous meetings.

There were three exceptions filed: by the AG, ABCWUA and NMIEC regarding the pre-paid pensionassets. They filed exceptions to the HE’s recommendation to approve them in the rate base of $137 millionin addition to an annual pension expense. The pension assets would increase the rates between 8.8 and9.6 million. The prepaid pension asset is created from an issue on appeal from the last SPS case andSupreme Court decided in the Commission’s favor. The asset is created when the shareholders’contributions exceed the amount received from ratepayers and the result is subject to the requirements ofERISA and in accordance with current accounting standards. The provisions conflict to some extent withoverfunding.


Mr. Smith They relied on prior rate cases for PNM and Supreme Court decision in AG vs PRC,which confirmed the Commission’s decision to include prepaid pension assets. In addition, PNM seeks torecover up to the amount that would be allowable. The AG objected because it would not benefitratepayers. The plan now only pays benefits of retirees. The AG argues that they over funded the plan andthat it provides no real benefit to participants. It is now in deficit of $69.6 million while the prepaid pensionasset increased from $100.1 million to $277.9 million. The AG says the losses were result of poormanagement rather than market forces. The AG argues it should be reduced by $250 million of lossesbetween December 31, 2007 and December 31, 2014. He also argued the Commission should require aninvestigation in the next rate case.

NMIEC objected to its inclusion on the basis that PNM has failed to satisfy requirements ofSupreme Court. NMIEC asserts that evidence that PNM contributed $33 million in excess fails to justify thecreation of the fund by shareholders. They assert the cost of service doesn’t serve to establishthe specificexpense items.

ABCWUA focuses on parts that have not been justified and the Supreme Court relied on theexistence of the prepaid pension asset as the basis for inclusion in rate base, PNM should be required tocost justify the asset before including it.

The Commission agrees with the HE rejection of these exceptions. The arguments rely on ademand for proof of the benefit rather than reliance on the creation of the asset by the utility. By makingcontributions that exceeded expenses, it generates revenues and reduces pension expense. The analysisof cost of service justifies the expense. The only source of information if from PNM and PNM has adjustedthat. To prohibit that use would be a severe disincentive but the Commission does agree with the AG that inlight of the treatment on gas, in that portion of the pension plan, PNM should be required to addresswhether its use of the electric portion mitigates future costs.

Mr. Smith went to objections filed by staff on regulatory asset on loss in the retirement. In theunderlying case the Hearing Examiner recommended approval of PNM’s request for approval of aregulatory asset of $2.1 million associated with the impairment of accumulated deferred income taxes,otherwise known as ADIT, resulting from the loss of state net operating loss otherwise and that everybodyrefers to, as NOL carry-forwards. Under the corrected Recommended Decision, the Hearing Examinerapproved a regulatory asset that would be recovered by the amortized over two years. It would not beincluded in rate base.

As explained by the Recommended Decision, PNM had on its books state NOLs that had to beused within a 5-year period. These NOLs were recorded as a ADIT asset, which increases rate base. Theexpiration of the NOLs creates a permanent book tax-timing difference because the tax benefit of theexpired NOLs will never be used. The HE recommended approval of PNM’s request of $2.1 millionaccumulated deferred income of"net operating loss" otherwise referred to as NOL. The HE approved assetrecovery over two years and not included in rate base.


Under generally accepted accounting principles, once it is determined that it is likely that a NOLcarry-forward will be, be, excuse me, will be used before expiring, excuse me, it should be will not be usedbefore expiring, the utility must impair or write off the amount of the expired NOLs. Because of the repeatedextensions of bonus tax depreciation, PNM determined it would not be able to use all of the state NOLcarry-forwards before they expired in 2015. As required by accounting principles, PNM wrote off the NOLforward - carry-forward, by recording an impairment reserve against the portion of the NOL carry-forwardADIT, as that related to the expired state NOLs. This had the effect of increasing income tax expense by$2.1 million and created a reserve liability in ADIT that offset the ADIT carry-forward asset by the sameamount.

Staff has taken the position that PNM did not prove that it was entitled to compensation for the lossof the NOL carry forwards, or that it amounts to a deferral that customers should have paid - basically thatPNM expected this and now can’t get it.

Staff further requests that the Commission adopt the Hearing Examiner’s - that if, rather, theCommission adopts the Hearing Examiner’s recommendation, the Commission should use a cost recoverymechanism that limits recovery to $2.1 million, to the $2.1 million requested by PNM. However, Staff didn’tpropose any specific mechanism to accomplish that.

The Water Utility Authority argues that the Hearing Examiner, while recognizing that regulatoryassets are the exception rather than the norm, nonetheless goes on to ignore that norm. The Water UtilityAuthority asserts that none of the parties’ experts in this case disputed that shareholders benefited to amuch greater extent from the bonus depreciation since the last general rate case, than rate payers have.Therefore, the Water Utility Authority concludes that the Commission should reject PNM’s requestedapproval of the regulatory asset.

The Attorney General has also opposed the recommendation and argues that PNM wants ratepayers to make shareholders whole for the loss of the ADIT asset created by the state NOLs, even thoughrate payers did not benefit from the full amount of the, of the bonus depreciation in the first place. TheAttorney General asserts that the ADIT asset is no different from other PNM assets used by the utilityservice and that PNM should not be recovered, excuse me, permitted to recover the cost of that assetbecause it is no longer used and useful. The Attorney General also asserts that the Hearing Examiner, bybasing her recommendation on the fact that the PRC originally approved the creation of the ADIT asset, theAttorney General argues that just because the Commission originally approved the asset does not meanthat shareholders are guaranteed its recovery, or is entitled to charge it to rate payers when it is no longerused and useful.

Finally, the Attorney General takes the position that because PNM shareholders are compensatedfor the risk that some assets may not be fully recovered through a risk adjustment return on equity, theshareholders should bear the cost of the NOL impairment. PNM’s response to these exceptions was that awrite off of the NOL carry forwards resulted in a reduction to rate base in the test period, and a benefit toratepayers. PNM points out that the NOL tax asset is not a physical asset, but a creation of tax


normalization accounting that reflects the accumulation of temporary book tax timing differences, in thiscase the deferral of bonus tax depreciation deductions.

Because it is a bonus tax depreciation, none of NOL costs, including NOL impairment loss, createsa substantial benefit to customers. PNM argues that it is entitled to recover that loss.

PNM further observes that the Hearing Examiner’s recommended rate making treatment isconsistent with the Commission’s prior treatment of a similar tax issue in PNM’s 2010 rate case.

The Commission’s determination would be that upon review of the exceptions, the Commissionfinds that the Hearing Examiner’s discussion and recommendations on this issue should be adopted by theCommission.

As determined by the Hearing Examiner, the record in this case shows that PNM should becompensated for the $2.1 million NOL impairment. The primary benefit received by way of ratepayers is thecreation of an ADIT liability that resulted from PNM taking what is known as a bonus depreciation. Tounderstand the nature of that benefit it should be first explained that a utility’s income tax cost for rate-making purposes assumes that the utility depreciates its capital assets using straight-line depreciation.However, most utilities will use some form of accelerated depreciation and for determining their actualincome tax liabilities, which means that they will enjoy higher deductions for income tax purposes and lowertaxes in the early years of an assets life that are assumed for rate-making purposes. In other words, bonusdepreciation is just another form of accelerated depreciation. The tax savings resulting from the use of theaccelerated depreciation is viewed as a cost-free source of capital to the utility, which is funded byratepayers. Ratepayers are compensated for the time-value of those tax savings by reducing rate base bythe amount of those tax savings, which in turn reduces the utilities return and taxes, reflected in rates.

Generally speaking, the foregoing tax savings are an ADIT liability. PNM’s customers are receivinga rate-based reduction of almost $25 million from the incremental bonus tax depreciation above thereduction that would have otherwise resulted from ordinary accelerated depreciation.

The Commission agrees with the Hearing Examiner that PNM’s request should be approvedbecause it is consistent with the Commission’s decision in 2010 rate case and because PNM has shownthat bonus depreciation net of all costs, including the NOL write-off and return on the NOL carry-forward atADIT asset reduces PNM’s revenue requirement and rates by almost $2 million. Moreover, the ADITliability created by bonus depreciation will continue to benefit ratepayers by reducing rate base for severalyears to come.

Mr. Smith said he just wanted to make sure he was in the right spot. The Commission declines toadopt Staff’s recommendations, given the undisputed benefit that ratepayers have and will receive frombonus depreciations. It would be fair and appropriate that rate payers pay the cost associated with thatbenefit, which includes the state NOL write off. Additionally, Staff has failed to justify its recommendationthat the Commission require the use of some costs of recovery mechanism that limits recovery to $2.1


million as requested by PNM.

Staff’s underlying concern is that PNM’s rates will reflect the amortization of the ADIT assetrequested by PNM. He was told it is eliminated in PNM’s rate case, thus resulting in the possibility thatPNM would recover more than the total of $2.1 million.

However, Staff failed to recognize that ratepayers can receive greater rate benefits than they areentitled to as a result of the timing of its rate cases. For example, the benefit for bonus depreciation goesdown after each of the assets are put into service.

However, PNM’s rate will not reflect that declining benefit until its ADIT liability associated with thebonus depreciation is reset in PNM’s rate case. Staff has not provided any reason to treat PNM’s ADITasset differently from its ADIT liability.

The Water Utility’s assertion that, that shareholders have benefited to a greater extent from thebonus depreciations of the last general rate case was rejected by the Commission for the reasons set forthin the Recommended Decision. As the Hearing Examiner noted, events occurring between test periods inrate cases are generally ignored. Moreover, the Water Utility Authority has failed to perform anycalculations for its client. The Attorney General’s exceptions are also rejected.

As stated by PNM, the ADIT asset associated with the state NOLs is not a physical asset but thecreation of a normalization account, a normalization accounting. The used and useful doctrine applies tophysical assets that are used to provide an actual service to rate payers and not to accounting entries. Itmay be appropriate in certain circumstances to eliminate ADIT assets or liabilities where the physicalassets that gave rise to those assets and liabilities are determined to be not used and useful. However, noparty, including the AG, has made that claim.

Finally, the Attorney General provided no evidence to support its claim that PNM’s or itsshareholders have already been compensated for the risk of not only recovering their assets. Accordingly,the Commission would adopt the Hearing Examiner’s recommendation.

There were no questions and Mr. Smith moved on. The next exceptions are brought by the WaterUtility Authority and NMIEC to the depreciation issues that were approved by the Recommended Decision.

PNM is seeking approval of changes to its depreciation rates applicable to production, distribution,transmission and general plant, in accordance with a depreciation study by its expert witness Mr. Watson.As a result of the proposed changes in depreciation, PNM’s depreciation expense would increase by $36.4million from $90,491,000 to $126,885,000.

The Water Utility Authority and NMIEC have opposed Mr. Watson’s testimony concerning thedepreciation rates for PNM’s Four Corners, Luna and solar generating facilities through their respectivewitnesses, Mr. Dunkel and Mr. Andrews.


Both the Water Utility Authority and NMIEC challenged the Hearing Examiner’s acceptance of Mr.Watson’s testimony on a primary basis that their witnesses should have been considered more crediblethan Mr. Watson, with the Water Utility Authority actually resorting to calling Mr. Watson "slick" anddemanding that the Commission accord its own witness some modicum of respect.

Mr. Watson presented a depreciation study analysis and recommended rates. In so doing heproposed service lines for PNM’s production plant.

The Commission notes that the expert witnesses have wide latitude in presenting facts they believeare to be relevant, and presenting facts that they believe carry more weight and expressing how those factsshould be interpreted. Necessarily the fact finder is in the position of choosing who and what facts toaccept. It is rarely a matter of whether the witness is being truthful or not, as much as whether the facts andthe theory support the argument that they are making.

