ML20117P126
| ML20117P126 | |
| Person / Time | |
|---|---|
| Site: | Palo Verde  |
| Issue date: | 06/24/1996 |
| From: | Charles Murray PUBLIC SERVICE CO. OF NEW MEXICO |
| To: | NRC |
| References | |
| FRN-61FR15427, FRN-62FR47588, RULE-PR-50 61FR15427-00009, 61FR15427-9, AF41-1-060, AF41-1-60, AF41-1-61, NUDOCS 9606250208 | |
| Download: ML20117P126 (107) | |
Text
DOCXETED USt %
FEDERAL REGISTER Vol 61, No. 68
'96 JLN 24 All :18 Proposed Rules OFFICE i :
WY 00CKiib._
..r viCE NUCLEAR REGULATORY COMMISSION (NRC) 9apm_f
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10 CFR Part 50 DTE NR PROPOSED RULE N 50 RIN 3150 - af41
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Financial Assurance Requirements for Decommissioning Nuclear Power Reactors 61 FR 15427 COMMENTS OF PUBLIC SERVICE COMPANY OF NEW MEXICO IN RESPONSE TO NOTICE OF PROPOSED RULEMAKING Public Service Company of New Mexico ("PNM") responds to the Notice of Proposed Rulemaking ("NOPR") issued in the above captioned docket on April 8,1996, by the Nuclear Regulatory Commission ("NRC"). In its NOPR, the NRC proposes to amend certain requirements for decommissioning funding by electric utilities. The proposed rule also would allow utility licensees to assume a positive real rate of return on decommissioning funds during the safe storage period. Finally, the rule would establish certain periodic reporting requirements.
I.
The Company's Interest in Palo Verde Nuclear Generating Station The Company is participating in the three 1,270 MW units of Palo Verde Nuclear Generating Station ("PVNGS"), also known as the Arizona Nuclear Power Project, with 9606250208 960624 '
PDR PR O
50 61FR15427 PDR 36t
i l
Arizona Public Service ("APS") (the operating agent), Salt River Project, El Paso Electric Company, Southern California Edison,_. Southern California Public Power Authority, and The Department of Water and Power of the City of Los Angeles. PVNGS is located in Wintersburg, Arizona. PNM has a 10.2 % undivided interest in PVNGS, with its interest in Unit I held under leases and Unit 2 held partially under leases. The Company's owned and leased interests in PVNGS (390 MW) comprise nearly 26% of i
PNM's total net generating capacity of 1506 M W.
i PNM's interest in Units 1 and 2 has been declared "used and useful" by the New Mexico Public Utility Commission ("NMPUC") and is included in PNM's New Mexico jurisdictional rates, which allows, among other things, recovery of decommissioning costs from PNM's New Mexico jurisdictional customers. PNM's ownership interest in Unit 3 of PVNGS is not in PNM's rate base, but wholesale power sales are regulated by FERC.
II.
Responses to Specific Questions raised in the NOPR.
The following comments are provided and arranged by topic:
A.
Topic A -- Timing and Extent of Electric Utility Industry Deregulation in New Mexico Many commentators and electric utility analysts have speculated on a likely timett.ble for industry-wide transition to competitien. For purposes of this rulemaking, PNM's primay focus will be to provide the NRC with an update on the legislative and regulatoy climate in New Mexico relating to wmpetition in the electric industry.
1 2
In November 1995, after three years of study, the Integrated Water and Resource 1
Planning Committee of the New Mexico State Legislature (the "IWRPC") issued a i
resolution reporting its findings on the advantages and disadvantages of retail wheeling _
and alternative restructuring schemes applicable to the electric power industry in New Mexico. The IWRPC's recommendation stated that any proposed restructuring (i) must benefit all ratepayers in the state, (ii) must maintain and possibly encourage the financial health and economic viability of each of the state's utilities, (ii) must provide for appropriate protection from unfair or advantaged competition from utilities or others from outside the state, and (iv) must share equitably any costs, including stranded asset costs, among the varied interests benefited.
The IWRPC also recommended that the NMPUC, under legislative direction and guidance, should monitor and evaluate the electric power industry and applicable market influences and factors and report its findings, conclusions and recommendations to the j
New Mexico State Legislature for legislative approval and action, as necessary, before any l
proposed restructuring may be implemented. The resolution further indicated that this continuing evaluation was necessary because of continuing changes even though restructuring and retail wheeling are not justified or in the public interest at this time. The IWRPC resolution was presented to the full Legislature as a Senate Joint Memorial. It was unanimously passed by the Senate and the I:ouse.
i In November 1995, the NMPUC issued a Notice ofInquiry ("NOI") regarding the restructuring of regulation of the electric utility industry in New Mexico. The NMPUC is seeking input on a variety of questions related to competition, retail wheeling and state vs.
3 i
i
w federaljurisdiction. The NMPUC established a timetable for comments and reply comments but has no date by which it has committed to issue a final rule.
The Company in its February 15,1996, response stated that it believes that: (i) competition and customer choice may be beneficial to all affected interests in New Mexico.
if done appropriately and (ii) in order to achieve restmeturing, there must be cooperative state and federal action to avoid prolonged uncertainty and litigation, as well as to avert inconsistent state actions that would inhibit the development of competitive markets and restrict the benefits that they may provide. The Company proposed a five-year period to accomplish the transition to a workable competitive market once the rules are established.
The Company also stated that it supports action by the United States Congress to clarify boundaries between state and federaljurisdiction over the electric utility industry, and to ensure that retail wheeling can be implemented in a manner that ensures fair competition and provides utilities the opportunity to recover all stranded asset costs.
PNM specifically advocates a wires charge, similar to that adopted in the telecommunications industry, to cover stranded assets, which charge would include decommissioning costs. A copy of PNM's Response to the NMPUC's NOI is attached as Exhibit "A" to these Comments, in order to provide more details about industry restructuring in New Mexico.
B.
Topic B -- Stranded Costs While PNM has no crystal ball to predia the future, the Company does believe, based on current developments both in New Mexico and at the federal level, that a 4
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R i
l transition to competition will include stranded cost recovery, including a mechanism for
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l recovery of decommissioning costs. Instead of trying to formulate its own separate e
l-approach to decommissioning costs in the era of electric industry restructuring, the NRC,
l along with FERC, should urge Congress to adopt stranded cost legislation that will insure i
t recovery of decommissioning costs as the most prudent solution to the uncenainties l
4 addressed in the NRC's NOPR. As PNM has assened in its Response to the NMPUC's NOI, "many of the issues that must be resolved to provide for fair competition and customer choice can only be resolved at the federal level, if such resolution is to avoid unfair advantages to consumers and producers in some states and disadvantages to consumers and producers in other states. Moreover, restmeturing must be approached comprehensively, rather than on a piecemeal basis, ifit is to proceed efficiently and with a minimum of delay and litigation." PNM NOI Response at page 16, Exhibit A hereto.
The NRC should avoid regulating industry-wide transition with respect to decommissioning costs based on selected developments with selected companies or selected states. Such action could have extremely negative and unintended consequences for ratepayers as well as taxpayers across the country-particularly in states such as New Mexico where legislatures have a cautious approach to any legislative or regulatory transition scheme that could dramatically increase costs or decrease reliability or availability of service for residential ratepayers.
PNM understands that the NRC cannot abdicate its responsibility to examine difficult issues relating to the electric industry's transition to competition but urges that the timing of any new rules that dramatically alter the way an electric utility funds its j
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f l
decommissioning obligation be delayed to correspond with legislative or regulatory resolution of the stranded cost issue. If the NRC were to change its mies prematurely, the entire industry could suffer dramatically and without good cause.
This is particularly i
true in New Mexico given the Legislature's recognition of the importance of recovery of i
stranded costs and FERC's current Open Access Rule that embraces stranded cost recovery.
i III.
Summary In summary, PNM urges the NRC to approach rule making regarding decommissioning costs in a manner that will facilitate a federal legislative solution to stranded costs. New rules should be timed to allow utilities sufiicient flexibility to take advantage of stranded cost recovery, whether mandated fede ally or by individual states.
j To act otherwise would create intolerable industry-wide financial impacts that are extremely undesirable both for ratepayers and taxpayers.
i Respectfully submitted, PUBLIC SERVICE COMPANY OF NEW MEXICO 6,g By;.
p Cindy S.
urray General Attorney-Bulk Power envices Alvarado Square, MS 0806 Albuquerque, NM 87158
.(505) 848-2850 6
BEFORE THE NEW AEXICO PUBLIC UTILITY COMMISSION J
IN THE MATTER OF THE
)
INVESTIGATION OF
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RESTRUCTURING OF REGULATION
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CASE NO. 2681 OF THE ELECTRIC INDUSTRY
)
IN NEW MEXICO.
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)
l Public Service Company of New Mexico's Comments on the Notice of Inquiry FEBRUARY 15,1996
INITIAL COMMENTS OF PUBLIC SERVICE COMPANY OF NEW MEXICO Table of Contents Page I.
Executive Summary 3
II.
Introduction 7
A. The Changing Face of Electric Utility Regulation 7
B. The New Mexico I.egislative Response 12 C. PNM's Perspective 15
- 1. The Need for State and Federal Cooperation 15
- 2. General Recommendations 22
- a. PNM supports the promotion of customer choice among
.22 energy merchants, and believes that choice must be available to all customers, not merely larger entities
- b. PNM supports the promotion of competition if the competitive 23 market outcome will be better for the public interest than the results of regulation
- c. For regulated transmission and distribution services, PBR 23 should replace return on rate base regulation
- d. If competition is to be introduced into the electric utility 23 industry, regulators must honor prior commitments by allowing utilities full recovery of their stranded costs
- e. Competition must not be allowed to affect adversely the 24 availability of reliable service to customers who do not choose to seek alternative suppliers
- f. Proper utilization of scarce resources should be encouraged via 25 proper price signals
- g. As a transitional mechanism, pilot programs of 25 real-time pricing ("RTP") should be allowed
- 3. Proposed Process for Action 26
'III. Comments 27 A. Proposals for New Mexico Action 28
- 1. As an Interim Measure, the Commission should Solicit and Encourage 29 Pilot and/or Experimental Programs for Competitive Pricing
- a. Pricing proposal 29
- b. Implementation 33
- 2. The Commission Should Consider Innovative Methods of Regulating 34 Transmission, Distribution, and Some Generation Services 1
i-1 i
i:
- a. Utilities should be permitted'to package their services to 34 i
compete in the marketplace i~
- b. Appropriate performance-based rates mechanisms should 35 be permitted i
)
- 3. The Commission Should Regulate Only Those Aspects of the Utility 37 l
Business That Require Regulation I
- 4. Distribution Utilities Should be Required to Source New Generation 40 j
Facilities and Power Supplies Competitively i
- 5. The Commission Should Develop legislative Recououesdations 41
}
to Aid in Implementmg Restructuring j
- 6. The Commission Should Participate Actively in the Federal 42 Restructuring Debate l
B. Proposals for Federal Action 44 l
1.- Congress Should Establish Clearly FERC's Jurisdiction Over the 45
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National Power Grid
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- 2. Consideration Should be Given to Permitting Utilities to Unbundle 47 by Creating Separate Subsidiaries Under a Holding Company Structure
- 3. Generation Should be Deregulated and Transmission and 50 t
Distribution Should be Regulated as Common Carriers
- a. The generation market should be deemed 50 workably competitive and deregulated
- b. The transmission function should be regulated by FERC, 53 and the distribution function should be regulated by the states 1
- 4. Stranded Costs Should Be Addressed at the Federal level, and 55 Utilities Should Be Allowed 100 Percent Recovery a.' Measurement of stranded costs 59
- b. Transition costs other than stranded costs 60
- c. Mechanisms for recovery of stranded costs 60
- 5. Congress Should Require Pricing That Will Provide Incentives 62 to Proper System Utilization and Construction of New Transmission Facilities 6.' PUHCA Should be Refonned or Repealed 63
- 7. The Transition to a Restructured Environment Should Be Phased 64
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in Over Five Years, or Sooner Where Possible IV. Additional Responses to Questions in NOl 65
v. Conclusion
91 2
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1 BEFORE THE NEW MEXICO PUBLIC UTILITY COMMISSION IN THE MATTER OF THE
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4 INVESTIGATION OF
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5 RESTRUCTURING OF REGULATION
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Case No. 2681 6
OF THE ELECTRIC INDUSTRY
)
r 7
IN NEW MEXICO.
)
8 9
10 INITIAL COMMENTS OF 11 PUBLIC SERVICE COMPANY OF NEW MEXICO t
12 13 Pursuant to the Notice of Inquiry ("NOI") issued in the 14 above-captioned proceeding by the New Mexico Public Utility 15 Commission (" Commission") on November 28, 1995, Public Service 16 Company of New Mexico ("PNM") hereby submits its initial comments 17 on the restructuring of the electric utility industry and the 18 steps involved that may permit benefits from competitive markets 19 for all New Mexico consumers and utilities.
90 PNM's comments are structured as follows:
First, PNM 21 sets forth an executive summary.
Second, PNM (1) identifies some i
22 of the economic, regulatory, and legal issues presented by New 23 Mexico Senate Joint Memorial 42 ("SJM 4 2"), the NOI, changes in 24 federal statutes, and pending and rapidly emerging proposals for i
25 change in state and federal regulation and legislation, and (2) 26 presents general recommendations based upon the New Mexico 27 legislature's guidance to the Commission concerning restructuring 28 matters.
PNM also offers for discussion a process by which 29 interested parties can seek, and perhaps achieve, solutions based 30 upon a consensus with respect to at least some of these issues 31 related to the implementation of competition.
32 Third, PNM offers more specific recommendations concerning appropriate New Mexico and federal actions to
i 2
r implement restructuring and thereby bring the possibility of benefits of co' petition and customer choice to New Mexico.
By 2
m 3
'doing so, PNM responds both to the Commission's invitation to all 4
commenters "to raise any and all issues relating to retail 5
competition or otherwise relevant to restructuring issues i
6 believed important to the development of a sound regulatory
.7 policy []" 1/ and to specific questions posed in ordering i
8 Paragraph A of the NOI. 1/
Next, PNM responds to specific 9
questions raised by the Commission's NOI, to the extent that 10 those questions are not answered in the previous section.
At 11 this time, PNM does not propose changes to the existing statutory 12 and regulatory framework governing New Mexico's electric 9
utilities, because restructuring discussions in New Mexico are at 14 an early stage and because the pace of change in the industry 15 will likely ensure that any such recommendations would be 16 premature (NOI Question 25 and Ordering Paragraph B).
PNM notes 17 that these comments reflect PNM's views based on the current 18 state of the electric utility industry and the restructuring 19 debate.
PNM reserves the right to supplement these comments if 20 further developments so warrant, to submit reply comments as 21 provided in the NOI, and to submit proposed changes to the 22 existing statutes and regulations at an appropriate time when the 1/
NOI, at 1.
2/
Where PNM responds to a particular question posed by the Commission in the NOI, the question is noted parenthetically, by number.
1 3
1 debate has crystallized.
2 3
I.
EJCEcunvs
SUMMARY
4 The electric utility industry in the United States 5
currently is undergoing a period of revolutionary change.
6 Legislators and regulators at both the state and federal levels 7
are considering whether, and how, to promote competition among 8
suppliers of electricity and customer choice of suppliers.
SJM 9
42, as adopted by the 1996 Legislature, reflects the conclusion 10 that neither retail wheeling nor restructuring is in the public 11 interest in New Mexico at this time.
j 12 In the NOI, the Commission recognized the " speed and j
breadth of changes occurring across the country.
The
'4 pace of change in the debate has accelerated since the Commission i
15 published the NOI late last year.
It is clear that change is i
16 coming, and New Mexico will be affected whether it acts or stands l
17 still.
PNM believes that there are many issues that must be 18 addressed if competition is to work in the electric industry, and 19 believes that New Mexico must be part of the transition process, 20 in order to shape the process and ensure that the interests of 21 New Mexico are protected.
22 Because the pace of change in the industry is so rapid, l
23 PNM's conclusions are preliminary and based upon assumptions and 24 perceptions that may change.
One conclusion that is not 25 tentative or ambiguous is that if the anticipated benefits of competition are to be achieved without disruptions that harm 4
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4 public and private interests alike, regulators must address 4
2 stranded costs; and other costs associated with the transition to 3
a competitive environment before restructuring takes place.
So, 4
too, regulators must ensure that service remains reliable.
These 5
conclusions hold whether the model desired is that of competition 6
for wholesale markets, as envisioned by the Federal Energy 7
Regulatory Commission ("FERC") Mega-NOPR, which includes stranded 8
cost recovery and explicit recognition of reliability issues as 9
mandated by the Energy Policy Act of 1992 ("EPAct"), or a more 10 extreme model based upon disaggregation or even divestiture of 11 the vertical functions of the industry, whose proponents may not 12 share concerns for reliability for all consumers, or for M
constitutional protection of property rights, or for benefits and 14 opportunities for all consumers and producers.
15 PNM believes that stranded cost recovery is sound 16 policy -- to ensure that generation competes in the future j
17 without regard to past decisions or inconsistent recovery 18 mechanisms.
Further, such recovery is required under the fifth 19 and fourteenth amendments to the U.S.
Constitution, as well as 20 Article II, Sections 18 and 20 of the New Mexico constitution. If 21 stranded costs are not addressed in advance of restructuring, 22 certain segments of the industry may achieve temporary and 23 opportunistic benefits.
In enlarging third-party access to the 24 integrated transmission system, the U.S.
Congress mandated that 25 reliability be preserved.
If stranded cost recovery and reliability are not addressed before restructuring and retail i
1 5
4 access, the groundwork will not be laid to ensure that society 2
will achieve the lasting benefits of competition.
3 PNM also believes that in order to establish a 4
competitive regime in which' customers will have effective choice 5
of energy suppliers at the retail level in as smooth, efficient, 6
and painless a fashion as possible, there must be cooperative 7
state and federal action to avoid prolonged uncertainty and 8
litigation, as well as to avert inconsistent state actions that 9
could inhibit the development of competitive markets and restrict 10 the benefits they may provide.
Without such action, the State of 11 New Mexico, its electric utilities, and their customers may be 12 disadvantaged -- the concern raised by the Commission in the M
.first sentence of the NOI.
)
14 To achieve deregulation in the market for electricity 15 generation, PNM believes that a five-year transition period will 16 be necessary, during which time state and federal regulators 17 should take actions necessary to foster a workably competitive 18 generation market.
The Commission should use this opportunity to 19 encourage pilot or experimental programs that will allow New 20 Mexico to gain experience with new forms of pricing for 21 generation, transmission, and distribution services.
