BEFORE THE NEW MEXICO PUBLIC REGULATION COMMISSION RECOMMENDED DECISION

Transcription

1 BEFORE THE NEW MEXICO PUBLIC REGULATION COMMISSION IN THE MATTER OF PUBLIC SERVICE COMPANY OF) NEW MEXICO S REQUEST FOR A COMMISSION ) ORDER GOVERNING THE ACCOUNTING TREATMENT ) OF COSTS RELATED TO JOINING THE WESTERN EIM) RECOMMENDED DECISION March 18, 2018

2 TABLE OF CONTENTS I. STATEMENT OF THE CASE... 1 II. DISCUS SION... 5 A. Commission authority and legal standards Authority and standards to approve PNM decision to join the EIM Authority and standards to approve advance ratemaking treatment Implied Commission authority Special cases of accounting orders and regulatory assets B. Evidence: costs, benefits and ratemaking treatment C. Recommendation: Approve accotmting order for regulatory asset but no other advance ratemaking treatment III. FINDINGS OF FACT AND CONCLUSIONS OF LAW IV. DECRETAL PARAGRAPHS RECOMMENDED DECISION Page i

3 Ashley C. Schannauer, Hearing Examiner for this case, submits this Recommended Decision to the New Mexico Public Regulation Commission ("Commission") pursuant to NMSA 1978, , and Commission Rules of Procedure D(4) and B NMAC. The Hearing Examiner recommends that the Commission adopt the following statement of the case, discussion, findings of fact, conclusions of law and decretal paragraphs in an Order. I. STATEMENT OF THE CASE On August 22, 2018, Public Service Company of New Mexico ("PNM") filed an Application requesting approvals related to its plan to join the Western Energy Imbalance Market ("EIM") in April More specifically, PNM asked the Commission to make the following findings: find that PNM has complied with the informational requirements of Rule (A)(5) NMAC; find that it is reasonable to join the EIM and expend necessary funds to do so; and, issue an accounting order that authorizes PNM to create a regulatory asset that allows PNM to seek recovery of the costs and carrying charges associated with the capital investments and operating and maintenance costs of joining the ElM in a furore general rate case, subject to review by the Commission. PNM Application, p. 9. New Mexico Industrial Energy Consumers ("NMIEC"), the Coalition for Clean Affordable Energy ("CCAE"), Tri-State Generation & Transmission Cooperative, Inc. ("Tri- State"), the Interwest Energy Alliance, Albuquerque Bernalillo County Water Utility Authority ("ABCWUA"), Western Resource Advocates ("WRA"), the Attorney General for the State of New Mexico, the City of Farmington and the City of Albuquerque intervened. On December 12, 2018, the Commission held a public hearing in this matter, with Commissioner Cynthia Hall serving as the presiding officer. The following witnesses appeared and provided written and oral testimony under oath: RECOMMENDED DECISION Page 1

4 PNM: Thomas G. Fallgren, Chase M. Cheshire, Sheila M. Mendez, Kelli C. Alcantar and Richard D. Starkweather; WRA: Douglas J. Howe, Ph.D.; Utility Division Staff: Charles W. Gunter and Heidi M. Pitts, Ph.D. The Presiding Officer admitted the following exhibits into the evidentiary record: PNM Exhibit 1: Direct Testimony and Exhibits of Thomas G. Fallgren PNM Exhibit 2: Rebuttal Testimony and Exhibits of Thomas G. Fallgren PNM Exhibits 3, 4, 5, and 6: EIM Contract Forms (sponsored by Thomas G. Fallgren) PNM Exhibit 7: Direct Testimony and Exhibits of Chase M. Cheshire PNM Exhibit 8: Direct Testimony and Exhibits of Sheila M. Mendez PNM Exhibit 9: Direct Testimony and Exhibits of Kelli C. Alcantar PNM Exhibit 10: Rebuttal Testimony and Exhibits ofkelli C. Alcantar PNM Exhibit 11: Direct Testimony and Exhibits of Richard D. Starkweather Staff Exhibit 1: PNM Resources Quarter 3 Earnings Review dated November 6, 2018 Staff Exhibit 2: California ISO, Western EIM Benefits Report, Third quarter 2018 dated October 29, 2018 Staff Exhibit 3: Direct Testimony and Exhibits of Heidi M. Pitts, Ph.D. Staff Exhibit 4: Direct Testimony and Exhibits of Charles W. Gunter. ABCWUA Exhibit 1: pages 4 and 5 from PNM Responses to NMIEC s First Set of Interrogatories and a 1-page PNM exhibit NMIEC 1-2n. WRA Exhibit 1: Direct Testimony of Douglas J. Howe, Ph.D. On December 14, 2018, PNM and Staff filed a Joint Proposed Form of Final Order (the "Joint Proposed Final Order"). On December 17, 2018, ABCWUA filed a Post Hearing Brief in which it recommended that the Commission authorize PNM to join the EIM, but that the Commission condition its authorization by: a. Requiring PNM to submit annual cost reports on a calendar year basis; b. Ordering that the amortization period for recovery of PNM costs, incurred as a result of joining the EIM, be established in a future rate case in which the Commission considers approval of recovery of these costs; RECOMMENDED DECISION Page 2

