New Mexico Indus. Energy Consumers v. Prc

• Decision Date: 28 August 2007
• Docket Number: No. 29,633.,29,633.
• Citation: 168 P.3d 105,2007 NMSC 053
• Parties: NEW MEXICO INDUSTRIAL ENERGY CONSUMERS, Appellant, v. NEW MEXICO PUBLIC REGULATION COMMISSION, Appellee, and El Paso Electric Company, Real Party in Interest.
• Court: New Mexico Supreme Court

168 P.3d 105

2007 NMSC 053

NEW MEXICO INDUSTRIAL ENERGY CONSUMERS, Appellant, v. NEW MEXICO PUBLIC REGULATION COMMISSION, Appellee, and El Paso Electric Company, Real Party in Interest.

No. 29,633.

Supreme Court of New Mexico.

August 28, 2007.

Steven S. Michel, Peter Jude Gould, Santa Fe, NM, for Appellant.

Carol Smith Rising, Santa Fe, NM, for Appellee.

Law Office of Randall W. Childress, P.C., Randall W. Childress, Stacey J. Goodwin, Santa Fe, NM, for Real Party in Interest.

OPINION

SERNA, Justice.

{1} Pursuant to the Renewable Energy Act ("REA"), NMSA 1978, §§ 62-16-1 to-10 (2004, prior to 2007 amendment), El Paso Electric Company ("EPE") purchased Renewable Energy Certificates ("RECs") representing renewable energy generated by Public Service Company of New Mexico ("PNM"); however, EPE did not purchase the actual renewable energy represented by the RECs. Pursuant to the REA, Section 62-16-6(A), EPE sought recovery of the REC costs through its automatic adjustment clause, see NMSA 1978, § 62-8-7(E) (2003). The Public Regulation Commission ("Commission") approved this form of cost recovery in a Final Order on Recommended Decision ("Order"). NMPRC Case No. 05-00231-UT. New Mexico Industrial Energy Consumers ("NMIEC") appealed the Order directly to this Court. See NMSA 1978, § 62-11-1 (1993).

{2} For the following reasons, we hold that EPE's REC costs are not eligible for automatic adjustment clause recovery. Accordingly, the Commission's Order is unlawful and hereby vacated. We remand to the Commission for proceedings in accordance with this Opinion.

I. RENEWABLE ENERGY ACT

{3} The Renewable Energy Act entered into effect on May 19, 2004. Section 62-16-1 note. Pursuant to Section 62-16-7, the Commission adopted Rule 572, implementing the REA. See 17.9.572 NMAC. The REA requires public utilities¹ to include renewable energy as part of their electric energy supply portfolios. Section 62-16-4(A). Beginning January 1, 2006, renewable energy must comprise "no less than five percent of each public utility's total retail sales to New Mexico customers." Section 62-16-4(A)(1). This requirement is called the Renewable Portfolio Standard ("RPS"), and it increases by one percent each year until January 1, 2011, when it will reach ten percent of each public utility's annual retail sales in New Mexico. Section 62-16-4(A)(2).

{4} Utilities must establish their compliance with the Renewable Portfolio Standard by filing Renewable Energy Certificates with the Commission. Section 62-16-5(A) (directing the Commission to establish a system of RECs); 17.9.572.13 NMAC (stating that utilities must establish their annual compliance with the Renewable Portfolio Standard "through the filing of [R]enewable [E]nergy [C]ertificates with the [C]ommission"). Rule 572 defines a Renewable Energy Certificate as "a document evidencing that the enumerated renewable energy kilowatt-hours have been generated from a renewable energy generating facility." 17.9.572.7(E) NMAC. Each REC must have "a minimum value of one kilowatt-hour of renewable energy represented by the certificate for purposes of compliance with the [R]enewable [P]ortfolio [S]tandard." Section 62-16-5(A). RECs

may be traded, sold or otherwise transferred by their owner to any other party; provided that the transfers and use of the certificate by a public utility for compliance with the renewable energy portfolio standard shall require the electric energy represented by the certificate to be contracted for delivery in New Mexico.

Section 62-16-5(B)(1)(b). Rule 572 adds that "transfers and use of the [Renewable Energy] [C]ertificate by a public utility for compliance with the [R]enewable . . . [P]ortfolio [S]tandard do not require physical delivery of the electric energy represented by the certificate to a public utility." 17.9.572.13(B)(2) NMAC. Thus, compliance with the RPS provision of the REA can be established through RECs representing renewable energy the utility itself has generated; renewable energy the utility has purchased from another source; or renewable energy generated and contracted for delivery in New Mexico without the utility itself purchasing the energy. To ensure that compliance costs are reasonable, the REA requires that each year until 2012, and if necessary thereafter, public utilities file for the Commission's approval a report on their purchases of renewable energy during the prior calendar year as well as a procurement plan. Section 62-16-4(D)-(E).