22 In these comments, PNM discusses possible structures, 23 and describes some of the regulatory issues raised by those 24 structures.
At one extreme, regulators could decline to open up 25 the retail market to competition, relying instead on wholesale competition to lower prices and protect the public interest in
6 i
economic and reliable electric service.
At the other extreme, 2
regulators and legislators could seek to force vertically 3
integrated companies to disaggregate the ownership of generation, 4
transmission, and distribution assets.
The markets for 5
generation, transmission, distribution, and other services could 6
be deregulated entirely, and the marketplace assumed to protect 7
the public interest.
There are many possible approaches rather 8
than these two extremes; PNM suggests that a model somewhere in 9
between holds the greatest promise to achieve the benefits of 10 competition without adversely affecting reliability and without 11 the disruption and uncertainty.
12 The Commission should consider performance-based regulation for pricing of any service which remains a monopoly 14 subject to regulation, and should permit utilities to provide 15 energy-related services in unregulated markets.
Above all, the 16 Commission should participate actively in the restructuring 17 process at the federal level, to protect the interests of all New 18 Mexicans.
19 PNM also supports action by the U.S. Congress to 20 clarify the boundaries between state and federal jurisdiction 21 over the electric utility industry, and to ensure that retail 22 wheeling can be implemented in a manner that ensures fair 23 competition.
Federal action should also provide that utilities 24 will have the opportunity to recover all stranded asset costs, 25 and should implement appropriate methods for siting assets and pricing transmission service to encourage and facilitate the
7 1
competitive generation market.
There should be a unified 2
environmental review process, to protect local inc.erests and 3
promote efficient siting of new generation and transmission 4
facilities.
PNM believes that, PUCHA reform or repeal could help 5
foster corporate unbundling and the formation of non-utility 6
subsidiaries for those utilities who so desire.
While PNM does 7
not believe that corporate restructuring is universally 8
necessary, there are benefits to such a structure.
9 PNM believes that these recommendations are necessary 10 to bring about the anticipated benefits of competitive market 11 forces and free customer choices with a minimum of delay and 12 disruption, and to protect the interests of New Mexicans in reliable electric service.
14 15 II.
INTRODUCTION i
l 16 A.
The Changing Face of Electric Utility Regulation l
17 The Commission's NOI should be viewed as a response to l
18 SJM 42.
SJM 42 is the result of three years of legislative study 19 and is, grounded upon a recognition of the many changes to the l
20 structure and regulation of the electric utility industry, 21 current and anticipated, at both the federal and state levels.
22 As the Commission's NOI states, "the speed and breadth of changes 23 occurring across the country make it apparent that the time is 24
' appropriate to commence consideration of changes in [ Commission) f
l l
8 1
i rules which may be required to adapt to restructuring." 1/
As l
2 will be demonstrated, however, changes in Commission rules are 3
insufficient:
New Mexico and federal statutory changes are also 4
required.
5 At the federal level, the United States Congress has j
6 enacted several regulatory changes since the mid-1970s, many of l
7 which have been designed to promote competition in certain 8
sectors of the electric industry.
The National Energy Act of 9
1978 included the Public Utility Regulatory Policies Act 10
("PURPA"), 1/ which freed some wholesale generation from 11 regulation based upon accounting costs, required purchases from 12 some facilities at avoided costs, and provided a relatively ineffective wholesale wheeling program.
The National Energy Act 14 also included the Powerplant and Industrial Fuel Use Act ("ITUL*),
15 1/ which limited the use of natural gas for electric generation 16 and thereby promoted utility investment in nuclear plants and 17 coal-fired generators.
18 More recently, EPAct E/ revised the rules governing 19 wholesale markets and access to transmission for wholesale 20 customers.
EPAct also amended the Public Utility Holding Company 21 Act of 1935 ("PUHCA") 1/ to permit the formation of exempt 1/
NOI, at 1.
4/
Pub.
L.95-617, 92 Stat. 3117 (1978).
1/
42 U.S.C. SS 8301 et sec. (1988).
E/
Pub.
L.
102-486, 106 Stat. 2776 (1992).
i
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9 wholesale generators ("EWGs"), thereby promoting the creation of 2
additional generation b'y utility affiliates and other entities.
3 Today, Congress is considering changes to, or repeal of, PURPA 4
and PUHCA, as well as comprehensive proposals for the overhaul of 5
the electric utility industry. 1/
These federal initiatives 6
developed after the Electricity Consumers Resource Council 7
("ELCON") and others called for federrl action to address 8
competition issues. 1/
9 Federal regulators have not been idle.
In 1994, the 10 Federal Energy Regulatory Commission ("FERC") began to develop 11 principles applicable to public utility open access tariff 12 filings for wholesale markets.
The most significant of these l'
principles, of ten described as the " golden rule of 14 comparability," is that a transmission provider must allow third 15 parties access to its transmission system under comparable terms 2/
15 U.S.C.
ss 79 et sea. (1988 & Supp.).
1/
Senator J. Bennett Johnston, one of the prime movers behind EPAct, recently introduced the Electricity Competition Act of 1996, S.
1526, which would, if enacted, require states to implement competitive regimes, with proper consideration given to recovery by utilities of the stranded costs associated with the transition.
Likewise, Representative Edward J. Markey has introduced a bill, the Electric Power Competition Act of 1996 (:H.R. 2929), to address restructuring and competition issues.
Representativa Dan Schaefer, who chairs the House Energy and Power Subcommittee, also has indicated his intention to move forward on electric competition and restructuring issues on a comprehensive basis.
1/
ELCON has published a " Blueprint" and a " Road Map" describing its vision for federal statutory changes.
ELCON, Blueprint for Customer Choice, Discussion Draft (Sept. 13, 1995); Road Map for the Transition, Discussion Draft (Dec. 22, 1995).
1 1
l 10 1
and conditions to those applicable to the provider's own use of 4
2 its system. 12/
In the spring of 1995, FERC promulgated the 3
Mega-NOPR, 11/ which proposes to require utilities to 4
functionally unbundle their generation and transmission services 5
and to provide open access transmission, and which supplements a 6
prior Notice of Proposed Rulemaking ("NOPR") concerning the 7
appropriate treatment of stranded conts associated with the 8~
transition. 12/
The Mega-NOPR appropriately links unbundling to
- 9. '
utility recovery of stranded costs, as do each of the 10 comprehensive legislative reform proposals.
There is robust 11 debate concerning how unbundling should be accomplished and how 12 to ensure that transmission-owning utilities conduct their M
business without favoring their own merchant generation. 11/
j 14 FERC is expected to issue a final rule in the Mega-NOPR 15 proceeding in the spring of 1996.
16 In addition, numerous states have begun to address 1q/
American Elec. Power Serv. Coro., 67 F.E.R.C.
(CCH) 1 61,168 at p.
61,490 (1994).
11/
Promotino wholesale Competition Throuch Onen Access Non-discriminatory Transmission Services by Public Utilities:
Recovery of Stranded Costs by Public Utilities and Transmittino Utilities, IV F.E.R.C. Stats. & Regs. (CCH) i 32,514 (1995).
12/
Recovery of Stranded Costs by Public Utilities and Transmittina Utilities, IV F.E.R.C. Stats. & Regs. (CCH) i 32,507 (1994).
11/
FERC has issued a NOPR on real-time information networks
(*RINs*), to address how information about transmission systems and markets is shared, and standards of conduct for transmitting utilities.
Real-Time Information Networks and Standards of Conduct, 60 Fed. Reg. 66,182 (1995).
11 retail wheeling and restructuring issues; the California Public 4
2 Utilitieb Commission ("CPUC"), for example, has issued an order 3
providing for the restructuring of its three largest electric 4
utilities. 11/
The CPUC order embraces competition and customer 5
choice, requires utilities to engage in letail wheeling, and 6
provides for recovery of transition costs through a non-7 bypassable charge.
Other states, such as Massachusetts, also 8
have moved to implement competition and retail wheeling.
9 Massachusetts also,has provided for recovery of stranded costs 10 associated with customers that depart utility systems for other 11 generation sources. 1E/
12 Some states, including New Mexico, have concluded that 11 retail wheeling is not in their interest at this time.
The 14 Maryland Public Service Commission ("MPSC") has rejected retail 15 wheeling in favor of a policy relying on progressive changes to 16 take advantage of wholesale competition. 1E/
The MPSC cited 17 reliability concerns, and also noted its apprehension that it 18 would be unable to ensure reciprocity and thereby prevent out-of-11/
Order Institutino Rulemakino on the Commission's Pronosed i
Policies Governino Restructurino California's Electric j
Services Industry and Reformino Reculation, CPUC No. R.94-04-031, Opinion (Dec. 20, 1995) (*CPUC Order").
j 11/
E2g Cambridae Elec. Licht Co.,
164 P.U.R.4th 69 (Mass.
D.P.U. 1995), in which Massachusetts Institute of Technology was required to pay a transitior cost charge deriving from its decision to rely on self-generation and take only standby service from the utility.
11/
In the Matter of the Commission's Inauirv Recardino Electric Se rvi c.e s, Market Competition, and Reculatory Policies, 163 P.U.R.4th 131 (Md.
P.S.C. 1995).
9 12 state suppliers from cherry-picking Maryland industrials.
The 4
2 staff of the Pennsylvania Public Utility Commission ("PaPUC")
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3 recently issued a report recommending against retail wheeling, 4
citing concerns about reliability and stranded costs and 5
concluding that retail wheeling would benefit only certain large 6
customers, while harming small ratcpayers and utility 7
shareholders. 12/
The PaPUC has not yet acted on the staff 8
report.
9 The legislative and regulatory changes reflect a 10 growing conviction that traditional return on rate base 11 regulation of bundled services may not create appropriate 12 economic incentives for conduct by utilities and their customers, j
n and that the interests of producers and consumers of electricity 14 could be served better by other regulatory approaches.
As a 15 result, some regulators have adopted performance-based rates 16
("PBR"), to reward utilities for efficient conduct and to ensure 17 that the benefits of efficiency are shared with consumers.
These 18 developments have been coupled with the recognition that 19 generation of electricity may not be a natural monopoly, and may 20 be better left subject to the discipline of market forces.
21 22 B.
The New Mexico Legislative Response 23 After extensive hearings and testimony from many i
12/
Egg "Pa. Staf f Recommends No Retail Access; Would Harm Reliability, Strand Assets," Electric Utility Week, at 10 (Aug. 21, 1995).
13 affected interests over the past three years, the Integrated 4
2 Water and Resource Planning Committe'e ("IWRPC") of the New Mexico 3
Legislature has concluded in SJM 42 that neither retail wheeling i
4 nor restructuring of the electric power industry is in the public 5
interest at this time.
The full Legislature adopted this 6
conclusion in SJM 42 by a vote of 34-0 in the Senate and 56-0 in 7
the House.
However, the Legislature recognized that competitive 8
influences ultimately may benefit all New Mexicans, and 9
instructed the Commission to monitor and evaluate potential 10 restructuring.
SJM 42 specifies four primary factors to be 11 considered:
12 (1)
[Alll ratepayers in the state should 13 benefit directly.with' lower rates from 14 any proposed restructure;
)
16 (2) any proposed restructure must maintain 17 and possibly encourage the financial 18 health and economic viability of each of 19 the state's utilities; 20 21 (3) any proposed restructure must provide 22 for appropriate protection of the 23 state's interests, including in-state 24 utilities,-from unfair or advantaged 25 competition from utilities or others 26 from outside the state; and i
27 28 (4) the costs, including stranded asset 29-costs, of any proposed restructure must' 30 be shared and apportioned equitably 31 among the varied interests benefitted by j
32 the proposed restructure [.)
33-34 These factors are to be given equal weight in the Commission's 35 evaluation.
36 In addition, SJM 42 specifies five additional factors i
to be. considered by the Commission:
i i
t l
14 4
(1)
(T]he avoidance, if possible, of 2
initiating or instigating litigation 3
over any proposed restructure; l
4 5
(2) the merits of transitional, phased-in, 6
experimental or pilot projects to 7
further determine the potential 8
advisability of the restructure of the 9-electric power industry; 10 l
11 (3) the experience of other states whose 12 market influences may be better suited 13 at this time for either retail wheeling 14 or industry restructure; 15 16 (4) the benefit of wholesale competition, in 17 the long run, in lieu of retail 18 competition; and 19 20 (5) the measures by which an evaluation of 21 any proposed industry restructure can be 22 made[.)
23 24 SJM 42 also states that the Commission should seek legislative guidance prior to undertaking any restructuring.
s 26 PNM agrees that the factors identified by SJM 42 are 27 critical in determining the benefits associr.ted with any proposal 28 to restructure the electric utility industry in New Mexico.
PNM 29 believes that implicit in SJM 42 is a recognition that the l
30 benefits of any proposed restructuring should be considered over l
31 the long term.
Proposals should not be adopted in order to l
32 produce short-term benefits if, over the long term, they may 33 produce significant costs, particularly if the short-term l
l 34 benefits accrue solely to narrow interests rather than the broad 35 interests identified by SJM 42.
Likewise, significant long-term 36 benefits should not be sacrificed because of relatively minor 17 short-term burdens.
Finally, PNM recognizes that the
. - = -
\\
l t
15 Legislature, having established the regulatory structure followed 2
in New Mexico since 1941, has reserved for itself the public 3
policy decision making authority over major changes to that 4
structure.
5 6
C.
PNM's Perspective 7
PNM believes that the Commission and the New Mexico 8
legislature have vital roles to play in ensuring that New Mexico 9
utilities and consumers of electricity are prepared to 10 participate in and benefit from the restructured industry, and in 11 regulating New Mexico's utilities af ter restructuring has 12 occurred where the services provided are not subject to 13 competitive forces, or where oversight may be needed to ensure 14 reliability of service.
New Mexico's interests will be affected, 15 regardless of whether the state acts, but failure to act 16 appropriately will only serve to ensure that New Mexico's 17 interests are adversely affected.
Moreover, New Mexico should 18 not attempt to act in isolation, because national and regional 19 concerns are also implicated.
20 21 1.
The Need for State and Federal Cooperation 22 PNM believes that New Mexico must act in tandem with 23 federal authorities to bring about restructuring.
PNM believes 24 that New Mexico must take legislative and regulatory actions that 25 ensure that New Mexico consumers and utilities benefit from competitive market forces and have fair access to markets and to i
16 supplies located in other areas.
However, New Mexico should 2
recognize that'many of the issues that must be resolved to 3
provide for fair competition and customer choice can only be 4
resolved at the federal level, if such resolution is to avoic 5
unfair advantages to consumers and producers in some states and 6
disadvantages to consumers and producers in other states.
7 Moreover, restructuring must be approached comprehensively, 8
rather than on a piecemeal basis, if it is to proceed efficiently 9
and with a minimum of delay and litigation.
That is not to say, 10 however, that transitional steps should not be implemented as 11 part of the comprehensive plan.
1 12 The need for a comprehensive approach, for cooperation i
13 between state and federal authorities, and for uniform federal 14 solutions to certain issues, is clearly illustrated by the 15 experience of restructuring in the natural gas and 16 telecommunications industries.
Piecemeal restructuring has been 17 a prolonged process in both industries, and after more than two 18 decades, neither industry has completed the transition.
Although 19 consumers and regulated entities have benefitted under more 20 competitive regimes, delay and uncertainty over the final outcome 21 have muted the benefits that competitive markets might otherwise 22 produce.
23 In the natural gas industry, FERC began addressing the 24 consequences of the developing gas surplus in interstate markets j
.=
17 in the mid 1980s. 18/
After programs to allow pipelines to 2
transport gas solely for industrial customers, but not for 3
residential and commercial' customers, were rejected as unlawfully 4
discriminatory, 11/ FERC promulgated Order No. 436, 2A/ which 5
encouraged pipelines to provide open access transportation for 6
all customers.
Order No. 436 was struck down because it failed 1
7 to address the increased take-or-pay burdens that pipelines would 8
incur as a result of reduced sales of gas. 21/
Order No. 500, 9
22/ which established a mechanism for addressing this issue, was 10 itself struck down. 21/
Finally, in 1992, FERC issued Order No.
la/
These surpluses came after a decade of shortages that many believe to have been caused by cost-of-service regulation of the competitive production function.
Debate over that law and policy raged from the Supreme Court's 1954 decision in Phillins Petroleum Co.
v.
Wisconsin, 347 U.S.
672 (1954),
until Congress passed the Natural Gas Wellhead Decontrol Act of 1989, Pub. L.
101-60, 103 Stat. 157 (1989).
12/
Maryland Peoole's Counsel v.
FERC, 761 F.2d 768 (D.C. Cir.
1985); Maryland Pecole's Counsel v.
FERC, 761 F.2d 780 (D.C.
Cir. 1985) 2n/
Reculation of Natural Gas Pioelines After Partial Wellhead Decontrol, F.E.R.C. Stats. & Regs. [Regs. Preambles 1982-1985] (CCH) 1 30,665 (1985).
11/
Associated Gas Distribs.
v.
FERC, 824 F.2d 981 (D.C. Cir.
1987), cert. denied, 485 U.S. 1006 (1988).
22/
Reculation of Natural Gas Pipelines After Partial Wellhead i
Decontrol, F.E.R.C. Stats. & Regs. [Regs. Preambles 1986-1990) (CCH) i 30,761 (1987).
21/
American Gas Ass'n v.
FERC, 888 F.2d 136 (D.C. Cir. 1989);
American Gas Ass'n v.
FERC, 912 F.2d 1496 (D.C. Cir. 1990).
In addition, the Commission's methodology for resolving transition costs was struck down as violative of the filed rate doctrine.
Associated Gas Distribs.
v.
FERC, 893 F.2d 349 (D.C. Cir. 1989), cert. denied, 498 U.S. 907 (1990).
18 2
636, 21/ which required all interstate pipelines to unbundle 2
fully their merchant services from their transmission services 3
and to provide open access transportation, and provided 4
correspondingly for full recovery of resulting transition costs.
5 2E/
However, over twenty years after FERC's initial response to 6
competitive forces in the production function, and over forty 7
years after Phillins, Order No. 636 (as well as the Commission 8
orders implementing restructuring for individual pipelines) are 9
still pending judicial review; among the more significant issues 10 to be resolved is whether FERC has jurisdiction over use of 11 interstate pipeline capacity by local distribution companies. ZE/
12 Moreover, the tangled saga of federal action, and the expenditure of valuable time, money, and the loss of 14 opportunities for producers and consumers alike associated with 15 the restructuring of the pipeline industry, is only part of the 16 story.