5 c. Requiring PNM to submit quarterly CAISO reports concerning the benefits of its EIM membership to the Commission once PNM joins the EIM; and d. Denying PNM s request to approve the ratemaking treatment of the costs associated with joining the EIM. On December 18, 2018, PNM and Staff filed responses to ABCWUA s Post- Hearing Brief. On December 19, 2018, the Commission issued an Order on Accounting Treatment of Costs Associated with Joining the Western Energy Imbalance Market ("December 19th Order"). The December 19th Order approved PNM s Application and stated that PNM shall have the burden in its next general rate case of demonstrating that its actual costs are consistent with the information provided in this proceeding and were reasonably and prudently incurred. The Order also required PNM to make annual compliance filings covering the costs actually incurred as a result of the approvals granted by the Commission. The Order required filings on or before March 1, 2020 for costs incurred through December 31, 2019; on or before March 1, 2021 for costs incurred for calendar year 2020; and on or before June 1, 2021 for 2021 costs incurred up to the date PNM begins trading activities in the EIM. It also required PNM to file copies of all executed contracts with CAISO in this docket within five days of their execution. December 19th Order, ordering paras. A-C. On January 17, 2019, ABCWUA filed an Application to reconsider the December 19th Order. Application to Reopen Case and to Reconsider Order on Accounting Treatment of Costs Associated With Joining the Western Energy Imbalance Market. On February 6, 2019, the Commission granted ABCWUA s Application. In its Order Granting Rehearing Motion and Vacating December 19, 2018 Order, the Commission vacated RECOMMENDED DECISION Page 3

6 the December 19th Order and provided that a rehearing shall be conducted in this case, subject to a further procedural order to be issued by the Commission in due course. On February 27, 2019, the Commission issued the further procedural order. The Commission stated that PNM s request in this case seeks approval only for the accounting treatment of costs related to joining the Western Energy Imbalance Market and that it does not appear to seek permission from the Commission to join the EIM. The Commission also noted that the rehearing likely needed to be completed by April 1, 2019 to permit PNM to join the EIM trading platform by April of Accordingly, the procedural order appointed the undersigned as Hearing Examiner to review the existing record in the case and to report to the Commission, no later than March 13, 2019, a recommendation of whether the existing record in this case is sufficient to issue a Recommended Decision in this matter, whether the record should be reopened for taking additional evidence or briefing, when a review of the existing record in this case can be completed, and whether a Recommended Decision can be considered by the Commission at its March 27, 2019 open meeting. The procedural order also stated that the Hearing Examiner should take any necessary steps he deems reasonable, and may shorten the exceptions deadlines, in order to permit review of the Recommended Decision by March 27, The Hearing Examiner thereafter issued a Briefing Order on March 5, 2019 directing the parties to file legal briefs on the Commission s authority and the legal standards that apply to discretionary requests, such as PNM s request here, and requests for the approval of regulatory assets.1 On March 8, 2019, the Hearing Examiner also filed a report with the Commission indicating that the evidentiary record appears to be sufficient to issue a Recommended Decision 1 The Hearing Examiner issued an Amended Briefing Order on March 7, 2019 that required the filing of initial briefs by March 12, 2019 and response briefs (if any) by March 15, RECOMMENDED DECISION Page 4

7 on the substance of PNM s Application and that, with the timely filing of briefs, a Recommended Decision could be prepared in sufficient time to permit Commission action on the Recommended Decision by March 27, On March 12, 2019, PNM, Interwest Energy Alliance and ABCWUA filed briefs. WRA and CCAE filed a joint brief. On March 15, 2019, PNM and ABCWUA filed responses. II. DISCUSSION A. Commission authority and legal standards 1. Authority and standards to approve PNM decision to join the EIM PNM describes the EIM project as discretionary. It says the project is not necessary for the provision of adequate service and is not required by any Commission rule or regulatory mandate. The project thus draws into question which, if any, legal authorities and standards apply to PNM s requests. The only provision in the Public Utility Act that contains an express authorization for advance approval of utility expenditures is the CCN statute at of the Public Utility Act. Section A requires public utilities to obtain a CCN before beginning the construction or operation of an3 public utility plant or system. NMSA 1978, A. The standard for the issuance of a CCN to construct or operate a public utility plant or system is whether the public convenience and necessity require construction or operation of a facility. NMSA 1978, A. The "public convenience and necessity" standard has been interpreted as requiring the showing of a "net benefit to the public." Re Southwestern Public Service Co., Recommended Decision, Case No UT, February 6, 2008, p. 6, approved in Final Order, Case No UT, February 14, 2008; Re Southern Union Company, Final Order, Case No. 1891/1892 (December 12, 1984). Utilities also need to show that the proposed RECOMMENDED DECISION Page 5

8 project is the most cost effective alternative to satisfy utilities needs. Re Public Service Company of New Mexico, Case No. 2382, 166 P.U.R.4th 318, 337, (1995); Corrected Recommended Decision, Case No UT, August 15, 2016 (hereafter "Corrected Recommended Decision, UT"), pp , approved in Final Order Partially Adopting Corrected Recommended Decision, September 28, 2016; Certification of Stipulation, Case No UT, November 16, 2015, pp , approved in Final Order, December 16, 2015, p Authority and standards to approve advance ratemaking treatment PNM asks the Commission to issue an accounting order that authorizes PNM to create a regulatory asset that allows PNM to seek recovery of the costs and carrying charges associated with the capital investments and operating and maintenance costs of joining the ElM in a future general rate case, subject to review by the Commission. PNM Application, p. 9. As discussed further below, accounting orders represent a form of advance ratemaldng treatment, i.e., ratemaking decisions that occur outside the context of a rate case based upon expenses that are incurred outside the test year of a rate case. There is little legal authority in the Public Utility Act for the approval of ratemaking treatment to recover a utility s costs before the costs are incurred and outside the context of a rate case. Under the CCN statute, a utility may ask the Commission to approve ratemaking treatment for a project for which a utility seeks a CCN. The statute provides that, in such a case, the Commission shall, in the order granting the certificate, set forth the ratemaking principles and treatment that will be applicable to the public utility s stake in the certified facilities in all ratemaking proceedings on and after such time as the facilities are placed in service. NMSA 1978, B. The Commission, however, need not approve the ratemaking treatment RECOMMENDED DECISION Page 6

