New Mexico's PUC goes down in flames.
This story has everything: politics, favoritism, a stock price crash, extortion (a long-ago crime by a certifiable nut), a utility rate case (I love'em), Ivy League economists (like moths to a flame), and finally, a last minute stay of execution, perhaps saving the utility from default on its revolving line of credit. Heck, even Enron's involved.
What's missing, however, is a clear understanding of who the good guys are.
The tale plays out in Santa Fe, capital city of the land of enchantment, where the state utility commission has long had a "thing" about Public Service Co. of New Mexico. In between bouts with Albuquerque or Las Cruces over electric franchise rights, PNM over the years has had to deal with regulator complaints of high rates - first on the electric side, stemming from failed diversification efforts, as I recall, and most recently on the gas side, when a strategy of buying short-term contracts in spot markets backfired when the weather went haywire.
Lately, the PUC has zeroed in on electric competition. In the past few months, in a series of cases that made news in financial circles, the commission has really put it to PNM, handing down orders the utility didn't want and seemingly dragging its heals on PNM requests. First, in August, the PUC imposed a pilot program for retail competition in Albuquerque, blind to PNM claims that the pilot was illegal without state legislation. Second, on Nov. 30, the PUC ordered a massive rate cut in a rate case that seemed to break all the rules. Third, on the same day, the PUC awarded a certificate of public convenience as a competing electric utility to Residential Electric Inc., an upstart electricity vendor, and granted REI's request to force PNM to open up its lines to REI for retail cream-skimming.
During all of this PNM had twice sought (unsuccessfully) to block the PUC moves in court. It finally succeeded however, when, on Dec. 15 and 16, it won stay orders from the state supreme court enjoining all three PUC orders - the pilot, the killer rate case, and REI's certificate.
And not a moment too soon. The rate case had sent PNM's stock reeling, falling from 191/2 at November's close to 171/2 on Tuesday, Dec. 1. The first round of PUC-ordered rate cuts was set to go on Dec. 28. PNM claimed the losses would upset its debt-equity ratio so badly as to end its credit line and force old debt to come due. But more than that, the PUC was racing its own internal clock. As of Jan. 1, the old three-seat Public Utility Commission would fade into the sunset, replaced by a new five-person Public Regulation Commission, formed of the merger of the PUC and the state Corporation Commission, which regulated telecommunications. The PUC aimed to settle as many accounts as it could before the clock could strike its demise. All the more to preempt any action by the state legislature, which was set to go to work on legislation to enact electric competition, and in fact was circulating circulated draft legislation in late December.
The PUC took absolutely outrageous positions in the PNM rate case. It outlawed all stranded cost recovery: "Because PNM has a legal duty to charge efficient prices, it is not entitled to avoidance of financial jeopardy as a matter of right." The rate case mechanics were frankly all fouled up. The PUC revalued PNM's generating plants at PUC-adjusted "market prices" (essentially long-run incremental cost), ignoring PNM's claim that no competitive exists. PNM recruited a stream of experts, including Lawrence Kolbe (The Brattle Group),and Paul Keglevic (Arthur Andersen) to testify that the PUC had violated all manner of accounting, legal, and ratemaking principles.
In the REI case, Consultant James Wilson joined Greg Sidak, both from the Law and Economics Consulting Group, Inc., to question the plan for competition. In his affidavit, Wilson saw the REI case as "seriously deficient" compared to retail access proposals in other jurisdictions. Wilson said REI lacked a policy framework or any approved, detailed, utility specific restructuring plans to coordinate with REI's market entry.
They're right, of course. REI tried to beef up its case. Michael Maloney (Clemson U.) testified for REI, as did J. Patrick Keene, rates and tariffs manager from Enron Energy Services, Inc.. Keene showed how to unbundle PNM services and design a distribution services tariff, with help from an Enron "white paper." Yet the legal analysis seemed dead set against REI and firmly on PNM's side.
Nevertheless, I find it difficult to fault the PUC for stirring the pot. No solution ever comes out of the same process that spawned the problem. The PUC may well have gotten its rate base scrambled in the rate case, and it may lack authority to mandate retail competition on its own, without legislation, but I say there's something noble about what it tried to do.
Many paths cross in the small world of New Mexico politics. Some say that the Republican Governor Gary Johnson saw the PUC simply as vehicle to press his own agenda, perhaps at the expense of the state legislature. Consider this exchange between PNM lawyer Patrick Ortiz and commissioner Beatriz Rivera (appointed by Johnson), in a deposition taken in May 1997:
ORTIZ: What we're asking here is don't put your values and belief aside, but let's lay down the weapons ¼
RIVERA: Speaking for myself as a commissioner, I don't see myself in any war with anyone. When our Governor appointed me, he said, 'I'd like for you to make sure that you lower rates and bring in competition.'
ORTIZ: This may be perceived by the legislature as an attempt to usurp their authority. You have never used the term 'usurp' ¼ but there have been public comments in the newspaper about the commission's authority to move forward regardless of what the legislature feels.
What about PUC chairman Wayne Shirley, another Johnson appointee? In the rate case, PNM had tried unsuccessfully to ask Shirley to remove himself, owing to Shirley's work ten years earlier as a lawyer representing the New Mexico Industrial Energy Consumers, an intervenor that sought market-based rate cuts from PNM. In fact, Shirley once practiced law with Lewis Campbell, the attorney who represented REI in its successful bid for a certificate of convenience.
But there's more. Twelve years ago, a federal judge handed down a three-year sentence to former utility consultant Bruce Poster for attempting to extort $120,000 from PNM in exchange for agreeing to stop testifying for the state Attorney General in rate cases against PNM. According to an article published in the Albuquerque Journal in on June 7, 1986, Poster had gone for advice to Shirley, who then worked in the Attorney General's office, and who reportedly advised Poster that he thought the extortion scheme was "immoral," but could not say for sure whether it was illegal.
New York lawyer Douglas Hawes ties up at least one of the loose ends. Writing in 1987 his textbook, Utility Holding Companies, Hawes notes that as the extortionist Poster was accosting PNM, he specifically requested that if PNM should ever pay the $120,000 shakedown fee, it should not charge the amount to ratepayers.
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