In New Mexico, PNM Gas Services ("PNMGS") was not immune 17 to the changes taking place at the national level.
It 18 experienced transitional problems and costs similar to those 19 faced by pipelines nationwide.
In 1987, in response to the 11/
Pipeline Service Oblications and Revisions to Reculations Governino Self-Imolementina Transoortation; Reculation of Natural Gas Pipelines After Partial Wellhead Decontrol, III F.E.R.C.
Stats. & Regs. (CCH) i 30,939 (1992), order on reh'c, III F.E.R.C. Stats. & Regs. (CCH) $ 30,950 (1992),
order on reh'a, 61 F.E.R.C.
(CCE) $ 61,272 (1992).
25/
These costs included stranded production function costs --
gas purchase contracts -- and the costs associated with creating the new marketplace for gas transactions.
2E/
United Distrib. Cos.
v.
FERC, No. 92-1485 (D.C. Cir.).
l l
1 l
. = _ _
4
?
i 19 i
1 enactment of NMSA S 62-6-4.1, 22/ the Commission issued General j
2 Order 44 (now Commission Rule 660) to allow customers to seek 3
lower-priced gas supplies and to have that gas transported 4
through the facilities of New Mexico utilities, such as PNMGS.
5 The Commission's open access transportation requirement 6
exacerbated the quantity deficiency liabilities faced by PNMGS, 7
as system supply customers became trensportation customers and i
8 purchased gas from third parties.
As a result, PNMGS faced 9
significant take-or-pay litigation.
In total, PNMGS and Sunterra 10 Gas Gathering Company incurred over $150 milllon in costs to i
11 realign their gas purchase obligations -- a significant portion 12 of which, under the Commission's order in Case No. 2183, have 13 been recovered from PNMGS' customers.
In many other states, 14 efforts are underway to bring about unbundling of local 15 distribution companies, as well as to provide residential 16 consumers of gas with a menu of choices similar to that enjoyed 17 by many industrial and large commercial users of gas today.
18 These efforts will likely lead to further litigation and further 19 expense.
20 The introduction of competition into the 21 telecommunications industry has presented even more difficulty.
22 Just this month the President signed the Telecommunications Act 23 of 1996 (S. 652), an omnibus telecommunications bill that would, 24 theoretically, resolve many of the issues that still confront 22/
N.M.
Stat. Ann. 1978 5 62-6-4.1 (Repl. Pamp. 1993).
i j
v^
20 i
i that industry in its continuing transition to a market-oriented 2
regulatory scheme.
The protracted efforts to bring competition 3
to the telecommunications industry can be traced as far back as 4
the late 1950s, to the landmark " Hush-a-Phone" decision on the 5
equipment side 21/ and the 1960s on the network side when 6
Microwave Communication Inc. requested and was granted authority 7
to build a private line network connecting St. Louis and Chicago, 8
a proceeding which lasted about six years.22/ Any attempt to 9
present a detailed discussion of the legislative, regulatory, and 10 judicial efforts to bring about competitive conditions in the 11 telecommunications field would require far more space than is 12 available here. 22/
Nevertheless, it is worth noting that the 13 process has been costly, both in terms of time, money, and lost 14 opportunities; it has featured an abundance of court litigation, 15 including private and government antitrust cases and appeals from 16 regulatory action by the Federal Communications Commission and 17 the states.
Failure to anticipate potential problems rendered 21/
Hush-a-Phone v.
United States, 238 F.2d 266 (D.C. Cir.
1956).
1E/
Microwave Communications Inc., 18 FCC 2d 953 (1969).
2.0 /
Moreover, the term " telecommunications" covers a broad q
spectrum, including wire-based telephone service, cellular telephone service, and cable television, each of which has been the subject of extensive regulatory activity in recent decades, and which can be more broadly considered as part of the "information services" industry as technological advances blur the distinctions among previously discrete industries.
21 1
restructuring orders obsolete almost immediately. 11/
2 The long and costly battles attendant upon 3
restructuring in the natural gas and telecommunications 4
industries clearly demonstrate that in an industry regulated at 5
both the state and federal levels, the transition to competition 6
and customer choice must involve cooperation between the state 7
and federal authorities, both legislative and regulatory, if 8
uncertainty and litigation are to be avoided.
They also show 9
that jurisdictional issues need to be resolved and that a 10 piecemeal approach is likely to cause more problems, not fewer.
11 Restructuring of the electric utility industry presents 12 even more problems than restructuring of other industries.
The 13 magnitude of the stranded cost problem is one complicating 14 factor.
The laws of physics, which cannot be repealed by 15 legislative or regulatory fiat, impose their own rigorous 16 obligations upon the vertical network involved in serving the 17 diversity of 1 cads on any utility's system; reliability of 18 service does not occur by accident.
The system for efficient and 19 reliable production and delivery of electric energy is essential 20 to New Mexico and the nation's economy.12/
It is therefore ll/
Egg Michael K.
Kellogg, John Thorne, and Peter W.
- Huber, Federal Telecommunications Law, at 541-64 (1992) (describing the Federal Communications Commission's attempts in the l
1970s and 1980s to address the relationship between computers and communications).
12/
As Senator Johnston has noted, approximately 90% of the United States gross domestic product is produced by entities that consume 99.9% of the nation's electricity.
142 Cong.
Rec. S379-80 (daily ed. Jan. 25, 1996) (statement of Sen.
i
22 imperative that restructuring be undertaken in as smooth and 1
2 efficient a fashion as possible, to minimize disruption to the 3
nation.
4 5
2.
-General-Reca===nd=tions 6
As noted above, PNM believes that SJM 42 appropriately 7
'sete forth the considerations that should be viewed as paramount 8
in assessing'the benefits of restructuring to New Mexico.
As a 50 declaration of the Legislature's views on this matter of vital 10
'public policy, it cannot be ignored.
PNM offers the following 11 general comments concerning the benefits of competition and 12 customer choice and the considerations-that the Commission must 13 address if they are to be introduced into the electric utility 14 industry:
15 a.
PNM sunoorts the cromotion of customer choice 16-amono enerav merchants, and believes that choice must be 17-available to all customers. not merelv larcer entities.
All 18 consumers, including residential consumers, should be entitled to 19 choose from a wide menu of energy services and providers (NOI 20 Questions 1, 2).
This menu should include a fully bundled s21 service,uas well as other services fer which there is a consumer 22-demand, based.upon consumer choices and appetite for, or aversion 23-to, risk.
If a customer wants PNM, or some other supplier, to 24 provide "one-stop shopping" for its electric or other energy Johnston).
23 1
needs, that option should be available.
2 b.
PNM supports the oromotion of competition if the 3
comoetitive market outcome will be better for the oublic interest 4
than the results of reculation.
This may be the case in markets 5
for the generation of electricity and the provision of other 6
services that are the subject of consumer choice.
It is very 7
unlikely to be the case in many -- if not all -- markets for the 8
transmission and distribution of electricity, which will need to 9
remain subject to some form of economic regulation (although 10 preferably not traditional return on rate base regulation).
11 c.
For reaulated transmission and distribution 12 services, PBR should replace return on rate base reculation.
13 Regulators should abandon the command and control model of 14 regulation for the services they regulate, and permit 15 transmission and distribution utilities to operate within a band 16 of freedom.
PBR mechanisms can promote efficiency and reduce 17 transaction costs associated with traditional return on rate base 18 regulation, and development of such mechanisms should be 19 encouraged.
20 d.
If competition is to be introduced into the 21 electric utility industry, reaulators must honor prior 22 commitments by allowino utilities ful) recovery of their stranded 23 costs.
If utilities are to compete with non-utility generation 24 for the energy component of retail and wholesale sales, it is 25 imperative that their ability to compete not be throttled by the costs of investment and purchase or other contractually fixed
f i
I 24 1
obligations that, although reasonable under the regulatory scheme in effect at the time,'ould become uneconomic.
As discussed 2
w 1
3 more fully below in response to NOI Question 24, PNM submits that j
4 stranded cost recovery is required by the U.S. Constitution, as i
5 well as New Mexico law.
[
f 6
Furthermore, it is clear that stranded cost issues must 7
be addressed in conjunction with restructuring, not at some i
8-
' future date. 22f The recovery mechanism must cover stranded 9
costs over the expected commercial life of the stranded assets 10 which, in some instances for PNM, extends through 2022 (with 11 decommissioning costs extending even further).
If necessary, 12 costs should be amortized over a reasonable time frame to avoid l
13 rate shock, with carrying costs to be recovered by the utility in 14 accordance with applicable accounting rules (NOI Question 16).
j 15 e.
Comoetition must not be allowed to affect
_16 adverselv the availability of reliable service to customers who i
17 do not choose to seek alternate sucoliers.
To ensure open access 18
-transmission and distribution,.the transmission system could be 19 operated by.an independent system operator
(" ISO *).
At present, 20 public utilities are responsible for ensuring that customers 21 receive reliable electric service.
No matter what restructuring 11/
Egg Ducuesne Licht Co.
v.
Barasch, 488 U.S. 299, 315 (1989)
(noting that " serious constitutional questions". arise when regulatory regimes change and deny opportunities for cost recovery);. Associated Gas Distribs.
v.
FERC, 824 F.2d F.2d 981,'1030 (D.C. Cir. 1987) (rejecting FERC open access program because of failure adequately to address producer-pipeline contract issues arising out of open access), cert, denied, 485 U.S. 1006 (1988).
25 1
model is adopted, there must be assurance that reliability will 2
not be compromised.
If there is to be a continuing obligation to that obligation must be defined and assigned to the 3
- serve, 4
appropriate entity.
If consumers are permitted to choose among 5
suppliers, however, they will bear the responsibility for 6
ensuring that their supplier is able to deliver the power when it 7
is needed.
Nor should some competitors be permitted to shift 8
costs to other customers, or to the utility whose former 9
customers they serve.
In these cases, the price of reliability 10 will be driven by the market.
To the extent that utilities are 11 expected.to provide backup service to ensure reliability, there 12 must be compensation (NOI Question 13).
13 f.
Procer utilization of scarce resources should be 14 encouraced via crecer crice sionals.
Scarcity and constraints 15 should be recognized via higher prices for utilization of scarce 16 or constrained resources.
PNM supports some form of transmission 17 congestion pricing to promote more efficient customer choices and 18 load patterns.
As a transitional mechanism. oilot orocrams of i
19 g.
20 real-time cricina ("RTP") should be allowed.
Real-time pricing 21 can provide customers and utilities with experience in pricing 22 and operations that will be of great use in moving towards a 23 competitive generation market.
It also enables customers to
)
24 receive appropriate price signals concerning the cost of 25 generation at peak times, enabling them to alter their load RTP also helps promote industrial growth by 5
patterns.
4 o
26 1
encouraging increased electricity usage during off-peak hours.
2 3
3.
Proposed Process for Action 4
PNM believes that the restructuring inquiry in New 5
' Mexico should be undertaken collaboratively, so that all affected 6
interests will be heard and there will be the opportunity to 7.
achieve a consensus with respect to some, if not all, issues 8
involved.
To make this process work, PNM suggests that the a
1 9
Commission use the NOI comment process to' define the issues, and I
10
' schedule roundtable discussions with respect to these issues, 1
11 each of which would be led by a "facilitator".
Each discussion 12 group would attempt to produce a workable plan for addressing its 13 issue, supported by as many interests as possible.
14 PNM suggests that.the Commission begin immediately the process of selecting fa'ilitators of the roundtable discussions.
15 c
16 After reply comments have been~ filed on April 1, 1996, the 17 Commission should identify basic principles and develop subtopics 18 for discussion purposes.
Parties interested in participating in 19 discussions would sign up for each subtopic.
Each roundtable 20 discussion group would then meet regularly with its facilitator, 21 in order to try to achieve a workable plan to address its
)
i 22 assigned issue that is supported by as near to a consensus as 23 possible.
The Commission would hold periodic sessions with
.24 discussion group facilitators to: consolidate separate work 25 products and assess results on a total system basis. The l
Commission should also hold regularly scheduled public discussion
7 t
l 27 I
sessions with regard to each subtopic.
Finally, in time for 2-introduction in the 1997 session of the New Mexico legislature, 3
the Commission should be in a position to propose draft
<4 legislation to the IWRPC, consistent with the requirements of 5
SJM42.
6 PNM believes that this would be a viable framework for 7
ensuring that all interests are taken into account and a-8 consensus is gained that would decrease the likelihood of
]
9 extensive litigation.
l 10 l
11 III. SQMMENTS 12 PNM believes that if competition and customer choice 13 are to be introduced into the electric power industry in a manner
,4 that will avoid unnecessary litigation over state and federal 15 jurisdiction, cooperation between state and federal authorities 16 will be necessary.
In the comments that follow, PNM will set 17 forth its recommendations for restructuring action by New Mexico 18 and by the federal government.
Below, in its response to'NOI 19 Question 24, PNM develops certain issues' relating to state and 20 federal jurisdiction over utility regulation and restructuring in 21 order to explain more fully the jurisdictional basis for certain 22 of its recommendations, including its conclusion that recovery of
'23 stranded costs is required by the U.S.
Constitution and by New 24 Mexico law. 11/
21/
Throughout this response, PNM points out areas of uncertainty in the law, and conflicting views of policy i
y 28 1~
The comments that follow reflect PNM's preliminary 2
recommendations, as well as questions that PNM believes are 3
raised by the prospect of restructuring.
These issues need to be 4
worked out among all affected constituencies, and the Commission 5
needs to consider the possible unanticipated consequences of 6
actions taken now which, if not reversible, may produce harm 7
where benefits were intended.
For example, if competition for 8-retail. markets is to be brought into being, the Commission needs 1
i 9
to consider who bears the risk of reliable energy supply --
10 utilities, new generators, new marketers, or consumers?_-- and i
)
11 what sectors remain subject to regulation.
The Commission also 12 should consider how consumers are to be shielded from or pay-for i
j 13 risks associated with failure to perform by new generators, l
14 without shifting that risk, and the costs associated therewith, i
l 15 to the utility or its remaining customers.
16 17 A.
Proposals for New Mexico Action 18 PNM believes that there are a number of actions that 19 should be taken, by the Commission and by the New Mexico 20 legislature, to restructure the New Mexico utility industry in 21 order to bring the benefits of competition and customer choice to matters.
In so doing, PNM doer not compromise the positions that it has advocated in the.past or may advocate in the future, where these issues are squarely joined; instead, PNM suggests that these conflicts and uncertainties make more compelling the need for a comprehensive and cooperative state and federal solution to achieve the transition and capture the benefits of competition and customer choice with a minimum of confrontation, litigation, and delay.
1 29 1
consumers, New Mexico utilities, and other electricity suppliers.
2 These recommendations are, in PNM's view, critical in order to 3
achieve the goals specified in SJM 42, thereby ensuring that all 4
New Mexicans benefit from the change that is taking place in the 5
industry today.
6 7
1.
As an Interim Measure, the Commission Should 8
Solicit and Encourage Pilot and/or Experimental 9
Programs for Competitive Pricing.
10 11 a.
Pricing Proposal 12 13 Pursuant to SJM 42, the Commission is to consider 14 whether establishing " transitional, phased-in, experimental or 15 pilot projects" will assist in determining whether restructuring 16 is advisable.
PNM believes that the Commission should solicit 17 and encourage pilot programs which, among other things, would 18 begin to separate generation costs from integrated rates and 19 apply competitive pricing techniques (NOI Question 4 and 20).
20 Such-a program could prepare utilities and consumers for the 21 emerging competitive generation market.
While this proposal is 22 by no means the only measure that should be taken in order to 23 make the transition to competition, it is an important step.
24 A key component of pilot programs could be the testing 25 of real-time pricing rates.
RTP rates can be designed to reflect 26 the market price of purchased power or the marginal cost of a 27 utility's own generation on a nearly real-time basis.
In one 28 version of RTP, a utility would send customers 24 prices, one for each hour of the following day.
In a more simple version, the l
1
30 1
utility would send the customer three prices, reflecting on-peak, 2
mid-peak, and'off-peak periods.
The prices for each period would 3
likely be the same on most days of the year, but would increase 4
on critical capacity days.
5 The primary advantage of RTP is that it sends customers 6
a better price signal by showing the costs of providing power at 7
particular times during the day.
For example, the marginal (or 8
peak) cost of generating capacity for some utilities exceeds 9
$1.00/kWh produced during a few critical hours during the year.
10 Under conventional time-of-use rates, however, these high needle-11 peak costs are averaged with other lower cost hours, producing an 12 energy cost to the customer of only S.05.10/kWh.
This averaging 13 of costs mutes the price signal to the customer, and does not 14 encourage adjustment of electricity usage in a manner that will 15 most reduce the cost of service for the utility and the customer.
16 PNM believes that RTP can produce several important 17 benefits.
First, RTP gives customers a greater opportunity to 18 manage their electricity costs by recognizing those hours when 19 their costs are highest and enabling them to focus their energy 20 management efforts.
This, in turn, can reduce the need for new 21 generation and transmission capacity.
As customers gain 22 experience with RTP and pay the true cost of critical hour 23 capacity, they become more likely to adjust their usage during 24 those critical hours to avoid those higher costs.
Utilities can 25 reduce their costs still further under demand-side management programs.
31 1
Additionally, RTP can aid in encouraging economic 2
development.
When high-cost' hours are no longer averaged with 3
lower cost hours, the price of lover cost hours becomes very 4
attractive, encouraging existing businesses to expand operations 5
during low load hours and enticing new businesses.
Georgia 6
Power, for example, has used RTP successfu,lly to attract new 7
business and promote expansion of existing business in its 8
service area, without significantly increasing peak capacity 9
requirements.
10 Finally, as recognized in the recently restructured 11 United Kingdom electric industry, as well as by the CPUC, RTP can 12 help provide competitive pricing, as utilities can sell power 13 that more nearly reflects the price'of power in the competitive 14 wholesale market.
Hourly (or half-hourly) varying RTP prices are 15 the currency by which power is bought and sold.
Under an RTP 16 scheme, the price for generation can be competitively 17-determined, 11/ and the market price for regulated transmission 18 and distribution services can be derived from the marginal (or 11/
The United Kingdom, and the CPUC's proposed Power Exchange, follow a "Poolco" restructuring model in which generators sell into a wholesale pool from which all customers buy.
PNM does not necessarily advocate the Poolco approach, and notes that the CPUC and others also offer the option of bilateral transactions in which generators contract directly with customers, often with simpler versions of RTP that do not involve hourly prices.
PNM believes that it is prudent to prepare for both Poolco and bilateral contract approaches.
32 1
congestion) cost li/ of serving a customer using the system at 2
that time.