The Commission acknowledges that Mr. Watson’s use of a terminal date of 2031 for the FourCorners gas-fired generating plant was contested by the parties. Mr. Watson claimed that the date wasbased on several discussions with PNM representatives. Mr. Dunkel contested Mr. Watson’s terminationdate for the Four Corners plant noting severa! instances where PNM documentation indicated a termina!dated 2041 rather than 2031. And in, in other instances Mr. Watson’s own notes indicated 2041 is thecorrect date. Mr. Watson’s response was simply that PNM had told him to use 2031. The Commission hasno reason to doubt that PNM did tell him to use 2031 as a date, but the fact remains that he provided noevidence that 2031 was the correct date.

However, this alone, the mere fact that there was a discrepancy over this issue, is not enough toplace his credibility in doubt on all the other matters, but that the Water Utility Authority and NMIECsuggests he should be doubted on.

Moreover, Mr. Dunkel’s criticisms of Mr. Watson’s Luna and solar production facilities were wellconsidered by PNM. Mr. Watson performed actuarial studies and/or simulated plant balance studies,otherwise known as SPR, on transmission, distribution and general plant accounts. And his testimonydescribed that, citing factors for his selection of average service life and survivor curves for thetransmission, distribution and general plant accounts.

Mr. Dunkel contested almost all of Mr. Watson’s account recommendations, primarily bychallenging Mr. Watson’s use of the SPR method rather than the actuarial method, which Mr. Dunkelclaims is the Commission’s preferred method.

Similarly, Mr. Andrews also contested Mr. Watson’s use of the SPR methodology thatrecommended alternative depreciation rates for only 10 accounts.

While Mr. Watson relied on PNM’s personnel for information, and his failure to rely on PNM’s 2010rate case information was also criticized, little was offered other than criticism to specifically counter Mr.


Watson’s analysis.

While the interveners accused the Headng Examiner of applying a double standard, the HeadngExaminer weighed the evidence presented by the witness, and accepted certain testimony over othertestimony.

The Headng Examiner found that Mr. Watson offered better explanations for his actions, hisdepartures from methodology and his conclusions, than the other two witnesses. While the Water UtilityAuthority and NMIEC point to alleged flaws in Mr. Watson’s testimony, they overlooked the flaws in theirown witness’s testimony. In weighing the witness’s reliance on factors other than the indications of thesurvivor curve models, all of the parties’ depreciation witnesses departed significantly from the indicationsof the depreciation studies they proffered.

NMIEC also argues that the Hearing Examiner erred in rejecting the actuarial method. The WaterUtility Authority argues that the SPR method can be only used where the actuarial method is not possible.

The Hearing Examiner did not reject the actuarial method, nor is the SPR method disallowed whenactuaria! studies are ?ossible. The SPR method is a standa!one, recogn!zed methodology for estimating theservice lives and average remaining lives for utility assets. Where the actuarial may be the preferredmethod, there must be sufficient data for a reliable study. The Commission understands that an actuarialstudy should use many transaction years and many placement years. The retirement patterns define thecharacter of the survivorship curve. In this case the data was not sufficient to capture how an old plantfared in earlier periods. That data is important. When for the character of the survivorship pattern, becausewe have only the latest activity blogs, it pre-skewed the perception of the survivorship pattern. The fact thatthe actuarial method produced results with service lives of hundreds of years, as seen in one of Mr.Andrews exhibits, suggests that there was something wrong with the data. Even where the actuarialmethod produced high but plausible service life results, Mr. Williams and Mr. Dunkel did not necessarilyadopt them.

The Water Utility Authority claims that the Hearing Examiner’s statement that there was only oneband in Mr. Dunkel’s discussion, was false and points to this and to the 2009 studies of 1994 and 2009period. The Hearing Examiner is correct. The other band was from a study done by somebody else. WhileMr. Dunkel compared the two studies to see if the results were consistent, his study actually only had oneband.

The last issue that was raised by the Water Utility Authority asserts that the RecommendedDecision should not have accepted Mr. Watson’s depreciation recommendations concerning a $10,100,000depreciation expense for account 391.3, which alone constitutes almost 30% of the entire cost of service.

The Water Utility Authority notes that although PNM admitted that the computer hardware has alonger life than is expected for PCs with an average of 9 to 14 years, in his depreciation recommendationsMr. Watson asserted that the account consists of vadous software systems and related equipment and that


software would experience a faster turnover cycle in the future.

Mr. Watson therefore recommended a five-year average service life rather than the 9 to 14-yearservice life indicated by his own actuarial study.

The Water Utility Authority points out that both PNM and ABCWUA used an actuarial life methodfor the computer hardware and that as the Water Utility’s witness, Mr. Dunkel pointed out, 75% of the 44.5million accounts are mainframe computers. This cast doubt on whether it actually has a high turnover rate.

Based on that revelation, the Commission defines -and this would be a deviation from the HearingExaminer’s finding - that Mr. Dunkel was persuasive with regard to this account and that the Commissionshould accept his recommendation of a lO-year service life.

There were no questions and Mr. Smith went to the next section.

The next section was on exceptions by New Energy Economy, Western Resources Advocates,Coalition for Clean and Affordable Energy and CFRE for rates and environment.

Exceptions were all filed to the Hearing Examiner’s recommendation that the Commission approvefor PNM’s inclusion and cost of service, a test period expense of $19.5 million for its portion of the cost of anew 15-year coal supply agreement for its Four Corners plant. The coal supply agreement was negotiatedby Arizona Public Service Company which operates the Four Corners plant pursuant to a participationagreement. PNM has a minority interest in Four Corners. PNM and the other plant owners approved thecoal supply agreement as it was negotiated by Arizona Public Service Company.

The first exception was filed by CCAE and that argues that PNM’s decision to enter into anagreement to extend its participation in the Four Corners Power Plant, was imprudent. CCAE argues thatthe prudence of PNM’s renewed participation in Four Comers is analogous to the prudence review ofPNM’s decisions with respect to the Palo Verde 1 and 2 leases.

However, Commission notes that this argument was only after the hearings on the Four Cornerscoal supply agreement were complete. And the Hearing Examiner had no basis in the record upon which torule upon these plants.

In its exceptions, CCAE says in his pre-filed testimony Mr. Van Winkle challenged the prudence ofPNM’s decision to continue its participation in the Four Corners coal plant, including the cost of a new coalcontract and its cost of service. In fact, Mr. Van Winkle only challenged PNM’s decision to enter into thenew coal supply agreement. He did not refer to any separate decision by PNM to continue its participationin the Four Comers plant.

In the rebuttal testimony, PNM’s witnesses Olson and Taylor responded to New Energy Economy’sspecific requirement to the argument that the cost of the coal supply agreement should be excluded from


PNM’s cost of service.

CCAE refers to PNM’s decision to extend its participation in the Four Corners plant claiming thatboth PNM and El Paso had the opportunity to end their involvement in the Four Comers plant in July of2016 when the participation agreement ended. Yet as he indicated, CCAE cited no evidence concerningthat agreement. And that is because no parties sought to introduce evidence of such an agreement in thiscase. CCAE relies only on the certification from the stipulation in case 15-109, which discusses El PasoElectric Company’s separate decision to participate in a proposed life extension of the Four Comers plant,in the, connection with the EPE’s request to abandon and sell its interest in the Four Corners plant.

CCAE argues that PNM had exactly the same choice before - whether to remain in the FourComers plant or whether to exit the plant. This assertion is wholly unsupported in the case record, again,because no party presented evidence that PNM had the same choice as EPE at that juncture. Moreover, asPNM notes in its response, PNM is not the same utility as EPE. It has different resources, resource portfoliowith different needs. No evidence was admitted in the proceeding about PNM’s decision-making criteriawith respect to the participation agreement, and no evidence was elicited about whether or to what extent,PNM performed any analyses before making such a choice.

Statements of facts like exceptions and briefs must be supported by the evidence. If evidence hadbeen admitted that PNM had the choice to enter its use of the Four Comers coal plant to provide retailservice, the prudency of that decision by PNM to continue, its use of the Four Corners plant would likelyhave been subject to challenge. Just as PNM’s decisions to continue its use of its Palo Verde interestshave been challenged and litigated in this case. However, it was not.

Separate from CCAE’s argument, New Energy Economy’s exception asserts that PNM failed tomeet its burden of proof through substantial evidence that the new cost of the coal supply agreement is justand reasonable. New Energy Economy’s challenges to the coal supply agreement focus an assertive lackof contemporaneous economic analysis to determine whether the cost of the coal contract was economic,reasonable and in the public interest. New Energy Economy’s exceptions point to isolated portions of itscross-examination of PNM Witness Taylor to, in order to establish a purported unequivocal failure by PNMto support its assertions that its decision was supported by its strategist modeling.

However, most of the testimony that is identified as unsupportive appears to consist of isolatedsnippets of questioning quoted out of the broader scope and context of the questioning. When viewed as awhole, this questioning appears more to be rather confused, apparently resulting from difficulty betweenNew Energy Economy’s attorney and Taylor over the terminology employed in the questions; specifically,the current contract. While New Energy Economy seems to employ the term to mean the new coal supplyagreement, Ms. Taylor seems to refer to the prior coal contract, which was still in effect.

PNM’s witnesses did testify that PNM performed a pre-contract strategist runs that show that underthe new coal prices at approximately $25 per megawatt hour compared to $18. And in 2013, even if there’sa substantial increase from the current contract price, the coal supplement agreement was the most cost


effective option, even compared to a gas plant.

Further, while New Energy Economy challenged the terms and the conditions of the coal supplyagreement, especially its escalation in take-or-pay provisions as unwarranted by the risk inherent in theirterms, PNM’s un-rebutted testimony was that such terms are consistent with the standard industry termsand conditions for coal supply agreements, as well as with the terms of the previous coal supplyagreement.

As the Hearing Examiner pointed out, New Energy Economy’s challenges to the new coal supplyagreement failed to account for the fact that as the minority owner, PNM must rely upon APS to conductoperational matters, including securing the coal supply. And unlike a resource acquisition case, the FourComers plant is not only already certificated, but is dependent upon coal as the fuel for that plant.

New Energy Economy’s challenges to the choice of coal as a fuel source as too risky, ignores thatsince this is a coal plant and its already certificated the primary concern before the Commission at this pointis whether the coal supply agreement obtains coal - the fuel - at a reasonable cost and on reasonableterms.

Several parties took exceptions specifically to the Hearing Examiner’s statement that challenges toPNM’s resource selection of coal at Four Corners should have been raised in Case 13-390. That’s the SanJuan case as everybody knows.

While the Commission agrees that the Hearing Examiner’s statement that challenges to theprudence of PNM’s continued investment in the Four Comers should properly have been brought in the 13-390 case, is incorrect. The Commission believes that this statement was likely unartfully drafted andintended to refer to 13-390 as the type of hearing in which such challenges should be raised, as it involvedresource selection, specifically the choice of a coal plant.

The Commission confirms that Four Corners was not an appropriate issue in case 13-390, even ifthat case involved the larger topic of the appropriateness of coal as a resource.

The Commission therefore finds that the exceptions to the Hearing Examiner recommendationsconcerning the Four Corners coal supply agreement should be denied.

CCAE’s challenge to PNM’s continued participation in Four Comers was not raised in pre-filedtestimony and was not addressed by the witnesses, and therefore is not supplied by evidence in the recordof this case. This argument was made for the first time in its, in CCAE’s post hearing brief.

The Hearing Examiner therefore, appropriately rejected the argument without discussion.

Similarly, while New Energy Economy’s challenge was to the reasonableness of this coal supplyagreement, New Energy Economy’s focus on the choice of coal as a fuel failed to provide us any basis onwhich the Commission could say that the terms of this coal supply agreement were unreasonable.


