N.M. Attorney Gen. v. N.M. Pub. Regulation Comm'n

Decision Date28 September 2015
Docket NumberNo. S–1–SC–34768.,S–1–SC–34768.
Citation359 P.3d 133,2015 NMSC 032
PartiesNEW MEXICO ATTORNEY GENERAL, Appellant, v. NEW MEXICO PUBLIC REGULATION COMMISSION, Appellee, and Southwestern Public Service Company, Occidental Permian Ltd., and Coalition for Clean Affordable Energy, Intervenors–Appellees.
CourtNew Mexico Supreme Court

359 P.3d 133
2015 NMSC 032

NEW MEXICO ATTORNEY GENERAL, Appellant
v.
NEW MEXICO PUBLIC REGULATION COMMISSION, Appellee
and
Southwestern Public Service Company, Occidental Permian Ltd., and Coalition for Clean Affordable Energy, Intervenors–Appellees.

No. S–1–SC–34768.

Supreme Court of New Mexico.

Sept. 28, 2015.


359 P.3d 134

Hector H. Balderas, Attorney General, P. Cholla Khoury, Assistant Attorney General, Santa Fe, NM, for Appellant.

New Mexico Public Regulation Commission, Margaret Caffey–Moquin, Santa Fe, NM, for Appellee.

Hinkle Shanor, LLP, Jeffrey L. Fornaciari, Dana S. Hardy, Santa Fe, NM, Xcel Energy Services, Inc., Stephen Fogel, Austin, TX, for Intervenor Southwestern Public Service Company.

Gallagher & Kennedy, P.A., Anthony J. Trujillo, Germaine R. Chappelle, Santa Fe, NM, Thompson & Knight, LLP, Phillip G. Oldham, Austin, TX, for Intervenor Occidental Permian, Ltd.

Charles F. Noble, Santa Fe, NM, for Intervenor Coalition for Clean Affordable Energy.

Cuddy & McCarthy, LLP, Rebecca Dempsey, Santa Fe, NM, PNM Resources, Inc., Benjamin Phillips, Albuquerque, NM, for Amicus Curiae Public Service Company of New Mexico.

OPINION

CHÁVEZ, Justice.

{1} The Public Regulation Commission (PRC) granted Southwestern Public Service Company's (SPS) application to (1) include a prepaid pension asset in its rate base in order for SPS to earn a return on this asset, and (2) obtain a renewable energy cost rider to recover approximately $22 million of renewable energy procurement costs from those customers who do not have a legislatively imposed limit on their renewable energy costs (non-capped customers). The Attorney

359 P.3d 135

General appeals the PRC's final order granting SPS's application, arguing that the approved rates are unjust and unreasonable because the inclusion of the entire prepaid asset in the rate base is not supported by substantial evidence, and the PRC acted contrary to law in allowing SPS to recover the aforementioned renewable energy costs from non-capped customers. We affirm the PRC because (1) SPS is entitled to earn a reasonable rate of return on the investor-funded prepaid pension asset, and (2) SPS may recover its renewable energy costs in excess of the large customer cap from non-capped customers because such a recovery mechanism is the only viable method of cost recovery that is consistent with the purposes of the Renewable Energy Act, NMSA 1978, §§ 62–16–1 to –10 (2004, as amended through 2011).

I. THE INCLUSION OF SPS'S PREPAID PENSION ASSET IN THE RATE BASE

{2} SPS applied to the PRC to include a prepaid pension asset in its rate base to allow its shareholders, who funded the asset, to receive a corresponding return on their investment. By including this prepaid pension asset in the rate base, the asset is treated as a capital investment, allowing SPS to recover the asset as an expense, thereby increasing SPS's revenue requirement. See Joseph P. Tomain, Symposium Article, Steel in the Ground”: Greening the Grid with the iUtility, 39 Envtl. L. 931, 945–46 (2009) (providing and discussing the rate making formula, which sets the amount of money utilities may receive for their investments and expenses). Importantly, inclusion of an investment asset in the rate base does not enable investors to recover the value of their investment, but instead only allows investors to earn a return on the asset. See id. (noting that utilities generally recover the value of an investment by treating the depreciation of the asset as an operating expense).

