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PNM, Local Union File Motion for Emergency Fuel Adjustment Clause

Posted on: Thursday, 20 March 2008, 18:00 CDT

PNM Resources' (NYSE: PNM) New Mexico electric utility, PNM, together with the International Brotherhood of Electrical Workers Local 611, today filed a joint motion with state regulators to implement an emergency fuel and purchased power cost adjustment clause, a move designed to allow the company to timely recover the higher cost of fuel and energy needed to serve residential and business customers.

N.M. Attorney General Gary King, whose office serves as the residential and small business consumer advocate in rate case proceedings, said PNM's proposed emergency fuel adjustment clause provides greater consumer protection than the utility's original request. He said his office supports PNM's motion for the emergency clause.

The filing and subsequent support from the Attorney General's Office come after a N.M. Public Regulation Commission hearing examiner's March 6 recommendation to cut PNM's proposed rate increase by two-thirds, to $24.2 million; allow a return on equity of 9.71 percent; and deny the utility's request to implement a fuel clause. PNM had proposed a $76.9 million rate increase, a 10.75 percent ROE and implementation of a fuel clause.

If approved by the Commission, the fuel clause could generate the revenue needed to recover an estimated $44.0 million in electric fuel and purchased power costs in 2008, based on a June 1 implementation and PNM's projected first-year emergency fuel-cost factor.

In today's motion, PNM and IBEW proposed changes to PNM's original request for a fuel and purchased power cost adjustment clause to provide the PRC with an alternative to the recommended decision and to PNM's original proposal. The proposed emergency fuel clause would, among other things:

Be implemented on the effective date of the new rates determined in the PRC's final order in the current rate case.

Expire 24 months after the effective date of the rates established in this case, or on the effective date of new rates in the next PNM general rate case, whichever is sooner.

Include a cap recovery amount of $0.01 per kilowatt-hour, based on the base fuel rate of $0.014972. As a result, the combination of the amount embedded in base rates and the amounts collected through the fuel adjustment clause cannot exceed $0.024972 per kilowatt-hour. No cap was established in PNM's original request for a fuel clause.

Require PRC approval of replacement power costs that are the result of base load power plant capacity factors being below the weighted average of 82.9 percent. In PNM's original filing, the company could recover all replacement power costs regardless of power plant performance.

Credit customers with 100 percent of the proceeds from off-system sales from jurisdictional resources. PNM had previously offered a 70 percent sharing mechanism with customers.

Be based on the projected fuel and purchased power costs for the succeeding 12-month period, to be adjusted after 12 months.

"Even with our proposed rates and a fuel and purchased power adjustment clause, PNM customers would have rates that are among the lowest in the region and nation," said Chuck Eldred, PNM Resources executive vice president and CFO.

On Wednesday, PNM filed its response, or exceptions, to the recommended decision. The utility is vigorously pursuing nine exceptions to the recommended decision. Among its arguments, PNM said the hearing examiner unlawfully failed to test the end result of his recommendation on the financial health of PNM. The filing said the decision does not provide PNM a fair opportunity to earn a reasonable rate of return, nor does it meet the statutory goal of enabling PNM to attract capital to provide the services required by increasing customer demand. PNM argued that New Mexico law requires the use of a fuel clause under the circumstances demonstrated on the record.

Eldred said the recommended decision's substantially lower rate increase, low ROE and rejection of a fuel clause resulted in negative reaction from credit agencies immediately after the decision was announced. Standard & Poor's changed PNM's outlook from stable to negative, while Moody's Investors Service indicated it would continue to review PNM for a possible downgrade, Fitch Ratings downgraded PNM's long-term debt two notches to the lowest investment grade credit rating, he said.

Eldred said that if commissioners approve the recommended decision as is, PNM likely would be downgraded to junk bond status by all three agencies.

"Falling below investment grade would impair PNM's ability to access debt markets," Eldred said. "The proposed base rate increase and fuel clause implementation are essential for PNM to fully recover the cost to serve retail customers, remain investment grade and reduce exposure to fluctuating fuel costs."

Included in the hearing examiner's recommended rates is a base fuel amount of $0.014972 per kilowatt-hour, which is below what is allowed in current rates. The low base fuel rate exposes PNM even more to future fluctuations in fuel and purchased power costs, which further underscores the need for a fuel clause, Eldred said.

In addition, PNM argued in its exceptions that the recommended allowed ROE of 9.71 percent is unreasonable and fails to properly balance investor and consumer interests. If granted at that amount, the ROE would be the lowest allowed return for a U.S. integrated electric utility as a result of a litigated case, according to Regulatory Research Associates.

PNM said in its exceptions that it is at a competitive disadvantage in attracting capital because it is the only New Mexico utility and one of the few in the nation that operates without a fuel clause. The hearing examiner, PNM said, erred in denying the utility a fuel clause and failed to properly evaluate the fluctuation of PNM's fuel and purchased power costs.

The PRC will consider the hearing examiner's recommendation, subsequent intervenor exceptions and PNM's motion for an emergency fuel clause before issuing a final order in the rate case by May 7.

PNM's emergency fuel clause motion, its exceptions to the recommended decision and other supporting documents are available at www.pnmresources.com/investors/regulatory.cfm.

Background

PNM Resources (NYSE: PNM) is an energy holding company based in Albuquerque, N.M., with 2007 consolidated operating revenues from continuing and discontinued operations of $2.4 billion. Through its utility and energy subsidiaries, PNM Resources serves electricity to approximately 835,000 homes and businesses in New Mexico and Texas and natural gas to nearly 492,000 customers in New Mexico. Its utility subsidiaries are PNM and Texas-New Mexico Power. Another subsidiary is First Choice Power, a deregulated competitive retail electric provider in Texas. With generation resources of more than 2,650 megawatts, PNM Resources and its subsidiaries market power throughout the Southwest, Texas and the West. In addition, the company has a 50-percent ownership of EnergyCo, which owns approximately 920 megawatts of generation. For more information, visit www.PNMResources.com.

Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995

The company's estimate of 2008 electric revenues that could be generated by the proposed fuel clause is a forward-looking statement. The actual results may differ, as the actual revenues will be dependent on a number of factors, including weather, wholesale power and fuel prices, electricity demand and the final order issued by the N.M. Public Regulation Commission regarding PNM's current electric rate case.

Source: Business Wire

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