9 proposed by the applicant. The ratemaking treatment the Commission ultimately approves depends upon the reasonableness of the applicant s proposal and the supporting facts. More generally, the Public Utility Act requires that public utility rates be just and reasonable. NMSA 1978, "Section offers no guidance to the Commission for achieving this goal, nor does it specify procedures." Otero County Electric Cooperative, Inc. v. New Mexico Public Service Commission, 108 N.M. 462, 464, 774 P.2d 1050, 1052 (1989). "To set a just and reasonable rate, the Commission must balance the investor s interest against the ratepayer s interest." Behles v. New Mexico Public Service Commission, 114 N.M. 154, 161,836 P.2d 73 (1992). As the Supreme Court has concluded, "Neither [interest] is paramount.., we cannot focus solely on investor interests." Mountain States Tel. & Tel. Co. v. New Mexico State Corporation Commission, 99 N.M. 1, 7-8, 653 P.2d 501 (1982). The implementation of this standard normally occurs in a rate case. Costs have traditionally been authorized for recovery based upon an historic test year or, more recently, a future test year. Ratemaking treatment outside of a rate case is disfavored as being contrary to the policy of piecemeal ratemaking. 3. Implied Commission authority The Commission has expansive power under the New Mexico Constitution and the Public Utility Act to supervise and regulate public utilities. The Commission has "general and exclusive power and jurisdiction to regulate and supervise every public utility in respect to its rates and service regulations.., all in accordance with the provisions and subject to the reservations of the Public Utility Act... and to do all things necessary and convenient in the exercise of its power and jurisdiction." NMSA 1978, (A). As an example, PNM s Application is filed, in part, pursuant to a reporting rule, Rule 440. Rule 440 was not adopted pursuant to a specific grant of authority in the Public Utility Act. It was adopted pursuant to the Commission s implied authority under the provisions of the Public RECOMMENDED DECISION Page 7

10 Regulation Commission Act that authorize the Commission to issue rules to implement the other authority established in the Public Regulation Act, the Public Utility Act and other pertinent statutes. Section of the Public Regulation Commission Act states that "[t]he commission shall administer and enforce the laws with which it is charged and has every power conferred by law." NMSA 1978, A. Subsection B(10) of section states that the Commission may "adopt such reasonable administrative, regulatory and procedural rules as may be necessary or appropriate to carry out its powers and duties." NMSA 1978, A, B(10).2 Rule 440 requires electric utilities to file reports with the Commission prior to making certain defined extensions, system improvements, or additions setting forth the character of the undertaking, the purpose sought thereby to be accomplished, the means by which that purpose is intended to be realized, the estimated costs involved in the employment of those means, and the data upon which the engineering and economic feasibility of the undertaking is based A NMAC. The portion of Rule 440 relevant here requires reports pertaining to "[a]ny agreements of sale, power pooling, interchange, capacity sharing, or similar transactions designed to achieve joint economies of generation or transmission." A(5) NMAC. Subsection B states that the report is for informational purposes and shall not constitute nor be deemed to constitute an application by the utility for authority to engage in the reported undertaking. But the rule also states that the filing of the report shall not preclude the commission from taking any action which it deems appropriate with respect to the reported matter B NMAC. 2 Rule 440 also cites as authority the provision of the Public Regulation Commission Act that prescribes the provisions for establishing rules. NMSA 1978, RECOMMENDED DECISION Page 8

11 Indeed, the only source of Commission authority that PNM references in its Application is Rule (A)(5) NMAC. PNM asks the Commission to find that it has complied with the informational requirements of Rule (A)(5) NMAC. PNM Application, p. 9.3 As PNM acknowledges, the exercise of the Commission s implied authority lies within the Commission s discretion. In exercising its discretion, the Commission must act reasonably and not arbitrarily. Its decision must be based upon the evidence. Most important, the Commission should consider whether its action will provide a net public benefit and serve the public interest, and it should fairly balance the interests of investors and ratepayers. In Case No UT, the Hearing Examiner recommended that, to exercise its discretionary authority, the Commission should require, at a minimum, that a utility make a showing sufficient to obtain a CCN. That includes, most importantly, proof that the project will produce a net public benefit. The Hearing Examiner also recommended that the Commission should carefully evaluate the public interest and ensure a fair balancing of the interests of investors and ratepayers (including the impact on customer rates). Furthermore, given the discretionary nature of the utility s request, the Commission should consider the extent of any public opposition, the extent to which the utility s justifications are not clearly demonstrated, and the extent to which any uncertainties will impact the public interest and create unreasonable risks for ratepayers. Recommended Decision, Case No UT, March 19, 2018, at 79, adopted in Final Order, April 11, The recent San Juan abandonment caseat UT cited by PNM in support of its request for the Commission to exercise its discretionary authority (independent of its Rule 440 filing) is a good example of a case in which there was not a clear showing of a net public benefit 3 The rule that PNM appears to be referencing is Rule 440, which is more accurately cited as NMAC. RECOMMENDED DECISION Page 9