Thus, RTP can provide for market-influenced pricing 3
now, as well as in a restructured marketplace.
4 PNM believes, therefore, that New Mexico utilities 5
should be allowed to pursue experimental programs such as the RTP 6
pilot program at this time.
RTP will provide another tool for 7
addressing peak generation and transmission capacity constraints.
8 Pilot programs will allow New Mexico to gain experience with RTP, 9
thereby capturing many of the benefits associated with 10 restructuring before restructuring takes place, experiencing 11 competition under Commission supervision, and encouraging a 12 smoother transition when the time is deemed right for broadet J
13 restructuring.
14 Pilot programs can also benefit New Mexico's utilities 15 by giving them an opportunity to gain experience in planning, 16 billing, and metering, in preparation for the restructured 17 industry.
Furthermore, it will allow customers to gain 18 experience in managing the risks and opportunities associated 11/
The approach to marginal cost pricing for transmission and distribution under the pilot program may be an extension of the current approach to calculating marginal costs followed by PNM and the Commission.
PNM notes that FERC contemplates embedded cost pricing under its comparable transmission tariffs, see Mega-NOPR, at p. 33,147; however, FERC has expressed a willingness to examine marginal cost or congestion pricing, ggg Inauiry concernino the Commission's Pricina Policy for Transmission Services Provided by Public Utilities Under the Federal Power Act, III F.E.R.C.
Stats. &
Regs. (CCH) i 31,005 at p. 31,146 (1994).
California utilities and others, including PNM, look to transmission congestion pricing as an appropriate solution.
See infra S III.B.S.
33 I
with a competitive environment, and the opportunity for utilities 2
to work closely with customers in chis regard.
3 Pilot programs should help to develop criteria for 4
determining who is eligible for real-time pricing, as well as to 5
define scheduling criteria and other relevant considerations.
6 Moreover, a pilot program will permit utilities to develop 7
safeguards to ensure that reliability of service is not adversely 8
affected by the transition and permit the market to develop to 9
provide assets and players willing and able to supply reliability 10 functions in various geographical markets and to various classes 11 of customers.
It should be, recognized that the costs of such 12 programs will not be trivial, and should be recoverable by 13 utilities as part of the cost of the transition to competition.
14 15 b.
Implementation 16 PNM submits that the timing is perfect for its own RTP 17 pilot program.
Because of PNM's changing resource situation, and 18 because the Commission staff expressed interest, PNM has begun 19 internal development of interruptible and RTP rates that could be 20 made available to a broader base of customers than those who can 21 currently benefit from PNM's existing interruptible rate.
PNM is 22 investigating the possibility of submitting the revised 23 interruptible and RTP rates this year. Prior to such a filing, 24 PNM will offer to review its plans with interested parties for 25 feedback in developing the proposal.
Thus, PNM and the Commission may be able to commence a pilot program quickly, and
J 34 1
at the same time help to address issues relating to PNM's 2
existing generation and transmission capacity constraints.
3 Although the details of implementing a pilot program 4
have not been determined, PNM has considered certain factors that 5
it believes are appropriate.
First, there should be a choice 6
between average cost and real-time rates driven by merit order 7
dispatch, reliability, and transmission system constraints. 12/
8 Customers who so desire would be able to experience the benefits 9
of real-time pricing on an immediate basis.
At the same time, 10 customers who do not desire real-time pricing would be permitted 11 to choose average cost rates, as at present.
Those customers 12 choosing to use real-time rates should of course bear the cost of
'3 installing the necessary meters, as well as any other costs 14 necessary to implement real-time pricing.
15 Another aspect of a properly designed pilot program 16 should be the gradual elimination of cross-subsidies (NOI 17 Question 2).
Elimination of cross-subsidies may offset 18 reductions in rates associated with competition, at least in the 19 short run (NOI Question 18).
20 21 2.
The commission should consider Innovative Methods 22 of Regulating Transmission, Distribution, and Some 23 Generation Services.
24 Utilities should Be Permitted to Package 25 a.
26 Their Services to compete in the Marketplace.
27 ll/
The CPUC order adopts a similar approach.
CPUC Order, at 76.
35 1
Unbundling of generation pricing will promote customer 2
choice, as will the opportunity'to benefit from real-time 3
pricing.
Utilities should be permitted further to enhance 4
customer choice by packaging their service offerings to meet the 5
desires and needs of individual customers (NOI Question 4).
6 Service' offerings could include competitive service options and 7
enhancements at market based prices.
8 Non-utilities, to the extent that they can create 9
marketable packages of services, should be permitted to compete 10
'as well, subject only to those limitations that are placed on 11 utilities in offering these services.
Consumers would receive 12 more appropriate price signals and could affect markets for i
13 products and services by casting their dollar votes.
14 15 b.
Appropriate Performance-Based Rate Mechanisms 16 Should Be Permitted.
17 18 PNM believes that the Commission should consider 19 proposals to implement performance-based rate mechanisms with 20 respect to rates for services that are not subject to 21 competition, to the extent that they will provide benefits to 22 consumers and utilities (NOI Questions 12, 26).
A properly 23 designed PBR mechanism can ensure that consumers and utilities 24 share in the cost savings resulting from more efficient utility
\\
25 conduct.
26 Performance-based rates are not a novel concept.
FERC l
27 has promulgated a policy statement setting forth general j
l 36 1
standards to govern PBR proposals by entities subject to its 2
jurisdiction. 18/
Price caps, such as those based on changes in 3
a consumer price index minus X percent, have been implemented in 4
the United States and abroad in electricity and f
5 telecommunications industries.
Several states have experimented 6
with some form of PBR mechanism for certain utilities, 1E/
7 The New Mexico Supreme Court has recognized that 8
regulation is a surrogate for competition. 10/
PNM submits that 9
a properly constructed PBR can better imitate competition than 10 traditional return on rate base regulation.
Performance-based 11 rates can benefit consumers by promoting more efficient and
't 12 innovative utility management for services that renmin subject to
'3 rate regulation.
Further, traditional regulation can provide 14 disincentives for utilities to improve operations by constantly 15 questioning if improvements reflect past inefficiencies and 16 should therefore lead to disallowances.
18/
Incentive Ratemakina for Interstate Natural Gas Pinelines, Oil Pipelines, and Electric Utilities, 61 F.E.R.C.
(CCH) $
61,168 (1992).
In its January 31, 1996 policy statement concerning non-cost-based rates for natural gas pipelines, Alternatives to Traditional Cost-of-Service Ratemakinc for Natural Gas Pipelines, 74 F.E.E.C.
(CCH) $ 61,076 (1996),
FERC revised its criteria for judging incentive rate proposals to permit rates that may be higher than cost-of-service results, if efficiency gains are shared with customers.
FERC reiterated its interest in incentive rates.
12/
- See, e.a.,
Central Maine Power Co., 159 P.U.R.4th 209 (Me.
P.U.C. 1995); San Dieco Gas & Elec.
Co., 154 P.U.R.4th 313 (Cal.
P.U.C.
1994).
10/
Eg_q City of Albucueraue v.
New Mexico Pub. Serv. Commln, 115 N.M.
521, 534 (1993).
37 1
Performance-based rate mechanisms will, if properly 2
designed, promote improved economic efficiency and environmental
~
3 performance.
Additionally, PBRs can reduce the transaction costs 4
associated with return on rate base regulation, by increasing the 5
time between rate cases and limiting the issues to be litigated.
6 There are many types of PBR mechanisms, and the 7
Commission should consider the various types and determine which 8
are appropriate for New Mexico utilities.
A PBR system could be 9
developed that provides the incentives and disincentives deemed 10.
appropriate in furtherance of the public interest of New Mexico.
11 In PNM's view, the best approach would be to consider PBR 12 proposals on their merits as presented in individual cases, 13 rather than to establish rigid guidelines in advance.
14 15 3.
The cammission should Regulate Only Those Aspects 16 of the Utility Business That Require Regulation.
17 18 There are many ways of addressing retail competition in 19 the electric utility industry.
At one extreme, regulators could 20 reject the introduction of competition into the retail 21 electricity market, on the theery that wholesale competition will 22 be sufficient to promote the public interest in inexpensive and 23
. reliable electric service.
At the other extreme, the industry 24 could be fully disaggregated and deregulated; under such a 25 regime, the whole issue of reliable integrated service is turned 26 over to competitive suppliers.
27 PNM does not believe that either extreme model is
~ ~ - - - -
i j
38 i
1 appropriate.
Some form of retail competition may be needed to 2
ensure that all customers have the ability to benefit from 3
competition and choice.
But reliability is likely to suffer in a I
4 deregulated market where ownership of assets is suddenly 5
disaggregated by an attempt to force divestiture, and thus there 6
will be no assurance that customers will receive the service they 1
7 need.
Most scenarios for industry transition envision the i8 unbundling of the various elements of the integrated service l
9l (generation, transmission, distribution and customer services) 10 provided today.
How and when each element is unbundled is d
11 critical to a successful transition.
PNM believes that it is 12 appropriate to follow a middle course.
PNM offers one d
13 possibility, among many that exist.
14 PNM believes that, if competition for energy sales or i
15 other services is to be introduced into retail markets in the 16 electric utility industry, those functions of a utility's 5
17 business, or services provided by the utility, that are subject 18 to competitive forces should not be regulated.
There are four i
19 basic functions in PNM's business, each with its own 20 characteristics, and the need for regulation should be tied to j
j 21 these separate characteristics.
Generation may, in time, become 22 largely a commodity, and at that time could be subject to 3
{
23 competitive forces. However, stranded cost recovery must be 24 addressed initially, to ensure that utility generation can i
25
. compete fairly with other generation.
Transmission will remain a l
natural monopoly, at least for the foreseeable future and, to 1
d
39 1
that extent, should be regulated to ensure reliability and 2
economy.
Distribution will also be a natural monopoly for the 3
foreseeable future and, as such, should be regulated to provide l
4 for reliability and deliverability.
Market power based upon i
5 ownership of transmission and distribution assets can be 6
mitigated by non-discriminatory access and customer choice, and 7
should not be used to favor a utility or an affiliate's 8
generation or services offerings.
Finally, PNM also provides 9
other services which it should be allowed to provide on an 10 unregulated basis in competition with other entities.
To sell 11 these services successfully in a competitive market, PNM must 12 differentiate its services from those provided by others as to 13 price and quality, and package them to serve customer needs.
14 Utilities should be able to sell closely related 15 utility and energy services, either through separate subsidiaries 16 or as part of the utility's business.
This will allow utilities 17 to employ their knowledge and expertise to the maximum, thereby 18 enabling potential consumers of these services to benefit (NOI 19 Question 15).
20 There are a variety of areas where PNM and other New 21 Mexico utilities may be able to, and should be permitted to, 22 provide valuable services, such as power brokering, load 23 management, energy efficiency services, real-time energy 24 information, total energy services, reliability, and other 25 energy-related services.
New Mexico utilities should be permitted to engage in these activities on a completely
40 1
unregulated basis.
Unlike transmission and distribution 2
services, these are not' natural monopoly functions, and thus 3
utilities should be allowed to compete to provide these services, 4
subject only to the laws of competition and to any necessary 5
scrutiny to ensure that regulateo functions do not unfairly 6
advantage unregulated functions over third-party suppliers.
7 8
4.
Distribution Utilities should Be Required to 9
source New Generation Facilities and Power 10 Supplies competitively.
11 12 The first consideration that SJM 42 requires the 13 Commission to take into account is, not surprisingly, lower rates 14 to ratepayers.
PNM believes that in order to lower costs to distribution utilities should be required to source
'S consumers, 16 new generation facilities and power supplies (or demand-side 17 management, where that alternative competes with physical 18 generation facilities) competitively.
19 One question that the Commission must address is 20 whether, and to what extent, there is a continuing obligation to PNM believes that the obligations of generation suppliers 21 serve.
22 to serve should be determined solely by contract, and, once 23 undertaken, should not be shifted to other customers or to the 24 residual utility (NOI Question 9).
It may be appropriate to 25 require marketers or other out-of-state entities to post a 26 performance bond, or impose some other requirement to ensure 27 performance or ensure that the out-of-state entity can satisfy B
liabilities if it fails to perform without shifting risks and
41 I
costs to other consumers or producers.
2 However, a utility should have the obligation to 3
continue providing transmission and distribution services to 4
customers, given the natural monopoly nature of transmission 5
assets, and to connect to new customers for those same services 6
(NOI Question 5). 11/
The utility should not necessarily be 7
required to operate the system itselr, but if it does not, it 8
should be responsible for finding another entity, such as an 9
independent system operator, to operate the system.
As discussed 10 more fully below, 12/ this may be done on a broader basis than 11 merely one utility system, as is to be the case in California, 12 with its ISO proposal. 11/
Once the ISO is approved by the 13 appropriate regulatory authority, however, the ISO should bear 14 the responsibility for operating the system; the obligation to 15 serve would remain with the distribution utility.
16 17 5.
The commission Should Develop Legislative 18 Recommendations to Aid in Implementing 19 Restructuring.
20 21 SJM 42 envisions clearly an ongoing dialogue between 22 the legislature and the Commission concerning restructuring, and 23 states that the Commission is not to act on restructuring without 24 first consulting the Legislature for guidance.
PNM recognizes alf New transmission services are discussed infra, S III.B.3.b.
12/
ggg infra S III.B.7.
l 11/
CPUC Order, at 28.
42 1
that many of the actions that the Commission will need to take in 2
order to implement restructuring of New Mexico's utility industry 3
will require additional legislation.
Accordingly, the Commission 4
should develop legislative recommendations that will~ aid in 5
implementing restructuring.
The Commission should serve as an 6
expert agency making recommendations to the Legislature with 7
regard to restructuring, and, together with the New Mexico 8
Energy, Minerals, and Natural Resources Department, should lobby 9
Congress as directed by the Legislature.
10 11 6.
The Commission should Participate Actively in the 12 Federal Restructuring Debate.
13 14 The introduction of competition and customer choice
.5 into the American electric utility industry will require action 16 at both the state and federal levels.
Many proposals that have 17 been raised, and will be raised in the future, may have 18 significant adverse effects on New Mexico utilities and The Commission should participate actively in the 19-consumers.
20 federal debate, both at FERC and before the Congress, to protect 21 the New Mexico public interest.
22 In addition, the Commission should contribute to 23 resolving federal-state jurisdictional questions.
As discussed 24 in response to NOI Question 24 below, the lines between state and 25 federal jurisdiction under the Federal Power Act ("FPA") are not 26 always clear, and there is the potential for costly and time-27 consuming litigation in the event that competing authorities or
l 1
4 l
43 1
constituencies are unable to resolve their differences.
PNM 2
urges the Commission to work with federal authorities in a spirit 3
of cooperative federalism, to minimize the incidence of, and 4
uncertainty associated with, litigation and to ensure that New 5
Mexico's interests are protected.
This is consistent with the 6
factors prescribed by SJM 42.
l 7
One issue that should be addressed is whether there are 8
limits on a state's authority to disallow costs paid to a 9
supplier in the event a utility purchases power or services from 10 an unregulated seller.
This could become a significant issue and 11 the risks should be identified clearly, in light of judicial l
12 precedent concerning passthrough of FERC-approved rates.
l 13 The Supreme Court, in Nantahala Power & Licht Co.
v.
14 Thornburc, 11/ reversed a state regulatory ruling that prevented 15 a utility from recovering its full costs of purchasing power at a 16 FERC-approved rate. 11/
The Court specifically declined to 17 address whether "a particular cuantity of power procured by a 18 utility from a particular source could be deemed unreasonably l
19 excessive if lower cost power is available elsewhere, even though 20 the higher cost power actually purchased is obtained at a FERC-l 21 approved, and therefore reasonable, ori ce." 11/
It is possible l
41/
476 U.S. 953 (1986).
AS/
476 U.S.
at 970-71.
See also Narracansett Elec. Co.
v.
Burke, 381 A.2d 1358 (R.I. 1977), cert. denied, 435 U.S.
972 (1978).
11/
Nantahala, 476 U.S.
at 972 (emphasis in original).
The question has answered in the affirmative by state courts.
I
p i
l 44 1
that absent a FERC-approved rate, such as would be the case in 2
the event of a^ utility purchase from an unregulated supplier, 3
Nantahala would not operate to protect the utility.
This could 4
discourage utilities from purchasing from unregulated entities, 5
and thereby inhibit competition simply through risk-averse 6
behavior by utilities.
7 With respect to this issue, competitive sourcing by the 8
distribution company should ensure that generation is purchased 9
at the market price, and such purchases should be deemed to be 10 prudent and recoverable.
Competitive markets cannot operate 11 correctly if regulators second guess competitive outcomes, or 1
12 attempt to replace direct regulation with indirect regulation.
l 13 14 B.
Proposals for Federal Action 15 PNM believes that federal action is necessary to bring 16 about the benefits of competition and customer choice throughout 17 the country. 42/
Congress needs to act with regard to retail 18 wheeling, because Congress alone has the authority under the 19 United States Constitution to allow reciprocity among the states, 20 thereby providing for fair competition among suppliers located in 21 different states.
PNM also believes that federal action is 22 desirable to address the stranded cost question, in order to
- See, e.a.,
Pike County Licht and Power Co.
v.
Public Serv.
Comm'n, 465 A.2d 735 (Pa. Commw. 1983).
I 12/
PNM's rationale for this conclusion is set forth below in l
l the response to NOI Question 24.
j i
i
,l
45 1
ensure that competition among utilities in different states is 2
not skewed as a result of differing regulatory treatment of 3
stranded costs.
Accordingly, PNM suggests the following areas t
4 where federal action is appropriate.
5 6
1.
congress should Establish Clearly FERC's 7
Jurisdiction over the National Power Grid.
8 9
PNM believes that Congrecs should find that the 10 electric system is a national resource, highly interconnected and 11 interdependent, and requires an overall federal structure to 12 promote fair competition, reliability, and economic security.
At 13 present, the FPA does not provide FERC with the full extent of 14 potential federal jurisdiction over electricity under the i
3 commerce clause. 11/
Accordingly, the FPA should be amended to 16 ensure that FERC has jurisdiction over the transmission of 17 electricity, both at wholesale and retail, while tha - ates 18 retain authority over distribution of electricity.
19 The need for a uniform federal structure to govern fair 20 competition is clear.
The purpose of restructuring is to 21 increase customer choice and promote the creation of new services 1
22 and new technologies.
All competitors must be able to compete in 23 the marketplace unfettered by the effect of prior regulation, and 24 this is unlikely to happen if they are subject to differing cost 25 considerations depending upon their location and the state 26 regulation to which they must answer.