The next exception is one that’s actually not much of an exception as much as it was a request forclarification from the City of Albuquerque and Bemalillo County, and it related to the street lighting tariff.And basically what the city/county had requested was that clarification of the statement that PNM’sproposed revisions to Rate 20 as revised by CCAE’s recommendation, should be approved. Thecity/county specifically requested a clarification that that approval would also be revised by the testimony ofWitness Aguire on page 51 of his rebuttal testimony, which would add a section to Rate # 20 with a rate forcustomer-owned and maintained street lighting- metered street lighting- at a volumetric rate of .0797939per kilowatt. That was unopposed by any of the parties and is just to be clarified after consulting with theHearing Examiner that that was, the intent was to approve both of those.

Commissioner Jones asked if that would make it the same rate as street lights.

Mr. Smith thought that was correct.

The next exception was filed by CCAE and WRA to PNM’s proposed revenue balancing account.PNM, in its application, sought approval of what it termed a revenue balancing account, which Mr. Smithreferred to as RBA. PN~. indicates that the RBA is a coupling mechanism which is intended to address therequirement in the Efficient Use of Energy Act that the Commission identified and removed regulatorydisincentives or barriers for public utility expenditures on energy efficiency and load managementmeasures, to ensure that they are removed in a manner that balances the public interest, consumer interestand investor interest.

Both CCAE and WRA took exception to the Hearing Examiner’s rejection of PNM’s proposed useof a revenue balancing account as a means to eliminate what PNM describes is a disincentive to promoteenergy efficiency programs in accordance with the Efficient Use of Energy Act’s requirement and that theCommission identify or remove those disincentives.

PNM argues that because it recovers a large amount of its fixed costs through its energy and itsvolumetric rates; any reductions in those sales due to energy efficiency measures causes PNM’s revenuesto be reduced by more than its avoided costs. PNM quantifies its fixed recovery as 8.13 cents per kilowatthour from this, from the residential class, and 3.35 cents per kilowatt hour from other classes - other thanthe irrigation class. PNM estimates that it loses approximately $24.9 million in fixed cost recovery due toenergy efficiency measures. PNM’s proposal is to adopt the RBA as a four-year pilot program that wouldapply to residential customers taking power under rates 1A and 1B, and small power customers takingservice under rates 2A and 2B, which PNM asserts are responsible for 84% of its fixed costs underrecovery.

The RBA calls for the PRC to authorize PNM to collect a pre-established fixed level of revenuewithout regard to sales levels and apply to its fixed costs and apply it to its fixed costs recovery. An allowedannual revenue per customer in each class would then be set. PNM would then calculate a monthlydecoupling deferral between the actual and allowed revenue per customer for 12 consecutive months. The

¯ New Mexico Public Regulation CommissionMinutes of the Case Management Open MeetingSeptember 28, 2016

decoupling rate change is to be calculated at the annual decoupling deferral total, divided by the forecastedsales for the next year for the affected customer class.

While the fixed cost recovery would still be collected through the volumetric rate, the amountswould be placed in the balancing account on a monthly basis with an annual end of the year, over andunder collection reconciliation that would be either refunded or rolled over to the subsequent year forcollection through an adjustment of the per kilowatt hour rate for each respective customer class. Undercollection would be limited to a 5% increase in each following year with any other amount beyond thatrolled over to a subsequent year for collection.

The Hearing Examiner recommended rejection of the proposed RBA because the mechanismwould insulate PNM from sales fluctuations from causes other than reduced energy use stemming fromenergy efficiency measures. The Hearing Examiner found that the RBA would protect PNM from salesdeclines unrelated to energy efficiency, such as unrelated economic pressures, customer volume changesand weather impacts.

In the process the RBA would shift the risk created by such external causes from shareholders torate payers. The Hearing Examiner notes that the RBA would create a financial windfall because it wouldcompensate PNM for lost revenues due to declines in per customer use, even if PNM’s total revenuesremain stable or grew because of customer growth.

The Hearing Examiner notes that despite this insulation from risk, PNM still proposes adjusting itsreturn on equity to reflect the implementation of the RBA program. The Hearing Examiner found that byinsulating PNM from cost not related to energy efficiency, the RBA was fatally overbroad, in that it suffersfrom the same faults as the decoupling proposal previously rejected by the Commission in case 06-210 andthe decoupling mechanism rejected by the New Mexico Supreme Court in the Attorney General versus thePRC 2011 Supreme Court 34.

Due to the failure of the incentives and disincentives to be cost based, the Hearing Examinerfurther notes that by shielding the utility from such risks, the utility would lose the incentive to operateefficiently. The Hearing Examiner further found that by factoring in projected loss fixed costs due to energyefficiency in its test period projected revenues, PNM would actually suffer no loss if it’s projections wereaccurate and therefore PNM would not need the proposed recovery mechanism.

PNM’s use of this method to address lost fixed recovery, further weighs against the adoption-thatof the RBA, even if it’s on a trial basis.

PNM did not file any exceptions to the Hearing Examiner’s recommendations. However, CCAEfiled exceptions to the Hearing Examiner’s recommendation and asserts that the RBA should be adoptedsubject to certain modifications. CCAE proposes that the RBA proposal be modified to merge theresidential and small power classes to whom it would apply, for the sole purpose of calculating the level towhich the revenues covered by the program exceeded or fell below authorized levels.


CCAE proposes that in so doing, true ups would be applied as a uniform percentage, as uniformpercentage adjustments across both classes and this would reduce rate volatility and permit a lower, a 3%cap on rate increases. Also by setting the rate, cap on rate increases at 3% instead of 5% as suggested byPNM, rate volatility would be lower, even if it occasionally resulted in rolling over recovery to subsequentyears.

CCAE, joined by the AG who has not filed an exception on this issue, further recommends thatupward adjustments be applied to the third rate block only and downward adjustments be made to the firstblock only, in order to reinforce existing incentives to reduce energy consumption and to protect low usagecustomers. The effect would be to insulate those using the lowest amounts of energy from increases.

CCAE further incorporates its exception to PNM’s request to increase the residential customercharge from $5 to $7, because the increase operates disproportionately to affect low income, low use andelderly customers, and because it asserts that the RBA would obviate the need for the increase in thecustomer charge.

CCAE a!so asserts that the Hearing Examiner’s analysis is flawed in a number of ways. First CCAEargues that the RBA would guard against insulating PNM from the effects of sale fluctuations from causesother than energy efficiency because the Commission would establish the revenue requirement for eachcustomer class on the basis of the, a certain total amount per customer that could be collected with theunderlying assumption that the additional customer growth brings corresponding growths in the costs ofservice. If the number of customers’ changes, the amount collected would correspondingly change.

CCAE further asserts that rather than insulating PNM from use changes due to weather andeconomics, the broad scope of the RBA benefits customers because it would provide refunds to customersduring periods of high energy use such as summer, because collections over the authorized collection levelwould be refunded to customers.

As CCAE notes, narrowing the adjustment to only energy efficiency savings would mean theadjustment would be in only one direction-up. CCAE further argues that the RBA would address theHearing Examiner’s concern about the potential for over earnings by using an annual earnings test similarto that identified by PNM Witness Ortiz in connection with the Renewable Energy Rider, whereby if PNMover earns by a certain percentage over the first fixed cost recovery authorized by the Commission, theywould refund that over earning to customers.

CCAE disagrees with the Hearing Examiner’s conclusion that the RBA is consistent with traditionalregulatory compact between utilities and regulators. CCAE argues that this is incorrect because withtraditional rate-making, if revenues go down or costs go up, there’s little if any risk on a utility, because itcan raise rates. And with a future test year there’s little if any, regulatory lag. CCAE further argues that ratepayers will only see the downside because conversely, utilities will not come into lower rates when theutility costs go down, or revenues go down.


PNM responds to CCAE’s exceptions in support of the RBA. PNM echoes many of CCAE’sarguments but additionally asserts that the RBA does not affect PNM’s incentive to operate efficiently.PNM asserts that PNM will retain the incentive to operate efficiently because with a set amount of revenueper customer, PNM’s opportunity to earn a greater rate will depend on operating efficiently.

The Commission determination would be that the Commission finds that the Hearing Examiner’srecommendations should be adopted at this time. While the Commission appreciates the efforts of theparties to create a mechanism that is intended to remove regulatory disincentives for expenditures onenergy efficiency, even as a pilot program, the current program is still not narrowly tailored enough andfocuses on the removal of energy efficiency disincentives.

The RBA fails to distinguish between disincentives specific to energy efficiency and insteadproposes a wholesale revision of PNM’s recovery of its fixed costs. In the process, the RBA seems toexclude the possibility that a mechanism could be created that would be specific enough to enable theelimination of disincentives to the implementation of energy efficiency managers, without similarly affectingother sources of revenue loss that affect PNM’s recovery of its fixed cost and changing the dynamics of theregulatory compact.

As described by Staff’s witness Dr. Pitts, "Utilities are granted a monopoly to provide electricity forthe purposes of this case in a specific service territory and the utilities agree to provide all necessary powerat a reasonable rate. Utilities are granted rates designed to recover a fair rate of return and the opportunityto achieve that fair rate. The implicit compact does not guarantee the right of full cost recovery or the fightto be made whole, especially in a time of declining load growth, because there is no way to isolate theimpact of any one factor in a reduction in energy sales."

Dr. Pitts further testified that the rise of the RBA introduces a moral hazard into PNM’s utilitybehavior. She defines moral hazard as an economic concept whereby the party will engage in riskierbehavior once it is protected against the risk of failure. With the RBA decoupling mechanism, any decline inload growth is attributed to the success of energy efficiency programs without considering other factorsinvolved.

PNM is encouraged to make efficient business decisions when it shares in the risk. Making theutility whole for any decline in load growth removes this risk.

Rather than contest the Hearing Examiner’s characterization of the RBA as overbroad, CCAE’sresponse instead embraces the fact that it is overbroad as being one of the characteristics of the plan thatgive it strength.

CCAE points to the fact that the fact that the RBA would address weather conditions such ascustomers increased summer bills due to hot weather, by providing for a refund. This is an example of howthe RBA fails to comply with the Commission’s prior directives for decoupling proposal’s, requiring that they


be narrowly focused to address disincentives to, to investment by utilities in energy efficiency programs,and not be aimed at making the utility whole for all load losses. And that was a quote from the final order on06-2000...on 06-201.

The Commission also agrees with the Hearing Examiner that the characterizations of the programconflict with testimony from PNM Witness Chen, who acknowledged that the program does not discriminatebetween the differing causes of changes in energy use and adjusts revenues for any deviation in expectedsales and actual sales.

The Commission further finds that the assertion that PNM’s use of the RBA will not overlap orconflict with PNM’s incorporation of projected lost fixed costs due to energy efficiency programs in its testperiod projected revenues, in light of Mr. Ortiz’s acknowledgment that if PNM sales forecasts were accuratethere would be no need for a decoupling adjustment. ~

The Commission similarly does not share the RBA proponent’s confidence in the RBA in the lightof PNM’s unwillingness to consider adjusting its return on equity as a result of its enhanced fixed costrecovery.

Commissioner Jones asked if the PNM proposal at a 5% cap per annum, and anything rolled over,is added to the 5% for the next year. Under that, it would be possible to have a 20% over four years. Is itcompounded annually.

Mr. Smith believed it would be compounded.

Commissioner Jones reasoned that the decoupling scheme is in place to create an incentive to cutcosts and absorb costs from energy efficiency but it could go the other way

Mr. Smith agreed.

Commissioner Jones said then CCAE came back with 3%. He asked if it could be 1% or 0.5%.

Mr. Smith said he heard nothing like that.

Commissioner Lovejoy said she thought the increase to $7 was the HE’s recommendation.