12 and the public interest. The San Juan case involved an abandonment request (for San Juan Units 2 and 3) and two CCN requests (to acquire additional capacity in San Juan Unit 4 and to include Palo Verde Unit 3 in PNM s rate base). As pertinent here, the case also involved PNM s request to approve in advance of a rate case the recovery of the costs of the selective non-catalytic reduction ("SNCR") pollution controls required by the EPA and the New Mexico Environment Department to continue operating San Juan Units 1 and 4, The Certification of Stipulation issued by the Hearing Examiner on the initial stipulation negotiated in that case recommended that advance ratemaking approval not be granted for the SNCR spending, contrary to the stipulating parties request. Certification of Stipulation, Case No UT, April 8, 2015, pp The Hearing Examiner questioned, in particular, the prudence and reasonableness of the balanced draft portion of the SNCR work and recommended that the stipulation be modified to provide for the review of the SNCR costs in a future ratemaking proceeding. The Commission thereafter approved a modified stipulation that included the signatories agreement to defer ratemaking treatment of the balanced draft costs to a future general rate case. Final Order, Case No UT, December 16, 2015, p. 22. The Commission ultimately determined in a succeeding rate case that PNM failed to prove the prudence of the balanced draft portion of the SNCR project and determined that the proper ratemaking treatment was the denial of the recovery of all but $300,000 of the $5.2 million annual revenue requirement associated with the balanced draft system. The $300,000 recovery reflected the O&M costs that were avoided by the system s installation. Final Order Partially Adopting Corrected Recommended Decision, Case No UT, September 28, 2016, pp RECOMMENDED DECISION Page 10

13 PNM s recent advanced metering infrastructure ("AMI") case at Case No UT, cited above, is another example of a case involving the Commission s discretionary authority in which there was not a clear showing of a net public benefit. PNM asked the Commission to approve PNM s proposed AMI project and to approve advance ratemaking treatment of the estimated $95.1 million capital cost of the AMI infrastructure costs and $26.4 million of regulatory assets for meter reader severance and customer education costs. PNM stated that the AMI project was not necessary for the provision of adequate service nor was it required by any Commission rule or other regulatory mandate. PNM said it was asking for advance ratemaking treatment -- prior to the project s implementation and outside the context of a rate ease -- because the project would require a significant capital investment. PNM submitted a series of cost-benefit analyses that showed that replacing its existing meters with AMI meters would produce a net present value benefit ranging from $8.6 million to $20.9 million over 20 years. PNM said the project would produce annual operations and maintenance expense savings of approximately $11 million. PNM s opponents argued that the request for advance ratemaking treatment would shift from shareholders to ratepayers the risk that is traditionally associated with utility expenditures. They noted that prior approval of ratemaking treatment is only afforded in the Public Utility Act to plant that has met the strict requirements of the CCN statute. They said the general practice is that utilities make investment and managerial decisions based upon their own managerial judgments without advance Commission approval and they seek to recover their costs later in a rate case. Utilities have the opportunity to earn favorable returns with good management decisions, and they bear the risk of earning lesser returns with poor management decisions. RECOMMENDED DECISION Page 11

14 The opponents also criticized PNM s cost-benefit analysis. They argued that a more accurate analysis would show that the project would actually cost ratepayers substantially more over the 20 year estimated life of the project than ifpnm were to continue to use its existing meters. The Hearing Examiner, and ultimately the Commission, found that PNM failed to show that the AMI project would produce a net public benefit, i.e., that PNM failed to show that the benefits (cost savings) to be realized by ratepayers would exceed the costs to be borne by ratepayers. The Heating Examiner agreed with the opponents that PNM s projections of net savings over the lifetime of the project were uncertain. Thus, the advance ratemaking treatment proposed by PNM would not have fairly balanced the interests of investors and ratepayers. Ratepayers should not have been required to bear 100% of the risk that PNM s savings predictions would occur, while shareholders recovered 100% of PNM s costs, while they earned an additional return on the new investment and while they continued to earn a return on the replaced investment. Recommended Decision, Case No UT, March 19, 2018, at The Commission approved the Hearing Examiner s recommendations. Final Order, Case No UT, April 11, In a 2017 Order initiating a iulemaking proceeding to address, among other issues, the standards for establishing a regulatory asset, the Commission stated that a net public benefit should form the basis for advance approval of a regulatory asset: 22. From one perspective, it can be argued that Commission approval of regulatory assets should be more the exception than the rule because they are approved without examination of the utility s revenues and other expenses at the time the expenses underlying the regulatory asset are incurred, and thus are a form of piecemeal ratemaking. On the other hand, if the expenses underlying a regulatory_ asset results in ratepayer benefits that exceed those costs, it can also be argued that allowing utilities to recover such costs, even though incurred outside of a test period, is not only fair, but consistent with the public interest. Order Initiating Investigation and Rulemaking, Requesting Comments and Scheduling Workshop, Case No UT, March 22, 2017, 22, 2017 WL at *7 (Emphasis added). A proposed rule, however, has not been issued. RECOMMENDED DECISION Page 12