Moreover, reciprocity in 18/
U.S.
Const, art.
1, S 8, cl.
3.
46 1
the retail wheeling context is also vital to fair competition, 2
and can only b'e authorized at the federal level (NOI Questions 3, 3
24).
4 As discussed above, 11/ experience in other industries, 5
such as natural gas and telecommunications, has revealed that 6
restructuring of federally regulated industries should be 7
undertaken comprehensively at the federal level.
The 8
restructuring process in those industries has gone on for many 9
years, at both the state and federal levels, and in neither case 10 is the transition complete.
The public interest would be served 11 better by clear federal direction at the outset, rather than a l
12 hodgepodge of federal and state actions and judicial proceedings.
13 Finally, Congress should provide a clear line between 14 state and federal jurisdiction in order to discourage litigation 15 and regulatory forum-shopping, eliminate uncertainty, and provide 16 uniformity.
PNM would suggest that federal authority extend to 17 generation, which should be deregulated, and retail and wholesale 18 transmission, which should be regulated, while states should 19 retain regulatory authority over local distribution.
In any 20 event, the line should be a true " bright line."
21 Senator Johnston stated the issue forcefully in his l
22 remarks on introducing the Electricity Competition Act of 1996:
23 This Nation cannot afford to miss this
,. 24 opportunity.
This legislation is needed to 25 avoid a patchwork of state policies, to bring 26 competition to consumers on a rational 41/
See sunra S II.C.1.
i l
l l
l
47 1
timetable, and to standardize stranded cost 2
recovery.
It is essential that we make this
-3 commitment now, and set competition in 4
. motion. -Every year, every month, every day 5
that we lose debating the fine points of this 6
transition means a loss of prosperity for-7 this Nation.
We are now fighting tooth and 8
nail in a global economy where every dollar 9
counts.
Accordingly, this legislation is i
10 essential. 12/
11 12 Although PNM does not embrace each and every aspect of Senator 13 Johnston's bill, PNM agrees with his sentiment concerning the 14 need for prompt federal action (NOI Questions 3, 24).
15 16 2.
consideration should Be Given to Permitting 17 Utilities to Unbundle by creating Separate 18 Subsidiaries Under a Holding Company Structure.
19 20 In the Mega-NOPR, FERC has proposed to require utilities to unbundle generation functionally from 22 transmission, 11/ and has required utilities to adhere to the 23
" golden rule of comparability" in providing transmission service 24 to third parties under open access tariffs. 52/
In the NOI, the 25 Commission inquires whether corporate restructuring will be i
26 necessary (NOI Question 22).
PNM believes that corporate 27 restructuring is not necesscry, but that it should be permitted 28 for those entities who so choose.
10/
142 Cong. Rec. S379 (daily ed. Jan. 25, 1996) (statement of Sen. Johnston).
E1/
Mega-NOPR, at p. 33,000.
12/
American Elec. Power Serv. Corp., 67 F.E.R.C.
(CCH) T 61,168 at p. 61,490 (1994).
48 1
As discussed above, 11/ regulators should recognize 2
which functions of the vertically in'tegrated utility should be 3
regulated, and which need not be.
Some functions, such as 4
distribution, need more flexible regulation as described below.
5 Disaggregation of these functions should be permitted in any 6
manner selected by the utilities to meet their business needs, 7
including as separate operating subsidiaries of a holding 8
company. 11/
There are several potential advantages to a holding 9
company structure:
it may facilitate financing, facilitate spin-10 off, improve the company's ability to dispose of assets, and 11 provide for a more efficient capital structure.
It would also 12 isolate risk and reward, shielding ratepayers from risk, while
'l preserving benefits for shareholders and other investors.
In 14 addition, managers of these separate entities would have 15 incentives to improve performance and profitability, in rivalry 16 with other sellers of goods and services and with other entities 17 within the holding company, and the invisible hand of competition 18 would be permitted to promote consumer welfare.
19 Under this structure, the holding company could own 20 four (or more) subsidiaries.
The generation subsidiary would not 21 be regulated and would have no service obligation other than that i
11/
See suora S III.A.3.
11/
The question of forced disaggregation and separation of ownership of vertically integrated assets is beyond the scope of these comments.
Suffice it to say, the legality of such a course is subject to grave doubt, and the wisdom of i
proceeding in that fashion is not apparent.
i
)
49 1
defined by contract.
The transmission subsidiary would be
~
2 regulated by FERC, and its assets potentially operated by a 3
regional ISO.
The transmission subsidiary would retain the i
4 obligation to connect with wholesale customers desiring service 5
but would retain no obligation to procure power and serve.
As 6
discussed below, some form of federal or regional siting 7
procedure would be necessary to ensure that the transmission 8
subsidiary is able to construct the transmission facilities 9
.~neces'sary to serve the system.
10 The distribution subsidiary would be regulated by the 11 state.
It would be the entity that would collect stranded costs 12 and should be allowed significant regulatory flexibility to 1
13 provide competitive energy related services and enhance and 14 customize its total service package.
In selling such services, 1
15 the distribution subsidiary should be allowed to retain all i
16 profits for its shareholders, if shareholders incur the costs and 17 risks of providing those services. If those costs are allocated 18 to the ratepayer, then the ratepayer should enjoy the resulting 19 profit.
The distribution subsidiary would retain an obligation 20 to serve existing core customers and connect to new ones, as well 21 as to connect to customers served by another generation supplier.
22 However, the distribution subsidiary must also be provided the 23 ability to protect any investments or generation commitments it 24 must make in this regard for this potentially highly volatile and 25 unpredictable customer base.
Finally, a fourth subsidiary could be created to sell unregulated services, such as efficiency and
d 50 1
utility services in broader markets outside the utility structure 2
at market prices (or this function could be undertaken by one of 3
the other subsidiaries).
4 This structure, which PNM offers merely as an example, 5
raises numerous issues and more study would be necessary to 6
determine whether such a structure would be appropriate and how
't it would operate, as well as how to avoid unintended 8
consequences.
Nevertheless, PNM believes that it could be a 9
viable way of approaching the various functions of the vertically 10 integrated utility once competition is introduced into the retail 11 section of the industry.
l 12 13 3.
Generation Should Be Deregulated and Transmission and Distribution Should Be Regulated as Common 15 carriers.
16 17 a.
The Generation Market Should Be Deemed 18 Workably competitive And Deregulated.
19 20 PNM supports deregulation of the generation market, 21 based on the competitive conditions prevalent in the regional i 22 generation market and assuming regulation is relatively equal in 23 the relative market area. EE/
At present, there is an abundance 24 of generation, including utility generation and non-utility 25 generators, in the regional generation market, and PNM submits 26 that this market is workably competitive, both as to existing 27 assets and new assets; with open access, barriers to entry should 11/
With the development of open access transmission, PNM believes that the market for generation is becoming regional, and in many cases national, in scope.
1 51 I
be minimized.
PNM believes that, under these circumstances, the 2
market can dis'cipline the price for generation, and the only need i
3 for federal regulatory oversight is to determine whether market 4
power becomes a problem (NOI Question 3, 23). EE/
5 Market power is not an insignificant issue, but 6
mechanisms currently exist, such as the Hart-Scott-Rodino 7
premerger notification law E2/ and the Department of Justice 8
("DOJ") and Federal Trade Commission ("FTC") merger guidelines EE/
9 to address the attainment of market power through acquisition.
10 Oligopolistic behavior by generators is a potential problem, 11 given the existence of certain barriers to market entry, such as 12 high capital requirements, transmission bottlenecks, and 13 environmental regulations.
However, PNM believes that i
14 governmental and private enforcement of the antitrust laws should EE/
In addition, deregulation of the generation market would be consistent with Congressional deregulation of the wellhead price of natural gas.
Egg Natural Gas Wellhead Decontrol Act of 1989, Pub. L. 101-60, 103 Stat. 157 (1989)
(deregulating all wellhead gas prices effective January 1, 1993).
However, provision must be made for recovery of stranded costs incurred prior to the introduction of competition.
Moreover, Congress should not distinguish between "old" and "new" generation, as it previously distinguished between "old" and "new" gas production, with consequent artificial and unintended adverse results.
12/
15 U.S.C.
S 18a (1988 & Supp.).
Eg/
Department of Justice and Federal Trade Commission Horizontal Merger Guidelines (1992); Department of Justice Merger Guidelines (1984).
Note that the 1992 DOJ/FTC Guidelines specifically address only horizontal mergers (mergers between competitors in the same market); the 1984 DOJ Guidelines still govern DOJ analysis of non-horizontal mergers, although the 1992 Guidelines are not irrelevant.
52 1
be sufficient to address these concerns.
2 Market power is a legitimate concern as the generation 3
function is deregulated.
Since the airline industry was 4
deregulated in the late 1970s, one of the most striking 5
developments has been the significant decrease in the number of i
6 competing national airlines, coupled, however, with the emergence I
7 of niche carriers where barriers to entry permit.
Many factors 8
combined to bring about this result, but the airline experience l
9 demonstrates that deregulation can result in shrinking the number 10 of competitors.
If that occurs in the electric industry, it 11 should be the result of activity that enhances efficiency, and 12 not destructive competition.
l 13 Destructive competition is undesirable because it would 14 lead to achievement of undue market power, leaving consumers ripe 15 for price gouging which likely be by out-of-state entities with 16 no interest in the welfare of New Mexico.
The DOJ/FTC definition 17 of seller market power is "the ability pcofitably to maintain 18 prices above competitive levels for a significant period of 19 time. " 12/
Thus, prevention of destructive competition is 20 necessary to preserve true competition, not simply to preserve 21 competitors. E0/
In any discussion of market power, it is 22 necessary to define the relevant market.
In the case of 12/
DOJ/FTC Merger Guidelines S 0.1 (1992).
E0/
Cf. Brown Shoe Co.
v.
United States, 370 U.S.
294, 320 (1962) (antitrust laws designed "for the protection of competition, not competitors") (emphasis in original).
~,
s 53 1
generation, the relevant market is at least the Western region, 2
and possibly the entire continental United States.
3 4
b.
The Transmission Function Should Be Regulated 5
by FERC, and the Distribution Function Should 6
Be Regulated by the States.
7 8
Unlike the generation market, which may be workably 9
competitive, the transmission and distribution markets remain as 10 natural monopoly functions, at least in many markets.
PNM 11 believes that these functions should be treated as common 12 carriers, with transmission subject to federal regulation and 13 distribution subject to state regulation.
PNM further believes 14 -
th:* the relationship between state and federal regulators should 15 be one of cooperative federalism.
Thus, regulators should i
16 cooperate to develop compatible roles for pricing, planning, and j
17 siting.
18 Siting of transmission facilities is a particularly 19 critical issue, because of its effect on generation markets.
20 Generation has to be transmitted to loads.
Transmission 21 constraints keep needed generation from markets, and if i
i 22 competition in the generation market is to function 23 appropriately, it will be necessary to ensure that transmission 24 constraints can be eliminated (NOI Question 3).
Given the 25 existence of environmental and federal / tribal land and resource 26 concerns in the western United States, it is often a lengthy and 27 costly process to obtain approval to construct transmission facilities.
When individual states superimpose additional or
54 1
contradictory environmental planning or compliance requirements 2
for certain types of projects or applicable to certain types of 3
entities only, the result may increase costs, inhibit 4
competition, and unfairly discriminate against those projects or 5
entities.
A good recent example is the lengthy history of PNM's 6
efforts to build the OLE transmission facilities.
PNM spent 15 7
years and $17 million; it obtained all requisite federal and 8
state environmental regulatory and cultural approvals other than 9
from the commission; these approvals withstood judicial scrutiny; 10 yet the Commission rejected PNM's application.
PNM is now 11 determining how it can proceed with regard to planning in order 12 to ensure that it can provide reliability on its transmission 13 system.
14 It may be necessary to establish some federal or at 15 least regional certification authority to ensure that needed 16 transmission facilities are constructed and that all interests 17 are considered and appropriately balanced.
One possible approach 18 is provided by Title I of the FPA.
Section 21 of the FPA 19 provides for a right of eminent domain to condemn private 20 property; E1/ section 4 (e) permits FERC to license facilities on 21 tribal lands, 12/ and section 10(e) provides for payment for such 22 use. E3/
This federal authority, if expanded to cover all E1/
16 U.S.C.
S 814 (1988 & Supp.).
E2/
16 U.S.C. S 797(e) (1988).
f3/
16 U.S.C.
S 803 (e) (1988 & Supp.).
See also Escondido Mutual Water Co.
v.
FERC, 701 F.2d 826, 828 (9th Cir. 1983)
55 1
transmission certification issues, could provide an appropriate 2
mechanism for promoting the public i'terest in the construction n
3 of additional transmission facilities.
4 EPAct and FERC's Mega-NOPR address the costs of 5
constructing new facilities to provide transmission services, 11/
6 but do not address pricing for constrained facilities. 11/
Nor 7
has FERC addressed -- yet -- issues related to costs of abandoned 8
projects, although customers may desire investment to increase 9
transmission capability.
These matters must be addressed to 10 avoid inhibiting competition in generation because of 11 transmission constraints.
12 13 4.
Stranded Costs Should Be Addressed at the Federal Level, and Utilities should Be Allowed 100 Percent 15 Recovery.
16 17 Stranded costs are a major threat to the continued 18 health of the electric utility industry.
Due in large measure to 19 federal policies that, in retrospect, were mistaken, some 20 utilities invested in nuclear facilities, signed up for long-term 21 obligations to buy PURPA power, and entered into long-term coal 22 contracts due to the FUA.
By contrast, some utilities have 23 benefitted from certain federal energy policies.
For example, (Anderson, J.,
concurring).
11/
See 16 U.S.C.
S 824k(a) (1988 & Supp.) (costs of transmission service to be recovered from the applicant for such service); Mega-NOPR, at p. 33,091.
11/
Egg infra S III.B.S.
56 1
hydroelectric projects, particularly in the West, generate cheap 2
energy for statutorily preferred customers.
No viable plan for 3
restructuring the industry -- whatever its form -- can avoid 4
dealing with the stranded costs or 'enefits associated with these s
5 federal mandates.
PNM submits that stranded costs should be 6
addressed at the federal level, and that utilities should be 7
allowed full recovery of all stranded costs (NOI Questions 16, 8
17). EE/
PNM further submits that in light of the national 9
nature of the problem, all customers across the nation should be 10 allocated a portion of the national stranded costs, which would 11 be collected by means of a national wires charge; divided by a 12 large number of terawatt-hours, E2/ even a large cost of stranded 13 assets becomes small.
It should be noted that, in the 14 telecommunications industry, use of a subscriber line charge 15 imposed on a national basis provided recovery of local loop costs 16 potentially stranded with the growth of competition in the long 17 distance market.E8/
18 Upon introducing his retail wheeling bill, Senator 19 Johnston stated that "{r]ecovery of all stranded costs is 20 imperative," E9/ and his bill intends to provide for full EE/
PNM addresses the legal justification for addressing stranded cost recovery in advance of restructuring in its response to NOI Question 24.
E2/
A terawatt is 1,000 gigawatts.
Eff See, NARUC v.
FCC, 737 F.2d 1095 (D.C. Cir. 1984).
E1/
142 Cong. Rec. S379 (daily ed. Jan. 25, 1996) (statement of Sen. Johnston).
57 1
recovery of stranded costs by utilities. 2A/
Representative 2
Markey's bill also contemplates full stranded cost recovery, 21/
3 and Representative Schaefer has indicated his support for full 4
stranded cost recovery. 22/
The Mega-NOPR recognizes that full 5
stranded cost recovery is tied to the introduction of wholesale 6
open access. 21/
7 PNM agrees.
Full recovery is essential in order to 8
bring about the transition to a competitive market:
9 In short, if we do not enact legislation 10 ensuring stranded cost recovery, most 11 utilities will be reluctant to embrace 12 competition.
If we do not enact legislation, 13 the transition to competition and lower 14 electricity prices will be slover.
If we do 15 not enact legislation, corporate risk becomes 16 unmanageable, and bankruptcies may occur.
17 This is not in the public interest. 21/
19 Moreover, permitting utilities to recover all stranded costs is 20 necessary to ensure that utilities and non-utility generators can j
21 compete on a level playing field (NOI Question 3).
22 Full recovery of stranded costs is equally important in 20/
S.
1526, 104th Cong., 2d Sess. S 11(b) (1996).
21/
H.R.
2929, 104th Cong., 2d Sess. S 201 (1996).
22/
Sag "Policymakers Push ELCON to Ocmpromise on Stranded Costs; Group May Cede 50%," Electric Utility Week, at 3 (Oct. 30, 1995).
21/
"The recovery of legitimate and verifiable stranded costs is critical to the successful transition of the electric utility industry from a tightly regulated, cost-of-service industry to an open transmission access, competitively priced industry."
Mega-NOPR, at p. 33,095.
24/
142 Cong. Rec. S379 (daily ed. Jan. 25, 1996) (statement of Sen. Johnston).
58
'I order to assure that a competitive generation sector can attract 2
capital in the' future.
In a market economy, capital cannot be 3
conscripted -- it must be attracted.
An industry where capital 4
is written off based upon changes in regulatory policy will face 5
higher cests of capital and thus higher costs to consumers, even 6
where markets are workably competitive.
It would be unfair to
't impose stranded costs on the utility's secured and unsecured 8
creditors, who provide the debt financing that makes capital 9
acquisitions possible.
Full recovery of stranded costs is 10 particularly fair for PNM, because the Commission already has Il determined that PNM's nuclear f acilities are prudent and, i
12 furthermore, PNM already has written off and written down its 13 assets by approximately $525 million, $179.1 million of which 14 were entirely voluntary in order to produce $30 million in annual 15 rate reductions in association with NMPUC Case 2567.
These 16 write-offs also included $116 million associated with Inventory 17 AFUDC and the Inventory methodology, $189.9 million associated 18 with the Palo Verde Nuclear Generating Station Unit 3 and $40 19 million associated with the 105 megawatt Contingent Power 20 Purchase Agreement with Modesto, Santa Clara and Redding (M-S-R).
21 A federal solution is particularly vital because many 22 of the stranded assets are the result of federal policies, such 23 as the promotion of nuclear generation, the QF purchase 24 requirement, and the FUA prohibition against using natural gas to 25 fuel electric generation.
Moreover a federal solution will also reduce uncertainty and delay, and provide uniformity -- it will
i 1
59
~ 1 provide the fastest path to competition.
At a minimum, Congress 2
must allow full recovery of ' stranded costs, and either Congress 3
or FERC must state which costs are to be considered stranded.
4 a.
