Commentary: (Sante Fe, NM) – New legislation introduced by Senator Joseph Cervantes (D-31- Doña Ana) would require electric distribution utilities to employ a competitive procurement process when purchasing power for their retail customers. The legislation, ‘Investor-Owned Utility Procurement Process’, SB 360, mandates that utilities perform a request for competitive proposals, subject to scrutiny by an independent evaluator, for the procurement of a supply-side electric energy or capacity resource.
“Market competition is an effective way to ensure the highest quality resources at the lowest cost to customers and businesses alike – we need that same assurance for the selection of our electricity supplies. Competitive procurement processes ensure a fair shake for all competitors – from the selection of secretarial services to janitorial supplies. Public agencies use competition to obtain the best possible product, and our electricity sector should welcome competition on behalf of its customers,” said Sen. Cervantes.
Under the Cervantes bill, the procurement process will be reformed to permit an objective evaluation of a utility’s expected direct costs, as well as the financial and operational risks associated with fuel price volatility, resource reliability, credit worthiness associated with potential suppliers, and environmental regulations.
If passed, the legislation will put New Mexico among many other states that have already adopted this industry standard, including our neighbors Colorado, Arizona, and Utah. By opening utility resource choices to competitive bidding, the bill will lower rates charged of customers, increase transparency, and reduce litigation.
The bill will protect the public interest and ensure compliance with state law that requires utilities to select the least-cost solutions to energy resource demands, with preference for the least environmentally damaging resource. Across the country states have recognized that not having RFP requirements artificially limits choice of resources, ownership of resources, and limits the availability of low-cost options. Practitioners and regulators in most states understand that, due to rate base regulation and emphasis on ‘earnings growth,’ most Investor-Owned-Utilities (IOUs) prefer to own new supply-side resources, even where the long-term costs may be greater than available power purchase alternatives.
Given recent controversy over ratemaking and resource replacement cases, this legislation will help to ensure that an unbiased evaluation of all resources is conducted and that it is informed by competitive market bids solicited through a transparent Request for Proposal (RFP) process.
Not only does the bill increase competition, save ratepayers money, promote efficiency, transparency, and accountability, in states where competitive procurement for electricity supply has been adopted, the process has also proven to stimulate the economy.
“What they are realizing in our neighboring states as a result of the RFP and bidding process is that they are ushering in a rapid transition to renewables, lowering the cost for generation, and ratepayers are reaping the savings from a diversified energy portfolio. These wind and solar resources are now under construction. This is a win for good government, good jobs, and responsibility to our children,” said Sen. Cervantes
The same effect has been seen in New Mexico. When Southwestern Public Service (SPS) voluntarily issued an RFP it resulted in 140 MW of solar at a cost of 4.2¢/kWh that will save consumers $84 million net present value (NPV) over the life of the project. As a result of another RFP, SPS had 700 MW of wind approved as a system resource by the New Mexico PRC at cost of 2.3¢/kWh, that will save ratepayers $590 million NPV.
The idea is to standardize this practice because we know it works. Competitive procurement processes are a win-win for consumers and for the electricity market, so it’s not surprising that they are the norm, not the exception. New Mexico’s electric supply procurement should conform with this standard.