15 4. Special cases of accounting orders and regulatory assets Accounting orders and regulatory assets are special cases in which the Commission has at times approved various forms of ratemaking treatment in advance of a utility s expenditures and outside the context of a rate case and its associated test year. The Commission has recognized four types of regulatory assets. The first is a pure accounting order that does not prejudge the ultimate ratemaking treatment of the regulatory asset, deferring ratemaking treatment to a rate case. The other types involve accounting orders and various levels ofratemaking treatment for the regulatory asset that is being recorded in advance of a rate case. 1. Regulatory asset solely to preserve a utility s ability to request recovery for a cost in a future rate case. The commission defers a decision on whether the expense recorded in the regulatory asset can later be recovered in rates. The regulatory asset is not included in rate base and the utility does not earn a return on the regulatory asset, i.e., accrue carrying charges. This treatment preserves a utility s ability to recover an expense from ratepayers in a future rate case that would otherwise be financed by shareholders or bondholders.5 ~ Corrected Recommended Decision, UT, at 129, citing E.g., Application of Pacificorp for an Accounting Order to Establish a Regulatory Asset, No. PAC-E-08-02, 2008 WL , Idaho P.U.C. June 26, As an example, such pure accounting orders for regulatory assets have been approved in Vermont. In a March 29, 2005 Order f~om a rate case involving the Central Vermont Public Service Corporation, the Vermont Public Service Board said it issues accounting orders to create regulatory assets for the sole purpose of preserving a utility s ability to seek ratemaking treatment of an expense in a future rate case: In Vermont, we authorize such treatment through accounting orders or through explicit rulings in cases that require the Company to record costs and earnings in a specific way. We usually consider accounting order requests without providing general public notice of the request (except to the Department) and without evidentiarv hearings. We have counterbalanced this policy by aff wmatively stating that the accounting order affected solely the accounting treatment of the relevant costs (or revenues) and that it had no precedential effect on the ratemaking treatment of those costs (or revenues). As we ruled in Docket 5983, such limitations are essential, given the abbreviated procedures employed: We must stress that, in the absence of full notice and opportunity for hearing on a request for an accounting order, such an order will not have final effect in a later rate proceeding under , and it would be wrong for any party_ to think otherwise. (continued on next page) RECOMMENDED DECISION Page 13

16 Regulatory asset amortized as an expense but with no return on the unamortized balance Regulatory asset included in rate base over an amortization period with the utility earning a return on the regulatory asset. The return compensates shareholders or bondholders for the time value of money before the costs are fully recovered from ratepayers Regulatory asset included in rate base over an amortization period with the utility earning a return both on and of the asset. 8 In PNM s 2015 rate case, the Commission said it does not oppose creation of regulatory assets and liabilities, but they should be the exception, not the norm. 9 The Commission stated Investigation into the existing rates of Central Vermont Public Service Corporation, Docket Nos and 6988, March 29, 2005, 2005 WL , *39, 241 PUR 4th 1 (Vt.P.S.B.) (Emphasis added). 6 Corrected Recommended Decision, UT, at 130, citing Application of Sierra Pac. Power Co., Docket Nos & , 2014 WL , VI(A) (Nev. P.U.C ). 7 Corrected Recommended Decision, UT, at s Corrected Recommended Decision, UT, at 130, citing Pub. Util. Deprec. Practices The Vermont Public Service Board, for example, issues pure accounting orders for the creation of regulatory assets to address exceptional or extraordinary events: One set of costs and revenues that the Board may authorize a regulated company to defer under GAAP are those associated with exceptional or extraordinary events. In fact, the bulk of the deferrals that we consider in these proceedings fall into this category; in reliance upon the Company s assertions that the events which cause these costs or revenues are "extraordinary," we issued a number of accounting orders that allow CVPS to "book and defer" costs and revenues. For example, in 2003 we authorized CVPS to defer the incremental decommissioning expenses for Yankee Atomic and Connecticut Yankee. These were large added expenses that CVPS could not reasonably anticipate. An extraordinary event or transaction under GAAP is one that is "abnormally and significantly different ~om the ordinary and typical activities of the company, and which [sic] would not reasonably be expected to occur in the foreseeable future." The GAAP standard encompasses four key considerations in determining whether an event is "extraordinary," and therefore merits a request for an accounting order. These considerations are: Is the amount material? Was the event unplanned? Was the event beyond CVPS s management control? Is the problem unusual, abnormal, and not likely to be repeated? Investigation into the existing rates of Central Vermont Public Service Corporation, Docket Nos and 6988, March 29, 2005, 2005 WL , *39-*40, 241 PUR 4th 1 (Vt.P.S.B.). (continued on next page) RECOMMENDED DECISION Page 14

