Commentary: What’s the problem?
As a regulated monopoly, El Paso Electric (EPE) operates on a cost plus basis. This means it receives reimbursement for all operating expenses plus a profit margin. For shareholders the return on equity is currently 9.48%[i] and is applied to all non-depreciated capital assets, including power plants still in service within the EPE system.[ii]
Because of this reimbursement formula, EPE pursues its corporate goal of increased profit by steadily maximizing capital assets, even if these expenditures are unnecessary or if alternatives less costly to ratepayers are readily available.
New power plants are the biggest capital expenditures a utility makes. Unchecked by regulators, EPE has been on a power plant construction spree over the past several years, having built one new natural gas unit (Rio Grande 9) in 2013, two new gas units (Montana 1 & 2) in 2015 and two more (Montana 3 & 4) in 2016. The construction of additional new plants is proposed.[iii]
In terms of benefit to EPE ratepayers, these new plants are largely unnecessary.
What is the impact of the construction of unnecessary power plants on local ratepayers?
The new plants cost approximately $95 million each to build.[iv] These capital costs plus debt service are borne by EPE ratepayers. If the utility’s current and proposed capital expenditures are approved, local residents will pay hundreds of millions of dollars in unnecessary costs over the next forty years.[v]
How could this be happening? Isn’t El Paso Electric required to get some kind of approval for new power plants?
The New Mexico Public Regulation Commission (PRC) has the responsibility of approving new power plants requested by the utilities. In practice, the overworked Commission and its staff have generally accepted utility justifications for new power plants with little scrutiny.
Ultimately, the current regulatory process depends on interventions, protests and complaints by independent parties, including industrial users, to challenge EPE assertions. Historically, these parties have intervened at the last stage of the process, the formal rate case. Little attention has been paid to controlling overall costs, but rather to dividing costs among different classes of ratepayers.
This inattention to overall cost has been a grave disservice to area ratepayers, and it has led to an unnecessary and unconscionable transfer of economic resources from local residents to EPE’s corporate stockholders.
EPE is a sophisticated, publicly traded corporation valued at nearly 2 billion dollars.[vi] It has enormous resources at its disposal and a shareholder expectation that corporate managers will maximize profits. This is what EPE is doing, relentlessly and without shame, in every position it takes throughout the regulatory process.
How does El Paso Electric justify building new generating capacity to the detriment of local ratepayers?
Utilities justify new capital investment by pointing to the need for sufficient capacity to serve ratepayers at times of peak demand. Unfortunately, given the incentives involved, EPE has consistently and deliberately chosen to address those capacity needs in the most expensive way possible – through the construction of new power plants – rather than utilizing a wide variety of strategies to lower peak capacity needs, or choosing other alternatives that are much less expensive for ratepayers.
What specific strategies has EPE used to justify unneeded capacity?
1. Once a power plant has been fully depreciated, it is in EPE’s corporate interest to remove it from the available capacity calculations so that it can build a new plant that can be included in the rate base. The “retirement” of the fully functional Rio Grande 6 plant so that a new non-depreciated plant can be justified is an example of the kind of activity that builds corporate profits while costing ratepayers millions of dollars.[vii] In addition to Rio Grande 6, EPE has plans to “retire” five additional plants between 2020 and 2024.[viii]
2. EPE bases its projected capacity needs on peak demand: one hour of every year (usually in the afternoon of the hottest day of the summer) when the demand for electricity is highest.[ix] This has meant that recently built EPE power plants are only needed a few hours a year for the benefit of local ratepayers,[x] but local ratepayers still bear the costs for plant construction and debt service.
Since the new power plants are only needed a few hours a year to meet peak demand, EPE uses the new plants to generate electricity for sales to utilities outside the EPE service area, at rates far below what is charged to EPE ratepayers.[xi] The out-of-system rates are so low that EPE may not always recover costs,[xii] but from a corporate standpoint that’s fine, because EPE can claim that these new plants are used more than a few hours per year, thus justifying their addition to the rate base. The increased size of the rate base in turn justifies increased overall profits. In essence, this is a strategy to deliberately over-invest in unneeded capacity, with local ratepayers supporting the enterprise by paying for plants that provide them little benefit.[xiii]
3. EPE uses the few hours of peak demand to justify building new power plants when there are a wide variety of available techniques to lower peak demand in the first place, eliminating the need for new power plants.[xiv] These techniques for lowering peak demand include:
• providing effective demand response and time-of-use rates that allow consumers to use less electricity at peak hours in exchange for more favorable rates
• prioritizing energy efficiency as a way of lowering both peak and overall demand
• encouraging the addition of distributed rooftop solar by homeowners and businesses so that peak power needs (which always occur during daylight hours in summer) are supplemented by solar power that is producing at high capacity during that same time.