Mr. Smith agreed.

Mr. Smith went to two other issues with an alternate order on one of them. He went first to the onethat didn’t have an alternative. It was the balance draft recovery from the San Juan Generating Station. Theexception that was taken to that was from PNM.

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The Hearing Examiner recommends that the Commission deny PNM’s request to recover the$52.3-million-dollar cost occurring in the San Juan Generating Station unit 1 and San Juan Generating unit2, to a balance draft system, because she determined that PNM had failed to show that its decision toinstall balance draft on those generating facilities was prudent. Although air quality permits had been issuedby the New Mexico Environment Department for the San Juan units and required the installation of thebalance draft system, a memo from the New Mexico Environment Department bureau chief in evidence inthis case, showed that the permits included that system solely because PNM had voluntarily requested thatit be included, not because it was required by any environmental laws.

The Hearing Examiner went on to determine that, that the fact that the balance draft system wasnot necessary to comply with air quality requirements did not necessarily mean that PNM’s decision toinstall that system was imprudent. PNM could’ve shown that it was prudent if it could’ve shown that itproduced significant environmental or health benefits. However, the Hearing Examiner determined thatPNM submitted no such evidence showing either the significant environmental or health benefit, or that thebalance draft system improved work safety.

PNM’s exceptions assert that it installed the balance draft system in order to comply with thespecific conditions in the permits. PNM does not dispute that the inclusion of the balance draft system wasincluded in the permits at its request. Or that the system was not required to comply with any environmentallaws. Instead it rests its case on the legally binding nature of the permits requirement that the balance draftsystem be installed.

PNM points out, for example, that section 74.2.7f provides that any condition placed in a NewMexico Environment Department permit "shall be enforceable to the same extent as a regulation by theboard." PNM further points to section 72...74.2.71 which provides "notwithstanding any other provision oflaw and subject to the provisions of section 74.2.4, a final decision on a permit by the department that asource will or will not meet applicable local, state and federal air pollution standards and regulations shallbe conclusive and binding on every other state agency, and as an issue before any other state agency shallbe deemed resolved in accordance with that final decision."

According to PNM, that statute precludes the Commission from going behind the terms of thepermits in determining the balance drafts system was not required to comply with air quality requirements.Because environmental compliance costs must be complied with, PNM argues there is a strongpresumption that they’re prudent expenditures. That presumption PNM argues, requires that PNM beallowed rate recovery for this necessary cost to continue to operate San Juan Generating Station to servePNM customers.

PNM further relies upon section 62.628b to support its claim. That section provides "a public utilitythat incurs costs to reduce harmful air emissions at new or existing power plants may seek recovery ofthese costs in a general rate case, regardless of whether the technology or method used qualifies as aclean energy project, or advanced coal technology. If a public utility seeks cost recovery for expenditures to


reduce harmful air emissions beyond levels required by law or rule, the Commission may find that suchexpenditures are reasonable."

PNM asserts that the balance draft system has eliminated virtually all fugitive emissions from theSan Juan units that it’s been installed on. And it has eliminated more than 150 million tons per year ofpermitted criteria pollutants. PNM argued.., points out that criteria pollutants are subject to primary andsecondary standards under the Clean Air Act. The primary standards define levels of air quality that arenecessary to protect the public health. Secondary standards define levels of air quality that must be met toprotect the public welfare from a pollutant.

PNM further contends that the balance draft provides ambient air quality in the San JuanGenerating Station working environment by eliminating fugitive emissions and ammonia associated with theSSCR process. The virtual elimination of fugitive emissions, PNM asserts, also eliminates the need forongoing maintenance and labor required to address these emissions. It eliminates duct leak compliancemanagement requirements and assures PNM’s compliance with the National Ambient Air QualityStandards.

PNM argues that the Recommended Decision erred in concluding that the balance draft systemwould not include workplace safety, in so far as it acknowledges that there have been numerous complaintsand Worker’s Compensation claims related to fugitive emissions.

PNM asserts that, at a minimum, it should be allowed partial recovery of the balance draft systemscost, because it is undisputed that the system reduces emissions in the atmosphere and the workplace.Although PNM does not specify what it believes the minimum recovery should be, it points to Staff’srecommendation that PNM be allowed to recover $2.1 million, out of $5.2 million revenue requirement.

Finally, PNM raises the same argument regarding the end result test and unconstitutionalconfiscation of property that it has raised with respect to the Palo Verde lease extensions.

WRA attacks PNM’s claim that it’s balance draft system will eliminate 150 tons of emissionsannually, as misleading. According to WRA, PNM’s post hearing briefing sheet contained a table thatshowed that over 150 tons of emission would be eliminated by the balanced draft system.

WRA points out that the exhibit actually shows the maximum allowable emission rates for ductleaks and not the actual emissions that would be eliminated by PNM’s balanced draft system. WRA furtherasserts that when the Hearing Examiner challenged PNM Witness Olson regarding PNM’s claimedreduction in emissions, he testified that PNM had not quantified the reduction in emissions from the balancedraft installation and further admitted that PNM did not have accurate information on the amount of leakagefrom the duct maintenance program.

WRA contends that information is necessary to quantify any emission reduction. Without evidenceshowing the amount of reduction, PNM argues that the Commission can only speculate on the value of the


presumed environmental benefits of the balance draft system. WRA also argues that PNM raised that from62.628b, for the first time in its exceptions, and observes that the Commission’s authority to allow recoveryof costs that were incurred to reduce harmful air and emissions is by the very express nature of that statute,permissive rather than mandatory.

WRA questions whether PNM needed to mitigate particular emissions to comply with NationalAmbient Air Quality Standards at all, and even if it did, it needed to do so only until San Juan GeneratingStations units 2 and 3 are closed in 2017.

WRA contends that PNM can ensure compliance with those, with air quality standards until thoseunits are closed, simply by spraying water on dusty roads.

WRA contends that the modeling performed by PNM shows that fugitive dust emissions at SanJuan were at the limit of 12 UG/m3, because fugitive dust emissions from increased truck traffic wereincluded in that model.

PNM Witness Olson stated on cross examination that he could not recall whether PNM had everattempted to mitigate that particular matter from truck traffic by paving or sweeping the roads, or if PNMhad ever modeled those types of mitigation.

The only rational conclusion that the Commission can draw from such an oversight and WRA used,is that the installation of balance draft system was a foregone conclusion and PNM had no interest inseeking alternatives.

WRA further points to the testimony of WRA Witness Howe that balance draft technology does notbreak even for many decades, even under the most generous assumptions, including an assumption thatno further maintenance or capital costs would ever have to be incurred due to the balance draft technology.According to Dr. Howe, the installation of balance draft was neither a prudent investment nor an exercise insound business judgment.

WRA also supports the Recommended Decision’s determination that PNM had submitted nocredible evidence that the balance draft system had improved workplace safety. In addition to matterspointed out by the Recommended Decision, WRA contends that one can only speculate how PNM’sworkers might react to PNM spending $250,000 per employee so that they could sometimes avoid havingto wear dust masks.

NMIEC also filed a response to PNM’s exception by stating that although they did not take aposition on the balance draft system costs, the Commission could, if it wanted to avoid total exclusion ofthose costs, take note of what NMIEC characterizes as PNM’s concession in its exceptions. According toNMIEC, PNM concedes that at a minimum PNM must be allowed the partial recovery in revenuerequirements proposed by Staff.


Staff, according to NMIEC, recommended that the Commission reduce PNM’s requested annualcost of service for the balance draft systems from $5.3 million to $2.1 million.

New Energy Economy opposes PNM’s recovery of the balance draft system costs, asserting thatPNM has done no financial analysis to support its requests for cost recovery, and because the balancedraft system is not required to meet environmental, environmental laws. To support its position NEE pointsto the testimony of PNM Witness Olson where he admits that PNM "did not complete a cost benefitanalysis" and further bluntly conceded that any operations and maintenance savings would not account forthe cost of the balance draft system or, not equate to the costs of balance draft.

New Energy Economy also points to the testimony of WRA Witness Howe, that balance drafts ingeneral does not ever pay for itself.

Finally, New Energy Economy points to the now infamous memo from the New MexicoEnvironment Department Bureau Chief stating that the balance draft system appears in the air qualitypermit system only because PNM had requested its inclusion.

CCAE argued that to show prudence a utility must demonstrate that it went through a reasonabledecision making process to arrive at a course of action and given the fact, given the facts as they were, orshould have known at the time and responded in a reasonable manner. With that definition in mind, CCAEasserts that even though a project the size of the balance draft system would normally be subject toapproval all the way up to the CEO, PNM produced no evidence of a cost benefit analysis; no evidence ofany analysis of alternatives, and no evidence of a presentation to its CEO or board before the decision.CCAE further points out that there is no evidence that PNM considered requesting that the New MexicoEnvironment Department remove the installation of balance draft from under its permit.

CCAE points out that Mr. Buchanan testified that he would expect that PNM would periodicallyreview the need for the balance draft system from the time. It was approved in 2011 to the time of itsinstallation in 2015. PNM’s Witness Olson agreed that the balance draft system was not required becauseof the installation of SNCR on units 1 and 2.

CCAE makes three arguments; the issue in this case is not whether PNM acted prudently inrequesting the inclusion of the balance draft system in its permit, and if not, the Commission should notinclude it in rate. To do so would not affect the air quality permit or in any way infringe upon the, theEnvironment Department’s authority. Disallowing this cost would not change emissions or air quality of theplant. CCAE further argues that section 62.628b does not require that PNM be granted recovery of thebalance draft system costs. That statute provides that the Commission may find that the costs arereasonable and thus is permissive only. While the balance draft system may provide benefits, it is not clearthat it could not obtain those same benefits in much less expensive ways, such as adequately maintainingduct work. PNM also should not be allowed partial recovery of the balance draft system cost, becausethere’s no evidence that the duct work maintenance and workers safety equipment which cost much lessthan the balance draft system, could not be as effective.


The city and county assert that PNM saves $200,000 to $300,000 a year in duct maintenancecosts avoided by the installation of the balance draft system. PNM would save $3 million in 10 years and $6million in 20 years. These amounts, the city and county maintain, are a far cry from the $3 million cost ofthe balance draft systems. They further point out that if San Juan Generating Station is retired in 20 yearsor earlier, PNM would likely attempt to get either accelerated depreciation or some other stranded costrecovery for the remaining undepreciated value of San Juan Generating Station 1 and San JuanGenerating Station 4.

The Commission’s determination would be that PNM’s witnesses argued that PNM did not conductan economic analysis or cost benefit analysis of the balance draft system, because it was required by thepermits. PNM thus apparently installed the balance draft system.under the view that the permitsrequirement that the balance draft system be installed relieved PNM from having to show the prudence ofthat installation.

For the reason stated in the Recommended Decision, that view is not supported by the statutesrelied upon by PNM. In fact, PNM’s assertion that it is not required to show prudence is contradicted by oneof the cases cited by PNM- Alabama Power. In that case, the Alabama Public Service Commissiondetermined that mandatory environmental compliance costs enjoy a presumption of prudence, and not astrong presumption, as contended by PNM, or a conclusive effect as PNM would argue...would have it.Moreover, the decision in Alabama Power raises serious questions over whether the balance draft systemcosts should be given a presumption of prudence. That decision determined that a presumption ofprudence should be given to the cost of complying with mandatory environmental requirements because"these are costs that Alabama Power could not simply choose to- could simply choose not to incur."

That decision went on to observe it is true of course, that decisions concerning the particular.., thatdecisions concerning the particular compliance arise, but by any measure these are significant costs overwhich Alabama Power has little or no control in terms of their timing or the relative magnitude.