17 that utility requests for regulatory assets and liabilities are becoming more frequent and that it shares the concerns expressed in that case by Attorney General witness Crane. Ms. Crane said that the Attorney General opposes the creation of regulatory assets in principle because they insulate shareholders from risk and shift risk to ratepayers. She said a utility s incentive to manage its business gets lost when regulatory assets are permitted: But I do find it ironic that you would go out and execute a buy-back of Palo Verde leases for $150 million or something without batting an eye, and yet you want to come in and have a regulatory asset for a couple of hundred thousand dollars in credit card fees. I mean, you are at risk, you should be at risk, and guess what? That s why you get a rate of return that s more than a risk-free rate. If you didn t have any risk, then we should be talking about a treasury rate of return for the company. We re not. Even Dr. Woolridge is not recommending that. And so, you know, there s risk. You re going to be compensated for that risk, and you need to take that risk instead of pushing everything off on ratepayers, you know, and trying to get - trying to get the Commission to guarantee recovery of costs that you haven t even incurred yet. Corrected Recommended Decision, UT, at 131. The Commission should not exercise its implied authority to approve discretionary projects and advance ratemaking treatment unless the applicant can show a net public benefit from the requests. B. Evidence: costs, benefits and ratemaking treatment The Hearing Examiner adopts and incorporates by reference the description of the evidence in the record set forth on pages 6 through 26 (paragraphs 26-76) of the Commission s December 19th Order. In summary, PNM s witnesses testified as to the benefits they state will be realized from PNM s participation in the EIM, the costs PNM will incur in its participation and the likely exceedance of benefits over costs for the first five years of PNM s participation. PNM s RECOMMENDED DECISION Page 15

18 witnesses testified that PNM s participation in the EIM could produce gross benefits ranging from $17 million to $21 million by 2024 and a net benefit of $15.1 million over the first five years of PNM s participation. Fallgren Direct, pp Mr. Cheshire stated that, currently, PNM buys and sells power on a daily and hourly basis, creating cost savings for its customers, but is limited to day-ahead blocks of energy, or real-time hourly transactions. The EIM would enhance PNM s ability to balance resources within each hour, on a five or fifteen minute basis, providing the potential for additional value and cost savings for its customers. He said, as an example, on certain days (e.g., hot weather conditions in New Mexico), PNM customers power demand reaches a high level, and PNM might be able to purchase power through the ElM at a lower price than it would cost to use its peaking units. Conversely, when PNM customer demand is low, PNM s demand may not require the full output of PNM s generating capacity. At those times, PNM may have the opportunity to use the available capacity to sell energy at a price higher than PNM s incremental cost of generation. Cheshire Direct, at 10, 13-14; Fallgren Direct, Exhibit TGF-2, at 8-9. PNM s witnesses also said the EIM would provide benefits that are not strictly monetary, such as improving the integration of increasing amounts of renewable energy in PNM s balancing authority and across the Western Interconnection as a whole. The EIM aggregates the flexible resources from neighboring states, capturing diversity benefits from an expanded geographic footprint and expanding the potential use of the resources. PNM states that, under the resource mix assumed in the cost-benefit analysis, PNM expects to integrate an additional 51 GWh of renewable energy that might otherwise be curtailed without the EIM. Fallgren Direct, pp RECOMMENDED DECISION Page 16

19 The WRA witness, Dr. Howe, an EIM Governing Body member from 2016 to 2018, testified about the likely customer benefits described by PNM, the potential reduction of CO2 emissions and the facilitation of larger percentages of renewable energy in a utility s portfolio. Dr. Howe, however, said he was not making a recommendation on the recovery of the costs PNM incurs to join the EIM. He said the New Mexico Commission has its own history and precedents on the accounting treatment of utility costs. Instead, he provided information on how six other state regulatory commissions addressed utilities requests for EIM-related cost recoveries (discussed in section II.C below), which he said the Commission may find useful in its deliberations. He said the benefits of joining the EIM fully flow to the customers of the utility and that all utility members of the EIM have sought recovery of their incurred costs. Utilities that were at the point of filing a general rate case at about the same time as they entered the EIM handled the cost recovery issue in the general rate case. He said other utilities requested some type of accounting treatment for the costs they incurred. Howe Direct, p. 14. Staffs witness Dr. Pitts testified regarding the likely benefits of PNM s participation in the EIM and Mr. Gunter described Staffs position on PNM s request for an accounting order. Mr. Gunter s recommendations on PNM s requests for an accounting order and cost recovery are discussed in section II.B below. ABCWUA s attorney cross-examined witnesses on the increasing frequency of PNM requests for orders approving the creation of regulatory assets and offered into evidence a discovery response from PNM listing PNM s current regulatory assets: Coal Mine Decommissioning $ 13,501,883 PCB Refinancing Hedge 13,503,542 Renewable Rider 967,972 Fuel Purchased Power Adjustment Clause 4,384,801 Energy Efficiency Rider 1,145,637 Sky Blue II 1,526,951 RECOMMENDED DECISION Page 17

20 ABCWUA Exhibit 1. General Rate Case Expenses 3,015,787 LVGS Decommissioning 37,225 SJGS Units 2 & 3 Stranded Cost 122,923,394 Unamortized Loss on Reacquired Debt 8,411,369 ABCWUA states that PNM s regulatory asset request in this case is just another in a long series of cases that shift risk from PNM to ratepayers. ABCWUA Application to Reopen Case and to Reconsider Order on Accounting Treatment of Costs Associated with Joining the Western Energy Imbalance Market, January 17, 2019, at 5-6. None of the parties objects to the adequacy of PNM s Rule 440 filing or to PNM joining the EIM. They disagree about whether the Commission should approve a regulatory asset for PNM s initial costs of joining the EIM and the extent to which any approval should also include advance ratemaking treatment of the costs that will ultimately be incurred and recorded to the regulatory asset account. Three positions were developed in the evidentiary record and briefs. 1. ABCWUA: No advance ratemaking treatment (no accounting order or regulatory asset) The ABCWUA argues that PNM should not be authorized to create a regulatory asset, because there is no proof in this case that PNM s proposed EIM project will produce a net public benefit. The ABCWUA states that PNM s request is based on potential ratepayer net benefits and estimated costs (emphasis from ABCWUA s March 12 brief). The ABC~tJA cites the following excerpts from PNM s Application and testimony: that "customers are likely to realize ongoing benefits ifpnm were to join the EIM;" "PNM concluded that potential benefits for customers could be realized if PNM joined the EIM;" "current estimated implementation costs;" and, "based on an independent analysis of potential benefits," PNM s net present value analysis RECOMMENDED DECISION Page 18