These and similar techniques have proven highly effective for utilities throughout the country that have chosen (or been forced by regulators) to put ratepayer needs ahead of a strategy of using unchecked peak demand to justify unneeded capacity.[xv]
Since both peak and overall demand are lowered by solar panels installed by local homeowners and businesses, why does El Paso Electric do so little to encourage solar use by local residents?
The short answer is that EPE can’t profit from generating facilities it doesn’t own. Any capacity needs that are met by consumer investments can’t be used to justify new company investments that would increase the rate base, company profits, and ratepayer costs.
Distributed solar generation – and improvements in energy efficiency – ultimately lower peak and overall demand, eliminating the need to build more capacity. Given that the profit-calculation formula is based on non-depreciated assets, EPE has consistently opposed these capacity-lowering options. EPE’s corporate priority is to build profit through capital expenditures, not save money for local ratepayers.
Besides the enormous cost to ratepayers, are there any other long-term consequences of EPE’s strategy to over-invest in power plant generation capacity?
We are at a point in the history of energy generation that parallels where cell phone technology was a few years ago. The cost of renewable energy is plummeting. New storage technologies, which allow energy to be stored when there is an excess, for use when demand exceeds generation capacity, are being developed and brought into production daily. We have already reached the point where utility-scaled solar plants in the Southwest cost significantly less to own and operate than new fossil fuel plants of the type EPE is planning to build.[xvi] Projected fuel costs alone for fossil fuel plants are higher than total construction and lifetime operating costs for a comparable utility scale solar generating facility.[xvii]
Any new conventional fossil-fueled plants that EPE builds would still have to be paid for by local ratepayers. Ratepayers would be chained to uncompetitive facilities, still transferring payment to corporate stockholders, for the two-to-five-decade life of the higher cost plants. This may explain some of the utility’s haste in getting these plants built. But this is a recipe for continued impoverishment of our border region.
Fossil-fueled power plants add to air pollution with large quantities of green house gases.[xviii] And, significantly for our desert region, EPE’s gas fired power plants use large quantities of water.[xix]
An additional often-overlooked consequence occurs in the area of economic development. Investment in home and business solar installations, in energy efficiency, and in consumer demand-lowering technologies would create hundreds of good-paying local jobs,[xx] while investment in large generating plants creates almost no local jobs at all. This should be an important consideration for local leaders and residents.
So what should we be doing instead?
EPE points to their high dollar investments as a good thing.[xxi] As we have seen, much of this investment, especially in new generating capacity, is more important for establishing an inflated profit base than it is for delivering inexpensive reliable power to local residents. A ratepayer-favorable strategy would be to keep capital costs as low as possible, with a goal of ever-lower rates for power users over time.
The good news is that community leaders have become aware of the underlying dynamics of EPE’s corporate strategy as it affects its policies and proposals for our energy future. Public Regulation Commissioners and hearing officers have also begun to question utility assumptions and representations.[xxii]
Especially important have been decisions by the City of Las Cruces and Doña Ana County to intervene in the entire regulatory process, including in decision-making about new plant construction and other key factors in sound energy policy. Of equal significance is their decision to intervene on behalf of all residents, and not just relative to rates for streetlights or other narrow governmental interests. These decisions have already proven very important in the 2015 EPE rate case, in which the original EPE rate hike request of $8.6 million was, with vigorous city and county involvement, lowered to just $1.1 million.[xxiii]
These interventions have the potential to save millions of dollars for local governmental entities and hundreds of millions of dollars for local residents in coming years. In the process, they will make clear the inconsistencies and structural constraints in the current rate making process. This, in turn, will hopefully lead toward changes in policy at the legislative level that better align utility goals with the economic futures of local individuals, businesses, families and our overall community.
This report was prepared in February, 2017 by:
Merrie Lee Soules mlsoules@hotmail.com
Stephen Fischmann Stephen.Fischmann@gmail.com
Allen Downs ecomaxac@lifeisgood2.com
Please contact them with any questions.
References in this report are available via endnotes to the online version, available at WWW.LifeIsGood2.com/EPE/report.pdf