Opinion ID: 891654
Heading Depth: 5
Heading Rank: 2

Heading: Whether the Emergency FPPCAC is Supported by Substantial Evidence

Text: {84} Lastly, ABCWUA and NMIEC claim that the evidence was insufficient to establish that PNM's fuel and purchased power costs periodically fluctuate and cannot be precisely determined in a rate case. In support of their claim, they point to evidence in the record indicating that (1) PNM had advance knowledge and/or the ability to predict future fuel and purchased power costs, (2) PNM's coal and nuclear fuel costs are the subject of long-term contracts and relatively stable, and (3) only a tiny portion of PNM's fuel costs are volatile and that [PNM's] total annual fuel cost could be reasonably estimated. {85} The following additional evidence, which was adduced in the underlying rate case and of which the PRC took administrative notice, is relevant to this claim. Hugh W. Smith, PNM's Senior Vice President of Energy Resources, offered direct testimony with respect to PNM's need for a FPPCAC. Smith explained that PNM has operated without a FPPCAC since 1994. In recent years, however, prices for all fuels  coal, nuclear and natural gas  have increased substantially and become more volatile. Increased volatility means that it is increasingly difficult to predict the future costs of fuel and purchased power for the purpose of establishing an appropriate fuel cost level in rates, one that will be reflective of the period when the approved rates will be in effect. A FPPCAC is the most effective way to match fuel costs with fuel revenues so that customers pay only for the actual fuel and purchased power costs incurred by PNM. In short, the FPPCAC eliminates the difficult and controversial task of predicting the level of these costs years into the future. Equally difficult to predict for rate setting purposes is the amount of off-system sales that will be generated and credited to customers during the period that rates are in effect. The availability of such sales and the level of margins derived from them depends upon future market prices, plant availability, and customers needs, which can vary significantly from year to year. The use of a FPPCAC, through which off-system sales credits flow, assures that customers are credited with the appropriate level of off-system sales during the period that rates are in effect, no more and no less. Finally, as discussed by Dr. Samuel Hadaway in his testimony, the financial markets perceive that any utility without a FPPCAC operates with greater risk compared to a utility that has a FPPCAC. Credit rating agencies and investors take that risk factor into account when determining a utility's credit rating and its cost of capital. Thus, a utility that does not have a FPPCAC is potentially at a competitive disadvantage in the financial markets. {86} Jeffrey E. Sterba, Chairman, President and Chief Executive Officer of PNM Resources, Inc. and its principal subsidiary, PNM, also offered direct testimony with respect to PNM's need for a FPPCAC. Sterba explained that Gas will be an increasing percent of our fuel base. Purchased power agreements will likely have variable fuel costs based on natural gas prices. Replacement power prices are high and volatile due to national market prices for gas and coal. Gas price volatility is evidenced by 50% to 60% price swings. The current fixed base rate method of fuel cost recovery for PNM is based on historical prices and limited estimates of future prices. If the estimate is too low, the company cannot recover costs. PNM was unable to recover about $50 million in increased fuel and purchased power costs over the past two years due to the lack of a fuel clause. This is one of the factors adversely affecting our credit standing. Rating agencies and investors view the impact of replacement power expense on cash flows in the absence of a fuel clause as significant risk. Dr. Hadaway discusses this in further detail. The result of this perceived risk is a higher cost of capital that is ultimately passed on to customers. Under the current method, without a fuel clause, the only way the company's owners can be protected from high volatility is to project high prices in the base rate calculations and have it approved by the [PRC]. If the estimate is too high, however, the price risk shifts to the customers and they pay more than actual costs. The fixed method also fails to provide accurate price signals, which are important to encourage economic efficiency. Either way the fuel and purchase power prices move, higher or lower, someone absorbs the risk when a fixed base rate method is used. An adjustment clause fairly balances the risk and instead tracks costs accurately for customers and [PNM]. In sum, the existing regulatory model is no longer viable for customers of PNM because of the changes in our supply portfolio, market prices, the energy environment and the need to encourage DSM and energy efficiency. {87} E. James Ferland, who succeeded Smith as Senior Vice President of Energy Resources for PNM, offered rebuttal testimony disputing that PNM's nuclear and coal costs are usually obtained through long-term contracts so that future fuel prices are fairly predictable. Ferland testified that [w]hile it is true that nuclear fuel and coal are generally obtained through longer-term contracts, these contracts are not fixed-price contracts. Longer-term contracts are used to provide some security for fuel availability. For uranium, purchases for Palo Verde are layered in over time, from a diverse set of suppliers, to avoid the delivery and price risk of buying fuel all from one supplier. Longer-term contracts and PNM's uranium purchasing strategy ensure a reliable fuel supply, but they do not prevent nuclear costs from fluctuating. Likewise, PNM's coal supply contract is not a fixed price contract. San Juan obtains all its coal from a single source. There are two main cost components for PNM's San Juan coal contract: the capital investment element and the operating cost reimbursement, which is over 70 percent of the total coal cost. Operating costs are affected by labor costs, prices for construction materials like steel and concrete and unforeseen events like the changing coal mine safety standards. These operating costs are passed directly through to PNM. The long-term contract does not prevent the cost of coal for San Juan from fluctuating. Please see PNM Exhibit EJF-1R, which shows costs on a dollar per megawatthour basis, to remove fluctuations due to changes in load. As can be seen, coal costs, even on a dollar per megawatthour basis, fluctuate month-to-month and year-to-year, and cannot be precisely determined in a rate case. {88} Ferland also offered rebuttal testimony disputing the relative[] stabil[ity] of PNM's nuclear costs. Ferland explained that the spot market price of uranium oxide (U3O8) [i]n the few years prior to 2004, was relatively stable, with prices between approximately $8 and $17 per pound. However, [s]ince 2004, there have been swift, dramatic spikes in the price of uranium, with the market seeing a tenfold price increase over that time, before making a quick retreat. With the rising level of concern about fossil fuel emissions, there is a growing level of consensus that the nuclear power industry in the U.S. will soon begin to expand, leading to increased demand for uranium. The market is not sure that supply will meet demand. As a result, we have clearly entered a new era of fluctuating nuclear fuel costs. {89} We conclude that the foregoing evidence amply supports the PRC's findings that PNM's fuel and purchased power costs periodically fluctuate and cannot be precisely determined in a rate case. Although conflicting evidence existed, the issue on appeal is not whether there was sufficient evidence to support a contrary result but, rather, whether the evidence supports the findings made by the PRC. See DeWitt, 2009-NMSC-032, ¶ 25, 146 N.M. 453, 212 P.3d 341. Indeed, [t]he PRC's order is rejected only if conflicting evidence renders incredible the evidence in support of the decision. Qwest Corp. v. N.M. Pub. Regulation Comm'n, 2006-NMSC-042, ¶ 38, 140 N.M. 440, 143 P.3d 478 (internal quotation marks and citation omitted). Because the conflicting evidence fails to render incredible the evidence that supports the PRC's decision, we affirm the Final Order of the PRC.