{5} The REA authorizes public utilities to recover the reasonable costs of compliance with the REA "through the rate-making process." Section 62-16-6(A) states:

A public utility that procures or generates renewable energy shall recover, through the rate-making process, the reasonable costs of complying with the renewable portfolio standard. Costs that are consistent with commission approval of procurement plans or transitional procurement plans shall be deemed to be reasonable.

The REA does not define the "rate-making process."

{6} A related statute, the Public Utility Act ("PUA"), NMSA 1978, § 62-13-1 (1993), grants the Commission "general and exclusive power and jurisdiction to regulate and supervise every public utility in respect to its rates and service regulations." NMSA 1978, § 62-6-4(A) (2003). In order to change or increase rates, a utility normally must go through a notice, hearing, and approval process. Section 62-8-7(A)-(E). However, utilities can recover certain costs — "taxes or cost of fuel, gas or purchased power" — automatically through an automatic adjustment clause. Section 62-8-7(E). The Commission adopted Rule 550, 17.9.550 NMAC, regarding the implementation, oversight, and maintenance of automatic adjustment clauses, pursuant to Section 62-8-7(E).

II. FACTS AND PROCEDURAL BACKGROUND

{7} In 2004, El Paso Electric Company obtained Commission approval of its 2004 renewable energy transitional procurement plan ("2004 Plan"), pursuant to Section 62-16-4(D)-(E) and Rule 572. EPE sought to comply with the Renewable Portfolio Standard by purchasing Renewable Energy Certificates, without taking physical delivery of the associated energy, from Public Service Company of New Mexico. In its 2004 Plan, EPE proposed to recover the costs of complying with the REA through its automatic adjustment clause. See § 62-8-7(E). The Commission approved EPE's 2004 Plan; however, the Commission deferred the issue of the appropriate mechanism for cost recovery to this case. Final Order, NMPRC Case No. 04-00306-UT.

{8} On September 1, 2005, EPE filed its 2005 renewable energy procurement plan ("2005 Plan"), which contained the specific REC contract with PNM as well as the costs EPE sought to recover through the automatic adjustment clause. NMPRC Case No. 05-00355-UT. In the instant proceeding, EPE sought Commission approval, on a permanent basis, of the automatic adjustment clause as the mechanism for recovering all costs of the purchased RECs under its approved Plan. In support, EPE filed testimony of its witness Steven P. Busser, contending that automatic adjustment clause recovery is appropriate under the REA, the PUA, and Commission Rules 572 and 550, and is the most reasonable mechanism for recovery of REA compliance costs. According to Busser, automatic adjustment clause recovery (i) would allow EPE to recover costs on a per kilowatt-hour basis; (ii) would be the least costly recovery mechanism, resulting in the lowest costs to EPE customers; (iii) would most timely allow one hundred percent of net proceeds from the sale of any excess RECs to be credited back to customers (although EPE does not intend to purchase RECs in excess of its REA compliance requirements); and (iv) was authorized by EPE's Stipulation and Final Order in its last rate case. The Commission also filed testimony, which staff witness Charles W. Gunter, a Utility Economist for the Utility Division of the Commission, adopted, in support of EPE's proposed automatic adjustment clause recovery, concluding that it (i) is the most appropriate method of cost recovery; (ii) is authorized by the REA and PUA; and (iii) will result in the lowest cost to EPE customers. NMIEC, Western Water and Power Production Limited, the Coalition for Clean Affordable Energy, and New Mexico State University ("NMSU") filed motions to intervene in the proceeding.

{9} The Commission held a public hearing on October 26, 2005, at which EPE witness Busser and Commission witness Gunter testified in favor of automatic adjustment clause recovery of EPE's REC costs. NMIEC and NMSU cross-examined the witnesses to establish that RECs are not "purchased power" under the PUA, and thus their costs cannot be recovered automatically through the automatic adjustment clause.

{10} On December 8, 2005, the Commission issued a Final Order, which concluded that automatic adjustment clause recovery is the appropriate method for recovery of EPE's REC costs. In reaching its decision, the Commission first determined that automatic adjustment clauses are part of the "rate-making process," contemplated in Section 62-16-6(A), based on (i) a previous Commission determination that they are (NMPRC Case No. 04-00334-UT) and (ii) Commission Rule 572, which "expressly recognizes the [automatic adjustment clause] may be used as part of a utility's rates for renewable cost recovery." Next, the Commission explained that it has "wide latitude to determine that the cost of purchasing or acquiring RECs are purchased power costs" because the PUA "grants the Commission `latitude' and `discretion' to include costs closely related to the broad categories of purchased power." See § 62-8-7. The Commission noted that it has previously allowed automatic recovery of gas hedging costs, "which demonstrate[s] the breadth of the Commission's authority to determine which costs to include in the adjustment clauses." The Commission agreed with EPE that "[b]ecause RECs are a requirement of EPE's energy...