By contrast, the evidence in this case supports at least a strong inference that the permitsinstall...included in the installation of the balance draft system were included primarily because PNMrequested it. For example, despite its many opportunities to do so PNM declined to expressly contest theallegations in the Environment Department Bureau Chief’s memos. Those allegations are given greatercredibility by the fact, as PNM admits that the balance draft system was not required to comply with anyenvironmental standards due to the installation of the SNCR on units 1 and 2.

Because San Juan Generating Station would not be in, in violation of any environmental standardswithout the balance draft system, there would be no reason, there would be, there would be no reason for,for the Environment Department to have required its installation, but for PNM’s request. Unlike AlabamaPower, PNM had a significant amount of control over the inclusion of the balance draft system in the permit.Furthermore, no such presumption would exist for PNM as result of the final order in the case 13-390,because serious questions were raised in that case regarding the prudence of the balance draft systems.


The Commission approved the stipulation in which PNM agreed that it would make an affirmativedemonstration that incurrence of the costs of the balance draft system was reasonable, was prudent andreasonable. Having agreed to make that affirmative showing, which is the showing that they were doing inthis case, PNM cannot simply rely on the permits as evidence of prudence.

PNM’s reliance on section 74.271 is also misplaced. Under that statute the only issue that isconclusively resolved by the issuance of an Environment Department permit - is the issue whether aresource will or will not be applicable air pollution control, the air pollution standards and regulations. Theissue in this case is not whether San Juan 1 and San Juan 4 currently meet any air pollution standards. Itis the entirely different issue of whether the balance draft systems are required for those units to complywith the standards. Nothing in section 74.271 precludes the Commission from examining the environmentalbenefits of the balance draft systems, especially where, as here, PNM has plainly admitted that the balancedraft system is not required to meet any environmental standards. Section 62.628b also does not supportthe conclusion that the balance draft system costs were prudently incurred. As pointed out by CCAE, thatstatute provides the Commission may find costs incurred to reduce harmful emissions to be reasonable,and is thus permissive only.

Because the matter is left to the Commission’s discretion, any finding that such costs arereasonable must still be supported by substantial evidence in the record. Nothing in section 62.628bsuggests that the burden of showing the reasonableness of such costs through the submission of theevidence doesn’t stay with PNM. Referring to the evidence regarding the prudence of the balance draftsystems installation, the Commission addresses PNM’s spudous and highly misleading claim that thebalance draft system has eliminated more than 150 tons of pollutants per year.

As pointed out by WRA, the evidence in this case clearly shows that the 150 million tons cited byPNM is the allowable limits of emissions through duct leaks, not the reduction of emission eliminated by thebalance draft system. The use of such misleading arguments highlights the desperate nature of PNM’sarguments, and more importantly undermines the integrity of the Commission’s processes. PNM has beenput on notice that it may be subject to sanction if it continues to engage in this sort of practice in the future.

The Commission also agrees with WRA that any claimed emission reduction resulting from thebalance draft systems installation is highly speculative. Any such reduction would obviously be based onthe amount of leakage from PNM’s previous duct maintenance program. However, no accurate informationof that prior leakage is in the record, apparently because it does not exist. Other than the spurious 150-million-ton reduction claims in PNM’s briefs and its exceptions, PNM has not submitted any evidenceshowing the amount of any emission reduction, apparently because it made no attempts to quantify thosereductions.

Turning to PNM’s assertion that it wanted to ensure that it remained below the particularcompliance level, it should be observed that PNM did not respond to WRA’s contention that PNM should’veremained below that level through simple less expensive means of reducing fugitive emissions from theplant by watering, paving or sweeping roads on the site.

New Mexico Public Regulation CommissionMinutes of the Case Managemer~t Open MeetingSeptember 28, 2016

While admitting that such measures are a typical mitigation step, PNM Witness Olson furtheradmitted that he couldn’t recall whether PNM had ever attempted any of those mitigation measures ormodeled those types of mitigation.

The Commission rejects PNM’s assertions regarding the improvement to workplace safety orhealth benefits for the reasons stated in the RD. In addition, PNM has not shown that continuing its ductmaintenance program combined with requiring its workers to occasionally wear masks, would not be amore cost-effective means of ensuring workers’ safety than the balance draft system. No such showing wasmade because PNM apparently did not conduct a cost-benefit analysis of installing the balance draftsystems.

The Commission also finds that there is nothing in the record that would support allowing PNM torecover the $2.1 million per year balance draft system costs recommended by Staff Witness Carrera. Mr.Carrera’s recommended $2.1 million amount includes %1.2 million for the leak detection system costs.Program costs that were eliminated as a result of the balance draft systems installation return on debt andcertain taxes.

Staff’s recommendation suffers from a number of infirmities. While stating that the balance draftsystem was used and useful, Mr. Carrera acknowledged that PNM had not provided a compellingdemonstration that the cost of the system is a more cost effective solution than alternative solutions. Inother words, PNM has failed to show the prudence of the balance draft systems costs. Without evidenceshowing the cost of possible alternative solutions, there is no basis in the record to give PNM any recoveryfor the balance draft system costs. Additionally, Mr. Carrera testified that if the cost of an alternative werejust a dollar a year, he would probably recommend a recovery of a dollar per year, per system.

Finally, PNM Witness Olson testified that he believed that the duct management program thatwould be eliminated by the installation of the balance draft system would be between $150,000 to $300,000a year, not the $1.2 million that was seen by Staff.

In light of the foregoing, the record in this case supports allowing PNM to recover $300,000 peryear of the balance draft system costs, which recognizes the maximum operation and maintenance coststhat are avoided by the balance draft systems installation. Because that amount reflects the cost savingsresulting from the balance draft system, PNM should not be allowed to recover any other operation andmaintenance expenses associated with the balance draft system in future rate cases. The record does notsupport the recovery of the other costs recommended by Staff such as the return of debt costs and taxesassociated with the balance draft system, insofar as PNM has failed to make an affirmative showing of theprudence of those costs per its agreement in case 13-390.

Commissioner Lovejoy asked, pursuant to statute 74.2.4 New Mexico NMSA 1978, theEnvironment Department has the final say in approving any environmental permits. So, they neithermodified nor withdrew the application with the installation of balance draft in both permits, so then how


does an agency like the PRC second-guess another agency’s decision? Can you give me someexplanation?

Mr. Smith said basically, the difference is that the Environment Department has the issues of theair quality under its control and the PRC has the rate-making treatment of the expenses that the agency, orrather that the utility makes under its control. So the statute that governs our decision making is permissiveand basically the Environment Department decisions do not impact this Commission’s discretion todetermine whether a cost was prudently incurred. And there’s nothing about this agency’s determinationthat affects whether PNM has to comply with the Environment Department or not.

Commissioner Lovejoy guessed that some administrative maneuverings went on. She asked bywhose request that email was sent to our utility office. She wanted him to clarify for her the administratorprocesses between one agency and another agency. She thought the email should have gone to theSecretary of Environment Department and not to utility staff, unless the utility staff requested an email besent to them regarding whether or not the balance draft system was a requirement.

Mr. Smith was not sure. He was not aware of the specific communications that went on pdor toStaff obtaining that email. He thought it was obtained in the discovery process and assumed that before theEnvironment Department would send something out of that nature that it would have been vetted throughmanagement, before it was sent over to our Staff.

Commissioner Lovejoy pointed out that the email was addressed to Utility Division Director.

Commissioner Jones said it appears PNM went above the permit and installed a balance draft andwe don’t know how that was done since it was not a requirement. If was an OSHA requirement and theydecided to go above that requirement, would the Commission say they exceeded the requirement and denythat cost? In PNM’s defense, we are being punitive by denying the balance draft cost when they were tryingto do something to protect the air and the employees. He was not sure that is the message that should besent. He understood it is a very expensive piece for a small percentage of clean up. He would havepreferred that the Commission somehow pursue some reasonableness of their action. We are basicallysaying no to 100% of it and he was not sure that should be the case. Whether it is a safety issue or airquality issue, we should encourage our companies to go above and beyond the requirement. That istroublesome. Did they do it, thinking they would get recovery of costs? The PRC and NMED should havebeen together when the administration was negotiating the closure of the plants so it could be conveyed toNMED when they issued those permits. We need better communications on the costs of these actions.

Chairperson Espinoza announced a short break at 10:57 until 11:15. Commissioner Jones andCommissioner Montoya were out at 11:15.

Mr. Smith said there were two competing orders. The first was the Palo Verde units 1 and 2 leaseextensions and repurchase. PNM has filed exceptions to the Hearing Examiner’s recommendation to denyPNM’s request to recover the cost of its eight-year extension of five leases in the Palo Verde Nuclear


Generating Station units 1 and 2 representing 114MW of capacity at a cost of $19.8 million. And to includein the rate base $158,300,852 representing depreciated value of its $165.3 million purchase price at $2550a kilowatt paid by PNM to repurchase three leasehold interests in Palo Verde 2 representing 64.1 MW ofcapacity.

In addition, PNM seeks to include in rate base an additional $49,136,314 representing the ratebase of the leasehold and common plant improvements to the 64.1 MW of Palo Verde 2 incurred under theprior lease, or rather to both, for a combined total of $207,437,165. PNM’s request seeks to recover boththe net book value of the plant and an acquisition adjustment for the Palo Verde 2 repurchase, which PNMasserts represents the fair market value of the plant. The acquisition adjustment is measured by thedifference between the purchase price of the Palo Verde interest and the underlying net book value.Because the plant was leased, PNM was required to recreate a net book value which asserts should be$1306 dollars per kilowatt.

The acquisition adjustment would be an addition to recovering the net book value. An acquisitionadjustment is an accounting principle peculiar to regulated industries. It means in ordinary terms theamount paid for a plant in excess of the original, original cost, less the accrued depreciation and isappropriate where the purchase was accomplished at an arm’s length basis, or results in net benefits torate payers.

The Hearing Examiner’s recommendation was based on her finding that PNM’s decisions to extendthe five Palo Verde leases and purchase the 64.1 megawatts of Palo Verde 2 were imprudent, because itfailed to show by a preponderance of the evidence that it reasonably examined alternative courses ofaction, and that its decisions to extend the leases and purchase the 64.1 MW was most the most cost-effective resource choices.

And two, that it adequately and timely notified the PRC of its decisions regarding Palo Verde units1 and 2, because the Hearing Examiner concluded that the, that PNM’s decisions to repurchase the 64.1megawatts of Palo Verde 2, and extend the Palo Verde 1 and Palo Verde 2 leases were not prudent. Shedetermined that the depreciated value of the purchase price of the 64.1 MW and the annual leasepayments for the five extended lease payments should be excluded from PNM’s revenue requirement. Shefurther held it is not necessary to address the net book value of the 64.1 MW in connection with PNM’srequest for approval of an acquisition adjustment.

PNM further objects to the Hearing Examiner’s extension of that finding to nonetheless hold thatPalo Verde units 1 and 2 should continue to serve ratepayers despite the exclusion of the lease andacquisition cost. ’

Mr. Smith, in clarification to the Commissioners, said this was not actually part of the larger finalorder. This should have been transmitted to the Commissioners separately. There were two alternativeorders. This is one proposed order and there was a second proposed order. He was reading from the


portion of a proposed order that was suggested by Commissioner Lyons. And giving the introduction andPNM’s version, which should be the same, actually everything pretty much for, for both of these orders.

PNM argues that no party challenged the prudence or reasonableness of the cost of the renewal ofthe Palo Verde 1 and 2 leases and asserts it is therefore entitled to presumption that the lease expenseswere reasonably incurred.

PNM further contends that permitting resource acquisition challenges in their rate case conflictswith the final order in Case 10-86 where, in which PNM held that the IRP process was the appropriateplace to consider concerns about the relative cost effectiveness of resource investments and alternativeresources.