21 calculates a potential net benefit." ABCWUA Brief (3/12/2019) at 6 (Emphasis in Brief), citing PNM Application at 2, 3, 5; Fallgren Direct at The ABCWUA argues that PNM s request would not result in a fair balancing of the interests of investors and ratepayers. The ABCWUA states that PNM s request for the Commission s assurance that it will profit from its capital investment in the systems necessary for it to join the EIM would insulate shareholders from investment risk and shift all investment risk to ratepayers. ABCWUA Brief (3/12/2019) at 6. The ABCWUA states that, if the Commission were to grant PNM authorization to create a regulatory asset, it should be limited to preserving PNM s ability to request recovery for costs in a future rate case without PNM being allowed to earn both a return on and return of the specified costs. It also states that if the Commission were to grant PNM authorization to create a regulatory asset, it should be subject to the requirements that (1) PNM file a CCN application for the EIM project;1 and (2) PNM file quarterly CAISO reports concerning the benefits of joining the EIM so the Commission can determine that PNM s entry in the EIM actually results in a net public benefit. ABCWUA Brief (3/12/2019) at Staff s witness: Approve accounting order for regulatory asset but no other advance ratemaking treatment; Staff witness, Mr. Gunter testified that the Commission should issue an accounting order to permit PNM to record its upfront EIM costs in a regulatory asset but that all ratemaking treatment be deferred and addressed in a future rate case. He said approval of the accounting order and regulatory asset should in no way constitute pre-approval of the reasonableness, prudence or recovery of such costs: ~0 ABCWUA appears to have withdrawn its CCN argument in the response brief it filed on March 15, RECOMMENDED DECISION Page 19

22 The Commission order authorizing PNM to create a regulatory asset in which to record the costs of joining the ElM should clearly state that such authorization shall in no way constitute pre-approval of the reasonableness, prudence or recovery of such costs. -- PNM should not be allowed to accrue carrying charges on the regulatory asset. -- PNM s proposed amortization period of 5 years should be extended to at least 10 years, with the actual amortization period to be established in the rate case in which the Commission approves regulatory asset recovery. The regulatory asset should be limited to the projected costs of $7.4 million (which already includes a 15% contingency); PNM would need to seek Commission approval to include amounts exceeding $7.4million, As part of the broader cost reporting requirement discussed above, PNM should be required to file annual reports with the Commission regarding expenses incurred that PNM intends to record as regulatory assets. Gunter Direct, pp (Emphasis added). Mr. Gunter testified that "the regulatory asset serves as just a placeholder for the costs. It keeps the company from having to write them off." Tr PNM: Approve accounting order for regulatory asset and partial advance ratemaking treatment The language in PNM s Application is similar to the position of Staffs witness -- that the Commission "issue an accounting order that authorizes PNM to create a regulatory asset that allows PNM to seek recovery of the costs and carrying charges associated with the capital investments and operating and maintenance costs of joining the ElM in a future general rate case, subject to review by the Commission." PNM Application, p. 9. The testimony PNM submitted in support of the Application, however, went further. PNM proposed that the Commission issue an accounting order to permit PNM to record its EIM implementation costs in a regulatory asset but it also asked that a limited ratemaking treatment be approved in this case. PNM asked that it be allowed the opportunity to recover in future ratemaking proceedings the total amount associated with joining the EIM in the form of a rate RECOMMENDED DECISION Page 20

23 base item, subject to Commission review that actual expenditures are reasonable and consistent with the estimated costs provided in this case: Q. PLEASE SUMMARIZE THE ACCOUNTING TREATMENT THAT PNM IS REQUESTING. A. PNM is requesting an accounting order from the Commission that allows PNM to create a regulatory asset so that PNM can defer expenses associated with preparing for, integrating with and participating in the Western EIM operated by the CAISO. Q. WILL THE REQUESTED ACCOUNTING ORDER GOVERN FUTURE RATEMAKING TREATMENT FOR THE DEFERRED EXPENSES THAT ARE INCLUDED IN THE REGULATORY ASSET? A. Yes. The requested accounting order will govern how PNM would be allowed to recover the actual costs incurred to join the EIM. As a result of the accounting order, PNM will be allowed the opportunity to recover in future ratemaking proceedings the total amount associated with joining the EIM in the form of a rate base item, subject to Commission review that actual expenditures are reasonable and consistent with the estimated costs provided in this case. The estimated $11.5 million annualized retail revenue requirement to join the EIM, which includes recovery of ongoing expenses as well as the requested regulatory asset, is more than offset by the expected benefits that customers will receive. It is reasonable to allow PNM the ability to include the requested regulatory asset in its cost of service, after review by the Commission in a future general rate case, given the expected net benefits to customers from participating in the ELM. Therefore, the Commission should issue an accounting order that allows PNM to create a regulatory asset associated with joining the EIM. Alcantar Direct, pp (Emphasis added). 4. December 19th Order: Approve accounting order for regulatory asset and partial advance ratemaking treatment The Commission s December 19th Order recommended approval of PNM s request: IT IS THEREFORE ORDERED: A. PNM s Application is approved, consistent with the findings and determinations set forth above. B. PNM shall have the burden in its next general rate case of demonstrating that its actual costs are consistent with the information provided in this proceeding and were reasonably and prudently incurred. RECOMMENDED DECISION Page 21