Measurement of stranded costs.
The Commission 4
5 should establish procedures ngw to identify the extent of the j
6 stranded cost problem for New Mexico utilities.
The recent New I
7 Mexico State University study is a starting point, but PNM has i
L 8
serious doubts about the results of that study, and believes that i
9 a forum should be created in which a]l stakeholders can I
10 participate.
Th's forum should consider all possible stranded q
^
11 costs and benefits.
12 Stranded costs should include the costs associated with 13 assets that have become uneconomic due to regulatory changes and 4
14 market changes induced by regulatory changes, such as nuclear l
15 facilities, high-priced contracts for purchases from qualifying i
16 facilities, or long-term coal contracts entered into in the era i
17 of the FUA.
They should include both capital and operating 18 costs.
Costs associated with nuclear decommissioning should be i
19 recoverable by the utility, whether as stranded costs or through j
20 some other mechanism.
21 PNM believes that Congress should establish the 22 appropriate standard for stranded cost recovery, which states 23 could then implement.
PNM suggests two ways of approaching the 24 issue at this time.
The first, which PNM favors, is to g
25 establish, as of some point in time, the market value of a
~
utility's generation, and subtract that market value from book
l 60 1
value at that same point in time.
Stranded costs are the 2
difference.
Deferred taxes associated with an asset should 3
follow the asset; if the utility is entitled to full recovery, as j
4 PNM supports, the deferred taxes should be credited as an offset 5
against stranded costs.
A major benefit of this approach is that 6
the utility has an incentive to compete at market prices in the
)
7 future.
A second approach is to take the difference, measured at 8
periodic intervals, between the cost of electricity and its 9
market price.
This approach would reduce the incentive to 10 mitigate, however.
11 b.
Transition costs other than stranded costs. 'The 12 Commission also should address recovery of costs of restructuring 13 other than stranded costs.
These would include costs that will l
14 be incurred in developing the mechanisms for all classes of 15 customers to benefit from a restructured industry, such as the 16 cost of computer software and hardware, administrative and 17 general costs, direct labor costs, and others.
18 c.
Mechanisms for recovery of stranded costs.
PNM 19 believes that all customers should share in stranded cost 20 responsibility.
PNM sees three alternatives.
PNM believes that 21 the best approach would be a non-bypassable surcharge, allocated 22 evenly over each unit of transmission and distribution service.
23 This would ensure that all customer < pay, and that no customer 24 can escape payment by leaving the system (NOI Question 6).
25 Ideally, this surcharge would be imposed nationwide, on all customers that use the system, in a manner similar to the
l 61 1
Department of Energy's spent fuel charge for nuclear utilities or 2
FERC's annual assessment for investor-owned utilities.
The 3
charge, however, should be spread over all utilities to minimize 4
the effect on any one region and to allocate the recovery across 5
all utility customers -- who should share in the costs of failed 6
policies and the benefits of future competition equally.
7 Imposing the surcharge nationwide would reflect the national 8
nature of the problem, as well as the federal policy origins of 9
many stranded costs and the federal initiatives to achieve 10 competitive markets.
Alternatively, the costs could be recovered 11 on a regional basis, to reflect the benefits that all regional 12 customers receive from the various transmission systems in the il region, or a variation to the solution would be to impose the 14 costs solely on a state-by-state or utility-by-utility basis.
15 However, stranded costs must be recovered, regardless of the 16 means of recovery.
17 Another way to recover the costs would be to revalue 18 the assets and establish incremental rates for transmission and 19 distribution. 21/
A third approach would be to charge customers 20 an exit fee.
In theory, this could ensure that the costs are 21 allocated to those customers who "cause" the assets to become 22 stranded.
But it does not guarantee that the cost of the 23 stranded asset will be removed from rates within a specified 24 period of time.
Until one of these approaches is selected, 21/
gge south Carolina Elec. & Gas Coro., Docket No. 95-1000-E, Order No. 96-15 (S.C.P.S.C. Jan.
9, 1996).
62 1
customers departing the system should be charged an exit fee, an 2
approach which has-been followed in Massachusetts.21/
'3 To, prevent " rate shock," and to ensure that competitive 4
pricing signals are allowed to function in the new electric 5
market, stranded costs should be amortized over a reasonable 6
period and utilities should earn a fair return on these costs 7
during the amortization.
Likewise, previous write-downs and 8
write-offs must be considered if authorities establish any 9
mitigation requirements or seek to impose stranded costs on 10 stockholders or creditors. 22/
If utilities are required to 11 absorb any stranded costs, previous write-downs and write-offs 12 should be used as an offset.
13
)
14 5.
Congress should Require Pricing That Will Provide 15 Incentives to Proper Systen Utilization and 16 Construction ~of New Transmission Facilities.
17 18 Transmission pricing is critical to ensuring market 19 efficiency.
Failure to provide for correct transmission pricing 20 will provide improper market signals in terms of the need to 21 build additional generation and transmission facilities.
PNM 22 believes that the proper solution may be " transmission congestion 23 pricing," which can provide the correct incentives for 24 appropriate system utilization and the construction of new 2E/
Re Cambridge Electric Light Company, 164 PUR 4th 69, 1995 WL 634599 (Mass. DPU 1995).
22/
As discussed below in response to NOI Question 24, PNM believes thet imposition of stranded costs on stockholders or creditors is unlawful.
4 1
63 i
1 facilities.
l 2
Transmission congestion pricing is a means of pricing l
transmission capacity based upon its scarcity or constraints of 3
4 its use.
The price of capacity is higher where there are i
5 constraints, or where the system is heavily subscribed, and lower 6
where there is available capacity.
This is consistent with basic 7
economic principles, and does not implicate concerns over 8-
' monopoly rents.
Allocative efficiency requires that scarce 9'. '
capacity go to those who value it most and are willing to pay for 10 it.
This proposition has been recognized by FERC in its 11 regulations governing rate design for natural gas transportation.
12 21/
Logically, if capacity is scarce in certain locations, and 13 additional capacity is needed, a higher price for the scarce 14.
capacity will send the appropriate signal to construct additional 15 facilities.
16 17 6.
PURCA Should Be Reformed or Repealed.
18 PUHCA reform or repeal is desirable to facilitate 19 corporate unbundling and the formation of non-utility 20 subsidiaries, if utilities so desire.
At present, PUHCA's 21 restrictions on holding company strhetures may tend to discourage 22 the formation of subsidiaries to perform separate businesses.
28/
Sag 18 C.F.R. S 284.7 (c) (1).
But see Pricina Policy for New and Existino Facilities Constructed by Interstate Natural Gas Pipelines, 71 F.E.R.C.
(CCH) 1 61,241 at p. 61,916 (1995) (providing for presumption of rolled-in pricing for new facilities unless the rate impact on existing customers is greater than 5%).
64 1
PNM believes that state and federal regulatory authority over 2
utility operations will be sufficient to protect the public 3
interest, without regulation of registered or exempt holding 4
companies by the Securities and Exchange Commission under PUHCA.
6 7.
The Transition to a Restructured Environment 7
should'Be Phased in Over Five Years, or Sooner 8
Where Possible.
9 10 The end result of restructuring should be that all 11 classes of customers should have access to competitive generation 12 sources.
To achieve this goal, significant physical changes will 13 need to be made to the control, billing, and metering systems of 14 utilities like PNM, and such~ changes will take time. 22/
'5 Businesses will need to decide upon the appropriate corporate 16 structure to adept and how to divide their assets among the 17 components adopted to ensure both efficient and reliable service 18 and a competitive posture in deregulated markets.
There should 19 be a five-year transition period to permit all participants to 20 become ready, physically and otherwise, for the new industry 21 structure.
22 Physical system changes also will have to be paid for, 23 and utilities should be able to recover the costs in their rates.
24 FERC provided for recovery of new facilities costs incurred by 22/
FERC currently is examining some aspects of this matter in
)
its proceeding concerning real-time information networks.
Other hardware and software will be required, as well, as discussed above with regard to the proposed New Mexico pilot program.
65 5
1 natural gas pipelines in restructuring under Order No. 636 10/
2 A similar prov'ision for recovery of costs by electric utilities 3
should also be adopted.
4 It may be that restructuring will have to be 5
accomplished via a combination of bilateral contracts and 6
"Poolco" methods, as the CPUC currently intends to proceed in 7
California. 11/
FERC, the various regional systems, the states, 8
utilities, and consumers should arrive at some sort of consensus i
9 as to the best way to proceed in this area.
10 Federal and state authorities must consider the need 11 for regional independent system operators. 12/
Jurisdiction over i
12 Isos would logically, and by statute, fall to FERC, as recognized 13 in the recent California restructuring order. 11/
However, the 14 impact of Isos en local regulatory concerns suggests that FERC 15 should consult closely with state officials in addressing the 16 formation and regulation of the Isos.
17 18 IV.
ADDITIONAL RESPONSES TO QUESTIONS IN NOI 19 In this section, PNM will address questions raised by a
1g/
Order No. 636, at p. 30,460.
Recovery of such costs is also contemplated by the Telecommunications Act of 1996.
Sam 47 U.S.C.
S 254 (e) (providing for federal support for
" provision, maintenance, and upgrading of f acilities" to i
ensure universal service).
11/
CPUC Order, at 29.
E2/
On January 24, 1996, FERC conducted a technical conference on ISOs and power pools.
11/
CPUC Order, at 43.
i l
\\
66 I
1 the Commission in the NOI to which PNM has not responded in the 2
foregoing discussion.
3 4
3.
What actions should be taken to ensure full and fair 5
competition in generation markets?
What may be the 6
impact of competition on rural electric cooperatives 7
and their customers?
8 9
PNM believes that if competition is deemed appropriate 10 for investor-owned utilities, all providers of electric services 11 should.also be subject to competition; the industry should not be 12 Balkanized so that some providers are subject to competition and 13 others are protected.
Full stranded cost recovery should be 14 permitted for all entities subjected to competition.
Customers 15 should not be denied choice simply because they now receive 3
service from a rural cooperative or a municipal utility.
If, for 17 public policy reasons, any utility is exempted from competition, j
18 it should be prohibited from competing for customers of other 19 utilities for as long as it is protected from competition.
A 20 wholesale supplier, owned by retail entities, should not be 21 allowed to compete on a retail basis if its owners are not 22 subject to competition on a retail basis.
23 24 5.
How should the Commission address issues related to 25 universal service?
26 27 Through a collaborative p;ocess, the Commission should
-28 develop and enumerate the elements of universal service.
PNM 29 believes that the currently existing obligation to procure power and serve should continue with respect to core customers -- those
i i
i 67 1
customers that prefer to continue receiving generation service 2
from the utility.
For those customers that choose to seek 3
competitive supplies, the obligation to procure and serve should 4
be replaced with an obligation to connect and deliver. 11/
That l
5 5
is, the utility should no longer be required to supply generation 6
service to those customers, because generation will be 7
competitive and the customer will have access to other suppliers.
8 Because the transmission and distribution functions 9
remain natural monopolies, however, and are often necessary for 10 access to generation, the utility should be obliged to remain 11 connected with all customers who so desire, and to stand ready to i
12 provide transmission for all supplies.
However, there are n
limitations on the utility's ability to connect to customers, 14 including the inability to obtain siting authorization for needed 15 transmission facilities, the need to recover the costs of 16 construction, and the difficulty of reaching remote locations.
4 17 If a utility is required to supply backup reliability, it should 18 receive appropriate compensation for the market value of the 1
19 service.
20 21 6.
What should Commission policy be with respect to a i
22 customer who changes generation suppliers?
23 a
24 First, customers who change generation suppliers should 25 not be permitted to evade liability for stranded costs.
The 11/
During the transition to competition, utilities may need to retain some obligation to provide generation for backup.
68 I
transition cost charge should be non-bypassable; otherwise, 2
customers will have a clear incentive to abandon utilities and s
3 shift costs to those customers that cannot switch.
The 4
Commission should not permit the customer that changes generation 5
suppliers to impose costs on the disp 1= rad utility or its other 6
customers.
Second, as stated above, t'.e utility should have no 7
obligation to continue to provide electricity to (as opposed to 8
the obligation to be connected with) customers who depart the 9
system.
They must be responsible for their own energy needs.
10 The utility may agree to resume service, either in an emergency 11 or on a long-term basis, but it should have no obligation to do 12 so.
If the utility does resume service, it should be compensated M
fairly.
14 15 7.
How should the Commission address issues related to 16 alternative energy supplies, including renewable 17 resources?
18 19 Generally, PNM believes that the Commission should not 20 require customers to purchase power that is generated from 21 alternative energy technologies and/or renewable resources.
Such 22 a requirement would be inefficient, and it is inconsistent with 23 customer choice.
Certainly if a customer wishes to purchase 24 electricity from such sources, it should have the opportunity to 25 do so; however, the customer shoald be responsible for paying any 26 higher costs associated with such electricity.
Market forces 27 should determine the cost and availability of these resources.
69 1
8.
To what extent should or would competitive power 2
suppliers be required to obtain a certificate of public 3
convenience and necessity?'
4 5
Certificates of public convenience and necessity should 6
only be required for competitive power suppliers to the extent 7
necessary to maintain a level playing field.
If utilities must 8
undergo any sort of certificate process in connection with their 9
generation, so should competitors.
10 11 9.
What obligations, if any, should campetitive generation 12 suppliers have to participate in system reliability 13 requirements and to continue service in the markets 14 they serve?
Conversely, under what conditions may 15 competitive generation suppliers abandon markets they 16 serve?
17 18 Competitive generation suppliers must contribute to maintaining the reliability of the system.
If a supplier fails 20 to perform, it should be required to purchase the necessary power 21 or other resources at market prices, and it must be penalized by 22 the system operator for its failure to perform.
The penalties 23 should be designed to ensure that suppliers are deterred from 24 harmful conduct.
Generation suppliers should be required to post 25 a bond or provide some other means to guarantee that they will be 26 able to perform, or will be able to satisfy liabilities for 27 failure to perform.
28 29 10.
What role should *aggregators" and "remarketers" or 30 other free market players have in a restructured 31 market?
What certification requirements would apply to 32 such entities?
33 Aggregators and remarketers should be permitted to
1 t
i 70 compete to provide repackaged service to customers, as long as a
2 PNM and other utilities are permitted to do the same.
This will 1
3 increase competition and customer choice, to the benefit of the 4
public interest.
These entities should not be subject to 5
certification requirements, as long as utilities who seek to 4
6 provide these services are not.
These entities should also be j
7 required to guarantee performance, in the same fashion as a 1
l 8
generation supplier.
9' 1
10 11.
In what respect should environmental concerns impact 11 the restructuring of the industry, especially in the j
12 generation and transmission areas?
i -13 l
14 Environmental regulation of generation and transmission i
must be coordinated with siting and transmission planning.
In 16 industry restructuring, environmental concerns should be j
17 integrated in such a way that artificial incentives or 18 disincentives, based on the level of environmental requirements 19 that are applied in a given instance, are not. created.
For 20 example, if generation projects constructed by state-regulated
~
j ' 21 entities are subject to an additional layer of environmental 22 planning and compliance requirements that are not applicable to 23.
entities who are not so regulated, additional obstacles, in terms 24 of cost and time, are raised that affect the competitive stance 25 of regulated entities and the competitive choices available to i
26 customers.
In many cases, this results in elevated costs to 1
l-27 consumers with no discernible progress toward protecting the
. environment.
The goal should be a level playing field, i
71 1
environmentally speaking.
Uniform planning and compliance 2
criteria should be applied to all entities who wish to build 3
certain types of projects or offer certain types of services.
4 Currently, entities that wish to build generation or 5
transmission projects are subject to a myriad of federal, state, 6
local, and tribal resource and environmental management and
/
protection requirements.
These requirements often are 8
duplicative, confusing, or outright contradictory.
It would be 9
counterproductive to superimpose yet another layer of 10 requirements on certain segments of the industry or certain types 11 of projects.
Instead, a more fruitful method of obtaining an 12 adequate level of environmental protection would be to promote M
cooperation and coordination among federal, state, and tribal 14 authorities to ensure that these requirements are adequately 15 enforced by the agencies having principal jurisdiction, rather 16 than developing another set of requirements.
The Commission 17 should then rely upon, and defer to, the findings of other 18 federal, state, local, and tribal agencies that have expertise in 19 given areas of environmental compliance, rather than developing 20 its own set of criteria or requirements.
21 As an example, differing environmental requirements for 22 transmission, as opposed to distributed generation, promotes 23 inefficiency by inhibiting the abil3ty of market incentives to 24 determine the best alternative.
The ideal solution would be to 25 transform environmental requirements from " command and control" regulations imposed by a patchwork of authorities into a unified
72 I
system of environmental incentives that utilize market principles 2
applied to a11' providers of goods and services in order to obtain 3
optimum levels of environmental compliance.
Such a solution most 4
likely would require that a federal, or at least regional, 5
planning and siting authority be established to ensure that 6
needed facilities are constructed and that all interests are 7
considered and appropriately balanced.
8 9
13.
How should the Commission address issues related to 10 long-term supply availability and reliability?
Who 11 should be responsible for these issues?
12 13 If competition is to be introduced, the answer to this 14 question must be that long-term supply availability will be left
'S to the market to decide.
If there are incentives to generate 16 electricity, it will be generated -- provided that capital can be 17 attracted to finance the required assets.
The Commission should 18 not introduce competition and then require some entity to ensure 19 that there will be supplies available, although it may be 20 appropriate to have the appropriate governmental entities perform 21 periodic studies to ensure that the market is working and that 22 there is sufficient supply to meet the demand for electricity.
23 However, if competition works in the industry, as anticipated, 24 the law of supply and demand will work over the long term to 25 ensure sufficient supply, given appropriate pricing signals.
26 Government must be willing to allow the market to work over time, 27 and not reimpose command and control regulation precipitously because the market outcome may appear temporarily unpopular.
73 1
Competitive markets do not always run smoothly, but have self-2 correcting mechanisms that work, and must be permitted to work, 3
over time.
4 Operational reliability can be addressed by an ISO.
It j
5 may also be appropriate to establish regional compacts among 6
state regulators to attempt to ensure reliability on a given 7
regional system.
The obligation to ensure reliability should not 1
8 be imposed on the utility, however, although utilities may be 9
prepared to provide backup services at a market price.
10 Maintenance of NERC and WSCC planning and operating criteria are 11 vital to ensuring continued reliability of the interconnected 12 grid, and any entity operating transmission facilities in the grid must be obliged to abide by these criteria and rules.
'1 14 15 14.
