PNM Seeks to Reverse Recent Setbacks with Ambitious Rate Case Filing

In early 2023, the outlook for PNM (New Mexico’s largest electric utility) seemed to be exceptionally favorable. Per a change in the New Mexico constitution, PNM’s regulating body – the New Mexico Public Regulation Commission (PRC) – had just seen three new commissioners appointed by the governor after transitioning from an elected body, which had previously rejected PNM’s proposed $4.3B merger with Avangrid in a scathing decision. Better still, the newly appointed PRC commissioners had signaled openness to revisiting the merger decision – filing a joint request with PNM and Avangrid with the New Mexico Supreme Court to return the case to the PRC for reconsideration. Finally, PNM had a pending rate case – seeking $64MM in revenue increases based upon a 10.25% return on equity (ROE), before the same newly appointed Commission. However, the subsequent year would see a series of serious setbacks for PNM, and the utility is seeking to rebound from these with an ambitious and innovative rate case filing now pending before the PRC. In addition to the obvious relevance for PNM, this case may also provide clear insight into many aspects of New Mexico’s regulatory environment.

Court Delays Doom Avangrid Merger

On May 15, 2023, the New Mexico Supreme Court (NMSC) denied the joint motion from PNM, Avangrid, and the PRC seeking to remand the case back to the PRC for immediate reconsideration. While not necessarily fatal to the proposed merger, this decision indicated a major setback for two reasons. First, it meant that the case would continue to progress at the NMSC, with the PRC unable to consider until a final NMSC ruling is handed down. Second, it meant that even after the final NMSC decision, PNM and Avangrid would likely need to file an entirely new case for approval rather than giving the PRC the option of reconsidering the case that had already been litigated. In short, while not fatal, the decision did indicate that the merger would likely face further delays. This proved to be too much for Avangrid, with the company announcing on January 2, 2024, that it was terminating the proposed merger, citing “no clear timing on the resolution of the court review.” The merger, which was seemingly given new life due to the reformed PRC, was officially dead just months after the newly appointed commissioners had taken their seats.

2022 Rate Case Ends in Disappointment for PNM

On January 3, 2024, just one day after Avangrid announced it was terminating the proposed merger, the PRC issued a final decision in the PNM rate case filed in December 2022 (Docket 22-00270-UT).

The financial terms of this decision (summarized below) represented a major disappointment for PNM:

Source: FactSet, New Mexico Public Regulation Commission

The approved revenue increase of $15.3MM represents just ~24% of the $63.8MM requested in the initial application. Further, the approved ROE of 9.26% substantially trails both the national average ~9.7% ROE approved in electric rate cases in 2024 (YTD) and the 9.58% ROE authorized for PNM in its most recent previous rate case (2016). In large part, the anemic approved increase was due to several disallowances for investments deemed as imprudent, including $64MM in expenses related to the Four Corners coal plant and $39MM in leaseholder improvements to the Palo Verde nuclear plant. PNM has filed an appeal with the New Mexico Supreme Court (Docket S-1-SC-40332), challenging certain aspects of the final decision (including the approved capital structure). The case is currently pending before the court with no statutory timeline for resolution.

Unsurprisingly, the rapid-fire setbacks experienced in early January 2024 took a considerable toll on the share price of PNM’s parent company, PNM Resources (renamed TXNM Energy as of August 5, 2024), with the price falling as much as 16.5% in the subsequent weeks.

Source: FactSet

While TXNM’s share price has subsequently recovered most of the losses seen in early 2024, it has still significantly lagged the broader utility market (as represented by the XLU ETF) year to date.

Source: FactSet

PNM Files Updated and Restructured Rate Request

In mid-June 2024, less than six months after the final decision in the previous rate case, PNM returned to the PRC with a fresh general rate case filing (Docket 24-00089-UT) seeking a $92MM increase in base rates based upon a requested 10.45% ROE. While the extremely short window between the January-2024 decision and the filing of the new rate case would suggest that the underlying business dynamics which led the PRC to issue the unfavorable ruling just months ago are little changed, PNM’s updated case is structured quite differently – leaving some to reason that the outcome may be more positive for PNM.

Specifically, the updated filing includes:

• A Future Test Year: While PNM also utilized a future test year in its last rate case, the current filing uses a projected test year beginning July 1, 2025, more than a year from the filing date – potentially mitigating regulatory lag for anticipated system investments in the next two years.
• A Multiyear Rate Plan: In another first for NM rate cases in the last 12+ years, PNM proposes to phase in the $92MM increase over two years ($46MM in each year). While the PRC may or may not ultimately allow this structure, it does open the possibility of allowing an increase while also mitigating customer affordability concerns – at least to some extent.
• Migration of Energy Storage Project Costs to Collection Through the Fuel and Purchased Power Adjustment Rider: PNM proposes to migrate costs associated with third party energy storage agreements (ESAs), which are currently collected through base rates, to collection through the company’s Fuel and Purchased Power Adjustment Clause (FPPCAC). If allowed, this change could allow PNM to more closely align the timing of associated cost recovery with the actual project timing, potentially reducing regulatory lag and mitigating possible imputed debt issues. PNM indicates that ~$37MM of the proposed increase to base rates is attributable to this change.

Going Forward

Given the outcome of its rate case just months ago, PNM may face an uphill battle in its quest to implement a sizable revenue increase in the current regulatory environment. However, the restructured case also represents the company’s best hope for turning the page on a year to forget. The outcome may also shed important light on the New Mexico regulatory environment as a whole – gauging the PRC’s receptiveness to concepts like future test years spaced significantly from the filing date, multiyear rate plans to mitigate affordability concerns, and more efficient recovery of costs associated with increasing renewable integration. As such, developments in this docket merit close scrutiny for anyone with an interest in New Mexico investor-owned utilities.

This blog post is for informational purposes only. The information contained in this blog post is not legal, tax, or investment advice. FactSet does not endorse or recommend any investments and assumes no liability for any consequence relating directly or indirectly to any action or inaction taken based on the information contained in this article.