PNM notes that it took into consideration that Palo Verde has been part of PNM’s resource portfolioas a certificated resource for 30 years. And that it has filled the need for base load capacity on a cost "effective and reliable basis.

PNM further disputes the recommended decision’s conclusion that PNM considered only,considered only whether to extend the leases or repurchase the Palo Verde 2 interests. PNM notes that inmaking its decision, it considered the results of its 2008 and 2011 IRP’s in which it repeatedly evaluatedretaining Palo Verde 1 and 2, as well as considering other regulatory, environmental and market factorsdescribed in its exceptions.

PNM asserts these evaluations confirmed that this Palo Verde 1 and 2 capacity was part of PNM’smost cost effective resource portfolio and provided a significant benefit to customers. PNM points out thateach of its 2008 and 2011 IRP’s as well as its 2011 four-year action plan identified PNM’s intention to retainboth its own leased interest in Palo Verde 1 and 2 as part of PNM’s most cost-effective resource portfolio.

PNM argues that at the time it sent the lessors its irrevocable notices in January 2012 and 2013,this was well within the four-year plan period for the 2011 IRP and therefore an off sell.

With regards to the lease extensions, PNM further argues that that the benefit to customersrenewing the leases is clear in that it reduced payments by 50% and achieved the savings of approximately$18 million per year. Unlike the Palo Verde 2 leases which it repurchased, which were only subject to atwo-year extension, the renewed leases were renewable for 8 year terms with a total savings of $145.1million in total over eight years. PNM notes that its decision to retain its interest in Palo Verde 1 and 2 wasalso consistent with the Commission’s approval to add Palo Verde III capacity to replace the capacity lostthrough the San Juan Generating Station plant retirements approved in case 13-390.

Based on these retirements and PNM’s load forecast PNM was concerned about the effect thatretirement of other regional coal plants could have on its continued ability to meet its long-term loadrequirements with carbon free base load generation at reasonable prices. It further relies on prior orders ofthe Commission that specifically authorized PNM to either renew or repurchase these Palo Verde leases


noting that the Commission had determined Palo Verde to be a used and useful resource in page 2567.PNM especially relies on the authorizations provided in the 1995 and 2019-page numbers- phase oneorders, as well as the Commission’s rules for resource planning.

PNM contests the RD’s finding that the, that PNM acted imprudently by not giving the Commissionadvance notice concerning its decision to retain the Palo Verde capacity. Noting that the RD concedes thatthere is no legal requirement for PNM to provide such notice.

PNM asserts that the RD’s failure to provide a value for the Palo Verde lease extensions orcapacity acquisition, even though it provides for the continued dedication of these resources for the benefitof its customers, does not comply with New Mexico law.

PNM relied on PNM gas services 2009-OC12 as confirming that the Commission cannot deny allcost recovery, but must determine a reasonable, prudent amount of utility cost. PNM argues that the RDmisapplied the Oregon Public Utility Commission’s decision. PNM points out that even though the OregonPublic Utility Commission found that the utility at issue had failed to establish the prudence of its capitalinvestment, the Oregon Public Utility Commission nonetheless allowed the utility to recover 90% of itsinvestments.

Finally, PNM asserts that if the Commission accepts the RDs recommendations, PNM will suffer adisallowance of over $215 million. Denial of recovery of the Palo Verde 1 and 2 lease extensions wouldeliminate recovery of approximately $20 million in annual expenses and property taxes for the eight-yearlease renewal pedod and disallowance of both the Palo Verde 2 capacity acquisition and the San JuanGenerating Station balance drafts cost would result in an estimated post-tax write off of $131.6 million andthis would represent an 86% reduction in PNM’s retained earnings, which as of December 31,2015 was$152.6 million.

PNM claims this will negatively affect PNM’s capital structure and credit ratings and raiseborrowing cost for customers. PNM additionally asserts that because it would collect less than its baseperiod cost of service, under the end result test, these disallowances when combined with the loss ofbalance draft costs, will result in an unconstitutional taking in violation of the Fifth and FourteenthAmendments.

The First Alternative Proposal for an order, would provide that the Commission would reject PNM’sargument that, that its Palo Verde expenditures, it would - let me back up- it would accept the HearingExaminer’s Recommended Decision; it would reject PNM’s argument that the Palo Verde expendituresmust be deemed reasonable because they were not challenged by the parties under presumption ofreasonableness and it would find - and that would be based on the fact that the Commission cleadychallenged the reasonableness of PNM’s lease costs by issuing its order to conduct additional hearingsand PNM should have known at that point that they could no longer rely on any presumption ofreasonableness.


Furthermore, the Commission would reject PNM’s argument that it was, that the Commission wasprecluded from reviewing a prudence of its acquisition of these, of this generating capacity and renewal ofthe lease costs in rate case, rather in rate base, because based on the Commissions orders in cases 1995and 2019 those orders specifically reserved the Commission’s ratemaking authority over those leaseextensions and purchases.

The Commission further would reject PNM’s reliance on its 2008 and 2011 IRP’s in support of itsclaim of prudence. Neither the 2008 or 2011 was the IRP admitted into evidence in this case.

PNM Witness Ortiz specifically in his testimony, could not state whether the 2008 IRP in any wayaddressed PNM’s acquisition of Palo Verde 2 Capacity and claimed that the 2011 IRP was the relevantdocument

The Commission further agrees with some of the interveners that to the extent the 2008 IRPanalyses may have been relevant, they were still by the time of PNM’s decision, having been completedfour years prior.

The Commission also finds that PNM should, may not rely on its 2011 IRP to establish theprudence of its decision in this case. In addition to the fact that the 2011 IRP was never moved intoevidence in this proceeding, even if its admission had been sought the affirmative value of that IRP waslimited as it was never accepted as compliant with the Commission’s IRP rule due to the closure of case11-317; a closure which PNM never sought to counter.

The Commission made no findings in that closure on whether the submitted IRP complied with therequirements of 17.73 or was deficient in any way, as alleged by interveners on the case. The Commissiondoes agree that, with PNM, that its decision to extend the Palo Verde leases and acquire the Palo Verdecapacity was not necessarily imprudent on the basis that PNM did not timely and adequately notify theCommission in advance of making those decisions. And that’s based on the fact that the RD itselfconcedes that PNM was under no legal obligation to provide such notice. However, the Commission doesreject the notion that PNM’s arguments that its various letters and presentations to the Commissionsomehow relieved it of its obligations with respect to exercising prudence in the renewal and repurchase ofthe leases.

One of the issues that was raised is the issue whether the transactions constituted arm’s-lengthtransactions. Several parties, while disputing that good faith negotiations took place, noted that thesetransactions could not constitute arms-length transactions because PNM, having already given notice of itsintent to continue using the Palo Verde capacity, was locked into continued use of the Palo Verde leases bythe time it sought to negotiate the purchase price. While PNM still had the option of simply leasing thecapacity that was the subject of negotiations, PNM was not completely free to walk away from thetransaction.


Moreover, the notice deadlines that were part of the lease notice deadlines were part of the leaseterms which were approved by the Commission in cases 1995 and 2019.

Notwithstanding that, the Commission does not need to reach the issue whether the transactionwas negotiated at arm’s length; because it finds that PNM failed to demonstrate that the purchase price forits Palo Verde 2 purchases constituted fair market value. While the authorization provided by theCommissions orders in cases 1995 and 2019 clearly authorized PNM to extend the leases that 50% of theoriginal lease costs and acquired the capacity at fair market value, PNM acknowledges that it failed to doany meaningful comparative pricing or obtain any appraisal.

While the terms of the lease admittedly only provided for an appraisal in the context of the, a failurebetween the lessor and the lessee to reach an agreement on the purchase price, PNM was aware that it’stransaction was still subject to ratemaking scrutiny bythe Commission. And a reasonable managementdecision would have anticipated the need to support, even in an agreed upon prices constituting fair marketvalue.

With regard to the two prior sale transactions in 2008 and 2012 relied upon by PNM0 theCommission finds that in addition to the concerns about the timing and comparability of those sales notedby the Hearing Examiner, PNM failed to provide some, provide sufficient information or analysis concerningthe terms and circumstances of those purchases. Something an appraisal by a disinterested third-partyprofessional may have provided.

Notwithstanding those findings, the Commission also rejects the assertion that the Commission isleft open with the soul option of denying any recovery from PNM’s expenditures and recommending that thePalo Verde capacity be abandoned. Several parties, notably the Attorney General, NMIEC and WRA havesupported the Hearing Examiners which, finding of an imprudence, yet recommended retaining the use ofthe Palo Verde 1 and 2 interests on the recognition they are, that they are certificated resources andcomprised a long standing established used and useful carbon free generation resource valuable in theface of anticipated increased carbon operations.

Notably in the Amer-Pacific court case relied upon by the Hearing Examiner, the Oregon PublicUtility Commission after making a similar finding of imprudence the OP, after making...the OPUC found itwas justified in retaining the use of the imprudent investment based upon a finding that it was in the publicinterest. The OPUC noted that the purpose of the prudence review is to hold ratepayers harmless from anyamount imprudently invested and found that the proper remedy was to determine a disallowance thatreasonably penalizes the utility for its imprudence and that a disallowance should equal the amount of theunreasonable investment.

Like the OPUC, the Commission finds that under the facts and circumstances of this case, it wouldnot be in the public interest to require either the complete disallowance of the Palo Verde lease costs andcapital investment in Palo Verde 2 from rates or require the abandonment of the Palo Verde interests. Theleased Palo Verde capacity has always been certificated capacity and has long been found to be used and


useful. The Commission’s apparent intent at the time the Commission authorized the leases and eventualrepurchase provisions was to provide an opportunity for the eventual reacquisition of the leaseholdinterests in Palo Verde 1 and 2. It is reasonable to interpret the Commission’s authorization ascontemplating that the capacity retained by PNM pursuant to that authority would continue to be used toserve New Mexico ratepayers. However there has been much disagreement in this case over the issue ofwhat value the Commission intended such interests to be require, required.

Several parties have argued that the Commission’s intent was to bring these assets back intoownership at, at basically zero value - zero dollars. While this argument is appealing at one level, theCommission cannot ignore the plain language of the Commission’s orders and cases 1995 and 2019 andthe Commission must presume at the time the Commission issued these orders it was aware of the resultsof its order, i.e. that PNM ratepayers would, would likely pay for the capacity over again. Had theCommission intended to prevent that results it could have simply conditioned the approval of the sale leaseback of the Palo Verde capacity on PNM being given the right to purchase or release that capacity at nocost at the end of 30 year leases, or at least with some equity credit.

For reasons unknown to this Commission, that is not the course taken by the previousCommission. Accordingly, it would now be unreasonable to assume that the Commission would authorizePNM to retain certificated capacity to serve its customers at fair market value or 50% of the original leasecost, but also intend that this Commission could nonetheless disallow recovery of the costs incurred inaccordance with the express terms of the Commission’s approval.

However, despite this preauthorization the Commission expressly reserved the right asacknowledged by PNM, the right of PNM’s exercise of that authority and disallow the recovery of thosecosts to the extent they were found imprudent. The limitation placed on the repurchase was that thepurchase be for fair market value. PNM failed to meet its burden of showing that its, that its $2550 perkilowatt purchase price for the 64.1 MW of required capacity, reflects the market value of that capacity.Accordingly, the Commission would find that the appropriate remedy for PNM’s failure to act prudently andestablish a fair market value for the plant is to do, as some parties have suggested- and deny PNM’srequest for an acquisition adjustment based on the purchase price and instead bring the plant into ratebase at a reasonable value based on its net book value.