How should the Commission address issues related to 16 generation, transmission and distribution system i
17 planning?
l 18 19 As discussed above, PNM believes that it may be 20 appropriate for utilities to reorganize into holding company 21 structures, with the generation, transmission, distribution, and 22 other services provided by separate subsidiaries of the holding 23 company.
The generation company would be deregulated, and there 24 would therefore be no formal generation planning; rather, the law 25 of supply and demand would be relied upon to ensure sufficient 26 supplies.
States could play a useful role, however, in ensuring 27 the availability of public information concerning anticipated system demands and constraints.
The transmission company would
74 1
be regulated by FERC, and the distribution company by the state, 2
with planning' undertaken on a federal or regional basis.
3 4
19.
What impact would restructuring of the electric 5
industry have on integrated resource planning, demand-6 side management, renewable resources and other least 7
cost planning tools, and plant decommissioning costs?
8
-9 As indicated previously, command and control type, 10 government regulation based planning is inconsistent with the 11 operation of a competitive market.
Generally the market should 12 be allowed to function.
Demand-side management could be offered 13 as a service by utilities and other providers, if the market 14 demonstrates demand for it, but should not be regulated by the 15 Commission.
As noted in the previous section, plant j
decommissioning costs, as well as remediation costs, should be j
a 17 treated as stranded costs, and should be recoverable through 18 utility rates.
If the regulated distribution company is to have j
19 the obligation to serve customers, it must also have the 20 responsibility for planning for those customers, and the ability 21 to protect any future investments which may be required.
)
22 23 24.
What Federal-State jurisdictional issues exist with 24 respect to restructuring and how should the commission 25 address those issues?
26 27 The lines of jurisdiction between federal and state 28 authority over electricity are not entirely clear.
Congress, in 29 enacting the FPA, clearly did not seek to extend the authority of 10 the Federal Power Commission ("FPC"), FERC's predecessor, to the
75 i
full limits of possible federal authority under the commerce 2
clause of the U.S.
Constitution.
In the years since 1935, 3
however, there has been substantial debate over how far Congress 4
did go.
That debate continues today, as evidenced by the 5
Commission's comments on the Mega-NOPR, 11/ which argue at length 6
against FERC's claim of jurisdiction to order open access 7
transmission of electricity and its further suggestion that it 8
may intervene with respect to stranded cost issues.
In the Mega-9 NOPR, FERC articulated its contrary reasoning at great length.
10 RE/
11 The FPA was enacted to bridge the so-called "Attleboro 12 gap" 32/ and provides for federal regulation of transmission and
't sale of energy at wholesale in interstate commerce.
Because the 14 electric industry historically has been dominated by vertically 15 integrated utilities, the dividing line between state and federal 16 jurisdiction has been less clear than in other industries, such 17 as natural gas, where the interstate transmission and local 18 distribution functions generally have been vested in separate 11/
Promotina wholesale comoetition Throuch Ooen Access Non-discriminatory Transmission Se2 Vices by Public Utilities, Docket No. RM95-8-000, Comments of the New Mexico Public Utility Commission (filed Aug.
4, 1995).
11/
Mega-NOPR, at pp. 33,132-45.
12/
Public Utils. Comm'n v. Attleboro Steam & Elec.
Co.,
273 U.S. 83 (1927).
In Attleboro, the Supreme Court ruled that Rhode Island could not regulate the price at which a Rhode Island company sold energy generated in Rhode Island to a Massachusetts company, which took delivery at the state line for resale to Attleboro.
76 1
entities subject to separate regulatory authorities.
The 4
2 jurisdictional question is c'omplicated further by the free-4 3
flowing nature of electrons.
4 In addressing federal jurisdiction under the FPA, the i
5 courts have in some instances drawn a bright line, as in Colton.
6 11/
In other instances, such as distinctions in jurisdiction 7
over transactions involving transmission, the line is far less 8
bright and, at least arguably, may not be clear under present 9
statutory language. 12/
PNM believes that the debate should 10 focus on what matters should be governed by uniform federal 11 solutions and what are matters of purely local concern.
In some 12 instances, a federal solution may be necessary to protect the 9
public interest in an area where FERC currently does not possess 14 explicit jurisdiction under the FPA.
In such instances, Congress 15 should act to ensure that jurisdiction is vested in FERC.
16 17 a.
Federal Action Is Required to Establish a Retail 18 Wheeling Program That Protects New Mexico 19 Interests.
20 21 i.
Authority Over Retail Wheeling 22 23 PNM believes that many of the issues surrounding the 24 electric industry today are regional or national in character, 88/
EEC v.
Southern California "dison Co.,
376 U.S. 205 (1964)
(holding that S 201(b) of the FPA, 16 U.S.C.
S 824 (b),
extends FPC jurisdiction to all sales of electric energy at wholesale not expressly exempted by the FPA).
Elf
- See, e.o.,
Duke Power Co.
v.
FPC, 401 F.2d 930 (D.C. Cir.
1968); Wisconsin-Michican Power Co.
v.
FPC, 197 F.2d 472 (7th Cir. 1952).
J
77 l
and can only be resolved appropriately at the federal level.
For 2
example, in PNM's view, the New Mexico legislature currently may 3
have the authority to require retail wheeling in New Mexico, 4
although it has not acted to confer that authority on the 5
Commission.
PNM believes that the proposals for cooperative 6
state and federal action set forth in PNM's comments will limit 7
' uncertainty, delay, and a proliferation of litigation that would
~
8
're,sult from state-by-state and case-by-case solutions, consistent 9, -
with the mandate of SJM 42.
10 PNM believes that the Legislature does have the 11 authority to mandate retail wheeling in New Mexico, although the 12 issue is very close.
Section 212 (h) of the FPA, which explicitly 9
forbids FERC to order retail wheeling, declares that "[n] othing 14 in this subsection shall affect any authority of any State or 15 local government under State law concerning the transmission of 16 electric energy directly to an ultimate consumer." 22/
This 17 language, added to the FPA by EPAct, does not constitute an 18 affirmative grant of jurisdiction; rather, it simply reflects an 19 intent by Congress not to disturb the jurisdictional status quo.
20 Several Supreme Ceurt decisions recognize that Congress j
i 21 may enact " savings" provisions that are largely nugatory because 22 state authority does not, in fact, exist. 21/
Savings provisions 22/
16 U.S.C.
S 824k(h) (1988 & Supp.).
21/
- See, e.o.,
Soorhase v.
Nebraska ex rel Douclas, 458 U.S..
941, 959-60 (1982); New Enoland Power Co.
v.
New Hampshirt, 455 U.S.
331, 343 (1982).
78 1
"do not indicate that Congress wished to remove federal 2
constitutional constraints on.
.~ state laws.
The negative 3
implications of the Commerce Clause, like the mandates of the 4
Fourteenth Amendment, are ingredients of the valid state law to 5
which Congress has deferred." 12/
When Congress wishes to 6
provide an affirmative recognition of state authority, it does so 4
7 in affirmative language, as it did in the McCarran Act. 21/
The 8
EPAct savings provision, like those addressed in New Encland 9
Power and Soorhagg, contains no such affirmative recognition of 10 existing state authority.
11 PNM believes that state-mandated retail wheeling would 12 not be preempted, and thus the New Mexico legislature does have
'1 the authority to order retail wheeling.
Federal law preempts 14 state law in six instances:
(1) where federal law expresses a 15 clear intent to preempt; (2) where there is such a pervasive 16 scheme of federal regulation that there is no room for the states 17 to supplement it; (3) where there is a conflict between state and 18 federal law; (4) where compliance with both federal and state law 19 would be physically impossible; (5) where there is an implicit 20 barrier to state law in federal law; and (6) where state law 21 obstructs the full accomplishment of federal objectives. 21/
PNM 22 believes that in light of the shared regulatory roles of federal 12/
Soorhase, 458 U.S.
at 959-60 (emphasis in original).
11/
Sgg Prudential Ins. Co.
v.
Beniamin, 328 U.S. 408 (1946).
24/
Louisiana Pub. Serv. Comm'n v. FCC, 476 U.S.
355, 368-69 (1986).
79 2
and state authorities, and the historical preeminence of the 2
. states in the' regulation of electric distribution, state 3
authority to mandate retail wheeling would not be preempted.
4 The Legislature, however, has not conferred its 5
authority over retail wheeling upon the Commission.
Nothing in 6
the New Mexico statute governing electric utilities authorizes 7
the Commission to order an electric utility to transmit j
8 electricity generated by a third party to a consumer.
The 1
9 Commission possesses only the authority given it by the New i
10 Mexico legislature, and cannot order retail wheeling in the 11 absence of such legislative authorization.
12 Clear evidence of the Commission's lack of authority to n
order retail wheeling is provided in Section 62-6-25 of the New 14 Mexico Public Utility Act. 21/
This section constitutes the only 15 grant of wheeling authority to the Commission, and is very 16 limited.
Had the Legislature intended for the Commission to have 17 authority to require retail wheeling, it would have said so, 18 rather than expressly limiting the Commission's authority.
19 Moreover, when the Legislature intended for the Commission to 20 have authority to order open access in the natural gas industry, 21 it expressly so provided. 2E/
Finally, the New Mexico Supreme 22 Court, in discussing the introduction of competition, including 23 wheeling, into the New Mexico electric industry, stated:
21/
N.M.
Stat. Ann. 1978 5 62-6-25 (Repl. Pamp. 1993).
16/
N.M.
Stat. Ann. 1978 S 62-6-4.1 (Repl. Pamp. 1993).
80 1
All of these developments, and more, may 2
occur; we have no crystal ball and can only 3
apply New Mexico law as it is presently 4
written 5
6 7
8 Perhaps the regulatory climate will change 9
Only time, and legislatures around 10 the country, including Congress, will tell.
11 22/
12 13 Moreover, PNM believes that New Mexico's authority over 14 retail wheeling does not extend to the rates, terms, and 15 conditions for retail wheeling transactions.
The Florida Public 16 Service Commission ("FPSC* ) has considered this issue, and has 17 concluded that even where a state commission orders 18 jurisdictional utilities to transmit electricity to one another, FERC has exclusive authority over the rates, terms, and 20 conditions of such transactions. 21/
The FPSC recognized that 21 although FERC has no jurisdiction over facilities used in the 22 local distribution of electricity, retail wheeling will likely 23 involve the use of transmission facilities, over which FERC does 24 have jurisdiction.
FERC has ruled that a wheeling transaction 25 employing both distribution and transmission facilities is a 26 single transaction constituting the transmission of electric 27 energy in interstate commerce, and therefore is subject to FERC's 22/
City of Albuaueraue. 115 N.M.
at, 534 (1993) (emphasia in i
original).
]
21/
Investication into the Adecuacy of the Electrical j
Transmission Grid in North F]orida, 119 P.U.R.4th 269 (Fla.
P.S.C. 1990).
)
i
7 81 jurisdiction. 22/
Accordingly, FERC would have authority to i
2 establish the rates, terms, and conditions of retail wheeling 3
transactions in New Mexico if, as is likely, the transactions 4
involve facilities employed for the transmission of energy in 5
interstate commerce.
6 7
ii.
Authority to Require Reciprocity 8
Moreover, PNM believes that an appropriate New Mexico 9
retail wheeling program must provide for reciprocity (NOI 10 Question 27).
SJM 42 recognizes that New Mexico's interests, 11 including the interests of its utilities, must be protected 12 against unfair or advantaged competition from out-of-state 9
entities.
It would not be equitable to allow suppliers from 14 other states to compete against PNM for retail sales in New 15 Mexico, if PNM is unable to compete with those suppliers for 16 retail sales in their home states.
However, a review of Supreme 17 Court precedent suggests that New Mexico cannot impose a 18 reciprocity condition on competition from other states.
l 19 The commerce clause gives Congress exclusive power over 20 interstate commerce.
The commerce clause not only grants 21 Congress the exclusive authority to regulate commerce among the 22 states, but also directly limits the power of the states to 22/
See Consolidated Edison Co. of New York. Inc., 15 F.E.R.C.
(CCH) 1 61,174 (1981) (exercising jurisdiction over rates for retail wheeling' transactions in New York, although FERC did not mandate the transections).
See also Mega-NOPR, at pp. 33,144-45.
82 discriminate against interstate commerce. 122/
This " negative" 2
aspect of the commerce' clause prohibits economic protectionism --
3
-those. regulatory measures enacted by a state which are designed 4
to benefit in-state economic interests by burdening out-of-state 5
competitors. 121/- State statutes that clearly discriminate 6
against interstate commerce are routinely invalidated, unless the 7
discrimination is demonstrably justified by a valid factor which 8
is unrelated to economic protectionism. 121/
9 The Supreme Court has articulated general principles 10 concerning the extent to which a state law may burden interstate 11 commerce legitimately without violating the commerce clause.
In 12 order for a state law which burdens interstate commerce, such as il a reciprocity provision, to survive a commerce clause challenge, 1AQ/ New Enerav Co. of Indiana v.
Limbach, 486 U.S. 269, 273 (1988).
See also Huches v.
Oklahoma, 441 U.S.
322, 326 (1979); H.P.
Hood & Sons. Inc.
v.
Du Mond, 336 U.S.
- 525, 534-35 (1949).
121/ New Enerav Co.,
486 U.S.
at 273-74.
- Ull/ See.
e.a.,
City of Philadelphia v.
New Jersev, 437 U.S.
- 617, 624 (1978) ("[W]here simple economic protectionism is effected by state legislation, a virtual par gg rule of invalidity has been erected.").
See also H.
P.
Hood and Sons. Inc.
v.
Du Mond, 336 U.S.
525 (1949); Toomer v.
Witsell, 334 U.S.
385 (1948); Baldwin v.
G.
A.
F.
Seelia.
Inc., 294 U.S. 511 (1935).
Li*igation over the subject has arisen in cases involving state regulation and the imposition of taxes, particularly in the area of energy supplies.
Some taxes pass constitutional muster, yet others do not.
Comoare Maryland v.
Louisiana, 451 U.S. 725 (1981)
(rejecting Louisiana "first-use" tax on imported natural gas) with Commonwealth Edison Co.
v.
Montana, 453 U.S.
609 (1981) (upholding Montana severance tax on coal).
-_m.
1 83 1
it must be either (1) specifically authorized by Congress 121/ or 2
(2) based on legitimate local concerns unrelated to economic 3
protectionism.
4 The Supreme Court has established a balancing test to 5
determine whether a state statute is able to withstand scrutiny 6
under the commerce clause.
First established in Pike v. Bruce 7
Church. Inc., lai/ the test provides that a state law will be 8
upheld under the commerce clause if it " regulates even-handedly 9
to effectuate a legitimate local public interest, and its effects 10 on interstate commerce are 'only incidental," unless the " burden 11 imposed on such commerce is clearly excessive in relation to the 12 putative local benefits." 121/
In Pike, the Court recognized 9
that a state may have a legitimate interest in protecting the 14 financial well-being of an industry within the state.
That 15 legitimate state interest, however, must be balanced with the j
16 burden imposed on interstate commerce by the means selected to i
17 protect that interest.
The extent of the burden that will be 18 tolerated depends upon the nature of the local interest involved 19 and on whether it can be promoted as well with a lesser impact on l
o 101/ See, e.c.,
Northeast Bancorp., Inc.
v.
Board of Governors, 472 U.S.
159 (1985) (upholding state statutes that permitted out-of-state bank holding companies to acquire an in-state bank if the domiciliary state accorded equivalent reciprocal privileges); Western & S.
Life Ins. Co.
v.
State Bd. of Eaualization, 451 U.S.
648 (1981); White v.
Massachusetts Council of Constr. Emplovers. Inc., 460 U.S. 204 (1983).
101/ 397 U.S. 137 (1970).
105/ 397 U.S.
at 142.
84 1
interstate commerce. 10E/
2 State reciprocity provisions are routinely invalidated 3
under the commerce clause; the Supreme Court generally has 4
determined that such provisions facially discriminate against 5
interstate commerce.
For example, in Soorhase v. Nebraska ex 6
Igl. Douclas, 192/ the court upheld a challenge to a Nebraska 7
statute under which groundwater could not be exported out of 8-Nebraska unless the importing state permitted the export of 9
groundwater to Nebraska.
The Court found that the statute was 10 not narrowly tailored to Nebraska's stated interest in conserving 11 its water resources, and invalidated the statute.
Likewise, in 12 Great Atlantic & Pacific Tea Co. v. Cottrell, lER/ the Court M
struck down a Mississippi regulation which permitted out-of-state 14 milk to be sold in Mississippi only if the state of origin 15 accepted Mississippi milk on a reciprocal basis.
Mississippi 16 argued that the regulation promoted free trade among the states, 17 but the Court concluded that Mississippi could not "use the 18 threat of economic isolation as a weapon to force sister States 12E/ 397 U.S.
at 142.
In Pike, the Court invalidated an Arizona law, enacted to protect and enhance the reputation of Arizona fruit growers, that served to prohibit a commercial farm from transporting uncreted cantaloupes to a nearby California city.
The court found the burden on the farm to be excessive in light of the state's interest, which the court found to be minimal.
107/ 458 U.S.
941 (1982).
121/ 424 U.S. 366 (1976).
l
85 t
to enter even a desirable reciprocity agreement." 121/
2 The Court's opposition to reciprocity provisions is 3
clearly evidenced in New Enerav Co. of Indiana v.
Limbach. 112/
4 Ohio enacted a tax credit for ethanol sales, but allowed out-of-5 state producers to claim the statute only if the domicile state 6
of the producer provided a reciprocal tax credit for Ohio 7
producers.
The Court concluded that the actual purpose of the 8
statute was favoritism to Ohio ethanol producers, and struck it 9
down.
It is significant to note that the Court struck down the 10 provision even though it did not result in a total prohibition of 11 interstate transport of the subject product.
The Court noted 12 that the state law imposed "an economic disadvantage upon out-of-13 state sellers; and the promise to remove that if reciprocity is 14 accepted no more justifies disparity of treatment than it would 15 justify categorical exclusion." 111/
16 Based on the foregoing discussion, it is clear that New 17 Mexico could not impose a reciprocity condition on access to
~18 retail wheeling by out-of-state entities -- at least not without 19 litigation and delay that would very likely occur.
Such a 20 condition-would be viewed by the federal courts as economic l
21 protectionism -- New Mexico seeking to protect the economic 22 interests of its utilities at the expense of out-of-state 101/ 424 U.S.
at 379.
110/ 486 U.S. 269 (1988).
111/ 486 U.S.
at 275.
I
86 competitors -- and would be struck down.
New Mexico's interest a
2 in protecting the financial well-being of New Mexico utilities 3
would likely be viewed as legitimate, but the courts could 4
conclude that a reciprocity provision is an unduly burdensome 5
means of protecting that interest.