24 C. PNM shall make compliance filings covering the costs actually incurred as a result of the approvals granted by the Commission, as follows: On or before March 1, 2020 for costs incurred through December 31, 2019; on or before March 1, 2021 for costs incurred for calendar year 2020; and on or before June 1, 2021 for 2021 costs incurred up to the date PNM begins trading activities in the EIM. PNM shall also file copies of all executed contracts with CAISO in this docket within five days of their execution. December 19th Order, ordering paras. A-C. The Commission found that the Application contains detail that complies with Rule (5) NMAC. It authorized the creation of a regulatory asset and the inclusion of the asset in rates in a future general rate case. It did not expressly address PNM s more specific request that the Commission "find that it is reasonable to join the EIM and expend necessary funds to do so." The Commission stated more generally that "[t]he regulatory asset shall be subject to review by the Commission in that future rate case to ensure that the actual costs incurred are then evaluated as being fair, just, and reasonable and consistent with the estimates provided by PNM in this docket." December 19th Order, p. 31. The Commission stated further that "PNM will bear the burden in a future general rate case of demonstrating that its actual implementation costs are fair, just, and reasonable. The Commission further established compliance filing requirements for the costs PNM incurs prior to beginning trading activities in the EIM. Id. C. Recommendation: Approve accounting order for regulatory asset but no other advance ratemaking treatment The Hearing Examiner recommends that the Commission approve PNM s filing as compliant with the reporting requirements of Rule 440. PNM s Application contains the information required by A(5) NMAC. The Hearing Examiner also recommends that the Commission issue an accounting order that approves a regulatory asset for the purpose of recording PNM s implementation costs to join RECOMMENDED DECISION Page 22

25 the EIM. The Hearing Examiner recommends that the Commission not approve any other advance ratemaking treatment for the costs recorded in the regulatory asset. All decisions regarding the recovery of the costs recorded in the regulatory asset should be deferred to the rate case in which PNM seeks recovery of the costs. Issues regarding carrying costs and amortization periods for the regulatory asset need not be decided in this case. PNM can record in the regulatory asset account the costs it seeks to preserve for ratemaking treatment in the appropriate future general rate case. Ratemaking treatment regarding those costs will be determined at that future time. Thus, the Hearing Examiner does not recommend approval of PNM s request that the Commission "find that it is reasonable to join the ElM and expend necessary funds to do so." The authority to make or approve such a request is not provided for in the Public Utility Act, and it is not clear, on the face of the language, what PNM intends that it means or what the legal significance of its approval would mean. No party objects to the most obvious interpretation, i.e., that PNM seeks approval to join the EIM. But PNM states that it is not seeking Commission approval to join the EIM. PNM states that joining the EIM is not necessary for the provision of adequate service, and it is not required by any Commission rule or regulatory mandate. Instead, PNM states that the language seeks a determination in this case that the implementation costs of joining the EIM are prudent. PNM states that the Commission s affirmative finding on this issue would allow PNM, in a future rate case, to recover the implementation costs in reliance on the prudence finding in this case. PNM Response (3/12/2019) at 8. PNM states that its proposed language would approve the recovery of its costs as long as the costs it actually incurs are consistent with the estimates provided by PNM in this case and as RECOMMENDED DECISION Page 23

26 long as the specific items of cost it seeks to recover are later determined to be reasonable. PNM states that the approval would apply (i) to the $7.4 million in expenses and $0.4 million in carrying costs to join the EIM and (ii) to the $20.9 million in capital costs PNM expects to incur. PNM states that only the reasonableness of the amounts of the expenses recorded in the regulatory asset account could be reviewed in a future rate case, and only capital costs in excess of $20.9 million could be reviewed for prudence. PNM Response (3/12/2019), at Thus, PNM is asking the Commission to exercise its implied authority to approve its proposed ratemaking treatment in advance of a rate case. As discussed in section II.A above, such a request requires a clear showing that PNM s participation in the EIM, including the costs it incurs to join, will produce a net public benefit. The Heating Examiner finds that PNM s estimate of net customer benefits is a sufficient showing of a net public benefit to justify the issuance of the accounting order to preserve PNM s ability to recover its implementation costs to join the EIM, but it is not sufficiently certain to justify the prudence findings and the related advance ratemaking treatment PNM requests. PNM claims that the EIM will produce more savings than costs. PNM s cost-benefit analysis predicts a net present value of $15 million in net customer benefits over the first five years of PNM s participation Non-FuelRevenue $9,165,899 $10,877,446 $10,471,249 $10,139,545 $9,876,615 Requirement EIM Gross Benefits 7,950,000 10,600,000 17,400,000 17,400,000 17,400,000 Net Customer (Cost)/Benefit ( 1,215,899) (277,446) 6,928,751 7,260,455 7,523,385 Net Present Value of $15,058,834 Net Customer Benefits Alcantar Direct, Exh. KCA-4. RECOMMENDED DECISION Page 24