This is in accordance with the Commission’s authority pursuant to 62. 614 providing that inconsidering the valuation of plant, the Commission should give due consideration to the history anddevelopment of the property and business of the particular public utility to the original cost thereof, to thecost of reproduction as a going concern, to the revenues, investments and expenses of the utility and tootherwise...in this state, and otherwise subject to the Commission’s jurisdiction, and to other elements ofvalue and rate making formula and recognized by the laws of this, of the land for rate-making purposes. Indoing so here, the Commission looks to the evidence of net book value induced in the record of thisproceeding.


Of the alternative valuations identified by NMIEC, the first value of 1598 was based on an analysisperformed by NMIEC’s own witness Mr. Dauphin in case 13-390. That analysis arrived at 10.71 per kilowattas a valuation of Palo Verde 3. However, Mr. Dauphin built that value up from, from value in, in case 13,rather built that value up from case 13-390 to a $15.98 value for Palo Verde 2 in this case. Mr. Dauphinadmitted that his analysis reflected the stipulation in case 13-390 and it could not be applied in this case.

Thus NMIEC’s recommended value of $15.98 is unsupported by the record and should not beutilized. For the same reasons the $1100 per kilowatt valuation adopted by the supplemental stipulation inCase 13-390 should also not be used. In light of that, the Commission finds it would be appropriate to adopta 13 and a 6 per kilowatt valuation that PNM offered in evidence.

The Commission further notes that several parties, including the Attorney General, and the city/county, have promoted reliance on that valuation. And capital expenditures and lease payments that havebeen made and paid for by ratepayers over the years.

The Commission also finds that although PNM similarly failed to justify a finding that it actedprudently in renewing the Palo Verde 1 and 2 leases, unlike the Palo Verde 2 lease extension, the amountof those lease renewals was known to the Commission at the time it approved the lease transaction, in thatthe terms of those leases expressly stated that the leases would be reviewed...renewed at half price.However, this inquiry does not end the need for a remedy that protects ratepayers from the effect of PNM’simprudent actions. The Commission cannot ignore the apparent role of PNM’s self-interest in expandingrate base to benefit shareholders and shifting the burden of decommissioning responsibility from its ownshareholders to rate payers in its decision to move forward on the Palo Verde leases without considerationof alternatives. The Commission notes that as a result of this failure is that PNM’s actions in renewing andreacquiring the leases exposed ratepayers to additional costs associated with the decommissioningresponsibilities that would likely not have been incurred had an alternative resource been selected.

Accordingly, while the Commission finds that these plants may continue in service, theCommission finds that an appropriate remedy to protect the ratepayers from the effect of PNM’simprudence would be to shift the burden of decommissioning related costs from the ratepayers to PNM.Although the Hearing Examiner recommends separately against additional funding of the decommissioningtrust fund, the Commission notes that PNM has argued against seizing contributions and the HearingExaminer further acknowledges that there might be a need to review additional contributions in the future.In the event additional funding is required PNM shall bear those expenses without recovery from ratepayers.

Finally, the Commission addresses the alleged double counting issue raised with respect to PNM’srequested a separate rate recovery of a return of and on $49.1 million in improvements in related commonplant. The Commission notes that a number of parties objected to PNM’s separate recovery of theimprovements to common plant and double counting, because PNM acknowledges that its purchase of the64.1 megawatts included the value of leasehold improvements to the 64.1 megawatts. PNM argues therewere really two transactions and they should be treated as separate assets.


Mr. Smith said he provided two alternative proposals for handling the double recovery. Hebelieved Commissioner Lyons indicated that the Commission prefers the Alternative Two.

Commissioner Lyons agreed.

Mr. Smith said Alternative Two provides that the Commission finds that PNM’s argument that thePalo Verde 2 lease repurchase should be treated as a separate transaction from the improvements ofcommon plant expenses necessarily relies on the lease repurchase transaction approved by theCommission in Cases 1995 and 2019. Again, for reason not clear to the current Commission thatarrangement did not allow for any equity credit against the fair market value purchase price for the value ofthe investment in improvements in common plant already paid by ratepayers.

However, PNM’s failure to prove that it concluded the repurchase at fair market value permits theCommission latitude in exercising its rate-making discretion to balance the interests of shareholders andrate payers. By not having met its burden to demonstrate the leases were repurchased at fair market value,the Commission properly exercises its discretion to approve the lease extensions and bring the reacquired64.1 megawatts of Palo Verde 1 and 2 in at net book value.

Because the parties agree that PNM’s repurchase of the leases included the title to thoseleasehold improvements, and that PN M’s own 1306 kilowatt calculation in net book value for the 64.1megawatts included the value of the leasehold improvements in common plant, the Commission finds thatthe costs of those improvements in common plants will already have been recovered by the inclusion.., orby the inclusion of 1306 kilowatts net book value and rate base and ratepayers should be released fromany continuing obligation to continue paying for those improvements separately.

Commissioner Jones noted it was close to noon and asked if they were still scheduled to break at12:00.

Chairperson Espinoza agreed.

Mr. Smith said he would cut to the ordering paragraphs on the other alternate order which wasmuch the same in final conclusions. This one by Commissioner Jones would uphold the HE RD with onedistinction that rather than finding they acted imprudently, that they failed to provide burden of proof andorder vary from the RD to provide an option and would provide it to be appropriate to give PNM the optionof continuing to use Palo Verde without recovering the $20 million per year of lease cost or including$159.8 million of its acquisition and rate base, but recovering the operation and maintenance and fuel costassociated with those assets, as well as the unrecovered cost of previous capital improvements incommon plant that had previously been approved as reasonable. They would be selling the power from thePalo Verde lease to an acquired capacity in the off system market and retaining the revenues of thosesales, but without recovering any of the lease and acquisition costs, operating...operation andmaintenance, fuel costs and the unrecovered capital improvement costs.


PNM would not be allowed to recover its unrecovered capital improvement costs if it adopts thesecond of the above options, because the common plant and capital improvements associated with PaloVerde 1 and 2 would not be used and useful.

PNM shall give the Commission written notice of which option it is electing to take within 10 daysafter the issuance of this final order. PNM can include in that notice a statement that it’s election is madewhile reserving whatever rights it has to challenge the appropriate and final order in an appeal. Other optionwould remain in effect unless and until PNM obtains authorization to abandon its leased or acquiredcapacity or the Commission otherwise authorizes PNM to recover the costs of those leases and acquiredcapacity in rates.

If PNM elects to take the second of the two of the above options, it shall file within 30 days from thedate of this final order, a written plan of how it proposes to allocate the off system revenues it receives,including the leased and acquired Palo Verde capacity and its other jurisdictional resources, and how itplans to acquire any energy needed to maintain reliable service on its system. The Commission wouldencourage PNM to work cooperatively with the parties and Staff in developing its option to plan. The partiesand Staff shall have 20 days to review the ol:)tion to plan and file any objections they have with that plan,and the Commission may also issue an order setting forth any questions or concerns it may have with theoption to plan within that 20-day period.

If the Commission does not issue such an order and no party files any objections to the options toplan, by the end of the 20-day period, the option to plan will be deemed approved at the end of the period.

If, however, the Commission issues an order setting forth any questions or concerns or any partytimely files an objection to the option to plan, the Commission will issue an order within five business daysof the end of the 20-day period that either sets an expedited hearing before the Commission on the optionto plan; or approves the plan if the Commission finds that none of the objections have any merit and theCommission does not have any questions or concerns regarding the plan.

The Commission would attempt to issue an order on the option 2 plan by 90 days after theissuance of this final order. Unless or until any option 2 plan is approved by the Commission, PNM shallcontinue to use the Palo Verde leased in acquired capacity, to serve its jurisdictional customers and PNM’srates shall reflect in its rates the operations and maintenance and fuel costs associated with that capacityand unrecovered capital costs. If and when any option to plan is approved by the Commission, PNM shallmake a compliance filing that adjusts its rates to reflect the elimination of the operation and maintenanceand fuel costs and recovered capital costs by a date to be specified by the Commission.


Commissioner Jones framed it as three options. Under one, it would bring Palo Verde in at around$6.95 in one proposal and second at $13.05 as the second, depending on capital improvements, or notbringing Palo Verde in at all and declare it prudent but not bring it at this time and allow PNM to sell it onopen market.

also.Mr. Smith agreed that is generally what they are. There is the undiscussed option to accept the RD

Commissioner Jones didn’t think of other alternatives but he had two other items - one is theirrigator class which we should discuss after this and the other is how to handle attorney fees. We shouldwork on these three proposals and then those other two items. That is how he envisioned this. He justwanted to reserve irrigators and attorney fees to the end.

Chairperson Espinoza said there are two amendments to the RD; one by Commissioner Lyons andone by Commissioner Jones and both include Palo Verde.

Mr. Smith agreed.

Commissioner Montoya pointed out that there are many the Commission could choose from asvariations.

Commissioner Jones agreed but said his was not that hard His two concerns were that he agreedthat no evidence was provided in support of Palo Verde but he thought there was merit in Palo Verde,allowing them to brief. It was rejected for whatever reason. His disagreement was to not find Palo Verdeimprudent. The relationship is longstanding and used for some time in other pieces and is a carbon-freesource. Having said that, he agreed it is prudent. We did add O&M and fuel but felt it was confiscation thatthey could not recover their investment. So to inoculate their investment would be to allow them to sell it onthe open market and allow them to prove the recovery in a future rate case around December. He hopedthat would make PNM revenue neutral and they could make a profit on that sale so they would recoverO&M and fuel. Until such time as they want to bring into rate base if they even wanted to.

The Commission recessed for lunch at 11:59 a.m. and reconvened at 1:15 p.m. with allCommissioners present. Mr. Smith arrived at 1:19.

Commissioner Lyons said this goes back to the San Juan case in 2012. They said $55 million tokeep them all going was needed. The EPA made them shut down two units and we got to the Palo Verdeissue. He had suggested closing all four units for Palo Verde energy which would have been cheaper andno increase needed. PV carbon-free nuclear energy is needed in the portfolio. Wind and solar don’t havemiracle batteries so we have to use either coal or gas. Gas is cheaper and we have to have a diversity.That is what is needed. That’s why his order included all three.


He was ready to make a motion.

Commissioner Jones pointed out that the 64.1 MW at Palo Verde was not a replacement for SanJuan but just a part. The replacement for San Juan was a gas plant.

Mr. Smith said there were provisions for a gas plant and Palo Verde 3 at 134 MW. That 134 MW isanticipated in next filing.

Commissioner Jones said they have the RD and two alternatives. He suggested moving the RD upor down and then go to the alternatives. He mentioned that there is a pretty big imbalance on irrigationrates. We brought some that were over 130% and asked that those be looked at. He thought that proposedamendment was distributed and wondered if anybody looked at it.

Commissioner Lyons asked if the attorney fees were in here.

Commissioner Jones said that would be in the next case. When we get to the last order, he wouldlike to take it as an amendment to the order. The attorney fees are getting to be significant. Those haveusually iust been amortized over a couple of years. We are spending a lot more on cases. There are twomodels. In Texas, they pay everybody’s attorney fees. In New Jersey, the attorney fees are awarded 50%to consumers and 50% to stockholders. Maybe some plan for mixing those fees might be more appropriate.

Commissioner Lyons asked about appeals. Here, when companies can’t get what they want fromthe Commission, they appeal to the Supreme Court and the court has to take the case. If you include ratecase expense, that would be a rate case expense that we would have also.

Commissioner Jones agreed. The Commission needs to consider that.

Chairperson Espinoza asked what the actual numbers are in attorney fees to the rate payers.

Mr. Martinez said the information received from the computation came out to be under scenario 2 a10.24% increase. The computation team was also told to keep RD as a banding approach so that nocustomer would receive less than 67% or more than 130%. The overall would be 13.3% And then asCommissioner Jones mentioned, there would be caps placed on irrigation rates.

Chairperson Espinoza noted that in December or January there is another rate case for anincrease.

Mr. Smith agreed.