Absent federal legislation 6
authorizing a reciprocity condition, New Mexico could not 7
implement such a condition, with the consequence that retail 8
wheeling in New Mexico could disadvantage New Mexico's utilities 9
and prefer out-of-state utilities, whether located in the Western 10 Systems Coordinating Council or in other reliability councils, 11 such as the Southwest Power Pool -- to which PNM is directly 12 connected -- or the Electric Reliability Council of Texas, to 11 which PNM is indirectly interconnected.
14 Accordingly, since federal action is necessary to 15 guarantee reciprocity in connection with retail wheeling, it is 16 critical that the federal government have the responsibility for 17 establishing a retail wheeling regime, if retail wheeling is 18 desirable. 111/
Clearly the FPA does not currently give FERC the 19 authority to order retail wheeling; 111/ thus, action by Congress 20 would be necessary.
111/ Alternatively, New Mexico could seek an amendment to the FPA permitting states to condition out-of-state entities seeking to obtain retail wheeling fron. New Mexico utilities on the provision by the domiciliary state of reciprocal privileges for New Mexico utilities.
111/ "No order issued under this Act shall be conditioned on or require the transmission of electric energy:
(1) directly to an ultimate consumer.
16 U.S.C. S 824k(h) (1988
& Supp.).
i
87
[
b.
Federal Action Is Desirable to Establish Uniform 2
' Standards for Recovery of Stranden Costs.
3 4
In addition to the reciprocity issue, the prospect of 5
competition among entities in different states raises the 6
' possibility that utilities may be advantaged (or disadvantaged) 7-by differing state approaches to the determination and recovery.
8 of stranded costs.
If utilities are to compete with suppliers in 9
other states, it is desirable that there should be a level 10
. playing field with respect to stranded costs and other service 11 parameters.
But only federal action can ensure that utilities 12 are not advantaged or disadvantaged by their states' position on 13 stranded costs.
14 PNM strongly believes, as set forth in its comments, 111/ that utilities should be allowed to recover 100 percent of 16 their stranded costs.
In addition to the policy rationales 17.
discussed elsewhere, PNM believes that full recovery of stranded 18 costs is required by the U.S. Constitution.
The Commission, in 19 previous decisions concerning PNM's rates, has not addressed the 20 consequences of open access or retail competition.
This is 21 clearly evidenced by PNM's decision to write of f approximately 22
$525'million of-its assets because of a need to remain 23 competitive.
24 In FPC v. Hope Natural Gar Co., 111/ the Supreme Court 25 noted'that one element in determining whether a rate is 11.1/ Ega supra S III.B.4.
111/ 320 U.S. 591 (1944).
- be
88 i
confisca*.ory, in violation of the fifth and fourteenth amendments i
2 to the U.S.
Constitution, is the so-called " comparable earnings" 3
test: "[R)eturn to the equity owner should be commensurate with 4
returns on investments in other enterprises having corresponding 5
risks." 11E/
Regulation makes the utility industry a special 6
case, in that public utilities are immune to the usual market 7
risks, but also unable to gain the benefits of free competition.
8 The utility industry is capital intensive, and because the 9
ability to profit is limited by regulation, investment in capital 10 assets will only be made if there is some reasonable assurance 11 that the utility will achieve some opportunity to earn a return 12 on those assets.
11 If the electric utility industry is opened to i
14 competition, and the utility's ability to recover the costs of 15 capital assets purchased under regulation is made to depend upon 16 market forces, the assumptions under which the investment in 17 those assets was made -- the assumptions comprising the 18
" regulatory compact" -- are retroactively invalidated.
As the 19 Supreme Court has recognized, regulators cannot simply shift 20 gears in a way that requires investors to bear the risks and 21 receive none of the benefits:
"[A] State's decision to 22 arbitrarily switch back and forth between methodologies in a way 23 which required investors to bear the risk of bad investments at 24 some times while denying them the benefit of good investments at f
111/ 320 U.S. at 603.
F i
89 1
others would raise serious constitutional questions." 112/
2 Denial of full stranded cost recovery would produce precisely i
3 this objectionable result.
Utilities would be forced to bear the
'4 burden associated with investments that have proven to be 5
uneconomic, although they have never been able to benefit with 6
increased profits from investments that proved to be very 7
successful.
i 8
Nor have decisions of this Commission fairly 9
compensated PNM, or any other utility, for the risks of a radical W
10 change in industry structure.
The New Mexico Supreme Court has 11 recently recognized that the returns allowed in utility rate 12 cases are lower than reasonable returns for otherwise similarly 9
situated competitive businesses. 118/
Even the comparable 14 earnings standard, if applied using returns available to 15 unregulated companies -- which it has not been -- is an 16 inappropriate basis for compensating equity investors for the 17 risk of losing the great part of their investment to unregulated 18 competition in an industry with, as Senator Johnston has noted, 19 more than twice the capital investment per dollar of sales of the 20 next most capital intensive industry. 112/
Debt and equity 21 capital to support the investment in assets subject to the 112/ Duauesne Licht Co. v.
Barasch, 488 U.S.
299, 315 (1989).
118/ Attorney General v.
New Mexico State Corocration Commission, 1996 WL 781168, 35 SBB 13, 14 (1/18/96).
119/ 142 Cong. Rec. S378-79 (daily ed. Jan. 25, 1996) (statement of Sen. Johnston).
90 regulatory compact was attracted, not conscripted.
The risk of 2
loss of billions of dollars in capit'l investment simply was not a
3 part of the compensation for risk in electric utility ratemaking, 4
and imposing those capital costs on debt and equity investors 5
would cause disruption in capital markets and would also thwart 6
societal welfare tests, rather than permit the opportunity for 7
the benefits of competition. 120/
8 The opportunity for full stranded cost recovery is' 9
required by New Mexico law, as well.
Article II, Sections 18 and 10 20 of the New Mexico Constitution 121/ provide due process and 11 just compensation protections similar to those accorded by the 12 fifth and fourteenth amendments to the U.S. Constitution.
In n
determining whether regulators have acted in a confiscatory 14 fashion, the New Mexico Supreme Court has long since adopted the 15 Hope Gas "end result" test. 122/
The end result of failure to 16 permit utilities the opportunity for full stranded cost recovery 17 would be to deny recovery of costs resulting from a fundamental 18 change in regulatory approach.
Given the magnitude of the costs 19 at issue, this clearly would be confiscatory.
Furthermore, by 122/ As Senator Johnston also noted, Moody's Investors Service has estimated that 87 of the nation's largest investor-owned utilities could lose $135 billion in stranded investment in the next decade, a figure which is greater than 80% of their combined total equity.
142 Cong. Rec. S379 (daily ed. Jan.
25, 1996) (statement of Sen. Johnston).
121/ N.M.
Const. art. II, SS 18, 20.
122/ See State v.
Mountain States Tel, & Tel Co.,
54 N.M.
- 315, 335-37 (1950).
91 i
statute, the Commission is obligated to balance the interests of 2
ratepayers and shareholders. 121/
As the New Mexico Supreme 3
Court has recognized, it is appropriate for the Commission to 4
deny ratepayers additional savings if the savings come from 5
drastically increased exposure for shareholders. 121/
6 The CPUC's restructuring order provides for 100 percent 7
recovery of stranded costs; 121/ this is the position espoused by 8
Senator Johnston in his retail wheeling bill, and has received j
9 support from Congressman Schaefer as well.
Regardless of how 10 this issue is resolved, however, it is important that the 11 resolution be uniform, so that competition is not harmed by 12 varying states' treatment of stranded costs.
In PNM's view, the 9
best resolution would be for Congress to set forth standards for 14 stranded cost recovery providing for full recovery, or give the 15 authority to establish such standards to FERC, but to permit the 16 states to implement stranded cost recovery through some form of 17 universal, non-bypassable wires charge.
18 19 V.
CONCLUSION 20 The electric utility industry is vital to New Mexico 21 and the United States as a whole.
If competition and customer 22 choice are to be introduced into this industry, it is critical 121/ N.M.
Stat. Ann. 1978 5 62-3-1 (Repl. Pamp. 1993).
121/ New Mexico Indus. Enercy Consumers v. New Mexico Pub. Serv.
Comm'n, 104 N.M.
565, 571 (1986).
325/ CPUC Order, at 110.
92 that the transition to a restructured environment is handled 2
comprehensively and carefully -- a lengthy period of uncertainty 3
and instability would be disastrcus.
Moreover, to avoid 4
litigation over jurisdictional issues that would cause 5
uncertainty and delay, it is crucial that federal and state j
6 regulators work together to ensure a smooth transition.
1 i
7 Cooperative federalism is consistent with the request by ELCON i
l 8
for federal legislation and, moreover, Congressional action could 9
address the NMPUC's atguments that FERC currently has no 10 jurisdiction to compel open access at the wholesale level.
11 PNM appreciates the Commission's concern that the I
12 interests of New Mexico not be disadvantaged by efforts in other 11 jurisdictions to restructure the electric energy marketplace.
14 PNM looks forward to working with the Commission and all j
i l
15 interests to ensure that the New Mexico electric utility industry i
i 16 is restructured for the benefit of the people of New Mexico.
i
}
l 1
1 i
d l
BEFORE THE NEW MEXICO PUBLIC UTILITY COMMISSION
~
IN THE MATTER OF THE INVESTIGATION
)
OF RESTRUCTURING OF REGULATION OF
)
CASE NO. 2681 THE ELECTRIC INDUSTRY IN NEW MEXICO
)
)
J l
CERTIFICATE OF SERVICE i
l 1 HEREBY CERTIFY that true and correct copies of Public Service Company of New Mexico's Comments on the New Mexico Public Utility Commissions Notice of Inquiry on the investigation of Restructuring of Regulation of the Electric industry in i
New Mexico, were mailed First Class, postage prepaid or hand delivered to each of i
the following individuals on February 15,1996:
i Mark A. R. Chalfant, Esq.
Jim C. Herron Senior Attorney Farmer's Electric Cooperative, Inc.
LAW Fund Energy Project Post Office Box 550 2260 Baseline Road, Suite 200 Clovis, NM 88102-0550 Boulder, CO 80302 i
John P. Wheeler Angela Nicolette Romero Central NM Electric Cooperative, Inc.
Energy, Minerals and Natural Post Cli;r.e Box 157 Resources Dept.
Mountainair, NM 87036 2040 South Pacheco Street Santa Fe, NM 87505 Michael D. Fletcher Howard Price Columbus Electric Cooperative, Inc.
Central Valley Electric Cooperative, Inc.
Post Office Box 631 Post Office Box 230 Deming, NM 88031 Artesia, NM 88211-0230 j
i
l Fred A. Lackey Randy E. Lovato Continental Divide Electric Plains Electric Generation and Cooperativa, Inc.
Transmission Cooperative, Inc.
Post Office Box 1087 Post Office Box 6551 Grants, NM B7020 Albuquerque, NM 87197 Levi A. Sanchez Forrest D. McDowell, Jr.
Jemez Mountains Electric Sierra Electric Cooperative, Inc.
Cooperative, Inc.
Post Office Box W Post Office Box 128 Elephant Butte, NM 87935 Espanola, NM 87532 Luis A. Reyes Ann Garcia Kit Carson Electric Cooperative, Inc.
Southwestern Electric Cooperative, Inc.
Post Office Box 587 Post Office Box 369 Taos, NM 87571 Clayton, NM 88415 Ernesto A. Gonzales Michael A. Dreyspring Mora-San Miguel Electric Lea County Electric Cooperative, Inc.
Cooperative, Inc.
Post Office Drawer 1477 Post Office Box 240 Lovington, NM 88260 Mora, NM 87732 Emery Maez William F. Mershon Northern Rio Arriba Electric Otero County Electric Cooperative, Inc.
Cooperative, Inc.
l Post Office Box 227 Post Office Box 217 Clouderoft, NM 88317 Chama, NM 87520 Mark A. Reedy Janet Johnston Plains Electric Generation and Plains Electric Generation and Transmission Cooperative, Inc.
Transmission Cooperative, Inc.
Post Office Box 6551 Post Office Box 6551 Albuquerque, NM 87197 Albuquerque, NM 87197 2
s i
J i
l i
David W. Burlingame Fred O'Cheskey Plains Electric Generation and Post Office Box 3988 Transmission Cooperative, Inc.
Albuquerque, NM 87190-3988 i
Post Office Box 6551 i
j Albuquerque, NM 87197 i
i j
Jerry W. Partin James P. Spiers I
Roosevelt County Electric Coop., Inc.
The JP Spiers Company Post Office Box 389 333519th Street i
Portales, NM 88130 Boulder, CO 80304 i
l Lupe Vega Jeannette Wilkins Socorro Electric Cooperative, Inc.
6201 Uptown Blvd., N.E., Suite 201 Post Office Box H Albuquerque, NM 87110 Socorro, NM 87801 1
1 l
David Spradlin Hunter Chiles
{
Springer Electric Cooperative, Inc.
3 Calle Cobre Post Office Box 698 Placitas, NM 87043 -
f Springer, NM 87747 i
Robert Castillo Thomas L. Newsom NM Rual Electric Cooperative Assistant Vice-President Association, Inc.
El Paso Electric Company 614 Don Gaspar Avenue 303 N. Oregon Street Santa Fe, NM 87501 El Paso, TX 79901 i
I Charles F. Noble Honorable Michael Sanchez l
Assistant Attorney General c/o P.J. Turner Post Office Drawer 1508 NM Legislative Council Service i
Santa Fe, NM 87504-1508 311 State Capitol Building j
banta Fe, NM 87503 Gerald Diller l-Vice President of Rates & Regulation Jeffrey L. Fornaciari, Esq.
Southwestern Public Service Company riinkle, Cox, Eaton, Coffield i
i Post Office Box 1261
& Hensley, P.L.L.C., Ltd Co.
}
Amarillo, TX 79170 Post Office Box 2068 Santa Fe, NM 87504-2068
{
3 1
i, we.,
John McKean Gediminas Cibas, Policy An.ayst
]'i INTEL Water & Waste Managment Division i
4100 Sara Road NM Environmen%, Department Albuquerque, NM ~ 87124 Post Office Ba 26110 Santa Fe, NM 87502 Helen Whitesides Larry P. Gunderson, Director - Pricing 4059 Dietz Farm Circle, N.W.
Texas-New Mexico Power Company Albuquerque, NM 87107 4100 International Plaza I
Post Office Box 2943 i
Fort Worth, TX 76113 Nelson Gavay NM Vecinos United 4
l 140 Washington S.E.
Sarah D. Smith, Esq.
Albuquerque, NM 87108 Public Service Company of New Mexico Alvarado Square - 0806 Albuquerque, NM 87158 Barbara Fern Reedy Corporation Post Office 3209 Kevin Elkins, Esq.
a Albuquerque, NM 87910-3209 County Attorney Dona Ana County 180 W. Amador Lois Sury Las Cruces, NM 88001 2172 Candelero Street Santa Fe, NM 87505 Peter Glaser, Esq.
Doherty, Rumble & Butler David S. Cohen, Esq.
1401 New York Ave., NW, Suite 1100 Cohen & Cohen, P.A.
Washington, DC 20005 121 Sandoval Street, Suite 300 Santa Fe, NM 87501 D. Christopher Ortega, Utilities Mgr.
Dept. of Public Utilities incorporated Phelps Dodge Corporation County of Los Alamos c/o Lewis O. Campbell, Esq.
Post Office Drawer 1030 Post Office Box 30605 Los Alamos, NM 87544-1030 Albuquerque, NM 87190-0605 4
t Donald M. Salazar, Esq.
Michael Newell, Esq.
Rubin, Katz, Salazar, Alley & Rouse Heidel, Samberson, Newell & Cox 123 East Marcy, Suite 200 Post Office Drawer 1599 Post Office Drawer 250 Lovington, NM 88260 Santa Fe, NM - 87504-0250 Daniel A. Najjar, Esq.
Roger D. Eklund Virtue & Najjar, P.C.
Public Service Company of New Mexico 119 E. Marcy, Suite 100 Alvarado Square - 0808 Santa Fe, NM 87501 Albuquerque, NM 87158 i'
Don Moseley Steven A. Gabrial, Lt Col, USAF BHP Minerals David D. Jividen, Major, USAF 300 W. Arrington, #200 Utility Litigation Team Farmington, NM 87401 General Litigation Division 139 Barnes Drive, Suite 1 Tyndall AFB, FL 32403-5319 Steven L. Joseph 3101 Old Pecks Trail, #731 Santa Fe, NM 87505 Richard B. Cole, Esq.
Keleher & McLeod, P.A.
Post Office Drawer AA Ray Cainski, P.E.
Albuquerque, NM 87103 Cainski and Associates 328 Paintbrush, N.E.
Albuquerque, NM 87122-1415 Richard N. Carpenter, Esq.
Carpenter, Comeau; Maldegen, Nixon & Templeman Honorable Tom Wray Post Office Box 669 New Mexico State Senator Santa Fe, NM 87504-0669 State Capitol Building Santa Fe, NM B7503 Thomas W. Olson, Esq.
Montgomery & Andrews, P.A.
Sarah D. Sawyer Post Office Box 2307 E>racewell & Patterson Santa Fe, NM 87504-2307 2000 K Street, N.W.
Washington, DC 20006-1872 i
Steven Michel, Esq.
368 Hillside Avenue Santa Fel NM B7501
)
5
Larry Schuster Matt Medura University of New Mexico Energy Strategies, Inc.
'~-
Ford Utilities Center 39 W. Market St., Suite 200 Albuquerque, NM 87131-3520 Salt Lake City, UT 84101 Jimmie W. Glenn, President Bradford C. Berge, Esq.
New Mexico Retail Association Campbell, Carr & Berge, P.A.
2403 San Mateo Blvd. N.E., Suite P6 Post Office Box 2208 Albuquerque, NM 87110 Santa Fe, NM 87504-2208 Nann Houliston, Esq.
Richard S. Shapiro City of Albuquerque Enron Capital & Trade Resources Legal Department 1400 Smith Street Post Office Box 1293 Houston, TX 77002 Albuquerque, NM 87103 and Hand Deliver to:
Bill R. Garcia Executive Director New Mexico Public Utility Commission 224 E. Palace Avenue Santa Fe, NM 87501-2013 By:
Lt
)
N Rogr D. Eklund i
Public Service Company of New Mexico Alvarado Square - 0808 Albuquerque, NM 87158 Telephone: (505) 241-2808 FAX: (505) 241-2386 S :/wp60/Ha nna /E klund/2681/noi.co s 6
.