{3} The parties agree that a prepaid pension asset is the amount by which investor contributions to a pension trust and earnings on these contributions exceed pension expenses. S. Co. Servs., Inc., 122 FERC ¶ 61,218, at *62235, 2008 WL 630079, slip copy at 5 (F.E.R.C.2008) (order on tariff filing), order clarified by 128 FERC ¶ 61,276, 2009 WL 3043950 (slip copy) (F.E.R.C. 2009 ); In re Delmarva Power & Light Co., 2014 WL 3964914, slip copy at 18, 315 P.U.R.4th 10 (Del.P.S.C.2014) (“A prepaid pension asset occurs when the accumulated contributions and growth in the pension plan exceed the accumulated expenses associated with the pension obligations.”). For example, SPS's expert stated that if the annual pension contribution over a five-year period is $100 and the annual pension expense over the same period is only $90, at the end of the five-year period, the prepaid pension asset would be $50 ($100 x 5 – $90 x 5), plus any return on the $50 prepaid pension asset. “Conversely, when [accrued expenses] exceed[ ] contributions to [a] fund, a prepaid pension liability accrues.” See In re Sw. Pub. Serv. Co., 2008 WL 4226018 n. 256, slip copy at 114 (NMPRC) (final order partially adopting recommended decision), order clarifying final order sub nom. 2008 WL 9888273 (slip copy) (NMPRC 2008). The SPS expert also stated that the prepaid pension asset is an artifact of timing; over a long period, pension contributions and pension expenses may even out, but over short and intermediate periods there will surely be differences, which are recorded as either prepaid pension assets or pension liabilities.

{4} SPS's expert testified that pension contributions and expenses differ because the federal Employee Retirement Income Security Act of 1974, 29 U.S.C. §§ 1001 –1461 (2011), and the Internal Revenue Code, 26 U.S.C. §§ 1 –59 (2012), dictate how much the utility must contribute to its employee pension program, whereas the Financial Accounting Standards Board promulgates codified accounting standards1 that govern how pension expenses are determined. The expert continued by testifying that as a result of these differing federal and industry standards, pension contribution and expense calculations utilize different assumptions, attribution methods, and periods of time over

359 P.3d 136

which the costs are required to be recognized. SPS's expert stated that these dissimilarities often result in differing annual contribution and expense amounts. When mandated contributions and income earned on the contributions exceed expenses, a prepaid pension asset accrues. See S. Co. Servs., Inc., 122 FERC ¶ 61,218, at *62235, 2008 WL 630079, slip copy at 5; see also In re Delmarva Power & Light Co., 2014 WL 3964914, slip copy at 18.

{5} The expert witness also testified that utilities cannot legally withdraw any funds from pension trusts except to pay pension benefits and expenses. See S. Co. Servs., Inc., 122 FERC ¶ 61,218, at *62235, 2008 WL 630079, slip copy at 5. However, SPS customers benefit from a prepaid pension asset because the earnings on this asset are deemed to be income for SPS, which reduces the amount of revenue it must collect from its customers. See Ind. Office of Util. Consumer Counselor v. Ind. Mich. Power Co., 7 N.E.3d 1025, 2014 WL 934350, at *12 (Ind.Ct.App.2014) (memorandum decision) (non-precedential). The following hypothetical offered by SPS's testifying expert illustrates the indirect benefit SPS customers receive.

[S]uppose that in a given year the utility had a revenue requirement of $300, and that it expected to earn a 6% return on the pension fund. The $3.00 return on [a hypothetical] $50 prepaid pension asset (0.06 x $50) ... would be credited against the revenue requirement, so that the utility could only collect $297 from its customers through [the] rates. Thus, the revenue requirement is reduced by $3.00 as a result of the prepaid pension asset.

SPS customers therefore would benefit from rate reductions generated by the prepaid pension asset, but SPS would not earn a return on the prepaid pension asset if the asset is not included in SPS's rate base.

{6} In this case, the New Mexico jurisdictional share2 of SPS's prepaid pension asset is approximately $36.9 million. According to SPS, this asset resulted in $1.7 million in earnings that effectively reduced SPS's pension expense by $1.7 million, which reduced SPS's revenue requirement by the same amount. SPS sought “to include the net amount of its prepaid pension asset of approximately $22 million” in the rate base to earn a return on its $22 million (the $36.9 million asset minus a $14.9 million tax deferred asset).

{7} In a recommended decision, the PRC hearing examiner concluded that because the prepaid pension asset reduced the pension expense by $1.7 million, that $1.7 million should be included in the rate base for recovery. The PRC hearing examiner did not recommend that the $22 million net prepaid pension asset amount be included in the rate base. SPS disagreed with this recommendation, contending that the examiner's proposal would enable “SPS [to] earn a return only on the amount of the reduction in the cost of service rather than on the amount of the asset that resulted in the reduction.”

{8} The PRC also disagreed with the hearing examiner. In its final order, the PRC authorized the inclusion of the net amount of the prepaid asset in SPS's rate base because doing so “recognizes that ratepayers benefit from the prepaid pension asset and that the utility should earn a return on the prepaid pension asset in order for the utility to recover its full cost of service.” The Attorney General appeals, arguing that substantial evidence does not support the...

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