Chairperson Espinoza moved to approve the RD. Commissioner Jones seconded the motion fordiscussion but the motion lost by a (1-4) voice vote.


Commissioner Jones moved to approve his scenario. Chairperson Espinoza seconded the motion.

Commissioner Lovejoy asked if under that scenario the percentage rate of increase is between6.4% and 10.24%.

Mr. Martinez agreed.

Commissioner Jones’s scenario would be more in line with the RD. If PNM decides to sell PaloVerde on the open market, it would reduce the increased cost it by $32 million.

Commissioner Jones said the replacement of 64.1 MW in a PPA could be higher.

Commissioner Lyons said the total would be a decrease of fuel costs. And Ms. Glick’s was at 3%.So we are talking 10% on that.

Commissioner Jones said it is not a big reduction and with that would come some risk for replacingthe 64MW.

Mr. Smith said the RD was straightforward and we are seeing this through the lens of Palo Verdeand should move the order plus the incentive plan that is taken out. The depreciation would take out $5million.

Commissioner Jones moved to adopt the RD plus the Commissioner Jones amendment.Commissioner Montoya seconded the motion but it failed on a 1-4 voice vote.

After a short discussion of costs, capital improvements, maintenance and energy sources, Mr.Smith said the Commissioner Lyons amendment is to approve the leases at 1.28 and that leavesunresolved the issue of capital improvements and common maintenance.

Commissioner Jones understood they were bringing in Palo Verde at 13.06 but didn’t understandwhat the other lease is.

Mr. Martinez said the proposal that is modeled reflects the lease extensions at 100%, the next isPalo Verde purchase of 64.1MW at $13.06 and back out the $610,000 of capital improvements leaving anet in rate base of $6.96 per KW or an increase percent of 10.24% with leasehold improvements back in.

Commissioner Montoya moved to approve the application with $13.06 net book value for64.1 MW and ratepayers released from paying those improvements as mentioned by Mr. Martinez.She clarified that would be no double recovery and alternate #2.

Commissioner Lyons seconded the motion, adding leases and irrigation.


Mr. Martinez clarified that it would add $8-20 million to the HE’s number.

The motion passed by majority (3-2) voice vote with Chairperson Espinoza andCommissioner Jones dissenting.

Commissioner Jones said he understOOd the importance of this. We need a diverse portfolio withcoal, gas, nuclear and renewable. He complimented the Commission. He was disappointed about themisinformation put out in the news media but was proud in the Commission today. Everyone voted out whatthey thought was best for the State. They all acted in a very good way.

Chairperson Espinoza said she just couldn’t support any of the amendments because she didn’tbelieve PNM met is burden. PNM did present many alternatives and some were not entered in the record.This makes the ratepayers responsible for nuclear risks and a 10% increase for the average person will behard for some. It is not a good day for ratepayers.

Mr. Smith said the effective date is not clear. It would be on service from the effective date.

Commissioner Montoya said Carolyn Glick did a phenomenal iob on the case. The issue ofbringing in Palo Verde at zero value was a taking and unlawful. Along with Commissioner Jones’s praisesof the Commission, she was not so happy with misinformation out there. There is not only misinformationbut the Commission gets targeted a lot about throwing people out of office and she could speak fromexperience. These folks along with her right now, have a tremendous plate and it would be very muchappreciated if the threats would go away.

Commissioner Lovejoy said this has been the toughest decision for her while she has been here.Not only this one but the EPE case as well. Every one has resulted in a rate increase. She was not happywith it but could not go along with the RD. There are some things she couldn’t agree with. We have to doevidence based decision. That evidence showed a history of prudent and useful principles applied and inthe RD it said several times it was imprudent or didn’t apply here. So there has been a trail of evidence thatwas applied. So based on that, she chose not to go with the RD. She wished there was an average inbetween. As some Commissioners stated - just too much information out there. No one with PNM hasinfluenced her. The only contact is here in the meeting. She read somewhere that she was called a PNMperson and that is absolutely incorrect. She has 26 years of commitment to the constituents to make thebest decision possible. Thank you.

Commissioner Jones said it will take a few days to actually calculate the rate classes and it willtake PNM time to finish that up. We will have questions on the residential rate and won’t have that amount.

Mr. Martinez agreed. Those numbers will have to be done.

Gerard Ortiz said if PNM got an order today, they would have the numbers by Friday.


Mr. Smith asked the Commissioners to not leave until they can sign the order.

=PUBLIC COMMENT

Public Comment was taken earlier in the meeting.

=COMMUNICATIONS WITH ACTING GENERAL COUNSEL, MICHAEL C. SMITH

There were no communications with Acting General Counsel.

COMMUNICATIONS AND POSSIBLE ACTION WITH CHIEF OF STAFF, ERNEST D. ARCHULETA,P.E.

There were no communications with Chief of Staff.

10. COMMUNICATIONS WITH COMMISSIONERS

There were no communications with Commissioners.

11. ADJOURNMENT

Commissioner Jones moved to adjourn the meeting.

The meeting was adjourned at 2:07 p.m.


ATTEST:

Carl az, Stenographer

APPROVED:

VALERIE ESPINOZA, CHAII

CHAIRI

PATRICK H. LYONS, COMM~SIONER

LYNDA [OVEJOY, COMMISSIONER

SANDY JONES, COMMISSIONER


NEW MEXICO PUBLIC REGULATION COMMISSION

OPEN MEETING: CASE MANAGEMEN. T MEETING])ate: .,, ~%~,,~" ~.~) ~,[~,

NAME COMPANY NAME(ff any)

PHONE NIYMBER

Thank you for attending this meeting.

EXHIBIT 1PRC - September 28, 2016

N~ MEXICO PUBU¢ REGULATION ~MMISS!ON

OPEN MEETING: CASE MANAGEMENT MEETINGWednesday, September 28, 2016

9:00 a.m.PERA Buildin~ 4~ Floor Hearir~ Room

1120 Paseo de Peralta, Santa Fe, NM 87501

III.

IV.

AGENDA

PLEDGE OF ALLEGIANCE/STATE PLEDGE

INTRODUCTION OF SPEQAL GUESTS

CONSIDERATION AND APPROVAL OF THE AGENDA

CONSIDERATION AND APPROVAL OF MINUTES

¯ Minutes of the Case Management Open Meeting for August 17, 2016¯ Minutes of the Case Management Open Meeting for August 24, 2016

.CONSENT ACl!0N

A. ~ Transportation Matters

NONE

B. Utility Matters:

NONE

REGULAR A ,,CT]ON A~i~ DISCUSSION

A. Transportation Matters:

NONE

Open Meeting: Case Management Meeting A~endaWednesday, September 28, 2016Page lof4 EXHIBIT 2

PRC -September 28, 2016

Utility Matters:

15-00261-UTMichael Smith

IN THE MATTER OF THE APPUCATION OF PUBUCSERVICE COMPANY OF NEW MEXICO FROMREVISION OF ITS RETAIL ELECTRIC RATESPURSUANT TO ADVICE NOTICE NO. 513

PUBUC SERVICE COMPANY OF NEW MEXICO,Appli~m.

VII. PUBLIC COMMENT

VIII.

IX.

COMMUNICATIONS WITH ACTING GENERAL COUNSEL, MICHAEL C. SMITH

COMMUNICATIONS AND POSSIBLE ACTION WITH CHIEF OF STAFFs ERNEST D.ARCHULETA, P.E.

COMMUNICATIONS WITH COMMISSIONERS

Xl. ADJOURNMENT

To obtain a copy of this agenda please log in the Commission’s website at

The Commission will make reasonable efforts to post the agenda on the Commission’swebsite at least 72 hours before the open meeting, but the inability to do so within the 72hours prior, will not require the Commission to delay the meeting or to refrain from takingaction on any agenda item on which it otherwise could act.

At any time during the Open Meeting the Commission may dose the meeting to the public todiscuss matters not subject to the New Mexico Open Meetings Act. The Commission mayrevise the order of the agenda Items considered at this open meeting.

Notice is hereby given that the Commission may request that any party answer clarifyingquestions or provide oral argument with respect to any matter on the agenda, if theCommission makes such a request, any party present at the meeting, either in person or bytelephone, shall have an equal opportunity to respond to such questions or argument. In theevent a party whose case is on the agenda chooses not to appear, the absence of that partyshall not cause such discussion or argument to become ex-parte communications.

Open Meeting: Case Management Meeting AgendaWednesday, September 28, 2016Page 2 of 4 EXHIBIT 2

PRC - Sepk~nber 28, 2016

PERSONS WITH D!SABILmES

ANY PERSON WITH A DISABIUTY REQUIRING SPECIAL ASSISTANCE IN ORDER TO PARTICIPATEIN THIS PROCEEDING SHOULD CONTACT THE OFFICE OF DIRECTOR OF ADMINISTRATIVESERVICES OF THE COMMISSION AT (505) 827-4042 AS SOON AS POSSIBLE PRIOR TO THECOMMENCEMENT OF THE OPEN MEETING.

PUBUC CQMMENT

All members of the public wishing to provide public comment must sign a sign-up sheetprior to the start of the meeting and identify their name and the name of the organization theyrepresent(if any), and the topic or issue on which they desire to comment. The portion of theagenda allocated for public comment at any one open meeting shall be limited to a maximumof 30 minutes for all persons wishing to provide comment. The order of speakers will be basedon the order in which speakers sign up, but public offidals may be taken out of order. If aspeaker is not present at the time he or she is called to provide comment, that speaker shallforfeit their opportunity to speak. Public comment by an individual or entity shall be limited tono more than three (3) minutes unless the Commission acts to extend the period, if thenumber of individuals on the sign,up sheet desiring to provide comment would exceed theallotted 30-minute period, the Chairman may limit individual remarks to a shorter time period.Individuals represented by or representing a common organization or association may be askedto select one individual to act as spokesperson to speak for the group. Individuals who sign up

¯ to comment, but either fail to do so or choose to speak for less than their allotted time, maynot cede or yield their time to another speaker. Written comments of individuals who cannotbe physically present may not be read aloud at the meeting but may be submitted to theCommission.

The subject matter of public comments shall be relevant to matters within theCommission’s jurisdiction. Public comment will not be permitted on matters that should beaddressed appropriately as the subject of an informal or formal complaint before theCommission or on pending rulemaking proceedings before the Commission once theopportunity for public comment in those proceedings has closed. Public comment by parties toa proceeding or adjudication pending before the Commission will not be permitted where thecomment concerns matters at issue in such proceeding. The Chairman shall retain the right tostop any speaker who raises an issue that is not under the Commission’s jurisdiction or issubject to the restrictions above. Public comment will be received without Commissioncomment or response. However, individual Commissioners may at their option seekclarification or additional information from speakers through the Chairman. No speakers willbe accommodated after the public comment portion of the agenda has closed. The Chairmanretains the right to exercise discretion in the implementation of this policy and may overridethe above rules in case of emergency or other unforeseen circumstances.


PRC - September 28, 2016

Speakers providing comment shall at all times conduct themselves in accordance withproper decorum. Profane or vulilar language or gestures will not be tolerated. Audiencemembers shall not disrupt an open meeting by speaking without being recognized by theCommission and shall not incite others to do so. 7he Commission retains the right to removedisruptive attendees and individuals who fail to conduct themselves in accordance with theseprovisions from the Commission meeting.


PRC- September 28, 2016

NEW MEXICO PUBLIC REGULATION COlVIMISSION

OPEN MEETING: C,,ASE MAN, AGEMENT ,MEETINGDate: ~ ~" 7.~ J

NA m PHONE NUMBER TOPIC

EXHIBIT 3PRC - September 28, 2016

minutes of the case management open …nmprc.state.nm.us/docs/older docs/09-28-16 minutes.pdf ·...

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